On 10/29 our Newmont Mining, November puts were sold for a 130% profit in 2 days. Since I had no idea if anyone was on the trade I didn’t update it sooner. November options had very little time left so I assumed anyone on the trade would have closed it being up better than 100%. If you missed that, the following Friday it was back up 70% giving two chances to close out with a solid profit. I closed @ 120%.
Couer D’Alene had an amazing 3Q with an 86% increase in silver production to 5.2 million ounces, 222% increase in gold production to 29K ounces and a 146% increase in revenue to an all time high of $90 million. The stock price is up 150% YTD.
I know several of you own Couer shares outright and I’m probably the only one with the options but it looks like there’s a lot more room to run for the metals and Couer should be a major beneficiary.
Now to the Dollar
For the last 18 months the stock market and the US dollar have moved in an inverse direction. Since the dollar began it’s epic fall the markets have rallied hard. Many believe that the reason for this is that the weak dollar makes exports and multinational companies more profitable and therefore strengthens the economy. Right or wrong, the dollar’s slide helped lift the market averages to remarkable heights. Although, I believe the reasoning is flawed.
There have been several occasions when I have discussed the effects interest rates have on the markets. When rates are low, it makes business more profitable due to low borrowing costs. When rates rise it chokes off investment and growth. With the Fed Funds rate at .25% it has allowed the large banks to borrow from the Fed and use the funds to purchase Treasuries for a 3% return on borrowed money. This is why the almost defunct banks are now sitting on a hoard of cash.
The Fed’s action has created a new “carry trade” similar to what existed in Japan for the last decade. Investors would borrow the Yen at 0% (or short the Yen) and use the proceeds to purchase higher yielding investments. This usually works out fine until interest rates begin to rise or the currency starts to strengthen, or both. It is this excess liquidity that’s sloshing around in the market searching for higher yielding assets that has given rise to the stock market and commodities alike.
At this moment there is the largest short interest in the dollar (97% short dollar) and investor dollar sentiment is at the lowest in 20 years. Everyone believes in the decline of the dollar. The trade is way too one-sided.
If the dollar begins to strengthen even slightly, the short dollar trade will begin to unwind, the “short squeeze” will force them to cover their positions causing the dollar to rise even farther than it would have. The sharp ascent of the dollar will cause a violent decline in the stock market as assets must be liquidated to cover margin requirements.
So, what we have is a beaten-down currency being used to prop up other assets which were inflated enormously since the March lows. Prior to March, the majority of traders were selling assets at bargain prices and looking for safety in the dollar.
Case in point, Fannie Mae is a worthless company and the stock having no equity values at all, but 4 days in August ‘08 FNM rallied more than 140% when short sellers panicked and were forced to sell other assets (stocks/commodities) to cover their shares. They would have been crushed trying to cover their short position as they were buried under a wave of sell orders. That is the risk of unwinding a carry trade.
With the overwhelming dollar short interest, a small strengthening in the dollar could lead to a devastating correction in stocks.
I am waiting for “technical” confirmation in the S&P which seems to be forming. The S&P topped out at 1100 and retraced down to 1050. A move back up to near the 1100 point where it is unable to make a new high combined with a strengthening dollar will signal the beginning of the end for this rally. With a 50% retracement we could easily see a move back down to S&P 850.
I will have a new trade Sunday (Monday the latest).
Add A Comment