This Week in Barrons – 2-1-2015:
“This is a Game Changer’…” John Madden
Thoughts:
Dear Ms. Yellen:
Who do you think will win today’s big game? If I compare our economy to the Super Bowl, I think that the major indicators and the earnings data that were reported this week could be true ‘game changers’.
- The U3 (your official unemployment indicator) is beginning to show it’s true colors in that instead of the published 5.6% rate – the U.S. is really closer to a 9.3% unemployment rate. Most economists think that we should be focused on the labor participation rate – which is at its lowest levels since the 70’s.
- The CPI (your official rate of inflation) has been so radically changed over the years that it no longer measures inflation, but rather the cost of living. Your fear of ‘deflation’ was reinforced this week as consumer spending contracted in the 4th Quarter – while wages remained stagnant.
- And GDP (your official measure of productivity) has been modified to include $100’s of billions of non-tangible assets – allowing the U.S. economy to appear far more robust than it really is. This week the data showed that GDP slowed far more than previously anticipated – to an anemic 2.6% growth rate.
I also think that the most recent Gartner report is a ‘game changer’. Peter Sondergaard reported that 1 in every 3 jobs will be converted to software and/or robots within the next 10 years. Peter said: "New digital businesses will require less labor, and machines will make sense of data faster than humans can.” Another study by Oxford predicts that robots will replace 47% of ALL jobs over the next 15 years. What is surprising is that the study also found that the displaced workers will have absolutely nowhere else to go. The original idea was for displaced workers to be re-trained and placed back into the workforce. But the numbers are showing that for every 100 displaced workers, there will only be jobs for 1.
Finally Ms. Yellen, I’m still trying to figure out what you meant to say with Wednesday’s FED statement. You said that the economy had gone from ‘solid to strong’. You replaced “keeping interest rates low for a considerable time” with “we can be patient on raising interest rates”. And then you said that the vote was unanimous. Does that mean that the vote was unanimous for the economy being ‘strong’, or unanimous with ‘being patient’ about raising interest rates? And I’m still troubled, if things are so ‘gosh darn’ strong – why do you still need a ‘zero interest rate policy’?
This dollar rally is truly a ‘game changer’. I know that you’ve tried to ‘talk down’ the value of the dollar, but that hasn’t worked. If the European Central Bank (ECB) and the Bank of Japan (BOJ) remain uber-accommodative with their QE, and you raise interest rates even 25 basis points – won’t the dollar spike higher and put serious deflation pressures on our economy? This year we could see everything from a war breaking out in the Ukraine, to China being included in the SDR currency basket, to the BRICs (Brazil, Russia, India and China) splintering completely away from the U.S., to the Euro-zone dissolving. The market chop we have seen lately is telling me that nobody knows what to do, and therefore confusion reigns.
Good luck today. May the best team win.
The Market:
Factually:
- Facebook (FB) came out with their quarterly earnings and originally beat the estimates, until everyone noticed they only beat those estimates because they got their tax rate lowered, and put those gains in as earnings.
- International Paper, United Technologies, Microsoft, Proctor and Gamble and Caterpillar all missed their top line revenue and bottom line earnings estimates. The CEO of Caterpillar even came on CNBC and pleaded with the FED not to raise interest rates because business is so lousy out there.
- The Durable Goods Index came out this week. They were predicting a gain of 0.3%, and instead it came in at MINUS 3.4% with the previous month being revised downward.
- According to Bankrate.com, 75% of Americans are living paycheck-to-paycheck with little to no emergency savings, and 27% of those surveyed have NO savings at all.
- The Baltic Dry Index (a general gauge of economic activity) has crashed to a 28-year low. That is lower than the 2008 meltdown.
- This week a major snowstorm was to cripple New York City, and even it missed the mark. I find it ironic that climatologists can predict with utmost certainty that global warming will completely wipe out our civilization within the next 40 years, but we still can’t forecast a local snowstorm accurately.
- On Friday we learned that in New York, an unemployed mother (on Food Stamps and $0 in income) was able to buy a BMW for her daughter. She was honest with the BMW dealer, and they assured her that she did indeed qualify for a sub-prime car loan. Didn’t we see this movie before? A rerun of the consequences of this madness is now warming up.
Most analysts blame the ‘uncertainty of corporate earnings in a high dollar environment’ for the markets most recent downturn. I don’t agree. Corporations have been faking and producing non-GAAP earnings for years. The only issue now is that our corporations are losing the ability to compound debt upon debt by the FED stopping QE. The current economic ponzi scheme requires Central Banks to continue devaluing their currencies, cutting rates to negative, and printing money. Given we received a ringing economic endorsement from the FED this week, my question is: If 93 million Americans are no longer in the workforce, and 49 million Americans are on food stamps, and 75% of Americans are living paycheck to paycheck – how does the FED categorize that as ‘strong’?
In my opinion, the FED has come to the realization that their manipulations of the U.S. currency have failed. Why do I think this? Last week Larry Summers (past U.S. Treasury Secretary) said from Davos, Switzerland: “We have to recognize that the era when central bank improvisation can be the world’s growth strategy is coming to an end.” I think that the FED knows that our economic system is beyond repair and to ‘keep face’ they’re going to tell us how great things are until a gigantic event happens that they can blame things on.
Currently the market is incredibly weak. The DOW is just 120 points away and the S&P only 20 points from their respective December lows. If they fail those lows, there is little question that we will then test their respective 200-day moving averages. The 200-day averages are a 5.6% correction from the December highs. In the last 5 years, that is about as deep a correction as we would get before the FED or the Plunge Patrol Team would come to the rescue. However in today’s non-QE environment, if we lose the 200-day moving averages we could fall into a major 15 to 20% correction within days.
The danger is to the downside. Earnings have not been good. The global situation is deteriorating. The Greeks are talking about defaulting on their debt and withdrawing from the EC. Russia has not taken the war bait. Our FED is acting tough in the face of a sagging economy. Unless something unforeseen changes quickly, I can make the case for a pretty hefty market plunge. The reason I labeled today's letter a ‘Game Changer’ is because we're not far from falling off the economic cliff. This is the biggest test we've had in a long time. Yes, they can pull a rabbit out of the hat and hold us here and try and work us higher. But it doesn't look likely right now. The best course of action right now is defensive. If you're sitting with a big portfolio of stocks and you simply don’t want to sell, then you should consider buying puts against your holdings for protection.
TIPS:
Of the 19 trading days in January, 13 of them were spent as triple-digit down days on the DOW. That is one terrifying statistic that demonstrates how scared investors are of our slowing economy. My current list of potential candidates for this coming week is as follows:
- Wells Fargo (WFX) – looking for an Iron Butterfly,
- Abbvie (ABBV) – looking for a move higher,
- Harley Davidson (HOG) – looking for a move to the upside,
- IBM – looking for an iron condor,
- FedEx (FDX) – potentially moving to the upside,
- Kansas City Southern (KSU),
- 3M (MMM),
- 3D Systems (DDD),
- Stryker (SYK), and
- Wynn (WYNN).
For next week I’m mainly selling into this increased volatility with:
- AMGN – MAR – SELL the +140/-145 PCS,
- CP – MAR – SELL the +155/-160 Put Credit Spread (PCS), and SELL the -200/+205 Call Credit Spread (CCS) as the CCS approaches $0.83,
- LL – FEB / MAR – BUY the Call Calendar FEB -65 / MAR +65,
- RH – FEB / MAR – BUY the Call Calendar FEB -90 / MAR +90,
- RUT – MAR – SELL the +1040/-1050 to -1270/+1280 Iron Condor,
- RUT – MAR – BUY the +1130 / -1200 / +1260 Call Butterfly,
- SPX – FEB – SELL the +1870 / -1875 to -2110 / +2115 Iron Condor, and
- TLT – FEB – BUY +135 / -141 Call Debit Spread.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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