Good day people. It’s time to warn against stupidity. Usually this is a straight up political blog, but when I see something play out that is ridiculous, I feel it is my obligation to point it out.
We are nearing the end of the earning season for U.S. markets. This is when all publicly traded companies disclose their earnings for the quarter. Since 2008, this has been a rather volatile time. Big swings go with the beats and the misses of the season. This quarter has been nothing short of a bummer. 70% of the companies reporting are missing their previous forecasts and, or guiding down for the remainder of the year. The crazy thing: The market is up huge! Both the DOW and S&P are at four-year highs. What? That doesn’t make sense right?
Well, we are rallying off of the promise of more bailouts. Seriously. The ECB is promising to bail out nations like Spain and Greece, and the Fed is promising that they will step in at any sign of GDP slowing. Get this, the market is getting excited as GDP slows because they are counting on the FED stimulus. Am I the only one who sees the crazy in this?
In addition to markets being at 4 year highs on the promise of ECB and FED stimulus we are heading towards the “fiscal cliff.” This is the stupidity of our national government. This time last year they couldn’t agree on a national budget and we got down graded by Moodys. Is there any reason to believe that we will not do the same this year? I think not. Especially because both sides are digging in to make it a political issue for the upcoming Presidential election. Matter of fact, it was supposed to be decided this month. Instead, our government went on a five-week vacation and promised to fix it upon their return. All I can say is that there is a fat chance of that happening. Even when they appointed a small group of congress members to do this last year, neither side budged an inch. Why would it be any different this time?
What I am most worried about is the fact that markets are becoming complacent. What do I mean by this? There is an indicator in the market called the VIX. This is an instrument that measures the “fear factor” of the markets. When people are hedging towards the down-side and buying puts to protect their long trades, it raises. As of today, it is about 15.5. The average for the past four years is 20. It is a pretty good idea of people’s protection should the market start going backwards. Let me repeat the above statement. 70% of our companies are reporting missed forecasts and, or guiding down for the rest of the year. In all rational thought, this should elevate the VIX.
Bottom line, this worries me because big hedge funds are not protecting their clients retirement money. Should we see any kind of market sell-off, people’s retirements will pay the ultimate price.
This is not an advice piece. I like to think out loud through my blog. Any investments you might undertake should be consulted with your financial advisor.
With that said, I cannot understand why people would put money into gold when they can buy oil at a huge discount. As I type this, WTI oil is pricing at $80.91 per barrel. We haven’t seen this level since Feb. of 2009. That was the midst of the biggest financial crisis our generation has seen. Guess what, since then our economy has improved. I know it may not feel like it, but it has. Matter of fact, usage is up since January where oil was trading well over $100 per barrel. It is a fact that most oil production companies and countries cannot make a profit selling oil below $80 per barrel, so it is in their best interest to keep the prices at these levels. Believe me when I tell you that they have the power to do so. The only exception to this rule is Saudi Arabia. They can make money all the way down to $70 per barrel.
I don’t want to confuse this situation too much. The real comparison is to gold. Gold traded up to about $2k per ounce and has since traded back down to the $1,600 level. That is a potential of 20% upside from here and will really only materialize if the dollar falls off a cliff with that of the Euro. Remember though, that is the only real catalyst for gold… hell breaking loose. As for oil, there are many factors that can contribute to it going back over $100 per barrel which is a 25% gain. U.S. growth, improved employment numbers, a resolution of the “Euro crisis,” any strife in the middle East, or the upcoming trade embargo with Iran can shoot prices back up. I don’t know about you, but I’m thinking if I have to pay $4.00 at the pump I would rather have at least made some money on its climb in prices.
July 1st is the deadline for the Iran situation. Any lack of complete agreement with them will result in a trade embargo which will significantly decrease the world’s supply of oil. I honestly hope that things don’t deteriorate, but it is a catalyst that can raise prices. If someone would like an idea of how to play it, one could buy the ETFs USO or UCO. UCO is trading at $25.63. It is a leveraged ETF and should return to $40 per share if oil trades back up to the $100 range giving you a 56% increase if you hold it that long. USO is trading at $30.49 and was trading at $40 plus when oil was in the $100 range. That would give you an approximate of 33% should oil trade back up to $100 levels. The beauty of all this is that there is a pretty damn good chance that oil will return to $100 per barrel at some point. I wouldn’t bet against it!
Again, so that no one tries to sue me, this is not an advice piece. You should consult your advisor before making any decisions based on this information.
We are headed towards a presidential election that will absolutely polarize the U.S. You could not find two candidates that represent two more opposite sides of the spectrum. You have President Barack Obama that is very much a liberal. I do not use liberal as a derogative term here, but there is a very clear distinction in his politics. He is on the side of larger government, higher taxes, and distribution of wealth. Mitt Romney, on the other hand, is making a point to say that he will get rid of as much financial regulation as possible. He is also proposing lowering taxes. This is a very right-wing stance.
Now, what they say and what they do are two totally separate things. I don’t know that Obama will really try to raise capital gains to 45% or if this is simply negotiation tactics to raise taxes in another way. I don’t know that Romney will really try to repeal all bank regulations or if this is something he is saying to encourage money from wall street into his campaign coffers.
I wish there was a middle ground. I wish that there was a candidate that said, “government is getting too big, but we need to avoid another financial meltdown in the future so I am going to bring back Glass-Steagall. I understand that the unemployment numbers are absurd, and it isn’t all because of Bush and Europe. I will do everything possible to encourage small business and never raise capital gains taxes. Health insurance is essential to have for all Americans. I will offer a public option that competes with the rest of the industry, but will not be required. People can opt in, if you will.”
We are a strong country. We can be both fiscally and socially responsible! We need a candidate that will change campaign finance so that we can feel comfortable knowing our elected officials are working for us and not their campaign donors. We need candidates that are more worried about their constituents than they are the “party.” You can argue yourself to death about the validity of a two-party system. Whether it is healthy or not for our country, it shouldn’t be as important as the voters. As of right now, it is.
Oh ya, and Wall Street is NOT the enemy. We need to recognize that there were mistakes made that we can eliminate in the future and move on. Demonizing people who make money helps no one. We have to admit our own mistakes that brought upon the mortgage crisis/recession. People knew and or should have known the mortgages they were taking out were bad ideas. Blaming the banks is very much hypocritical. When I purchased my house, my mortgage broker pushed a 1yr Arm on me. Guess what, I said NO. We all had that chance.