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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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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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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Beginning in around 2002/3 the energy/commodity complex began a magnificent rise as the sleeping Chinese dragon began to awake from its slumber ahead of the Beijing Olympics. The effects were widespread, even in locations that had zero exposure to China, investing capital began to flow into these sectors.  The narrative of the Commodity Super Cycle began to play out and the bobble-heads on financial media all had hard-on’s for any natural resource plays which were going to supply the raw materials for China’s growth.  Commodities, once viewed as speculation only, became the new asset class of choice and the ETF industry eventually took full advantage.

I was in the mining consulting industry during most of these commodity bull years and companies were spending a lot of money.  We were hiring like crazy and there wasn’t enough talent around to finish all of the projects we had.  Production companies were investing in land, transportation infrastructure, exploration, permitting, and equipment.  Rising commodity prices now meant that resources/reserves that were once thought to be economically unfeasible were now “in the money”, so to speak.  Times were good, but it was the classical example of strong demand (and higher prices) leading to over-investment, leading to low oversupply (and lower prices) leading to weak demand.  You don’t need a Harvard Business School degree to recognize what’s happened:

The Boom is now a Bust.

The problem now is figuring out where we are in the cycle.  I think much of the bust has already taken place in regards to commodity prices however, they are mean reverting instruments and will probably overshoot to the downside just like they did on the upside – so stay clear of them in my opinion.  Furthermore, the Fed’s monetary tightening narrative should lead to more commodity downside; read my last article for details: http://ibankcoin.com/dyer440/2015/11/06/fed-trade-school/

Think back to what the world was like in 2002/3, think about the size of the businesses in many of these sectors: energy, mining, chemicals, transportation, etc.  These sectors are going back to at least 2002/3 levels.  Just like the consulting company I used to work for, they will have to shrink.

The interesting thing to note is that all these companies are managed by HBS type personalities, and the hubris at the top is simply incredible.  They should all be scrambling to save their companies but instead they’re missing the writing on the wall – this is especially true in the Oil & Gas industry.  Managers typically have a hard time acting like traders; when we realize a mistake – we get out and cut our losses (at least we should) .  We shouldn’t sit around with our fingers crossed hoping for a rebound.

 

So Here’s the Trade:

I looked for a company with the following attributes:

• Overpriced relative to P/E
• Large Cap
• Tradeable, liquid options
• Large Dividend
• Still has enough meat on the bones to short

The winner is ConocoPhillips (COP).  COP has a forward earnings P/E of around 85, and they are attempting to defend their dividend which is around 7%.  The bullish thesis on COP is “collect 7% while you wait for oil to rebound”.  That is insane.  Last quarter COP generated $1.93 billion in operating cash flow, but spent $2.17 billion in CAPEX and another $920 million on dividends.

The bottom line is they will have to cut their dividend distribution.  That, combined with the commodity price exposure and you have the recipe for a fine-looking short trade.  Use the recent high’s ($57-ish) as a stop loss , and the recent lows ($42-ish) as a price target.

Refer to the COP chart below:

 

 

 

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