max re: ["So you are calling for a concurrent strong dollar and a recession?"]
Max, it's not about having a "crystal ball" and making a call on the future...as much as it's about being able to determine "discrepancies between price & risk" -- in the present.
Regarding the US Dollar... I have mentioned many times how virtually the entire market was on the short side of the US Dollar trade.
Ignoring that little when, not if contrarian factoid (along with Paulsons appointment as Treas. Sec.) has crushed the hopes and dreams of gold bugs of late.
While we all have price targets and/or WAG's of where the future may take us... targets are always moving because the market is always changing, as is the public reaction to the markets. So trading via --playing the players and not the cards -- is always a dynamic, not a static exercise.
I'm beginning to throw on a few DOW puts here...no huge bet, using some longer dated puts, even LEAPS – giving away some upside in exchange for buying some time.
You must respect the other side of the trade...and right now, that’s the "student body left" trade into the DOW 30 stocks and so far, it is working. But, a discrepancy is developing between a slowing economy and what has clearly been the pumping up of just a few key DOW stocks.
I both see and am patiently awaiting an opportunity to trade against the desire of the "powers that be" to create a soft-landing for the US Economy (for the coming elections) and to keep the DOW propped up...so the transfer of all of those Trillions of Dollars of Social Security contributions over the coming decades can be channeled into the greedy hands of the Investment Bankers.
I don't have a crystal ball...but, I do know a "discrepancy between price and risk" -- when I see one.
I saw one on a sector basis back in December 2000 -- when I exited the Oilpatch and made the leap from "black" to yellow gold.
I saw one on a trading basis in gold back in April/May 2005 when the 'bugs were at the end of their 2nd 100 point HUI death march and sentiment had reached all time lows...and levered up for a well timed bottom trade.
I saw one of the single most compelling discrepancies between price & risk that I've ever seen, last September in the Gold:Silver and Platinum:Palladium disconnects. Swapping out of gold and into Silver & Palladium gave me 2:1 out performance to gold and gold stocks for the next 6+ months.
Discrepancies can be found just as often on the short-side.
Last December when Natural Gas had gone parabolic on an entirely speculative basis... completely disconnecting from supply:demand fundamentals. I made a large bet on the short side and caught the first, fast & easy 40% of the collapse in Nat Gas in just a little over a month.
Yes, I left a little money on the table on that one...but, risk was ramping...and reward was diminishing...and soon thereafter, both Mother Rock and Amaranth got taken out.
This May…speculation reached a crescendo and I dumped into it -- exiting and turning short into commodities and long into bonds…piling up cash.
I had a $400 price target on Palladium and sold heavily into my target...and tightened stops up to $372 right behind it. It turned out to be a pretty good target and/or call.
This has been a very, very tough market of late. Anyone making large bets and leaving them hanging out there too long has been crushed.
We had a nice opportunity to take profits, pile up some cash in the bank, throw on a few shorts…and simply patiently wait for “the next mistake to be made”…and for the next “discrepancy between price and risk” to develop…be it short, or long.
Presently, there are not any compelling opportunities, or glaring discrepancies. There was a nice little disconnect between the XNG Natural Gas E&P’s stocks and the price of natural gas…that allowed for a nice short trade with September & October puts doing well. I still think the stocks are over-priced considering where natural gas prices and inventories are…but, will wait as shoulder season ends…to see where the annual speculative run of the bulls takes both gas and the E&P stocks.
To put things in proper perspective…for gold bugs, this collapse in gold has been the equivalent the DOW collapsing 3,559 index points. Hubris and greed have been severely and consistently punished in this market of late.
While Bernanke was listening to what gold had to say about inflation – in guiding the Fed to it’s 17th consecutive rate hike…gold bugs didn’t listen and ignored the “when, not if” slowing effect upon the economy (and commodity prices) that these hikes and a global tightening of liquidity would create.
…and they just paid dearly for it.
Volatility has been the trade of late. Markets have been data driven day to day and week to week…manically swinging from euphoric peaks to the depths of depression. Playing volatility via option straddles has been a very profitable, low risk trade of late.
Trading becomes vastly easier when you are trading out in front of the market –in anticipation of…versus trading behind it – in reaction to…it. Lately, the gold bugs have been trading in reaction to the market…and well behind it.
The discrepancy between price and risk was created by their hubris and greed in the failure to recognize the excess speculation this spring in commodities for what it was. And also in failing to anticipate the effect of the collapse of the housing & mortgage refinance bubble, as well as the effects that 17 consecutive Fed rate hikes would have on the economy.
The collapse in gold & gold stocks this spring even exceeded the two “100 point HUI death marches” of 2004 & 2005. But, the bugs are a hearty bunch and many of them are climbing right back on the bull, because they expect the Fed to soon have to cut rates to rescue the US economy from recession.
Hmm? Two thoughts on that:
First, if the ‘bugs are so sure the economy is going to slow and that the Fed will come to the rescue with more rate cuts…then why didn’t they see gold’s collapse coming this spring…generated by the Feds 17 consecutive rate hikes and removal of the speculation punch bowl?
The bet by those calling for a bottom (and for much further upside as well) here in gold, came from their expectations that the Fed would be cutting interest rates as early as January, or February next year. But, given the rally in the DOW and the so far – surprising soft landing of the US economy…those potential rate cuts have now been pushed into late 2007. Yet, gold bugs keep reloading as if that rate cut is coming any day?
Earth to ‘bugs:
The high reward:low risk -- "Big, Fast & EASY Money" trade on gold has already been made… and the profits from it should already have been banked. Whether another one develops remains to be seen…the when part of the “when, or if” equation…just got pushed out... and the "if" part, still remains to be seen.
The best trades are often either the ones you don’t make, or the ones you exercise great patience…before making.
Patience has just proven itself as the most valuable commodity in this very difficult market.
Patience and real contrarianism…
The Dow is at a record high… gold and oil have collapsed… and the US Dollar has rallied to 10 month highs.
Who would of ‘thunk it?
I got 2 out of the 3 correct and did very well...most of the permabulls went "0 for 3."
Right now, it's not so much about predictions -- as it is about patiently waiting for the next mistake to be made and for the next discrepancy between price and risk to develop.
SOTB |
