This Week in Barrons – 2-8-2015:
Thoughts:
Dear Ms. Yellen:
On Friday the latest labor report showed that the U.S. created 257,000 jobs in January. This number exceeded even the wildest expectations. In fact, December’s job creation number was also increased by 80,000 more jobs, and November’s was increased by over 70,000 additional jobs. The U3 unemployment rate moved up from 5.6% to 5.7%. 82% of the hiring was accomplished by small and medium-sized businesses, and 86% was in the service portions of our economy. Those are impressive headline numbers, which would ‘normally’ reflect a roaring economy, but instead are being accompanied by decreased corporate revenue, reduced consumer spending, and lower earnings.
The report continued to show a decline in the labor force participation rate. Year-over-year we’ve had over 1.1M people leave the U.S. labor force. The ‘silver lining’ is that companies learned how to shed jobs and increase productivity during the 2008 collapse. Companies learned that productivity depends upon ‘skilled labor’, and that 20% of your employees will generate 80% of your productivity. Currently, we do NOT have the skilled labor necessary to fill our employment vacancies. Obamacare has only amplified this problem as employers are reluctant to ‘take a chance’ on an un-skilled prospect due to the mandate of supplying them with healthcare. In fact, the largest gain in the workforce (by far) has been in temporary and part-time workers residing below the 30-hour Obamacare threshold. So although mathematically President Obama has created jobs, in reality companies have turned many full-time employees into part-time and then hired other part-timers to make-up the difference – all to avoid paying for healthcare.
Ms. Yellen, some people think that our nation has a problem with the minimum wage. Honestly, only 2% of the entire U.S. work force is working for minimum wage. In fact, the average hourly wage in the U.S. is $25/hour. The real problem is building a skilled labor force. The lack of ‘skilled labor’ has caused the real unemployment rate to spike above 9%, and the workforce participation rate to fall like a rock. Skilled labor is NOT just about college degrees, but also about trades and crafts such as: plumbers, mechanics, and electricians. Unfortunately, our colleges and our public schools have eliminated shop class, home economics, and other real-world skills – in order to focus on teaching to an SAT or GED test - rather than teaching to supply the economy with skilled labor. Therefore, until we can increase our supply of skilled labor – we are indeed limited as a nation.
The Market:
Factually this week:
- The U.S. productivity index fell another 1.8%,
- The Challenger Grey report showed layoffs rising 17% year-over-year,
- The Ukrainian currency fell 30% as their government continued to implode,
- Denmark cut its interest rate for the 3rd time in a month to -0.75%, and is close to introducing negative mortgages (the bank PAYS YOU to live in a house.)
- Nestlé’s corporate bonds are paying a negative rate. Which means you have to PAY THEM to loan THEM money.
- The ISM manufacturing index tumbled to a one-year low as factory orders plunged for the 5th month in a row.
- Over the past several weeks, more than 20K oil workers have lost their jobs as companies pare their workforces to deal with the drop in oil prices.
- Markel (of Germany) and Hollande (of France) are going to Russia to talk about solutions to the Ukraine. Otherwise, the NATO commander is saying that the military option is on the table. And, the Russian Foreign Minister is speaking at a security conference in Munich – laying out exactly who was and still is responsible for what's happening in the Ukraine.
- The ECB is playing a game of ‘liars poker’ with Greece. On Friday, Mr. Dijsselbloem (the Head of the Euro-group) said: "The Greeks have 10 days to apply for a bail out, or leave the Euro".
- If we calculated our unemployment rate as we did in 1994, the U.S. rate would be 22%. In fact, the CEO of Gallup (the polling company) went on record as saying: “America's 5.6% unemployment rate is one big lie.”
- Fundamentally, our financial institutions are exposed to $5.4T in loans and debt from the oil industry. Remember, a mere 20% of this exposure ($1T in loans and debt from the housing industry) triggered the 2008 Financial Crisis.
Currency wars along with oil prices are providing the catalyst for significant market volatility. I expect increased volatility as we continue to move deeper into the 1st quarter of 2015. The Fed is not going to raise rates, and (if anything) will become more accommodative. The ECB and BOJ will remain accommodative. The market will move on what happens to the U.S. dollar and oil prices, not because of real economic fundamentals or earnings. The price of oil has been rising for several days on the idea that the oversupply will end soon due to oil companies cutting back on exploration and drilling. The thought is that as the supply dries up, the price will increase, and funds are buying oil stocks in anticipation of that event. I think that a surge in oil related buying would help keep the market from closing below its December lows.
Speaking of a rebound, this week’s market bounce was nothing short of spectacular. Last Monday we were on the edge of a cliff when the fake Greek headline hit the wires. The headline stated that the Greek government was reversing its stance on NOT bowing to EU pressure, and ready to toe the line. Our market gained 800 points in 4 days.
There is a combo platter of volatility out there, and none of it will be solved by Monday. Trying to call a direction is tougher than usual. I will revert back to the numbers that have worked in the past. Until we put in a close over 2,064 on the S&P, we still have to consider the idea that we are trapped between January’s low and 2,064. I think that we will ‘try’ again to break over 2,064. I also think that the EU will find a way to dismiss all of Greece’s debts in order to have it remain in the Euro-zone.
According to a note from the Goldman Sachs equity strategy team, we’re seeing the most depressing forward guidance in 34 quarters – since the summer of 2007 right before the financial crisis. Couple that with the fact that markets have been down 12 out of the past 13 weeks following a Friday ‘jobs report’, and you get a nervous market. On Friday the S&P closed at 2,055 and the DOW at 17,824. In order for this market to go higher for a sustained period of time, I believe that the DOW needs to be over 17,840 and the S&P over 2,064. Under those levels on either index simply puts us in no man's land, and makes me nervous about getting long this market in the week ahead.
TIPS:
Navigating the trading day:
- Do NOT trade in the first 45 minutes of the day.
- Markets often pop at 11:30am (EST) – when the European markets close.
- Wall Streeters take their ‘Power Lunch’ between 12:45 and 1:30pm – so ‘the weekend crew’ is manning the desks at that point. Here is where you can catch some ‘interesting’ reversals.
- The 2:15pm ‘Bump’ is when the trades discussed over lunch begin to hit the tape.
- 3:30 to 4pm is the ‘Run for the Roses’ and it is truly where and when all the action is, but you must be nimble in order to trade here.
Below is a chart of the ‘technicals’ for the up-coming week:
For next week I’m mainly selling into this increased volatility with:
- AMGN – MAR – SELL the +140/-145 PCS,
- CP – MAR – SOLD the +155/-160 to -200/+205 Iron Condor,
- 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 – MAR – BUY +131 / -138 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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