Thanks for the updates. I have been out for awhile, twisted my back reaching for a beer!!! It sucks getting old!!! Been building my positions on UNG and DBA substantially. I can’t say that UNG has me overly confident although I continue to buy more contracts. The price is just too cheap!! DBA just keeps picking up a point here and a point there. I am in for July on both although I am going to buy more for October. My shorts are not working well, numerous contracts on FXY and HOT are both out of the money although I have time (Sept) for them to make up ground. I bought 500 shares of CVI and its moved nicely in two days—thanks! I am long on PCX (patriot coal), July 7.50 calls and short on GS (Goldman Sachs) July 140 puts. Any thoughts? These Treasury auctions are interesting. I appreciate your insight on them because the bond market can leave me a little confused. When do you think the pending inflation will begin? In 2009 or next year?
My response:
You need to keep those beers a little closer (that one must have been a “40″). I agree, it does suck getting old.
If you bought UNG using my recommendation it would have been a 15 strike price and it looks like it broke above 15 today. Hitting the strike price is definitely not the gist of this trade. As you know, I look for positions that will return 100-300% or better. In the case of UNG and DBA it will be much better. The UNG pullback was needed to confirm the trade when it retraced close to the 52 week low of 12.69. It never hit it and it never will.
Fundamentally I suspect that the new cap & trade emissions regulations will force more utilities to switch from coal generation to using nat gas. Couple this with any drawdown in inventory and/or supply disruption and you’ll see a raging bull market off the lowest gas prices in 7 years. It’s tough calling market tops & bottoms but that’s exactly what we’ve been doing. I’m glad to hear you’ve been adding to your Nat Gas position. You will be richly rewarded.
So much for my fundamental analysis. The pricing structure for both UNG & DBA plays has lined up perfectly and those are the only places I put my money to work. The patterns that I trade rarely vary much and though they are by no means infallible they work out in a big way much more often than not.
Did you happen to see the YTD results? It’s not often you see a string of 100%+ winners like that on the same page and it’s only since Jan.
Let the trade play out. Rarely does any traded security go straight up with no pullbacks or consolidation. If it did the trade would burn itself out. When they start talking about Nat Gas being the next big thing for what ever reason or the new Nat Gas bull market, it will be time to sell.
Acting in a contrarian manner takes balls. You need to put your money to work (and at risk) when everything you see, hear and read tells you the trade is dead money. If there is intrinsic value and either buyers or sellers become exhausted, the chart patterns clearly show this… and this is where the big money is made.
I also have the July 24 contracts on DBA and recently bought the Oct. 28 contracts (on the other days interday pullback… it didn’t last an hour). The price pattern and the fundamentals are in perfect alignment.
You would have to go back to the ’70s to find today’s low level of grain inventory. There’s a lot more affluent mouths to feed today than there was then. China’s grain production is a full 1/3 less than it was this time last year. As the summer droughts start to appear you begin to see price spikes. The AG’s are in a long term, multi-year bull market trend. As with all big trends, they tend to retrace so as to shake out the “weak hands,” steal their money and move on with the biggest moves.
FXY did the same thing. Everyone knows that Japan is in a swandive and they are gradually debasing their currency. We may not be in it to see the biggest moves down but our job is to take profits. It had two sustained rallies up to 105 and was not able to move above it. If you look at the 1 year or 6 month chart you’ll see it stopped out right at that spot both times. The move from here is down (I think it’s down $2 today). Talk about shaking out the “weak hands.” Hang in with it and I’m certain it will work for you.
Where was I? Ok. I can say with virtual certainty that the Sept. FXY puts will give you an exceptional payoff. The Yen pays nothing and is backed by huge debts that can never be repaid. It’s an export economy with a GDP that is underwater, aging population and a shrinking tax base. The only way for Japan’s Gov. to increase exports and revenues is to devalue the currency. I still firmly believe this is a solid trade. The trade was down 1.80 Thurs. and up 1.50 today. Those are huge swings for any currency. I feel it’s starting to play out now.
I have not been following PCX although the coal trade has some more good upside. Arch Coal July 15 calls are trading close to 18 today and I expect to hit 20 (the top of the trading range). Coal is moving up with the energy complex but it has a separate set of issues of which we’ve talked about. Keep a close watch on your coal trade and don’t hesitate to take profits (I suspect you’re in the money on Patriot also).
I don’t follow GS and have never traded it so I can’t really offer anything constructive, but I am totally convinced the market is setting up for a substantial correction (at least 100 pt S&P and very possibly much more). If that happens in your time frame it could easily drag GS down with it.
Whenever I find an attractive short position it usually starts with a specific segment or industry (on a macro level). Then I try to isolate the biggest dogs in that field. There are a number of “at risk,” biggest dogs and zombie banks that qualify as short plays. I’m not sure that I would place GS in that category.
The Regional Banks (I believe it’s KBW and the individuals within the basket) are the walking dead. Their exposure to commercial real estate could well be the nail in their coffin.
Even JPM (Morgan Chase) has an giant exposure to the defaulting credit card market which would put them at risk but GS is really more of a trading desk, M&A and arbitrage. Again, I don’t really follow GS.
The inflation trade is already beginning with the move up in commodities. This is the surest place to profit as the money printing and monetizing the bond market starts to take hold. The real impact will probably be in the early part of 2010 (and beyond). Once they let the inflation demons out of the bottle, it’s very hard to put it back in, meaning that once the trend begins to manifest itself it will be in place for quite some time. The Fed’s not in any position to start raising interest rates in such a weak economic environment to fight inflationary fear that they perceive as non-existent or even healthy. They will not be able to pull the massive liquidity out of the market and risk causing a double dip recession.
Inflation in many respects is already upon us. The giant ocean liner that is the U.S. economy is too big to turn on a dime. They’re usually long, slow, wide turns and they are telegraphed well in a advance.
I am a gold, commodity, interest rate and inflation watcher kind of guy so I’ll keep you posted when I see something changing. This market is going to start getting serious very soon.
Ray
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