For the last several weeks, the Fallen Angel Stocks team has been urging caution. We’ve recommended tightening stop losses, selling losers and most importantly, we’ve pounded the table on covered call writing.
Last week we saw the reason why. The Dow ended down 1.5%, the S&P 500 was off 1.2% and the NASDAQ was down 0.7%. The average stock is down a lot more than that. Look for more of the same going forward. We’re using trading rallies to sell covered calls and have started putting on selective shorts.
With oil prices skyrocketing, the average American is really starting to feel the pinch. As Dylan outlined in his excellent article last week, Americans are beginning to squeeze their lifestyle budget just to keep up. If gas prices stay at these elevated levels and/or continue to go higher, this will result in a transformational event that we call a “Cycle Trigger.”
“Cycle Trigger” events let loose a massive cycle of change that unleashes a whole new “Money Cycle.” “The Money Cycle” is how we describe the repositioning of money from one part of the economy to another. Massive wealth is created in riding these “Money Cycles”.
High oil prices act as a global tax, meaning they suck hundreds of billions of dollars out of the global economy and reposition the majority of that wealth outside of our own and our allies' borders. While we despise tax time, at least our taxes are used within our borders for the benefit of our economy. With $70 oil, all that extra money we spend on gas ends up in a vault under the Arabian desert or in some South American dictator’s private bank account.
So that great sucking sound you hear at the pump is our national wealth fleeing the country. The repercussions of this will be widely felt across the US economy, and for the savvy investor who understands the power of profiting from “The Money Cycle,” this is a great time to rake in the dough.
Movie chains, restaurants, ATV makers, boat builders etc. are all going to see huge drop-offs in revenue and earnings as the embattled American public struggles to make ends meet. With only a 20 basis point spread between the 2-yr note and the 10-yr note and the Fed determined to push up short-term rates even more, the big banks are going to get CRUSHED.
Remember, they live and die based on the interest rate spread between short- and long-term rates. Banks are just wholesalers of money; like any good wholesaler, you want to buy cheap at wholesale (they have exclusive access to money from the Fed at the discount rate) and sell high at retail (long-term rates.)
But what happens when there’s only a 0.2% difference between wholesale and retail prices? Answer: YOUR EARNINGS POWER GETS KILLED!! Next week, we go deeper into “The Money Cycle” as we reveal more “Cycle Triggers” that you can profit from RIGHT NOW!
Chief Investment Officer
ETF Master Trader