Senior Fly has allowed me to grace these hallowed halls once again, and for that I’m grateful.  Last time I was posting on iBankCoin I had one of my most profitable runs ever.  This time around I’d like to do the same, but it’d be a mistake to not have learned a few blogging lessons from the last go ’round.  Therefore I’m going to try to develop a “less talk & more action” approach in an attempt to post more.  The goal is to deliver more actionable trading ideas to the readers without all of them having to fit into some well developed macro puzzle.  Sometimes the big picture is unknown and you simply have to trade what’s in front of you… if you keep your discipline (using stops, money management, etc.) you will eventually catch the big move.  And once that happens you’ll find the big picture becomes clearer and you’re already positioned perfectly.

That being said, there is a sweet short setup developing on $XLE (the SPDRs Select Sector Energy ETF).  Crude Oil has been crushing shorts lately, and that’s all well and good.  The thing is, crude and energy stocks cannot stay correlated forever.  Why?  Because crude is NOT going back to 2014 levels and these energy companies are still in loads of trouble.  It’s simple really, the earnings are terrible and the resulting price/earnings are absurd.

Take Schlumberger ($SLB) for example: only the most dimwitted oil bull would buy this stock today trading at a 45 P/E (ttm)!!  Look at the rig count, these service company workers are all at home twiddling their thumbs (or working on their resumes).  The earnings will only get worse from here…  Fracking – psssh – if E&P’s had that kind of capital they’d probably pay down debt with it.

The bottom line is I believe the divergence is starting to play out.  For example, today Crude Oil futures were up 3.29% whereas the $XLE was up only 0.29% .  It’s time for the energy equities to underperform the commodity.  I think a reversal on the $XLE is forthcoming, and if I’m wrong so be it, but the risk/reward is setting up in the short sellers favor.

So Here’s the Trade:

The $XLE is trying to make a run at it’s recent highs in the 68.80 range; I don’t think it will get there.  Once it’s clear that the rally attempt will fail, enter it short (or buy puts).  Use the 68.80 level or the failed rally high as a stop loss.  Take a look at the chart below:

I think the failure high will occur somewhere within the orange box.  The target is anywhere in the 57’s (green box) by the end of July.  This represents about a +12% setup; properly placed option bets could easily reward +100%.

Good luck and be sure to follow me on Twitter @dyer440.

 

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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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ConocoPhillips will have to cut their dividend, there’s no if’s and but’s about it.  If you have any faith in their management, you have to believe they would not chose to take on MORE debt just to pay out $3.6 Billion over the next year.

I understand CFO Jeff Sheets declared recently that the company’s “top priority is the dividend.”  Those are the type of statements that make me cringe as an investor!  Think about it, some “experts” believe that half the oil and gas industry may go bankrupt.  If I’m a long term investor of COP, I want the company’s ongoing viability to be the CFO’s top priority.

COP has an earnings announcement on Feb. 4, 2016.  Given the extraordinary circumstances playing out in the energy markets, I think it’s reasonable for them to back down on this issue.  Who would blame them?

Expect a dividend cut.

So Here’s the Trade:

I told you in a recent post that the $42 level was key, depending on how the overall market bounces.

Well, equities bounced yesterday and COP rallied up near the $42 level ($41.82 is close enough for me), see the chart below:

That is a 30 minute chart.  The grey line is the $42 level.  The arrows are my numerous maneuverings (red = adding to shorts, green = skimming off profits).

Bottom Line: if you want some short energy exposure – COP is the play as long as it is sub-$42.

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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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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OPEC is dead.  Saudi Arabia rules the oil markets all by themselves and they are THIS close to hearing the sweet tones of the the final death knell to all their competitors.

Houston, we have a problem.

The pain is coming to an Oil and Gas producer near you, all it will take now is a little more time… If crude prices stay down below $50 for another 6 months I anticipate bankruptcies – which has been the Saudi goal all along.  Even the IEA expects weak demand and over-supply to last through 2016 (see their November report here).

This is the perfect storm of commodity collapse:

1. Declining Demand
2. Already over-supplied markets
3. Strengthening US Dollar
4. Saudi Arabia in control

For signs of oil bottoming, the very first thing you need is for the narrative out of Saudi Arabia to reverse.  I’m not talking about the kind of one-liner that came out this morning:

“Perhaps it would be fitting here to mention the role of the Kingdom of Saudi Arabia in the stability of the oil market, and its continued willingness and prompt, assiduous efforts to cooperate with all oil producing and exporting countries, both from within and outside OPEC, in order to maintain market and price stability”

Frankly, that’s weak sauce and the markets know it.  The second thing you need is global economic growth to help the demand side.  Finally, you need some production destruction; not a declining rig count – I’m talking about fracking bankruptcies, oil sand bankruptcies, more offshore projects shelved, etc.  The icing on the cake will be a weakening US Dollar.

Right now, the supply imbalance is GETTING WORSE, see below:

 

So Here’s the Trade:

Use any strength in the oil and gas sector to short it.  My two favorites are currently ConocoPhillips (COP) as I detailed in Commodity Not-So Super Cycle, and Anadarko Petroleum (APC).

Technically, APC has been resting above resistance which was first established in August at around $58.50.  The strength today (currently trading at $60) makes a good entry point to short APC.  Add to the position when resistance breaks, use a stop level of around $63 to limit your risk.  Refer to the chart below:

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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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