How To Make Money While Government is Shutdown (DNO)
The current political morass that congealed into a partial government shutdown has finally begun to adversely impact the economy. There have been numerous attempts to reconcile along both party and moderate lines, and until a majority can be commanded in the House and Senate simultaneously, this will not occur. This outcome should, probabilistically at least, be more likely, and yet seems to be increasingly less likely to transpire before having done serious harm to the economic recovery with each passing hour.
Making money while shutdown will be best accomplished by focusing on areas of the economy that will be impacted directly by any sort of global slowdown, which seems to be slowly taking shape amidst the turmoil being perpetrated in Washington. This will negatively inform future oil demand in a very direct fashion, as lower output levels necessitate lower demand side pull, and thus pushing prices lower. This could also cause a supply side contraction that will be the cohesion answer to two fundamental questions for oil producers: 1) if I have a finite supply of oil, shouldn't I sell it at the highest possible price to maximize profits? and 2) if I am keeping production constant, and the supply of global reserves seems to be ballooning, would I be better off by slowing production when prices are pushing lower and waiting for the market to improve?
Key Reactions Broadcasting Future Activity
The Brent to WTI spread is expanding slowly but so far this month, as it has slowly priced in the disconnect between the American and global economies. Goldman Sachs had targeted a $115 range for oil in the near and medium terms, which is an almost 12% discount to current prices; unfortunately, this picture is no longer viable. The immediate impact of the uncertainty and attendant volatility this shutdown has created has taken a few days to ripple its way through the economy, but is now slowly taking shape as markets are all down around 1% today. There will be no Jobs report available this Friday, as the shutdown has delayed it, and other available measures show a slight move upwards, leaving a margin to pull back. The industrial manufacturing index is up .5% in Q2, but Q3 will have some headwinds to factor in that will push output estimates lower for the year as new guidance will be generated, presented, and then priced in. This indicates that oil, which had seen a quality run up these past few months on Syrian tensions buttressed with Libya not producing at capacity, is going to see soft demand in the coming days, and decidedly longer if the government shutdown endures or even becomes more extreme come Oct. 17, when the U.S. government will completely run out of funding.
Make Moves Before Markets Move
The ideal way to capitalize on this line of deduction grants an investor two options. The first is to invest directly by establishing a short position in the futures market. The investor who is more risk averse, or less inclined to put in the commensurate hedge in the options market, should look to the relatively small United States Short Oil ETF (DNO) as his optimal choice.
The previous value of more than $40 per share was realized before there had been a widespread adoption of the news of the American recovery, and the flat to slightly positive numbers of Europe, and were coupled with lower than anticipated numbers from China. The current economic climate, and the direction it is being pushed, could surely have the price back up in that range very rapidly. This 25% upside on oil's downward movement is indicative of how extensively leveraged the position is, and it also represents a smaller amount of risk than buying directly into the futures market, thus making it even more desire-able, even if it's not hedge-able.
The scenario can be summed up rather directly: as the government shutdown endures, markets are slowly starting to price in the impact of a longer term shutdown, and volatility and lowered pricing and output numbers in the oil market seem to be more and more likely as the glut of American oil will take even longer than anticipated to be processed. To make money, short the value of crude directly or through the United States Short Oil ETF (DNO).