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Robert Duval
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Professional Independent Trader, 15 years. Started as a equity index futures floor trader, now day and swing trade, stocks, treasury futures, index futures and commodities. Believe in correlation of markets, must undertand all markets to trade one well. (aka Jim Rogers) Self taught by... More
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  • 12 Reasons To Raise Cash And Become Defensive


    They don't ring bells at tops, and one rarely hears the bullet they say.

    Here is a short list of why I am highly defensive, right now, and recommend others do so and raise cash before the fall arrives.

    It's all about the internal indicators, the weak foundation of the current rally.

    1. Divergences. Although the Nasdaq continues to power higher and the SPX celebrates breaking the 2000 barrier, small cap stocks (NYSEARCA:IWM) continue to substantially lag. The rally -- continues to narrow in breadth and in new 52 week highs.

    IWM Chart

    IWM data by YCharts

    2. Treasury bonds continue to substantially outperform junk bonds, which are also lagging the SPX, a divergence. The Yield curve continues to flatten, with long bonds greatly outperforming 5 year instruments.

    TLT Chart

    TLT data by YCharts

    JNK Chart

    JNK data by YCharts

    3. Commodities are starting to sell off, hard, particularly Oil, very interesting during a time of substantial Mideast Uncertainty. Both this and the bond trends put into question economic strength going forward.

    USO Chart

    USO data by YCharts

    4. Poor retail, and housing stock sector performance. These sectors are tied to the consumer, who accounts for 70% of the economy. There are numerous articles detailing the continued struggles of the middle class consumer.

    XHB Chart

    XHB data by YCharts

    5. Overwhelming belief -- market cannot be timed. Common near cyclical tops. Market timing becomes most popular -- prior to cyclical lows.

    6. Complete faith in Central bank's ability to sustain asset prices regardless of underlying economic trends. This faith in the all knowing, all powerful central banks to generate robust growth -- I sense this faith will be tested in the weeks and months ahead.

    7. Record corporate profit margins, far above the mean, sustained by junk bond issuance, corporate Buybacks, special dividends. Lack of organic growth. Buybacks are slowing:

    8. Lack of consensus bearishness on SA and elsewhere, especially compared to pre 2013 levels. Bears have been converted to bulls, or simply have their hides laid out in the sun...if one read the commentary and feedback from 2009 - was regularly forecasting the return of another 2008 crash. We don't see that much, anymore.

    See this --

    As a well known Wall Street analyst throws in the towel on his cautious stance, and projects a parabolic 300 point SPX run into year end. Capitulation of the bears? We will see.

    9....The Billionaire getting much more cautious, holding and raising substantial cash reserves. Warren Buffett (currently holding his largest cash allocation, ever), Seth Klarman, (50% cash) Wilbur Ross (selling 6x his buying ) and others....all legends very cautious, and largely dismissed.

    10. QE those who would call irrelevant -- would ignore historical precedent in 2011 and 2012 at the conclusion of QE programs, then. The Fed is determined, IMO, to get out of the QE business, at least for now. A valuation adjustment, is entirely rational. And like 2011.....

    11. Europe is having issues, once again, and threatening to return to recession. Stock markets in Germany, Spain, Portugal, France are correcting hard. To say the US will sail through without being affected..Ignores history. See German ETF chart:

    EWG Chart

    EWG data by YCharts

    EWI Chart

    EWI data by YCharts

    12. Continued US contractionary fiscal, taxation and regulatory policy.

    Bonus Chart: New Margin Debt figures from SA's Doug Short. Notice both the absolute total seems to have peaked, and prior peaks from 2000 and 2007- note 7 years apart and now it is another 7 years later -- line up perfectly.

    Conclusion. I am highly defensive on US markets here. I recommend investors raise substantial -- 30-50% cash and / or buy long dated option protection. I also believe investors would be well served examining out of favor emerging markets with secular growth stories, when the time comes.

    These are my thoughts alone from 16 years in this business, and I make my trading plan accordingly.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    This article is tagged with: Market Outlook
    A Next Great Investment Opportunity -- Brazil - EWZ11/9/13     
    Aug 26 11:40 AM | Link | Comment!
  • The Case For An Energy Led Commodity Stock Melt-Up

    This is a follow up to my previous Instablog, " the case for a secular rise in Natural Gas Producers", which is a key component of this Instablog.

    It is said Generals, and Investors, commonly fight the last war, while the new trend sneaks up on them like a covert enemy.

    In this missive I will briefly make the case, that the next investment trend will not be the deflation feared by many participants, but a cost-push inflationary trend in the months and quarters to come, and how we can capitalize as Central Banks slowly beat back deflation, and the focus shifts to direct inflation assets and hedges.

    USO Chart

    USO data by YCharts

    Much attention is on the Crude oil market these days, and it's recent break above $105, basis July Crude futures. However what seems to not be the focus, is how strong crude oil has been trending PRIOR to the developments in Iraq.

    This is remarkable, in the context of -- to this point -- a still sluggish US economy, a slowing Chinese economy, and a European economy so slow Quantitative easing measures are being prepared.

    Also remarkable is Crude oil well above $100, in the face of the commonly held belief of exploding US domestic supply, and "energy independence".

    But is the supply there? Note the above link where the EIA cuts the Monterey shale recoverable reserves -- with current technology -- by 96%

    UNG Chart

    UNG data by YCharts

    I next would draw your attention to my favourite secular commodity asset class, Natural Gas. As is well known, we have had a long and cold winter, substantially drawing down supplies well below last year and the 5 year average. Spot Natural Gas is currently challenging major resistance near the $5.00 level, remarkable strength for June. Continental US Working Natural Gas in Underground Storage Chart

    Continental US Working Natural Gas in Underground Storage data by YCharts

    As you can see, injections are starting to increase supply, but it is almost certain we will begin the next winter with a large supply deficit once again. In addition new rigs have been slow to come on line, as the industry has become much more disciplined at current prices.

    Remember the context -- a sluggish but improving economy in the US, with contractionary fiscal policy, and slow Asian growth. The bull case for demand of both products; is as follows:

    Accelerating growth in the US, via stronger consumption / and or future expansionary fiscal policy / and / or increased corporate Capex spending / Gov't Infrastructure spending. (sorely needed!)

    Stabilized Chinese economy;

    Other Asian demand -- such as India, who has recently elected a new; pro-growth and development government -- a potential huge source of future demand;

    Large new Natural Gas exports to Asia; as explained in my other post.

    Technically, these stocks are all starting to move -- as the commodity prices flow through to this group of disciplined, cost restructured producers, and investors begin to consider overt inflation protection assets, in an environment with the EBC, PBOC, BOJ , and (still) the US FED providing liquidity.

    How to position?

    I recommend several specific themes:

    A) Strong, diversified producers with both oil and Natural Gas assets;

    B) Land - focused Drillers -- to service the above;

    C) Solar. Every year, Solar producers get closer to profitability without government subsidies --

    D) Coal (speculative) -- Nothing is more hated than coal -- but coal is still responsible for 70% of US power production. This will take many decades to change. There may be the opportunity for one more "coal cycle" -- and if the US ever embarks on a steel - consuming infrastructure program -- coal stocks will rocket higher.

    E) Alternative Energy plays (Speculative)

    F) Other mining plays -- for this I would watch Copper closely. Copper has had every reason to technically break down, but hasn't, in spite of poor news flow. IF -- the desire for inflation assets spreads to materials -- both a copper and possibly a silver producer, should be considered.

    What to avoid -- If inflation begins to take hold? Business hurt by input cost inflation. Consumer focused companies may have difficulty in such an environment.

    Best Wishes to all investors!

    Jun 16 1:26 PM | Link | Comment!
  • BUY CRISIS - BUY Russia Now! (MBT)

    Crisis and Opportunity live in harmony.

    This brief post will make the case for an investment in Russia now, and specifically Mobile Telesystems, which trades as a US ADR (NYSE:MBT)

    (click to enlarge)

    MBT data by YChartsWe as investors are emotional beings. When faced with conflict, a powerful inner fight / flight response is natural. When faced with CNN headlines screaming "crisis in Ukraine" and "pending invasion" and CNBC exhorting us to get out of emerging markets and stay in the "safe harbour" of US stocks, it is difficult to do anything but run. It would seem the safe and prudent thing to do.

    But this is exactly why most investors underperform the averages over long periods of time.

    I had the opportunity to personally visit Egypt immediately prior to the military coup in the summer of 2013. Remember that? "Crisis in the Middle East" Long forgotten in our fast paced Twitter world. What crisis?

    While I was there, I notice from an up close and personal perspective, that in spite of many issues and a terrible atmosphere, business carried on. Roads and housing subdivisions were being built. Commerce was occurring. I had many conversations -- with other foreigners , and the advice given to me, in spite of my positive observations, was I'd be a fool to invest. This was pretty unanimous.

    I also learned the local people actually favoured the military as rulers, contrary to CNN, and that a change would be a positive step and bring back some certainty. I also viewed Egypt as too strategically important to be allowed to disintegrate.

    Through all this I saw a deeply contrarian buying opportunity in a country ETF with a good yield, so I began to invest at the height of the crisis headlines, in the low 40's basis (NYSEARCA:EGPT). After the coup I invested more, and I netted in excess of a 50%gain within 6 months while collecting substantial dividends

    (click to enlarge)

    EGPT data by YCharts

    I believe a similar pricing opportunity exists in Russia today.

    On any metric, Russia's stock market is among the cheapest, most beaten down, out of favour in the entire world, with a P/E ratio in the 5 range. One option for an investment in Russia, would simply be the (NYSEARCA:RSX) etf, with a yield in the 3.5% range.

    However I believe a better opportunity exists within a core and growing industry in any developing country, with a greater margin of safety, and that is in telecommunications, specifically Mobile Telesytems. (MBT)

    MBT is the leading mobile provider in much of Russia and the surrounding states, including substantial Ukraine operations. They recently announced financial results indicating steady growth.

    This stock trades at a PE of 6 with an attractive yield of 5.5%. As recently as October the Stock was trading in the 24 range, my initial target today, from the 16 area now.

    I note; in spite of the news intensifying late in the week towards a Russian military buildup, (MBT) refuses to trade down to the early March lows at 15, indicating much of the uncertainty has been discounted by the market.

    Much like in Egypt, I expect that in spite of the headlines, new LTE networks will continue to be built out, and folks will continue in Russia to be tied to their mobile phones day and night, much like we are. I doubt very much the CNN coverage will stop people from mobile usage.

    Any good article also needs to examine the risks. There is always a chance, that MBT is completely nationalized by the Gov't in some radical view of the future. However, with the country controlled by powerful, wealthy interests, it is difficult to see widespread future nationalization. Also an obvious risk is a full - on return to a Cold War scenario, which would obviously change the picture. However, I simply do not believe in that scenario at the present time, and believe the risk / reward is heavily tilted to the upside.

    To summarize; I see MBT as another excellent opportunity to enjoy a 5% yield, with an upside of at least 50% within a year.

    Long MBT

    Disclosure: I am long MBT.

    Additional disclosure: Not remotely investment advice. Consult a qualified adviser.

    Apr 26 2:40 PM | Link | 4 Comments
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