In early December 2015 I warned not to touch commodities until specific currency levels were breached on the USD/YPY and EUR/USD crosses. For reference: Calling All Degenerate Oil Gamblers!!.
I was specifically referring to crude oil and energy related exposure. That was back when everyone was calling for a bottom in crude every other day. I remained short energy exposure and it generally worked out. Now it’s time to revisit those currency levels because the Yen Carry Trade is unwinding. This has led many to question what the hell is going on – including myself.
From my article:
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
The USD/JPY level has been breached due to the unwind, the EUR/USD has not (yet):
The interesting thing to note regarding oil and energy is the decoupling from US Dollar correlation. I believe this is a testament to the weakness in crude oil and energy related names.
On the other hand, it may be time to look at non-energy related commodities. Is this the turn? Is inflation (or US Dollar devaluation) on our doorstep? If you’re listening to the story Gold is telling, you may be inclined to think so. Instead of chasing gold higher, I’ve got a better idea.
Here’s the Trade:
Continue shorting oil & gas related companies and derivatives, I like these two:
- $USO
- $UNG
I would also stay short energy related equities. I would recommend one or two but I no longer have an edge in any of them specifically now that $COP cut their dividend (as I warned multiple times here).
So here’s what is happening: the oil & gas companies in the US are pumping whatever they can simply to bring in cash flow. The cash is not returning a positive return on their initial investment, but at least it’s returning cash – which these companies desperately need to pay their bills (and notes). Bottom line is they are NOT cutting production, they cant.
They’re in a financially engineered negative feedback loop.
The Saudi’s will not come to the rescue. I’ve given you their script already, here.
Good luck out there, and follow me on Twitter @dyer440
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