This Week in Barrons – 11-22-2015:
Thoughts:
Dear Ms. Yellen:
I remember when I was a
kid. Our family rowboat needed a new
coat of paint, and my father was NOT about to hire a painter. Instead, he asked around the paint stores,
talked to people that did it ‘on the side’, and went ahead and tackled it
himself. At 12 years old, I painted one
entire side of the rowboat all by myself.
It didn't seem odd or strange at the time – the rowboat needed to be
painted and we were painting it.
Now let’s ‘fast forward’
to present day where that same DIY induced generation is in charge of
corporations. The problem is: every executive
team requires an annual pay raise, or they will move on to a different
corporation. But what do you do if your corporate
earnings stink, and your revenues stink even more? The only available avenue is for you to take
advantage of the FED’s zero interest rate policy. Coming from a DIY mentality, you (Mr. / Ms.
CEO) have the ability to financially engineer your own executive compensation structure
and influence your own stock price – as follows:
-
Your corporation
borrows money at 0%, and sits on it a while.
-
You link your executive’s
compensation to your stock price by heavily paying your executives in stock options.
-
You annually
issue new stock options to the executives.
-
You have the executives
elect to redeem their options simultaneously.
-
At that options
redemption moment, the corporation announces a stock buyback program (roughly
the size of the total executive option redemption) allowing management to
redeem all of their own shares. Because
earnings are a function of dividing income by the amount of shares outstanding,
you also succeed in reducing the number of shares outstanding and therefore increase
‘earnings per share’.
-
The key here is
to ‘Get Out of Dodge’ (exit the corporation) BEFORE the debt comes due. After all, you’ve already spent the money
that you borrowed to buy back your own stock.
Macy’s (who’s stock price has been cut by 50% in the past 4 months) is
an example of a company that is seeing it’s debt come due prior to increasing
real sales and real earnings.
Therefore, due to the
FED’s zero interest rate policy, private investors are buying into hundreds of
stocks that have no real growth, falling sales, but manufactured earnings.
If you wonder how widespread the above DIY behavior has become, just know that
buybacks have hit an all time high. Factually, almost 60% of the 3,297 publicly
traded U.S. corporations examined since 2010 have bought back their own stock. In
fiscal 2014 the total combined net income of these companies was $847B. All the while the corporate buybacks and
dividends for those same companies totaled $885B (more than all
of their earnings combined). Currently, 78%
of all executive compensation flows from stock options. I believe that earnings should come from
innovation, production, and increased sales – not from corporations taking on
billions in debt to buy back their own stock.
So corporations (in their
lust for big paydays) have perverted and manipulated their own stock price. The ONLY thing a CEO cares about any more is a
higher stock price. Not sales, not jobs,
not production, not expansion – simply a higher stock price. And corporations are DIY’ing it right in front
of you.
My family and I continue
to think that every dollar we save by not having to pay someone to ‘Do It For
Me’ – is a dollar we can use to enjoy the things we like. I was blessed to have been raised in a family
where my dad was a hands-on guy and wasn't afraid to learn new things. I’m constantly being asked: “What is the best
investment?” My answer is always: “Your
best investment is education.” But let's
narrow that down a bit. The best
investment is learning how to DO THINGS YOURSELF. Nothing will give you a better return on your money than NOT having to
pay someone else to do it.
The Market:
This
week we learned that the NYSE is not going to execute stop loss orders after
February 2016. They are selling this idea as ‘protection’ for the
masses. But, let’s play a crazy conspiracy theory forward:
-
There is
presently a ‘full court press’ going on out there for the FED to raise rates in
December as a symbol of a recovering economy.
-
The FED has (however)
failed and is on the ‘look-out’ for some extraordinary event on which to blame
the economic weakness and therefore start more QE.
-
Starting more QE
‘out of the blue’ would be a blatant admission that their 7 years of policies
have FAILED, and our FED cannot FAIL.
-
The FED has pimped-up
the jobs reports, changed the way GDP is calculated, and modified our inflation
measurements – all to create the illusion that the economy is doing fine.
I think that the FED will
hike rates in December and eliminate stop loss orders in February because the FED
knows something is coming on which they can blame our ills. The NYSE has been instructed to not stop people
out when the market crashes, and could (therefore) create a massive loss of
wealth. I realize that I sound like a
conspiracy nut, but the good news is – it will only take 3’ish months for my
theory to play out.
This past week:
-
Deutsche Bank
reported that without buybacks, earnings in the 3rd quarter would have been
NEGATIVE.
-
Putin offered a
$50M bounty for information leading to the arrest of who made the bomb that
blew up his airliner.
-
The Empire State
manufacturing report came in at a NEGATIVE 10.4. A less than zero reading
denotes contraction. This reading was
actually an improvement over October's NEGATIVE 11.36. Collectively, these readings indicate the
worst manufacturing climate since March 2009.
-
The Baltic Dry
Shipping index has fallen from 1200 to just 537 in recent months – showing just
how slow the global economy is running. In fact, reports show that we've
been sending thousands of container ships back to China - empty. Those containers were supposed to be full of
goods and materials, but China doesn't need or want them.
-
The
BlackRock Global Ascent Hedge Fund has lost 9.4% this year and investors were
notified that it would be closing. The
hedge fund (which as recently as two years ago had $4.6 billion in assets under
management) is now almost completely cashed out and will close due to
unfavorable market conditions.
-
This week we
found out that simply by asking a mutual fund’s manager how much money they
have invested in their own fund – is actually a very accurate gauge of the
success of that fund. That is to say
(according to Morningstar), mutual funds where their managers invested nothing
had the lowest returns, and those in which their managers had over $1 million
invested had the highest returns.
-
Wal-Mart
announced a new service: savingscatcher.walmart.com. You can sign up for free, and anytime you buy
something at Wal-Mart you put the TC# at the bottom of the receipt into the
‘savings catcher’ website. Wal-Mart will
then automatically compare the items you bought to other stores in the area and
if anything you purchased can be found for less somewhere else, they pay you
the difference.
Whether you’re talking
stocks, bonds or commodities, strange things are happening all around the globe.
For example, in the gold arena I’m
seeing 300 paper contracts being written for every single ounce of physical metal. This is an accident waiting to happen in the
precious metals pits because the major bullion banks appear to be moving their
physical gold away from the exchanges. A
similar situation exists in silver – so one small spark and the precious metals
could indeed be off to the races.
This week David Tepper,
David Einhorn, and Stanley Druckenmiller reminded us that the market has no
business being up where it is. All three
of these major hedge fund players have backed away from the market – many of
then reducing their exposure by over 30%. The market run-up from the August lows topped
out at 2109 on the S&P. We closed
Friday at 2089, a mere 20 points from that short-term top. I suspect the 2109 level will become a fairly
formidable resistance area once again.
This week we have a short week
as the market is closed on Thursday, and only open a half-day on Friday. Monday through Wednesday will encompass 90%
of this week’s trading volume, with just 10% being saved for Friday. I expect volatility will be ‘in the air’ for
sure. But allow me to get a jump on the
festivities by wishing safe travels for all of you going to see loved
ones. Do enjoy yourself and give thanks
for being as blessed as we are. Eat, drink and enjoy each other’s company
– because in the end, that is really all that matters. Please take care,
be safe, and have a Happy Thanksgiving.
TIPS:
I think:
- The market will drift higher this week due to the Put/Call Ratio, the
Skew, the Trin, and the VIX all being neutral,
- Crude oil will go lower to $31/barrel (currently @ $41.46),
- I will buy FOLD > 10.75,
- I will buy TRV > 116.48, and
- I will buy EA January Calls and finance them by selling some ‘in the money’
PUT options.
I am:
-
Long various mining stocks: (AG, AUY, EGO, GFI, IAG, and FFMGF),
-
Short the Euro via owning PUTS on FXE,
-
Long the FANGs (Facebook, Amazon, NetFlix and Google),
-
Long the RUT, January, Broken-Wing Butterfly (1100 / 1180
/ 1250),
-
Long the IWM, January, Broken-Wing Butterfly (109 / 117 /
124),
-
Sold the SPY, Dec4, Iron Condor (190 / 195 to 216 / 218),
and
-
Sold the NDX, Nov4, Call Credit Spread (4750 / 4760).
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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