QE3 Positioning Should Be Reactionary

I will warn you only once. Do not bet on the third round of easing before it happens.

I’m not going to pretend like I can prophesize; I have no idea if the Fed will embark on such an endeavor or not.

What I am cognizant of, rather, are the potential magnitudes of outcomes. Worst case of betting against QE3, at this stage in the game, is you miss out on 5% of upside when the Fed announces plans.

The worst case of betting on QE3 and not having it develop is you get to “enjoy” 20% of downside in commodity related names as the dollar devaluation trade unravels and everyone stuck inside gets their limbs torn from their sockets.

You have been cautioned.

The cause for my 1% loss this morning can be summed up by three things; oil, uranium, and MGM.

Oil is obvious, as people jump into buying crude thanks to positive outlook on Japan’s economy.

Uranium is most likely from people running scared, as a result of Germany’s declaration of nuclear de-activity…someday.

And MGM is just MGM. Roll with it.

Ergo I will not be adjusting. Japan may instigate a massive surge in crude, but once it’s taken off the table, there seem to be far more exogenous events that can negatively impact crude, at this point, than positive ones. Libya declaring a cease fire, for instance, and beginning to massively export crude so as to aid reconstruction efforts. Ditto for other countries in that region who have been hit by revolution. See my other rants to try and comprise a full list of scenarios that may crush crude oil prices.

I will add to my ERX short if it crosses $90; and will do so again at $110.

As for nuclear, I sincerely doubt countries saying they intend to wean off will carry through with it. There are just no suitable substitutes, at this point. Alternative energy is not up to the task, oil is very, very expensive, and I don’t see countries having the will power to step into coal. Still, if you believe that nuclear is getting the axe, coal and perhaps natural gas are the places to be.

Myself, I think these countries are just making show until things calm down enough to renege. But even if a decade from now, some countries do go through with plans to scuttle existing nuclear operations, uranium miners like CCJ are a buy today. Plants marked for shut down will still require fuel until their doors are closed. And for the task of keeping all current plants operational, uranium prices are cheap here.

Altogether I will hold my positions, which I have favorable prospects for, hedging by holding short energy companies (ERX). The losses today are very much an off event, caused by unique weakness in other areas of my portfolio. However, further downside in these positions seems limited, and the rest of my holdings, especially the multi-family REITs, are displaying strength.

The market is boring, so I’m out. The holiday weekend is not something most people have the courage to bet against, so I don’t anticipate any sudden change between now and the close.

BG is up over 1.5% again today. Let’s keep it coming.

My performance is mixed, and I gave back some of yesterday’s gains.

Hopefully, Libya will negotiate a cease fire this weekend, brokered by Europe, and the resulting calm will help to absolutely destroy the price of oil and, lagging somewhat, gasoline.

I’m rather happy at the moment. The state of Michigan finally has a governor who isn’t a complete imbecile. Maybe we can finally have some population and job growth now that we’re not running a policy of stabbing our own working citizens in the face with pencils.

I must admit, I’ve enjoyed watching the “spend more, we can’t afford cuts” crowd going haywire, trying to explain why cutting salaries and reducing services will systematically bring about the end of civilization. However, it has finally started to get a little old. Snyder is preparing to sign into law the new year budget, which goes to town on both Michigan’s open purse policies, and our retarded tax code.

For the first time, I’m actually optimistic about my state’s future. Any more of their nonsense, and I was going to have to flee to Texas like Ted Nugent.

My, my… where to begin?

A report came out this morning suggesting that U.S. farm exports could increase by as much as 26 percent this year, as groups like Bunge try to meet absurd demand from China. It’s looking to be a rough crop season, so I’m not sure how they’re figuring on this, but then the U.S. typically has a massive crop surplus (we give the shit away, in a normal year), so maybe the exceptional moisture and late planting cycle won’t impede the money making noticeably?

Coming off of three spectacular quarters leaving them flush with cash and coupled with this environment, BG announced they would increase their dividend by 8.7%, bringing it up to one quarter a share.

And what to do with the rest of their money, unless they just leave it sitting in foreign accounts around the world? Well, BG also announced that they’re dropping another $350 million in operations, most of which will go straight to their newly expanded sugar operation in Brazil. They intend, in addition to simple replanting of fields, to expand business by 300,000 hectares.

Sugar cane is, of course, what the Brazilian government is using to create bio-fuel. What is the possibility, I wonder, the company is fully aware that their entire new crop yield is going to be acquired for just that purpose? Can you say near ensured profits? Couple that with restructuring occurring in Australia by a major sugar outfit, and it looks promising that BG will get full compensation for its harvest.

Meanwhile, predictions that agricultural companies like BG or ADM will get crippled by increasing grain prices will continue to come up short. ADM’s CFO said it best last Wednesday, I think:

High grain prices don’t benefit everyone evenly. Archer Daniels Midland Co., for example, buys a lot of grain and soybeans to make processed food ingredients. When crop prices jump, it can squeeze that company’s profit margins.

But Archer Daniels Midland Chief Financial Officer Ray Young said agribusiness conglomerates can even out the volatility by playing both sides of the market. Companies like Archer Daniels Midland or Bunge Limited both buy and sell grain, so they can offset losses in one division with gains in another.

“Our businesses are interconnected,” Young said. “We manage risk on an enterprise basis, rather than a segment basis.”

And how they have. BG, for instance, it appears idled a German oilseed mill until August, just so that they could avoid losses from un-purchased (and relatively expensive) inventories.

So how long are prices of grain going to continue upward? The same article had this to say, and I have no reason to doubt it, looking at the global shortages:

Presenters made clear that while global food prices might be unpredictable from day to day, they are headed in one general direction: Upward.

“We’re seeing strength in the commodity sector across the board,” David Honeyfield, president and chief financial officer of fertilizer maker Intrepid Potash Inc., said in comments at the BMO Capital Markets 2011 Farm to Market Conference in New York.

The higher grain prices mean farmers will be able to pay for more expensive inputs like potash or other fertilizers, Honeyfield said. And prices aren’t likely to fall anytime soon. That’s because global surplus levels of major crops like corn, soybeans and wheat are at historic lows. When backup supplies are so thin, crop prices can jump on even small supply disruptions.

It could take years to bring surpluses to normal levels, Honeyfield said.

“It takes two or three really good growing seasons to make a dent,” Honeyfield said.

Watch as the underperforming large scale operations like ADM and BG continue to defy expectations, much to the detriment of those who sell out early.

I’m up about 1.05% with my REITs leading me significantly higher, and broad support in the rest of my positions overcoming the losses in ERX.

Meanwhile, the price of crude is down from yesterdays bounce, and weakness is permeating the commodity space.  Then again, after yesterdays run, it may be a healthy settling to the next leg higher.

I am not so proud to ignore that possibility.

Soon, as early as next week, I hope to see where things are headed.  I wait with baited breath for Saturday and Sunday, the time when elected officials make public announcements, particularly the bailout and monetary aid variety.

And in waiting, I am very, very bored…

While I know plenty of people are anticipating the same old song to keep playing, it rather appears that European distress has continued to flare up and is making that impossible.  Today, Greece has begun what might be called a fire sale of assets, looking to unload and privatize.

Would they be doing this if they thought international assistance was just around the corner?  Perhaps, if this is a largely symbolic act, they would.  But if it is not such an act, then it marks a new beat in the global symphony.

The IMF and similar world bodies must be very anxious about the condition of other European countries.  Portugal and Spain are in the corner of the World’s eye, so to speak.  And it is just as plausible that these groups are concerned with the idea of not having enough firepower to put down a crisis caused by the latter, that they are presently toying with the idea of disserting the former.

How this all ultimately plays out is rather complicated.  However, the last time these concerns went mainstream, the euro collapsed significantly against the dollar.  I have reason to guess the final outcome will look similar.

More directly, a slowdown of the European economies will surely be felt in the energy markets, as demand drops off from an entire continent.  That’s one outcome.

Another would be that the EU devalues the euro to accommodate its members, thus strengthening the dollar.  Again, here, energy markets, as well as all U.S. denominated assets, would be roiled.

What I am confident in is this:  Europe and its countries have a…

…oh wait a minute, I promised some sort of retarded picture for the illiterate in my last post.

There.  Continuing.

European countries have a long history of operating by currency devaluation.  The historical context of this problem stems from after the Great War.  Watching London stagnate Britain’s economy in pursuit of a strong pound sterling, as France benefited from a fixed, low exchange rate (France was the original China, you see), permanently fixated the sound logic of maintaining low unemployment, even at the expense of other citizens. 

I do not expect that mind set to change dramatically, even in the face of stronger representation from purportedly conservative groups.

All of this bodes well for the dollar; particularly because it now appears as if Bernanke is getting what he has so desperately sought: wage inflation.  I read about wage inflation picking up today, for contract workers.

In addition, unemployment is picking up in the U.S. making it further dangerous for the Fed to continue destroying the USD.  Continued easing could force a commodity run that puts the unemployed into a deep poverty.  Plus, if wages for employed workers are increasing, bringing about such economic benefits as they do, it will be equally hard to justify continuing the path at hand.  The Fed is being pulled apart from two ends, and I think both play to a policy of a firmer dollar.

All in all, I would not be long energy here, with reports of slowing economies and many reasons for a stronger currency.  Moreover, I would not push my luck, betting that the Fed continues its policies indefinitely, as that is most certainly not the case. 

Similarly, while the destruction of the euro may aid commodities in other markets, or even at home as foreign deposits search for safe havens, but as a rule of thumb I would not count on such a trade, as temporarily it looks like Europe is going to refuse to devalue the euro, until it absolutely has to.  And the indirect relationship between the dollar and the euro makes those trades extremely difficult to calculate.