RF's Financial News

RF's Financial News

Sunday, March 15, 2015

This Week in Barrons - 3-15-2015

This Week in Barrons – 3-15-2015:
                                               

You do understand - you’re just selling Lingerie…” Mr. Wonderful on Shark Tank

Thoughts:

A recent episode of Shark Tank showed the CEO of a small, lingerie company attempting to sell 5% of her company to the ‘Sharks’ for $500,000.  That investment would give her lingerie company a valuation (right out of the gate) – of an absurd $10M.  Did she receive her recent MBA and Law degrees from Stanford University – yes.  Was she originally given $850k for 17% of her company by a wealthy investor – yes.  Did she come on to the show with a ‘chip on her shoulder’ – yes.  And yes – she found out that arguing with the ‘Sharks’ is a difficult (and costly) negotiating strategy.

‘Smarts’ certainly count for something, as does personality, caring, understanding and doing your homework.  In this case the CEO was so busy trying to get rich that she forgot to embrace and display her passion for the underlying business.  In this day and age, so often the goal of a young company is obtaining VC cash, rather than building the business with real customers.  Just because you didn’t go to the best school, or weren’t the smartest person on the block, doesn’t mean that you can’t be successful and happy.

The ‘takeaway’ from the last 20 years is that the traditional path no longer works.  ‘Professional’ is no longer the highest rank in our society.  A good college degree gets you a ‘ticket’ to the middle of the pack.  If you want to win, you will need to learn so much more than is ever taught in schools.  You often learn these lessons from parents and mentors.  These are the people that will take you under ‘their’ wing, out of the goodness of ‘their’ heart, for $0 and 0% of your company.  We see this very rarely today.  It’s a dog eat dog world, and there are very few altruistic dogs out there.  So – yes perseverance counts, just not as much as charisma, charm, and the ability to get along.

In this case, the CEO’s numbers were insane.  She believed since one person invested in her business at an obscene valuation, everyone else would do the same.  She had been a winner all her life – why would ‘Shark Tank’ be any different?  What she found out was that no one was interested in her, or her business.  More often than not, winners put their hearts and souls into a business, and when they hear ‘NO’ – they get angry and double down.  They become convinced that they are right, the world is wrong, and they are going to prove everybody else inadequate.  This is often a recipe for disaster.  The real winners in life: (a) admit when they are wrong, (b) learn from their mistakes, (c) change and pivot, and (d) then deliver a solution that everybody wants.

It all starts with admitting failure.  Wining at the game of education is often not a good precursor for admitting failure.  Lucky for us – the game of education is NOT the game of life.


Market:

Factually this week:
-       Retail sales fell 0.6%,
-       Initial jobless claims still averaged over 300K a month,
-       1st Q GDP estimates were cut by Goldman to 2.2%, and Barclays to 1.5%,
-       Intel warned that 1st Q revenue will come in under estimates,
-       The Chinese are putting the finishing touches on their ‘non-U.S. Dollar’ alternative to the Global SWIFT payment processing system,
-       Thailand and South Korea cut their interest rates, bringing the total to 23 nations that have reduced interested rates in 2015,
-       McDonalds announced their 9th consecutive month of falling sales,
-       Japan’s GDP continued to come in lower than estimates,
-       The Greeks are again making noise about exiting the Euro, and
-       The lunatics in Brussels are suggesting the EU create their own army, instead of relying on NATO.

This week David Stockman (previous Director of the Office of Management and Budget under Reagan and 20-year veteran of Wall Street) came out and said: “Never has there been a more artificial (indeed phony) gain in the stock market - than the 215% eruption orchestrated by the Fed since the post-crisis bottom - six years ago.  There is nothing fundamental, sustainable, logical or warranted about today's S&P 500 index at its current levels.  The U.S. economy remains mired in even more debt, less real productive investment, fewer breadwinner jobs and vastly more destructive financialization and asset price speculation than had been prevalent at the time of the Lehman event in September 2008.”

February 2015 was the single biggest month on record for corporations buying back their own stock, and March is shaping up to possibly surpass February.  Even more interesting is that company ‘Insiders’ (people who get paid in stock bonuses) are SELLING their own corporation’s stock at the fastest pace on record.  These are the same ‘Insiders’ that are making the corporate buy-back decisions in order to make themselves ‘rich’.  For example: during the week of February 11th, the ratio of ‘Insider’ sellers to buyers was 17 to 1.  That’s 17 TIMES more ‘Insiders’ selling stock than buying it.  And those same corporations were buying back billions of dollars of their own stock in order to keep the stock price high for the ‘Insiders’ that were selling.  Thus far in March, some of the announced stock buybacks have included: GM for $5B, Boise Cascade for $2B, Best Buy for $5B, Stryker for $2B, and Qualcomm for $15B.

However it’s not the buybacks or the data that are making the FED uneasy – it’s the rapid dollar rally.  The dollar rally is bringing on talk of ‘disinflation’ and ‘deflation’.  Unfortunately, to fight either of these you need to reduce interest rates, print more money, or both.  European and Japanese QE, coupled with the ‘official ending’ of our own QE is what is driving the dollar higher.  What is putting selling pressure on the equity markets is the assumption that the Fed is about to raise rates, which (ironically) further fuels the dollar rally.  I suspect we will shortly see a shift in focus of our FED from job creation and unemployment, to the concerns about the dollar and deflation.  Finger pointing toward Japan and Europe will then follow, and we will be told that they are both the cause of our market’s demise.

This Wednesday the 18th will be the next meeting of the FED.  Market volatility will continue to ‘rule the roost’ until we learn whether the FED drops the words ‘being patient’ from their comments regarding interest rate increases.  This market is completely reliant upon debt, low interest rates and free money to sustain the price of stocks.  In terms of the statement itself: if the word ‘patient’ is still in their statement then we will see the markets rejoice.  If however the word ‘patient’ is removed from the statement, the market will fear a series of rate hikes are coming and immediately sell off.  The ‘cheerleaders’ will then come out in force (backing up the FED) saying: “This is a good thing.  Our economy is so strong that the FED is getting out in front of this.”  The bottom line is that the market ‘chop’ is not finished and could get worse before it gets better.  For Monday we could see an up day, and Tuesday be the calm before the storm.  I wouldn’t get too brave in either direction until we hear from the FED on Wednesday.

If history taught us anything (and I know: ‘This time is different’), when the NASDAQ first crossed the 5,000 mark – one year later it was down 59%.  On November 2007 when the DOW first exceeded 14K – one year later it was down 47%.  How quickly we forget the carnage that irrational exuberance can cause.  Everyone looks at the DOW hovering around 18K and the NASDAQ around 5K and thinks that ‘all is well’.  I can guarantee you that all is NOT well. 


TIPS:

In the ‘Theory of Cycles’, March 6th through March 9th 2015 was a cycle, and mid-April 2015 is signaling another (much larger) cycle.  Cycles can often pinpoint market tops and bottoms.  The best-case bullish scenario is that we top out in the March 6-9 cycle, bottom out in the mid-April cycle, and then resume the uptrend.  The worst-case bullish scenario is that we rally into the mid-April cycle, and then begin a multi-month (or longer) selling process.  Either way, keep in mind that the game has changed, and volatility is here to stay.

The theme for this week is to: “Play the Chart that’s in front of you”.  I’m currently watching:
-       AAPL: Apple put out an official sell signal last week when it crossed below its 8 and 21-day moving averages.  Watch it to the downside via Buying Puts or Selling Call Credit Spreads.
-       TSLA: Tesla has been in STFR (Sell the f----g rally) mode since September when it hit its high of $300.  Each time that it rallies back to resistance, simply Buy Puts or Sell Call Credit Spreads.
-       IWM / RUT: In direct conflict with AAPL, this index is signaling both a daily and a weekly buy signal.  Watch it to the upside to either Buy Calls or Sell Put Credit Spreads.
-       USO: Crude Oil is presently sitting at $45 and moving lower.  There is not much support in Crude Oil until $41.15.  Therefore, on any rally in Crude Oil, Buy PUTS on USO.
-       UUP: The dollar index is exploding higher while the Euro is getting trashed.  This drives commodity prices lower in the U.S., and stock prices higher in Europe (with the DAX (the German Index) making new highs this week).
-       PCLN & NFLX:  In terms of some high-fliers that are rolling over and dying – look at PCLN, NFLX in order to Sell Call Credit Spreads.
-       /GC = Gold: Watch the 1147.90 level in gold.  If it breaks through that level, then either Buy DUST or Sell Call Credit Spreads on NUGT.

I’m currently holding:
-       AMGN – BOUGHT APR Call Calendar: - APR 160 / + JUL 160.  In the ideal world the APR Calls would close less than $160 leaving me pure profit on the July 160 calls.
-       CELG – SOLD APR Put Credit Spread: -105 / +100
-       CF – BOUGHT MAR - Put Butterfly: +295 / -290 / +280 … that will get interesting as CF approaches $290 this week,
-       CP – SOLD MAR – Iron Condor: +170 / -175 to -200 / +210 … which should expire worthless this week,
-       COST – BOUGHT APR – Call Debit Spread: +145 / -160
-       HFC – SOLD MAR – Iron Condor: +36 / -37 to -45 / +46 … that should expire worthless this week,
-       IBB – BOUGHT MAR – Call Butterfly: +345 / -350 / +360 … that will get interesting as IBB approaches $345 this week,
-       LL – SOLD APR – Put Credit Spread: -30 / +28,
-       RH – BOUGHT MAY Call Calendar: - MAR 95 / MAY 95 … that increases the closer RH gets to $95,
-       RUT – SOLD MAR – Iron Condor: +1130 / -1140 to -1260 / +1270 … that will become interesting to the upside if the Russell 2000 remains strong,
-       HEDJ – BOUGHT MAR – Call Debit Spread: +63 / -66 – that I will cash in and renew for May – as it performs well with U.S. dollar strength, and
-       SYK – SOLD APR – Put Credit Spread: -87.5 / +85. 

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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