June 28, 2018
In my 38 years around the markets, or for that matter, in my lifetime, I don’t think we have ever had a more economically disrupting president than we now have in Donald Trump. To be upfront, I have a very low opinion of his basic intelligence, his lack of integrity and his narcissistic approach to dealing with people and issues...but this newsletter is NOT a political platform and do be assured that everything I write here truly has a single principal purpose: To attempt to understand where various markets are headed (and why)…and then to present recommendations that hopefully will result in money making trades. To that end, I have to make mention of Trump, and my perception of him, as he, more than any president in history, has definitely become a MAJOR factor in the pricing equation of any number of market sectors. Again, NONE of my trade ideas have ANYTHING to do with my personal feelings about Donald Trump. ALL I care about is getting it right in the markets.
I don’t care what your political leanings are…
I think the idea of blindly initiating a
GLOBAL TRADE WAR is just stupid.
China will NOT be cowered.
They will NOT back down.
I think that any ideas that China needs the USA more than the USA needs China, and that President Xi Jinping is likely to timidly accede to Donald Trump’s demands are wrong…and I therefore believe that any upping of the ante in the form of tariffs (or whatever latest impulses DT has) are ONLY going to be met by equally strong Chinese responses, one of which is already being DISASTROUSLY felt in the agricultural community here in the USA, wherein just about every farmer in this country has recently seen their revenues slashed by approximately 15-20%...in just the past few weeks…And unfortunately, I suspect that it’s going to get much worse for rural America before it gets ANY better.
Just to be clear as to how bad it really is, on the charts following, check out the real world devastation that is taking place if you are a farmer here in the USA…And just imagine what it must feel like to have your income slashed like this, virtually overnight…with prices now having mostly fallen BELOW your cost of production.
And these will all look like GIANT moves…because they truly are…and again, they have all happened, literally within a matter of weeks.
And let’s get real, NONE of this was anticipated by the great art-of-the-deal maker…And if this doesn’t change soon, and DRAMATICALLY to the upside, you will definitely be looking at a lot of bankruptcy in Agricultural America…a LOT.
I usually am able to have a sense as to where I think the economy is heading…
But with much of what is happening now,
I can imagine just about anything…both positive and negative.
I originally thought this trade war thing was inconsequential, but the truth is, I had no idea that Donald Trump (who IS solely responsible for what is happening) would decide to turn his bluster into confrontation with the rest of the planet (with EVERYBODY except Russia and North Korea?), and I am now forced to consider that the end result of this Trump driven possible fiasco could take on any number of very negative outcomes…with the damage already done in agriculture being just one example of what might be coming in other industries…
Believe what you want to politically…but I maintain that virtually no one on the international leadership scene trusts DT at all…that his “word” is worthless…and that it is a FACT that he has alienated ALL of our allies (and buddied up to our enemies), the possible result being that when/if WE get in trouble…when/if the Chinese DON’T bend for Trump…and when/if the consequences begin hitting harder here in the USA…the idea of all of our longstanding allies unifying to support us is NOT something I think anyone should be expecting…You reap what you sow, and while business is business, I don’t think there is anybody in the industrialized world (beyond Russia) who would now go out of their way to lend the USA a commercial hand. Again, this is NOT a politically inspired notion on my part. This IS the reality that has been created by the current president.
The Stock Market
If you have been reading this newsletter through the years, you will know that I have been resolutely almost non-stop bullish on the economy and the stock market since August, 2010 (throughout all the nonsense about Europe collapsing, Brexit, Elections, China supposedly crashing, etc.), with my basic premise being that the USA and world economies have been in a decades-long major boom inspired by the death of Communism as an economic policy around 1990 (and with it the addition of 2-3 billion new capitalistic consumers), the Technology Revolution (which is still expanding almost exponentially as regards new products and totally new industries), AND, since 2009, the lowest interest rates in modern history…
However, while I think all those conditions are still the major driving force in a global expansion that I see continuing for the foreseeable future, for the first time in years, due to the unknown impact and ramifications of Trump’s Trade War, I am wondering if stocks and the economy have now become vulnerable to some degree of a contraction…BUT…not to the extent that I am ready to shift to a bearish posture regarding equities and the fate of the world’s economies, my feeling being that the longstanding upward GLOBAL economic expansion may be bigger than Donald Trump’s hopefully momentary disruptions…But the truth is, I DON’T KNOW what will happen in the stock market…or rather, I should say, I can easily imagine both positive and negative (potentially very much so) developments. I still lean toward the upside but I just don’t know how far POTUS might go with WHATEVER he is planning (or if there really is a plan)…or for that matter, if this whole thing hasn’t already gone too far.
The Dow Chart
Several months ago (May 1st), I wrote that I thought all the worry about a trade war was Wall Street nonsense, and that I expected to see the Dow make new highs later this year...But I now see that I misjudged how far Trump would actually go in alienating the entire economic planet...and I am now quite uncertain as to what the outcome of his famous "dealmaking abilities” might be...To be honest, I can see the Dow quickly being 2000-3000 points lower...OR...having a resumption of the strong bull market that has been in force for years. All in all, I will say that taking out the recent 25,400 high (noted on the chart) would be quite significant and a precursor to perhaps lifting off into new all time highs...Otherwise, I can see this thing going in either direction.
I have been short Eurodollars and Treasury Bonds for several years now…and while I still believe we are headed toward much higher interest rates (meaning lower Treasury Bond prices), the latest sideways action in Treasuries, and my perception that Trump’s actions could have consequences that move the market in either direction, I have this week decided to move to the sidelines with my Short Treasury Bond position…As I have indicated on the chart following, I still see Bonds going MUCH lower, but I would first like to see them BEGIN the move before re-committing funds to a short trade there.
For what it’s worth, the fact that they have NOT gone lower since February has surprised me...and I can only conclude that it is possible that all the distress being caused by Trump’s Trade War may be resulting in safe haven buying…as well as the fact that Europe’s reluctance to raise their own rates is attracting money (buying) to our higher paying Notes and Bonds, thus providing support to US Treasury prices…I would add that the declines we have recently seen in various commodity markets could also be signaling that DEFLATION is now on the horizon (perhaps as an unexpected result of the trade war)…which would be unquestionably bullish for Bonds.
On the flip side…China is the single largest foreign holder of US debt (Treasury Bills, Notes and Bonds---about 20% of everything we owe) and they HAVE discussed selling that debt as a further response to Trump’s tariffs and demands. And if this were to happen, I don’t see how it could be anything but bearish for Treasuries…
The bottom line is, while I definitely lean to the downside in Bonds, I think the current environment could result in a sharp move in either direction, and I am basically willing, as noted on the charts below, to see them get STARTED on the downside before repositioning on the short side.
I remain strongly committed to
SHORT GOLD & SILVER
In fact, SHORT GOLD AND SILVER ARE NOW THE TWO BIGGEST POSITIONS WE HAVE ON THE BOOKS HERE NOW…and I continue to believe that the YEARS of forever wrong brokerage house recommendations to buy these markets are about to see the bottom fall out. As I am always reminding you, all of the markets are nothing but a mob psychology game, that no prices are real but rather are a matter of perception, media garbage, and investor funds chasing and fleeing the latest hot Wall Street generated ideas. And like I said, “YOU HAVE TO OWN GOLD” HAS BEEN ONE OF THE UNANIMOUSLY TOUTED “STORIES” OUT THERE SINCE 2012…AND BY MY ESTIMATION, THE MONSTROUSLY OVERWHELMING MAJORITY OF BUYERS SINCE THEN ARE PROBABLY ALREADY LOSING MONEY…AND I BELIEVE, WITH NEW RECENT LOWS FOR THE YEAR, ABOUT TO FIND THEMSELVES LOSING A LOT MORE…THE END RESULT BEING THAT MORE AND MORE…AND MORE…OF THEM WILL SOON BECOME SELLERS AS GOLD AND SILVER SHOCK THE INVESTMENT WORLD WITH HOW BIG AND FAST THOSE TWO MARKETS CAN GO DOWN.
As I have repeatedly noted, Gold does NOT rise and fall due to the classic supply & demand equation that are the case with traditional commodities. In my mind, 95% of Gold’s movement is based on emotion…and NOTHING else.
As both of these markets drop into new lows for 2018, I continue to aggressively recommend new short positions.
A liquidating market is like sliding off a slippery cliff…As you slip lower and lower, you start moving faster and faster…as more and more people start trying to get out at the same time…
Think about it: If all the turmoil we’ve already seen this year has not moved these “safe haven” metals higher…WHAT WILL? And in this business, when a market doesn’t do what it’s “supposed to do”, the next thing it often does is exactly the opposite of what it “should” have done…and just as often, in a BIG, BIG way…Never forget: All of this is just one big game. Where prices go has nothing to do with “reality.”
A few brief comments on other trades…
Still Buying Sugar
For various reasons that I will address in another newsletter (so I can get this one out today), I still consider owning Sugar a GREAT trade over the course of the next 10-12 months. As this is a “bottom pick”, I am religiously using the 2 & 1 to take positions here. With this market having been “dead” for so long now, with my opinion being that an 8-10 cent move could be easy to envision from current levels, I see option prices as being just dirt, dirt cheap here…
Short Corn, Wheat & Soybeans
While I believe that the 1-2 year outlook for these three markets is quite bullish, I was fortunate to have recognized the implications of the trade war and have been short for the past 3-4 weeks…and still am. On June 19th, as Trump pushed tariffs higher and China responded in kind, Corn, Wheat and Soybeans ALL nosedived and then put in fairly stout one day reversals to the upside (noted on charts following)…which led, I believe, to just about every analyst and trader on the planet concluding that “That must have been THE low.”
However, my experience has been that when something looks OBVIOUS, it isn’t…And I therefore remain short all three markets, again religiously using the 2 & 1 approach. We have a major USDA report tomorrow (Stocks and Planted Acreage) which could produce some additional volatility but I still look for these three major row crops to continue lower…possibly to reach levels that most analysts would find unthinkable…If I am wrong, or if severe unfavorable weather develops, what I don’t expect to see is some sort of “quiet” move higher. These ARE volatile circumstances right now, and if these markets are going up, I think it will be at a blistering pace…in which case, using the “2 & 1” (owning a call against every two puts) should protect short positions quite well…
I am not deadset on remaining short Corn, Wheat and Soybeans…but I am in these trades with idea the decline could last well into Mid-August…Two reasons being that, as noted above, I DON’T think the Chinese will suddenly say, “We give in, Donald!”, and also, as Corn and Soybeans develop in the fields, more and more SELLING pressure will be coming from producers as their crops mature and they head towards harvest.
With a major USDA report coming out tomorrow morning, I am not going to make any specific recommendations in these three markets today, as whatever I propose will probably be quite different by the time you are reading this….But here are the charts again…and what I see as a very definite possibility in each of them. Give me a call if you do want to get into actual prices of 2 & 1 strategies that I think make sense here…
Recognizing that weather, or positive developments on the trade war front, can immediately and sharply reverse any of these down moves, I am ABSOLUTELY using the 2 & 1 approach in all cases...When you get down to it, this strategy is PERFECT FOR EXTREMELY VOLATILE MARKETS.
Give me a call if you are interested in anything here…or if you just want to talk. As ever, I always enjoy talking to all of you…whether we agree…or disagree.
Thanks for reading,
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Gold, Silver, Corn, Wheat, Sugar, Soybeans