Weekly Wrap

The Portfolio

The portfolio continues to suffer from the weakness in energy and now matches the year to date loss of the S&P 500. I have been adjusting the portfolio by using the inverse energy ETFs to capitalize on the weakness in energy. That has saved the portfolio from much more dramatic losses, however the adjustments are a little too little too late. The big problem here is that I am not sure if the trend in coal and natural gas is just broken or if it has reversed. It is clear now that the trend broke. Initially there may have been a chance that this a pull back due to some large hedge funds imploding and that the trend will continue intact. I have heard mumblings on CNBC that some hedge funds indeed did blow up. However over the last two weeks it become clear that the trends broke down. The question now is whether the trend is broken and will now go sideways for a while till it decides on the next directional move, or whether the trend reversed and now it is time for a long term short in this space.

For now I am assuming that the trend has broke but not reversed and will continue to hold on to the positions but keep them on a tight leash.

On the flip side I am now in DTO, which has saved the portfolio from totally collapsing, DUG and SMN. Respectively these are double reverse in Oil, oil companies and basic materials.

Outside of the energy space, RACK reported and disappointed and got killed after hours, gapping hugely down the next morning. RACK was a large position and that plunge took a toll on the portfolio as well. I ripped the band-aid and closed the position. I still hold the RACK Sept. calls but these are nearly worthless and I am going to close them if I can cover the commission price otherwise I will let them expire in 6 weeks.

I am starting to wade into Financials, bought MER recently. I am also looking to add a home builder at these levels. The home builders have bottomed and some of them are starting to show life. This is an indication that housing prices may start to bottom in the next 12-18 months as the stocks usually lead the home prices. That's good news for the tapped out consumers. As such we can see that select retailers have bottomed and now are starting to break out into new up trends. I am in FINL, a retailer exhibiting that behavior.

I am not anticipating closing out many long positions this week as I am still trying to digest the markets and the portfolio. This is subject to change if something like RACK happens to another stock. On the short side of things CHTT has move up close to its stop level and may be closed this week.

The recent collapse in commodities has affected crop prices as well such as wheat and corn. Farmers are starting to shift from these crops to other crops. Interestingly, this change means a shift from crops that need a lot of fertilizer to crops that need less. This will put pressure on companies like FEED (which I own), POT, MOS and MON. These stocks have had huge runs powered by ever increasing margins and profits. As farmers have less need for fertilizer and as crop prices come down their margins will shrink pretty quickly. The pricing power equation is shifting from the fertilizer companies, where it was for the last few years, to the farmers. I am looking to close out of FEED and possibly enter a short into one of the high fliers and/or use an ETF like DEE which is an inverse soft commodities ETF.

 

 

 

The Markets

The markets are behaving exactly like I anticipated. But as my wife often reminds me, what's the use of calling the market right if you still cannot make money. The S&P 500 has moved up to kiss the falling 50 day moving average. This completes the move from the bottom, which I had called to within 4 pennies, of 1200.04 to the falling 50 day moving average. If you are playing the broad market now is the time to step aside and let the next move develop. If my assertion is correct, that we have hit the bottom of the this bear market and are now doing a shallow retrace to the 50 day moving average then we will go down from here, back to the 1200 area and then move in volatile side way moves while the 200 day moving average flattens out.

That gives us about a 100 points on the S&P 500 to play on the short side. We will have to see how things shake out early in the week to see if indeed the market will be turned away by the falling 50 day average.

If on the other hand we power up through the 50 day moving average and close convincingly above it then the path of least resistance would lead us to the falling 200 day moving average, currently at 1374. It will be closer to 1350 by the time the price catches up to it. If that does happen we are definitely not going to simply power through the 200 day moving average. In fact that would be very bearish for equities and would present a great shorting opportunity almost identical to what happened back on May 19th when we moved up to the 200 day moving average, peeked above it and then closed below it on the day and continued to crumble all the way down to 1200 from there. That scenario would probably coincide with a bottom in commodities followed by a move up as the broad market falls.

For the next few days though the correct play is to be on the sidelines and give a chance for either of these two scenarios to develop.

 

Oil continues to crash. When we had that huge up day on June 6th, I commented that this marked a top in oil that is eerily similar to the top in the Chinese stock market as represented by FXI. Crude oil obliged and moved exactly as telegraphed, in a volatile side way fashion for couple of weeks before falling apart. I had attempted to short USO at the top but got shaken out in the volatile moves that followed. I then entered again using the double short oil ETN, the DTO and that has been working great for me. USO is only $5 away from the rising 200 day moving average which is now acting as a magnet. As it nears closer to the 200 day average I will probably close my DTO position and monitor what happens with oil. If we cannot hold the 200 day average and we continue to crash, I will re-enter DTO. If however we bounce off the average then I will go long oil via USO.

 

I declared few months ago that the "short the dollar" trade is over and that the dollar has bottomed at those levels. The dollar did not disappoint either, as it acted as planned. I expect some consolidation here before we continue an upward, slow and deliberate move in the dollar. There is no easy mechanism to go long the dollar, plus most of my net worth is in dollar denominated assets. I am not inclined to short the currency ETFs such as the Euro or the Pound because they pay a hefty yield that will come out of my pocket when I short them.

 

Shills

There are Shills and then there is Larry Kudlow. Kudlow is always quick to proclaim on any down day in the market that the market is pricing in an Obama presidency and selling off.

Here is an idea: The markets are indeed pricing in an Obama Presidency. That's why the Commodities are falling, Oil is falling, Gas at the Pump is falling, Wheat, Corn and Rice are falling in price. That's why the $US Dollar is finally stabilizing and starting to move up against other currencies.

The markets realize that Bush's war on the US dollar, the US economy, the US Budget and the US middle class is about to end. The markets realize that the special tax treatments afforded to oil companies, how come Microsoft does not get the tax kick backs that Exxon does?, and that the endless money wasted on wars of choice are about to end.

Bush spent our money like there is no tomorrow. He spent it on ventures that offer no returns, so it was all waste, in vein. Obama is not going to spend any less. But I'd rather a million times that the money is spent in Kansas than in Baghdad. With all their corruptions and under the table dealings the Democrats will still have the money circulating inside the USA instead of sending it overseas to Bush's friends in dictatorship regimes.

So Mr. Kudlow, next time you look at the market and spew some garbage about how the stock market went down in anticipation of an Obama presidency, just keep your eye on oil, gold, gas, and the US Dollar and explain to me why they are behaving favorably.