Daily Notes
10 June 2009
“And they all moved away from us on the Group W Bench…”
(A reference to the song Alice’s Restaurant at about the 11:30 time mark. )
Russia today announced their desire to move to a lower U.S. Dollar holding level in their national reserves. This is a big deal partly because Central Banks NEVER announce an intent to move away from an asset (since that drives down the price they are likely to get for it). They have additional motives.
Brazil announced that it is going to fund the IMF with $10 Billion of loan purchases (at least, the news reported it as loan purchases – since the IMF usually uses SPRs: Special Drawing Rights – it’s a little murky exactly what form their funding will take. The interesting bit is that Brazil had demurred on such funding just a bunch of months ago… due to the excess risk in IMF SPRs (backed by a basket of currencies only part of which are US $). Clearly they think the basket is better now.
On these two bits of news, the U.S. Dollar tanked. Then we had the Treasury Auction of 10 year bonds…
At the 10 year treasury auction today, the interest rate touched 4% (which also means the PRICE of the bond dropped – so if you owned bonds already they were worth less…) Clearly it’s getting harder for the U.S. Government to whip out the old credit card.
That caused a dead flat market to roll down. At the same time, the U.S. Dollar gained a bit of strength (due partly to money coming in to buy those bonds at those high interest rates, and due partly to folks dumping many stocks, including foreign funds. I expect the U.S. Dollar slide to continue, after the bond trades settle.
OOTUS (Out Of The U.S.) is still working. See the racing stocks tab for currencies and for foreign emerging stock markets for the latest moves (which shows India on top as I type this).
08 June 2009
Now it gets hard.
It looks to me like the market is entering the Summer Doldrums. The “Sell in May and Go Away” aphorism captures this. The market tends to “go flat”. We’ve had a big run up (hope you enjoyed the ride!) and now it will be hard to find “rocket rides” into the end of the year. This is a preliminary analysis and I’ll flesh it out in the posting next Friday.
For now, take a look at this chart of VIX – the Volatility Index. Volatility goes “way high” in a crash. We have returned to near normal volatility.
VIX - Volatility Index (not a ticker, you can't trade it) VXX - Short term VIX futures ETN (a ticker you can trade) VXZ - Medium term VIX futures ETN (a ticker you can trade) FXY Japanese Yen SH "Short" sell of SPY SPY S&P 500 benchmark
At the same time, the market today opened down 100+ points on the DOW, and slowly drifted back up on very low volume. There was a small spike in volume and prices went up at 3 pm ET. Some cash money stepped in to buy (not big, but enough).
My take on this is that the market makers make money on volume. For each buyer, there is a seller and they get a commission (most days – sometimes they need to sell short into a “hot stock” at too high a price or “buy in” to cover a short by scaring folks out of long positions). When there is no volume they will often try to “run the stops” by pricing stocks way low and making stop loss orders sell out. (Covering any shorts they had to make in the last run up, or taking the commission on selling those stocks to the “buy the dips” “limit” orders sitting below the present price.) You can’t force folks to buy, but you can scare them into selling.
This often happens Monday morning as the traders came in “flat” or with no inventory to sell, from the weekend. Someone else started to take advantage of this with some buy orders and we got a spike up as market makers moved their quotes up.
Remember that prices are only QUOTES until someone moves VOLUME. The price moving does not mean someone is buying or selling, it means the market maker is moving his quote to get someone to buy or sell… They moved prices down to pick up some cheap inventory, then when “real buyers” showed up they rapidly moved the quotes up to sell higher than they bought. This is why you have to be very careful with when and how you use stop loss orders…
If you are building a new portfolio at this point, I’d start with high dividend stocks that will pay you through a long flat summer. I have several of these (and there are lots more). Things like oil trusts (LINE, PWE, PGH, etc.), Australia funds (I like the dividend on IAF a bit better, as it is paid quarterly, than EWA that only pays at the end of december, but both are good), even cell phone companies (CEL in Israel has a very nice dividend, nearly 13% as I type), and oil pipelines ( TGP is a natural gas tanker company. They enter 30 year leases on their ships, so it is more like a pipeline than an oil tanker. The price tends to move with oil tankers for no good reason, but right now it has a 12% Dividend. Nice.)
The market This Week
WSW – Friday, June 05, 2009
I put this comment in the daily notes on last weeks posting, it bears repeating as the major financial news of the week:
The Ministry of Stupidity Speaks had the congress interviewing Ben Bernanke. Ben is a great guy and does a wonderful job. He had to say that he will defend the dollar, and he did. He pronounced a list of all the things the Fed can do to unwind their balance sheet (loaded up with things from doing “take unders” (not “bail outs”…) of various agencies and financial companies (like AIG) and NOT cause inflation.
But news flow had a report of Geitner pronouncing to a meeting of Chinese students that Chinese investments in America were sound; and they laughed at him… Someone needs to tell the students not to be so honest. At least not until China has finished rolling it’s US debt into shorter maturities…
So we had the dollar showing strength. OK, we knew this would happen for a little while a little bit. Just don’t expect it to hold for long.
I expect this will cause a short term rise in the dollar, but nothing fundamental has changed in the economy or the basic fact that the U.S. Government is broke, but sill wants to load up the credit card with all it can (“free” healthcare for all, Government Motors as a welfare plan for the United Auto Workers, a complete replacement of our entire energy infrastructure, little things like that…)
I have lightened up my non-US holdings (not exited, just lightened a bit). Partly because I think the dollar will, for a short time, move against them a little bit, but also for the simple trade discipline rule that when you have a big gain, like a double, or a position has risen out of all proportion to your portfolio design (i.e. if you have a 10% limit per “position” and one as risen to 20%) you simply must “rebalance” as a risk mitigation strategy.
This weekend I will be doing a more through review of longer term trend expectations and I’ll put an update here.
We had the spectacle of one day, the News Flow had some traders saying to short the commodities companies (in particular FCX) or to sell out of oils (in particular PBR) due to them being significantly high, followed the next day by Goldman Sachs saying oil was going to go way higher. What a “whipsaw”. Up, down, sideways.
So I’ve lightened my PBR by about 1/3. The chart looks to me like it is setting up for an entry on next Wednesday morning just before the Oil Inventory Report (10:30 ET or 7:30 PT). I’ll be watching a 10 day 15 minute and 1 hour charts for a ‘re-entry’ on that part of my PBR. (IFF the charts say to do so…)
For the US markets, we were substantially flat on the week. A bit of a wobble, but not much. ADX on the 10 day hourly chart (the DMI indicator part that tells you strength of motion) fell to 15. That’s a dead market. I’ve started raising cash (partly to prepare for entries into other new themes, partly due to the need to ‘rebalance’ over strong positions, and partly due to the market saying it’s “dead money time” in the U.S. stock market – Perhaps that “Sell in May and Go Away” market aphorism…) Mexico has also gone flat, so I’ve exited the EWW position. I entered it late, and it is particularly risky to enter a trade late, then hold through a flat time for a potential drop.
Sometimes I don’t flow my own rules about how to enter a trade, then I regret it later…
The BRIC trade (Brazil, Russia, India, China). Had Brazil more volatile than the US market, but substantially flat by the end of the week. Same thing for China, but Russia took a drop. Meanwhile India rose. Why? There was a “pundit” on one of the financial channels talking up India relative to the other BRICs. OK, I’m going to watch it and see if it’s time to rotate more percentage into India, but you certainly don’t need to “enter” the trade on a talked up day.
In daily notes last week, on the day that Brazil spiked up, I made one of my more typical mistakes. I knew to sell the spikes and buy the dips. I had a trade rule that said to sell 1/2 when you have a double. I ignored both because i was too busy feeling good. OK, not a big deal. I’m still at about a double on the trade, but I’ve been reminded (yet again) that the trade rules exist for a reason; and that the time to buy is when blood is running in the streets, and that the time to sell is when you feel most happy about your position and want to tell the world…
We’ll see what tomorrow brings. For now I’m just loving it: Heavy in EWZ and CZZ. Up 4.7% and nearly 10% respectively as I type this… Gotta love that “money for nothin’ and the land for free” trade put on in CZZ back at about $2.85 a share – now it’s at $5.60 and folks are paying up for it. I have a double, and ought to sell half, but I’m not going to. Yeah, I’m violating trade discipline. But with BZF the Brazilian currency (the Real) going up, with SGG and Oil both going up (CZZ makes sugar and fuel), there are just too many positives for me to walk away. We’ll see if I’m showing great wisdom or being an idiot for violating trade discipline…
CZZ briefly touched $6+ then bounced off $5.25 a few times and ended the week at $5.40 more or less. So I’d make that an “idiot for violating trade discipline” more than “great wisdom”. On the other hand, I’ve lost all of 20 cents a share from my brain fade moment. Not a big deal. Over time, sugar and oil are going up. Both from increasing demand and from shrinking dollars. I will be holding a core position in CZZ for a long while. Yeah, pushing for a triple… I really like triples… And I think CZZ has that in it, longer term. It likely won’t be the rocket ride it was off the hard bottom, but it ought to slowly rise to about $8 to $10 over an investment time horizon. So I sold 1/4 of my position on Friday just to spank myself for not doing it before. The 3/4 I’m going to hold a while longer (expecting it to rise after the oil inventory report on Wednesday – we’ll see.)
Last week I had a section “Looking ahead:” at the US Dollar down trade. Well, it was a good call. I’m repeating the chart here. We will likely see the dollar continue to rise (until this “down dollar” bet reaches the moving average stack).
Dollar Trade -Down - getting old
Look at that RSI. Approaching 80. That’s what happens in a bull run getting old. This ticker “UDN” is a bet that the Us dollar will go DowN. There is a matching “UUP” that bets the Us dollar will go UP. So what does this mean, 80? It means that a lot of distance is between the price and the moving averages, that a lot of people have figured out this is a good trade to have made, and there are ever fewer folks left to figure it out and join the trade. Typically, RSI is a leading indicator. When it hits 80 you have a bit more to go, but need to start thinking about your next trade and thinking about stepping away from this one for a while.
If it is a long term (secular) up trend trade, RSI will tend to oscillate between 50 and 80. If it’s a trade that’s rolling over, it will go from 80 to 50, then up a little to about 70, then down to 30, then up to 50, then down to 20; when it then says the short side is getting old. Basically, it’s a bit of a roller coaster, so you watch the bumps up and down. As RSI hits 80 ish, watch for a pull back. At the NEXT run up in RSI, if it makes a new “bump” that is lower than the last one (i.e. less than 70 or so), then that trade is over for a while. If it rolls: 50 / 80 / 50 / 80 etc. you have a steady rising position with lots of room to run … until that “next 80” turns into a “next 70” or even less… then it’s over. That time is also when the Simple Moving Averages have gone into a Flat Weave. Right now, the SMA stack is pointed hard up. We have time.
I expect it to be a shallow strengthening, followed by another drop of the dollar, like mid-March to mid-April and probably starting in a couple of weeks.
The only part I missed was the onset. Didn’t count on the Bernanke Cheerleading.
Now this particular trade, against the US Dollar, is a very important one if you have a lot of money Out Of The US, as I do. So this is telling me to check, and double check, that positions in places like Brazil and China can beat a (temporarily?) strengthening dollar – and to do it now before the dollar starts to move… UUP and UDN are measured against a basket of currencies, but dominated by major exchange currencies like the Euro and Yen – not so much against the BZF or Chinese Yuan. It is quite possible, and maybe even likely, that the US Dollar can strengthen against the Euro while BZF strengthens against both. So this is just a warning flag, not an exit call…
Well, take a look under the racing stocks tab up top at the currencies. Run a chart of BZF. It’s got an RSI of 80 … and the Real has ‘gone flat’. I’m not panicking out of Brazil just yet, but I did lighten my EWZ position back to be in line with my trade rules. I’m expecting the BZF to stay flat and not fall against the dollar, even as the dollar strengthens against the Euro and Yen. We have a treasury auction coming up and that will tell us a lot about the demand for dollars globally. TBT continues to ‘win’ meaning long term bonds are dropping…
Ideas of the Week
If you would like a peak ahead at what I’m evaluating this weekend it is stuff like oil services and some tech. Cell phones, pda’s, that kind of stuff. What all that lithium, copper, etc. gets turned into for sale. AAPL is ripping, but I “have history” with them that makes it hard for me to be objective. PALM is on a rocket ride, but you need to evaluate it carefully, it’s gone up a lot already. I’ll probably stay with the QQQQ basket as a less emotional vehicle for me. PALM is moving based on an introduction of a new phone with S Sprint / Nextel. Expect the run to end on the actual shipment (soon).
Hog Wild in China?
I always wanted a farm…
CVGW Calavo Growers - Calif. Avocados and veg. MLP Maui Land & Pineapple - with a tourism kicker... CGLA Cagle’s Inc - Atlanta Georgia - Chickens and feed CALM Cal-Maine Foods - Eggs SAFM Sanderson Farms - Mississippi Chickens & Poultry PGPDQ Pilgrim’s Pride in bancruptcy (trailing Q on ticker) HOGS Zhongpin Inc, - Chineese hog farms FEED Agfeed Industries - Chineese hog farms & hog feed SFD Smithfield - Huge intl. meat & hog producer HRL Hormel - Spam spam spam spam ... and a whole lot more SPY S & P 500 baseline
In daily notes I’d said:
Looks to me like FEED and maybe HOGS are rocket rides with a bet that as China gets rich, there will be one Whole Heck of a Lot of sweet and sour pork replacing steamed rice…
But even the domestic farms and meat producers are rising faster than the S&P 500… Maybe it’s time to “buy the farm”? I’m planning on taking a “tiny” position in HOGS or FEED (or maybe both) and maybe a piece of MLP or CVGW depending on how I feel about pineapples vs avocados …
Notice that FEED is on a “parabolic spike up” and these often resolve back to the moving averages. Hard core traders will put on a “pairs trade” and short that type of stock against a similar stock that is not spiking up. I think we saw that on Friday when HOGS spiked up 10%+ (as traders bought HOGS against a FEED short?). This is part of why I’ll buy two matched stocks if I can’t figure out what the “pairs trade” trader will do to me. So I buy both CCL and RCL when I do cruise ships and both RTK and SYNM as my synthetic oil toys (since there is a trader that regularly does pairs trades between the two and I just don’t want to worry about it.) So this coming week I’ll be looking at buying a “tiny” in both FEED and HOGS (and probably SFD would be better as a long term cautious investment. For a non-rabid trader, a “sweep” of 1/2 SFD and 1/4 each of FEED and HOGS would be a nice mix of global established strength with risky Chinese growth. Make it 2/3 SFD and 1/6 each FEED and HOGS if you are very conservative. Yeah, complicated. But it reduces my volatility and lets me neutralize a bit of what the hard core traders are tying to do to me (scare me out of one while bidding up the other).
Have to find something else to sell first, though… I’ll need to race what I hold against them and see who loses the race (and what the volatility looks like – too bouncy is annoying… and what has an RSI at 80+ and maybe isn’t quite time to buy until that dip Real Soon Now…)
Well, I’ve lightened my sugar farm and my Brazil a bit, so now I’ll have money (in 3 days when it settles or before then if the entry call is very clear) to buy a bit of Chinese hog farms “on the dip”… whenever it comes.
(I divide things into Full Position – about 10% of total money to invest, 1/2 Position, 1/4 or small, and “tiny” or less than 1% of total money (10% of a ‘full position’) – reserved for risky or unfamiliar companies, those on huge rocket rides that might collapse back a long ways, or toys. This is typically a couple of hundred dollars up to a thousand or two, but no more than that until I get familiar with the company and know it better.
So I’m looking at a “tiny” or a “small” position in these farms. I can add more later once I’m comfortable with their “action”.
What does the 10 day hourly chart say is happening now?
The charts on this posting are very large. On a Mac with Safari, “CTRL” and a mouse click lets you open them in another window for better viewing. Other browsers, YMMV…
Here’s a 10 day houly chart of the Dow 30 Industrials (DIA), the S&P 500 (SPY), the Nasdaq tech companies (QQQQ), the Russel 2000 (RUT), and both a Brazil fund (EWZ) and an Australia fund (EWA). It also has a ‘short fund’ (SH) on the chart so you can see what being short this market is doing right now. We also have EWO, an emerging Europe Austria fund, EWW for Mexico and IIF for India.
10 Day Hourly Interval Broad Market
This is a live chart, so my comments will describe how it is now, but in a week it will be showing new data and a new week. Since I think it’s more important to be in touch with what the market is doing NOW than to preserve the historical chart, this is, IMHO, a reasonble choice. Just don’t be surprised if the chart I describe is not the one you see a few weeks from now!
We see that the U.S. market is in a flat wobble. No need to be there. The emerging markets are continuing to out perform, though the action has moved to India. No real surprise. India elected a pro-business government. Decisions decisions… BING! I’ll take India for $10,000… Obama is now pushing for a VAT type tax (10% National Sales Tax) to fund his spending spree since the Carbon Cap and Tirade got watered down enough that he’s short a $Trillion or so. This will help US Stocks how, again?
(FWIW, under the ‘racing stocks‘ tab I’ve added two examples of ‘fast trader’ charts under the SPY broad market section. You can trade this market just buying and selling on the crossovers of the 16 hour moving average, but a couple of the other indicators can help… if you want to day trade. Sideways choppy markets are suited to day trades, but you must be fast to exit if it turns down. When a market goes flat and wobbles, you can make money trading, but being an investor is just taking on the risk of a drop with no gain. Step aside. Just step aside.)
Other Asset Classes
The 10 day hourly asset class race:
10 Day Hourly Interval Asset Class Race
Everything has gone flat to down. Absolutely everything. Bizarre. Even the very short term bond fund, SHY, rolled down. Clearly there is a run to the US dollar / cash as Bernanke talked it up and a move into India on the election. I’d take this as more of a “dip” to get in than a “top – roll over” to get out. But it raises the flag, so this weekend I’ll be doing a more in depth double check. Right now I still see China and India buying all the commodities they can while they dump their treasury bonds. My GUESS at this point is it’s just a news driven wobble in the long term trend of: “dollar down, stuff up”. Time to take a tiny in India if you don’t already (or maybe “small”) and roll up to a full position on the next “dip”…
SPY S & P 500 US stocks GLD Gold EEM Emerging Markets FXY Japanese Yen JJC Copper SHY Short term bonds 1-3 year USO U.S. Oil DBA Agricultural basket SLV Silver WOOD Wood / Timber
So what happened in the Tech Market relative to world markets?
Recent months - A Tale of Two Markets
QQQQ Nasdaq 100 mostly Tech companies DIA Dow Jones 30 Industrials SPY S & P 500 largest companies in the U.S.A. MDY Midcap (Middle sized in terms of market capitalization) RUT Russel 2000 - a collection of 2000 companies from small to large. EWZ Brazil fund EWA Australia fund EWO Austria fund EWW Mexico fund
Shows tech making a breakout against the other markets after a long flatish period. The low dollar is helping tech exports and the recent turn stronger in the dollar has dampened foreign plays. My preference would be to hold some of each. Hold tech against the foreign component of your portfolio. Only “once the trend is confirmed broken” would you exit one of the rising themes. (i.e. it’s a “dip” until you have a “failure to advance” after a “dip”.)
Were Bonds a good idea?
OK, lets take a peak at the Bonds Race.
All the bonds rolled over (and TBT went up, being a “bond short”). Odd, given the dollar strength. Even TIP took a hit on the assumption that inflation will not happen (i.e. that Bernanke has more magic than Obama has spending lust.) This is a traders market for bonds as The Ministry of Stupidity Speaks and drives things back and forth. I’m neutral (i.e. I own no bonds nor have I taken a “short” position right now). It all depends on what the bond auction does next week, and you can’t know what that will do. (Will The Fed intervene to suppor the Treasury? Will China dump? Will the European central bank intervene to support the dollar so they don’t get completely smoked in the global market for selling goods? A high Euro makes Mercedes very expensive and harder to sell…) The long term bet is TBT, but for now, I’m stepping aside.
What sectors won this week?
17.63% DJ US Aluminum Index 14.37% DJ US Railroads Index 14.29% DJ US Transportation Services Index 13.73% DJ US Airlines Index 13.15% DJ US Consumer Electronics Index 12.68% DJ US Automobiles Index 11.45% DJ US Commercial Vehicles & Trucks... 10.90% DJ US Industrial Engineering Index 10.52% DJ US Automobiles & Parts Index 10.27% DJ US Industrial Machinery Index
So we have aluminum rising from the dead (and likely an early entry point on a bottom fish play). Various transportation (most likely on the oil drop, that turned back to a rise by Friday; along with some China shipping / rail income to domestic rails and bulk shippers for all that coal and copper they are buying) with a bit of economic recovery expectation. OK
Per airlines: “NEVER BUY AN AIRLINE”!! OK! GOT IT!!
But the rails and commercial vehicles (think big yellow things) and the “Build things for China” Industrial Engineering companies. These are all likely early cyclical moves off a bottom. So “click through” the chart you get from the heading of this section, look at the winners, and see what looks good. Over the next week I’ll be adding some of these sectors to the “racing stocks” tab. For now, FWLT, FLR, CAT, CMI, and both JOYG and BUCY are my “go to” names in those areas. The race of these shows JOYG and BUCY on a tear (having been hyped a bit on some TV shows lately). I’d go for a tiny or small in each of JOYG and BUCY and a small any of the others, then round out my tiny on the first pull back. Not saying I’m going to do that, just saying that is how I would approach it. I need to finish my review of what I presently hold before I decide what to hop into next.
Autos was largely F Ford along with the German makers (VLKAY VW, BAMXF BMW and DAI Daimler, in order, with honorable mention for PEUGY Peugeot and NSANY Nissan). Maybe I left that Ford trade too early… Oh, and smack in the middle was HOG (Not HOGS… Chinese pork, HOG the bike…) with Harley Davidson looking like the end of a “Dead Cat Bounce” and settling into a “bottom fish value play”. Worth watching, but I don’t know a lot of folks looking to buy a new 5 figure motorcycle… I still hold TTM as a long term growth play but clearly with Chrysler toast and GM now Government Motors, there will be more money made by everyone else…
A Broad View
Finally, my “Rorschach Race” (under the “Racing Stocks” tab up top too).
EWJ Japan fund SHY Short term bond fund SPY S & P 500 EWZ Brazil fund FXI China fund SH Short S & P 500 RWM Short Russel 2000 EPI India fund EWQ France fund EWP Spain fund EWG Germany fund
Has India beating Brazil on the change in government. Shorts continue to make no money.
What Is Our Context
Let’s look at the S&P 500 largest stocks in America compared with some other kinds of assets; a couple of month maturity bond fund, oil, gold, Yen.
Asset Class Recent Race
SPY The S&P 500 ETF GLD Gold ETF USO Oil ETF FXY Japanese Yen currency fund SHY 1 to 3 year U.S. Treasury Bond fund FXE Euro currency ETF SLV Silver fund BZF Brazilian currency ETF EWA Austria ETF WOOD A wood and paper products fund
Things of gone flat at the end. Sell in May and go away? This argues for pulling money back from risky positions. I’ll be focusing more of my money into those positions with large dividends and payout to me even if the price of the stock does nothing. Things like my Australia funds, TGP with a 12% dividend as I type, PGH and LINE in oils at about 12% dividends, and HE Hawaiian Electric that has a nice modest dividend but is in a recovering (rising) position as folks realize that the rest of the world will continue to vacation in Hawaii (especially with a cheap dollar) and that takes electricity. Oh, and they own a bank too, so you get a bit of indirect exposure to Hawaiian real estate via the bank.
So for new positions, it will be harder to find rapid rises from June to September and you want some “dividend juice” if you can get it.
Stock Indicators – what and how
If all this talk of indicators is leaving you wondering what the heck I’m talking about, hit the link in the heading of this section and there is a bit of an explanation.
What about Brazil?
Brazil ETF vs Currency Race
Looks to me like we’ve had nearly a double over the last 6 months. While Brazil still has lots of upside available (see the 10 year chart under the “racing stocks” tab) my trade discipline tells me I have to cut back my position to be in balance again. The chart does not yet say this run is over but I would expect a pull back to the SMA stack. So have a 1/2 position in Brazil and fill it out at the “dip”. (As opposed to me, where I had a “double position” until today…) This chart does look like this may have been a “small dip” but we’ll need to see if next week brings a “full dip”, a “failure to advance” rollover, or a runaway bull run. The chart is ambiguous at this point. But trade rules say stick with the trend until shown clearly otherwise. (But I can at least follow my other rule of “sell 1/2 on a double”…)
What About Oils?
XOM Exxon Mobil - Largest, U.S. / Global COP Conoco Philips - U.S. with Russian exposure CVX Chevron Texaco - U.S. PBR Petrobras - Brazil PCZ Petro Canada BP British Petroleum STO Norway E Eni Italy TOT Total - France RDSA Royal Dutch Shell IMO Imperial Oil - Canada Oil and Oil Sands SU Suncor - Canadian Oil Sands SSL Sasol - South African Synthetic Oil Company
U.S. oils continue to have the “Obama Put” pushing against them, but oils overall are still doing well long term. This week we took a “pop and drop” as oil was talked down by one “pundit” then talked up by Goldman Sachs. Canadian and Brazilian oils continue to show strength. OK, I’m not ready to sell out my oil position just yet. FWIW, coal has been moving as well. China, at least, fully expects to burn a heck of a lot of coal in the next few decades. Rails that carry coal have business for decades to come, as do dry bulk ships to carry it. There is late money to be made in rails (I’m especially fond of the Canadian rails) and early money in the dry bulk shippers (“bottom fishing” an entry in a beaten down cyclical sector.)
Some Near Oil and Oil Related Comparisions
Notice that the the Brazil ETF (named EWZ) tends to move with oil. That is because PBR Petrobras is a large part of it, and the rest tends to move with commodities in general (miners and steels).
This chart shows that USO, an oil ETN that holds futures contracts, has not moved up as well as XES, OIH or other oil services companies (that have almost exactly tracked the actual oil price). Why? Because of “contango”.
There are two conditions in a futures contract.
1) You pay more for delivery a few months from now. This is the “normal” condition, where someone gets paid to store the commodity. It is called “contango”. (Why? Don’t ask why, down that path lies insanity and ruin …)
2) You pay less for delivery a few months from now. This is called “backwardation” and it means that anyone with oil in storage has an incentive to sell it out now.
USO holds contracts for future delivery. Each month, it sells the present contract and buys those further out. In “contango” it is constantly buying expensive oil and selling it cheaper. That prevents it from exactly matching spot oil prices.
In some ways, XES or OIH make a better guide to actual oil prices. And a better way to “bet on oil”. (Personally, I like the oil trusts that pay out a monthly dividend, even though they don’t move as fast as the other oils.)
The REITS race – Real Estate Investment Trusts
Shows REITS bottomed but with a small upward movement starting. I’m continuing to hold a small position in REITS with both mall REITS (RPT, PEI) and timber (PCL) along with some logistics (PLD).
PEI Pennsylvania Real Estate - Mall REIT VTR Ventas - sr. care, nursing homes, hospitals PSA Public Storage - junk storage units BXP Boston Properties - office REIT on BosWash corridor HCN Health Care REIT - extended care, senior care, medical offices HCP Health Care Properties - ex. care, senior living, Dr. offices PCL Plum Creek Timber - lumber and trees REIT SPY S & P 500 broad stock market benchmark RPT Ramco Mall REIT PLD Prologis - logistics
And Other Bottom Fishing
At any given time, you want to be rolling some of your big winners into positions that have a lot of head room. If something has doubled, it is not likely to double again at anywhere near the same rate. If something is down 90% (so it would take a 10 times growth to get back to that point) it is much more likely that it can take a “double” back to just 80% down… That’s a “bottom fishing” candidate.
Well, this week Aluminum stocks were showing big life off of a hard bottom. While raw aluminum (JJU) has not moved up much, the Bottom Fishers are starting to pick up extremely expensive to build assets very cheaply.
The Chinese aluminum company ACH is running hard, but I hold all Chinese positions to be a bit more speculative than I like, so I’d be more inclined to have a “small” in ACH and a “full” in AA (or split between NHYDY Norsk Hydro in Norway and KLU / AA in the US.) Let your risk tolerance be your guide. But as the world economy recovers, aluminum will move with it. It looks like the aluminum play is starting a bit ahead of the actual metal moving.
Conclusions and Likely Actions
I’m holding my OOTUS positions in Australia, Brazil, metals, miners, and ‘stuff stocks’. I have started a ‘rebalance’ and will likely buy more India, and roll into some of the Farms and industrial recovery stocks noted above. No promises, though, as I need to run racing charts against all the candidates and look closely at what I’m comfortable with owning. Oh, and I’ll probably add to my ag / grain position in JJG and maybe pick up some NIB Cocoa or JO Coffee now that I have some cash free.
I’m particularly watching ag and food related, given the cool weather and likely crop failures that are shaping up for the year (including drought in places like Argentina).
Musings from the Chiefio 