The primary driver in today’s markets are the various Central Banks and their desperate attempts to stimulate inflation of any kind within their economies.  I believe we can view the markets through the lens of Central Bank policy and the associated market movements, and gain some insight into potential outcomes.  Hopefully this will provide some actionable trading and/or investing setups.

Issue #1: The elephant in the room in the Federal Reserve; they are in a tightening posture and I believe markets are underestimating the number (and possible dates) of future rate hikes.  On the other hand you have the rest of the world’s Central Banks, seemingly dead-set on doing whatever it takes to stimulate their economies.  This is despite the fact that each action becomes less and less effective.

Issue #2: We have the commodity markets, most of which are showing the characteristics of having potentially bottomed.  For example, crude oil is up something like 45% since it’s lows earlier this year.  It could simply be a short covering rally, but every bottom starts out that way.  I’ve said it before (here), in order for the commodity complex to demonstrate a sustained rally, one that perhaps leads to the next up-cycle, the U.S. Dollar needs to pull back against the rest of the worlds currencies.

Given that the above two issues are definitely related, what should we expect moving forward?   Let’s take a look at the currency trigger levels from my previous post:

 

Taken by itself, the USD/JPY cross trigger level of 115.50 was a good signal to buy commodities for a bounce; oil bottomed 2 days later.  However, I recommended waiting for the EUR/USD cross to confirm the move, and I suggested using a trigger level of 1.148.  See below:

 

To date, it’s not even close.  My recommendation is therefore NOT to play crude oil or any of the other growth (inflation) driven commodity on the long side, at least until both trigger levels are breached.

If the European Central Bank’s bazooka somehow disappoints, this situation could turn on a dime.  However, I think it’s more likely that Central Banks will continue with their current postures: the Fed tightening while everyone else eases.  Furthermore, I believe the U.S. economy is the proverbial last man standing, meaning we are stronger relative to the rest of world.

This is important, it implies that all of the Central Bank posturing is perhaps “correct” on a global scale (i.e. relative to everyone else).  For example, if the U.S. economy is stronger than the rest of the world, perhaps the Fed should be in a tightening posture.  Likewise, if the Japanese (or European) economy is struggling, they probably should be easing.

In summary, I expect the U.S. Dollar to outperform other currencies.  Why?  Because, if the Fed is raising rates and the U.S. economy is outperforming (on a relative basis), the U.S. Dollar will outperform.  Growth commodities should therefore either pull back from current levels or languish into a trading range.  Either way, they do not represent a good risk/reward long at this point in time.

So Here’s the Trade:

Short the banks – the risk is the Fed will guide to further tightening (or even raise rates in March).

Short the EUR/USD – divergent policies will continue and the performance of each economy will also continue to diverge (U.S. > Eurozone).

Short any of the insolvent Oil & Gas companies that are up over 30% in the past two weeks – research their bonds, find the ones that are due soon – these companies are at risk of default.

Follow me on Twitter @dyer440

 

 

 

 

 

 

 

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Saudi Arabia is playing chess while everyone else is sitting at home watching reality TV and occasionally playing with themselves.  The Saudi Oil Minister Ali Al-Naimi is kicking your ass and you probably didn’t even know it – until right now.  Here’s how he’s done it so far:

Step 1: Accumulate a horde of US Dollars.

Step 2: Show the World who’s really in control of the oil market.  His words in December 2014:

We want to tell the world that high-efficiency producing countries are the ones that deserve market share.

Crude Oil Prices subsequently collapse.

Step 3: Tell the rest of OPEC to pound sand.

Crude continues it’s plunge.

Step 4: Sell back US Dollars… wait whut!?  – Yep, that was a hedge.  Remember, they’re playing chess.   Meanwhile, guys like Harold Hamm scrap their hedges.

 

Step 5: “Shut them Haters Up”

Sorry I had to.  You should play that in the background while you read the rest; the Grandmaster of Oil is willing to go full Gangsta!

There’s a lot of “Haters” out there.  They believe Saudi Arabia is having huge budgetary issues and that they’ll soon have to give-in and forego this effort to bankrupt the rest of the worlds oil production.  The Grandmaster of Oil told us in the interview I referenced above that it doesn’t matter!!

The interviewer asked him, almost pleadingly, “But you have announced that you will have a budgetary deficit?”

His response:

A deficit will occur…. We have no debt. We can go to the banks. They are full. We can go and borrow money, and keep our reserves. Or we can use some of our reserves.

Go to the banks huh?  How would they do that?  What would that look like?

Well now we know.  It looks like this: Open the Saudi Arabian stock market up to foreign investors (see here), then IPO the biggest company on the planet (see here).  That’s Gangsta!

Bottom line, they won’t stop until there are mass casualties – they can’t stop – the future of their kingdom depends on it.  Now that hopefully you finally realize the non-Saudi petroleum producers are screwed…

Here’s the Trade:

Stay Short ConocoPhillips (COP).

I already gave you this one back in early November 2015, see my post Commodity Not-So Super Cycle.  It remains my favorite energy short, reason being simply because they haven’t cut their dividend yet (as I discussed in the article).

Here’s the chart, the red arrow points to where I handed you free money.  The green line was my original price target ($42):

 

Depending on when equities bounce this week (if they bounce), I think COP either blows right through $42, or bounces off of it.  Use the $42 level as resistance or support whichever the case.  For example, if we blow through $42, short it again once it bounces back to that level.  Conversely, if we bounce and COP is near $42, wait for it run – once this cold fish gets tired of running, re-short it.  It’ll be well below $42 once they cut that dividend!

Good luck.  Follow me on Twitter: @dyer440

 

 

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The hardest part of the trading game is sticking to a strategy.  Short term-ism is pervasive is our culture and more so in finance.  Therefore, I’ve provided a quick reminder of what is working below:

First and most importantly, Netflix – the chart below has my original forecast along with the various maneuvering I’ve done:

 

NFLX target = anywhere in the $60’s.  Refer to the previous posts here and here.

Next up is the Visa vs. American Express pair.  Refer to the original post here.

This pair has worked out well and we haven’t been stopped out of either leg of it, which I hope continues.  Either way however, this is a great trade setup in order to pivot with the market either up or down.  I really like the short on AXP here:

 

Regarding commodities – which I have beaten to death – literally (shorting) and figuratively, I believe value investors are putting money to work in these sectors to begin 2016 (especially oil & gas).  This should have the effect of holding them up relative to the underlying commodities. I therefore favor shorting the commodities over the equities right now.

However, keep in mind the currency trigger levels I pointed out here.  If/when those break it’ll be time to get long commodities again – as inflation perhaps finally wakes from it’s slumber.

Currencies are volatile these days (huge understatement).  I’m beginning to believe that Crude Oil is the dog wagging the proverbial US Dollar tail – and not the other way around.  The FX flows due to the crude trade are simply massive.  For example, since Q3 2014 the Saudi Arabian Monetary Agency’s reserves in foreign securities have declined by $71 billion! Reference

These could be are the capital flows causing the US Dollar to rally.

Good luck out there.  I’ll have another trade setup later this week, but for now “Stick to the Plan”.

 

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Since everyone seems itching to get long oil exposure – being the degenerate gambler myself – I’m going to share with you my own “trigger signals” for commodities in general.  First of all however, a bit of a history lesson:

The Oil crash during the Great Recession of 2008-9 was followed-up by a huge rebound as central banks around the world went all-in on various stimulus measures.

This has led some of you to have recency bias.  So first of all I would say:

Check your age, and bias at the door of this casino before entering.

Secondly, I believe the current Oil crash to be primarily a result of Saudi Arabia posturing, and the Saudi’s have played this game before.  Who remembers the mid 1980’s?  I don’t, I was under 5 at the time but I’m from Louisiana and my dad worked off-shore for Schlumberger (he got laid off).  Now I live in Houston and the old-timers here still talk about it.  They like to say:

Last one leaving Houston, please turn off the lights.

Anyway, it’s part of my life history – sort of a mythology of the time period.

After OPEC took the stance that they were going to capture market share – they didn’t stop pumping until everyone else was in real pain.  There’s no reason to expect the Saudi’s to change the playbook this time around.

If you were trying to bottom pick energy exposure back in the mid-80’s you had a tough time of it; there were 3 waves up in price, each followed by another collapse.  The rout finally ended when everyone gave up, then crude prices languished for a decade before anyone made real money in the space.

Now, most of you realize that commodities priced in US Dollars are therefore correlated to the US Dollar.   Did you know that over the past 10 years, they are 74% correlated on an annual basis?  One of my favorite Twitter follows (@TheEuchre) shared this:

 

My “trigger signals” on the commodity space are therefore currency related.  I don’t think you can overlook the currency impact if you are speculating on Oil or Oil related exposure.

I like to view the US Dollar in two ways, in USD/JPY and EUR/USD, as opposed to simply the US Dollar Index by itself.  I think there is more detail to be gleaned from it that way, and it provides more confirmation when both pairs signal the same thing.

So Here’s the Trade:

Stay away from Long Oil exposure (and commodities in general) until:

1) The USD/JPY cross falls below 115.50, AND

2) The EUR/USD cross trades above  1.148

Refer to the charts and levels below:

 

 

Sure, you might miss out on the first 15% of the move, but you may just save yourself from sleepless nights monitoring futures and more importantly, the huge opportunity costs associated.  There are opportunities out there that offer better risk/reward scenarios, so stay out of long energy exposure until the coast is clear.

Better yet, stay short; refer to the following posts for ideas:

• Yell Laughing at Commodities
• OPEC Is Dead
• Commodity Not-So Super Cycle

 

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As commodities continue to crash and pundits continue picking bottoms, you will do well by paying special attention to currencies.  If you haven’t noticed by now, everything is correlated to currencies at the moment.  Since we’re all currency traders now, it’s important to understand what is happening, and what the possibilities of it continuing to happen are.

First of all, if you haven’t read my article Fed Trade School, do it now.  I described what’s happening, and provided a strategy that continues to work (it’s not too late to put it on, or add to it, by the way).

Now, we are approaching a big binary event – an inflection point if you will: Fed Day, Dec. 16.  The market will read it one of two ways, in my view:

1. “One and Done”; the Fed raises rates and then attempts to reverse the narrative of additional rate increases.
2. “Fed 2% Target”; the Fed raises rates and then provides some narrative on how they will approach their 2% rate target.

After today’s speech, the odds favor the “Fed 2% Target” outcome, which will result in more of the same.  Meaning, the US Dollar will continue to outperform global currencies, and I will continue yell laughing at commodities as they crash, see below:

 

Most big research firms have suggested that equities are only in for modest single digit gains in 2016.  As you can see in the chart above, the S&P 500 is stuck in the middle of what’s happening to currencies and commodities worldwide.  Therefore, if you plan on outperforming in 2016 – I think you need more currency exposure.

So Here’s the Trade:

Part 1: If the Fed narrative is hawkish and they lay out their path to a 2% target, go long the following currency ETF’s:

1. ProShares UltraShort Yen (YCS)
2. ProShares UltraShort Euro (EUO)

Part 2: Go short your favorite commodity exposed countries via some of the following ETF’s:

1. Russia (RSX)
2. India (INDY)
3. Canada (EWC)
4. S. Africa (EZA)
5. Chile (ECH)
6. Brazil (EWZ)
7. China (FXI)

Part 1 or Part 2 will work on it’s own, but both parts paired together will work very well – especially if worldwide growth continues to slow down throughout 2016.

If you’d prefer more direct commodity exposure,  I have recommended shorting ConocoPhillips (COP), and Anadarko Petroleum (APC), here and here.  I still like those ideas and for full disclosure I am still in those positions.

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I’ve been handing out free money to iBankCoin readers for the past few weeks and I’d like to summarize my take on the markets and my recommendations up to this point.  This is done in an effort to be transparent with my ideas, calling out my own mistakes and tooting my own horn when I’ve made money.

First of all, if you’re short the Fed Trade School Basket you’re doing very well for yourself, I’ve updated my recommendations below:

Stay short the country basket, Brazil (EWZ), China (FXI), Mexico (EWW), Russia (RSX or ERUS), and Australia (EWA), you should be up on all of these except EWZ, be patient these will continue to work well, especially if you are long some of your favorite US equities as well.

Take some profits on Freeport-McMoran (FCX), you should’ve made some nice gains on this one, personally my options were up around 85% when I took profits on Thursday (too early).  If you’re still short I recommend taking profits and perhaps leaving a piece on, depending on your trading style.

Currencies are still a good play,  although my recommendation was to use Friday’s highs (11/6/15) as a stop loss, you would’ve been stopped out however, I believe these will still work; “Short the Aussie Dollar (FXA), and Short the Canadian Dollar (FXC)”.

Stay short Oil (USO), you’re making a killing here!  No reason to to cover, especially after we had war escalating events over the weekend (Paris attacks) and crude oil was still down today – very bearish.  Perhaps move your stops down depending on your trading style.

From last week’s post, Commodity Not-So Super Cycle you should be short ConocoPhillips (COP).  Depending on your entry you should be doing okay in this one.

Stay short COP, use Wednesday’s (11/11/15) high around $54.75 as a stop.

Finally, my call on coal (perhaps) bottoming in King Coal’s Big Bounce? is still a wait and see event driven idea.

Keep an Eye on ACI, for the signal to buy BTU, when it’s apparent that Arch Coal (ACI) is in fact going bankrupt, depending on the reaction in Peabody Energy’s (BTU) shares, go long BTU for a potential bottom in coal.

I think overall the markets should bounce early in the week and most likely give up those gains by the close on Friday.  The easy trade is to stay short commodity exposure (as described above) and stay long US equities until they break down again.  I personally doubt we’ll see any fireworks until the end of the year.

I’m working on a few ideas for this week, they’ll be associated with transportation (rail) stocks and perhaps THE momentum trade of 2016.

Feel free to comment below, let me know if I’m adding any value here or if you’d rather me go back into my own little trading cave.

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The picture above is the Pasha Bulker, which ran aground near Newcastle, Australia in 2007.  I’ve been to that beach and what an amazing sight that must have been!  Now that the Fed is going to hike rates in December, I figured it illustrated perfectly what could well be the (continued) fate of many commodities around the globe.  Not to get too “macro” here because academic economists are typically full of it- trying to explain things after the fact- but it should be apparent by now that the US Fed is running a monetary tightening policy whereas the rest of the world’s central banks are easing.

The effects of this are obvious:

1. The US Dollar is going to get stronger relative the rest of the worlds currencies
2. Things prices in US Dollars are therefore going to get weaker
3. Companies that produce and sale things prices in US Dollars will lose income/revenue
4. Countries exposed to exporting things priced in US Dollars are also going to feel the negative effects

See the chart below, Commodities ($GTX) vs the US Dollar (UUP), shown at the bottom:

 

 

Now that this is set to continue, at least until mid-December…

Here’s the Trade:

Countries: Short Brazil (EWZ), Short China (FXI), Short Mexico (EWW), Short Russia (RSX or ERUS), and Short Australia (EWA).  Use their respective recent highs as a stop loss, and use their recent lows as profit targets.

Companies: Short Freeport-McMoran (FCX), use Friday’s high as a stop loss; $11.25.

Currencies: Short the Aussie Dollar (FXA), and Short the Canadian Dollar (FXC), use Friday’s high as a stop loss.

Commodities: Short Crude Oil (USO), and Short Gold (GLD) – only on a break to new lows.

I’ll probably use options for that basket of positions since it’s a fairly short duration trade and I’ll be able to use a minimum amount of cash – allowing me to enter each one.  These trades are not that ingenious, they seem fairly obvious right?  There’s beauty in simplicity, and simple usually makes money.  Key Note: I think this strategy should be closed out by the day of the Fed decision, December 16 – It might self destruct Mission Impossible style, and here’s why I think so:

If they hike rates, the Fed will most likely hint at a “one and done” policy in order to talk the US Dollar back down.  More on this idea to come… but I think Dec. 16 could be the current commodity cycle’s low.  I think the Fed will begin to ‘turn their battleship around’ and start the slow process of changing the narrative back to easy money.  This is of course dependent on how weak the Q4 GDP estimates (and Q3 revisions) come in.   They could be hiking into weakness which is not good.  Furthermore, if you’re a little uneasy about staying long the market after one of the largest monthly rallies ever, the short ideas listed above are a good way to balance (hedge) your portfolio.

Last thing to keep in mind, it doesn’t matter if the Fed actually hike rates, what matters is that the jawboning and the perception of tightening is effectively tightening in and of itself.  That’s why these trades should work.

 

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