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Robert Duval
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Professional Trader, 16 years. Started as a equity index futures floor trader, now swing / intermediate trade, US stocks, international ETFs and commodities. Believe in correlation of markets, must understand all markets to trade one well. Self taught by studying myself and other investors,... More
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  • My Market Triggers To Reduce Risk -- Its All About The Bonds!


    • Stock Buybacks, partially fueled by Corporate Debt sales, have had an undeniable positive impact on the Bull Market.
    • It is not the Fed that will begin a tightening cycle, it is the Bond Market, led in turn by increasing inflation expectations.
    • Key Levels or disorderly behavior in the bond markets should be triggers for investors to take defensive action in equity exposure.

    It is said that Bond and Equity markets are akeen to a long time married couple -- And I know this well -- that so often the female leads in the intricate dance of a relationship. Put another way as a friend puts it, "happy wife, happy life".

    Now this is not to blame the female gender for future issues that befall equities, but as an illustration.

    It is my current thesis, that no matter how soft US economic data may look, how stagnant corporate revenues may appear, and how long it has been since a meaningful correction took hold in US equity markets, a substantial downturn is not likely to take hold unless (and until) led by the bond market.

    This is, if for no other reason, there needs to be an attractive yield alternative to stocks to entice investors.

    At this time European yields are beginning to move away from the zero bound, and US long bonds are beginning to follow towards higher and steeper yields. While this is very good news for yield - starved financial institutions finally seeing their lending margins expand somewhat, we need to be wary after being acclimatized to a benign yield environment for so long, for a potential rapid pushback in the opposing direction, and possible impacts on a fully valued equity market.

    As I've previously written, I've positioned for increasing inflation expectations through concentrated exposure to Emerging Markets and Commodity - Based stocks, while hedging with long Dated Puts on both (NYSEARCA:TLT) long bonds, and on the Nasdaq (NASDAQ:QQQ)

    To this point this strategy has played out nicely, with stocks like (NYSE:FCX) rallying, and Bonds selling off, and I've maintained a full long position.

    Yesterday with the (SPX) rallying into a seasonally weak period,while small caps and transports continued their negative divergence, I reduced some risk outright, and also through selling calls on commodity positions that have run - up nicely.

    Today I will discuss "Trigger" prices on fixed income and other markets, that would lead me to further reduce risk on an intermediate term basis.

    Lets look at some charts:

    TLT Chart

    TLT data by YCharts

    is in a vunerable position here -- testing a triple bottom in the 123 area. It goes without saying those in Yield sensitive equity instruments, as I've written before, should immediately take defensive action, should the long bond not start to rally very soon.

    The next area of support is in the 118 area, which leads to the fixed income market much more correlated to equity performance -- Corporates (NYSEARCA:LQD) and Junk Bonds (NYSEARCA:JNK). Disorderly movements in these 2 markets is an intermediate warning sign for Equities.

    LQD Chart

    LQD data by YCharts

    JNK Chart

    JNK data by YCharts

    So far -- both markets are better behaved than treasuries -- Yellow flags for me would go up with below last years lows in the 37.50 area, for , I would be watchful below key support at 117.50, and certainly for an "disorderly movement" towards the 2013 lows in the 112's. So -- not time to panic -- but to be watchful.

    Equity Key levels -- I would in particular be watching China Shanghai (NYSEARCA:ASHR) Small caps (NYSEARCA:IWM) and Transports, which continue to lag (NYSEARCA:IYT), for support violations.

    ASHR Chart

    ASHR data by YCharts

    IWM Chart

    IWM data by YCharts

    IYT Chart

    IYT data by YCharts

    Best wishes to all investors.

    Edit -- as I literally have been writing this, TLT is collapsing below support, and Nasdaq QQQ is looking to follow. I have substantially increased my option hedges on both. Stay tuned...

    Tags: TLT
    May 05 10:26 AM | Link | 10 Comments
  • The Return Of The Inflation Trade -- Is Is Time To Prepare?

    *I expect the "End Game" for the current cycle to be led by Bonds, regardless of stock valuations.

    *In turn, the potential prerequisite to a Bond market Bear Cycle would be increased inflation expectations, through indicators such as wages and commodities.

    *There is a case to increase exposure now to assets benefiting from higher inflation expectations, such as selected commodity and Emerging Markets, playing a traditional late cycle class.

    To invest successfully one must be a contrarian to a certain extent, to look where the puck is going, not where it's been -- to process and consider what the crowd expects is least likely to happen, then look for mispriced assets that may benefit from a change in that view.

    The predominant world - view out there is the following:

    * Entrenched or threatening deflation, in many parts of the world.

    * Contractionary Fiscal Policy

    * Permanent slow growth and credit formation

    For this reason, the best asset classes have been Bonds and bond like sectors -- Utilities, REITS, and defensive, dividend paying stocks, all have which been bid up to expensive valuations, projecting forward a long run view of the status quo.

    I believe profitable investment allocations are made by challenging the status quo viewpoints with variant perceptions, and looking for evidence fundamentally and technically that supports a variant view. Lets examine a few possibilities fundamentally, that might change the macro outlook for inflation expectations.

    The massive excess reserves from multiple QE rounds, and continuing to be added by ECB action today, have simply piled up. What if, through easier housing lending standards (promoted by the new FHA head) lending and credit formation accelerate?

    Fiscal policy has been highly contractionary. What if, due to public pressure on the crumbling state of our Nations Infrastructure, this dynamic changes -- leading to more usage of Steel, Copper, Energy, and other inflation - tied components? In my view, this is only a matter of time, unless we all stop driving!

    The investment case to be made, in my view, would be an appropriate allocation commodities and selected emerging markets tied to commodities. Even if not as a primary investment class for the investor, I believe it makes sense -- like buying any asset when cheap -- to pick up some "inflation protection" while it is still cheap.

    There are various ways to do this. I am not much of a bond guy, but one could (alternatively to generic government bonds) take a good look at TIPS, which are very cheap relative to normal Treasuries -- note the word "relative".

    I'll note that many folks would say, "I'll wait for overtly higher inflation numbers, and then re-allocate" -- and that's fine. However -- I think we can improve our results by Anticipating change in a widely held world-view, and then incrementally applying exposure to benefit from this change.

    Remember the old, and wise saying: "Market leads the news" In other words, we will likely see the asset classes start to move before the news changes, and indeed this is starting to occur.

    My preferred method is to look at what the "smart money" is saying;examine the technicals for confirmation, and consider investments in these areas while they are still out of favour. Lets examine briefly a few specific ideas.

    Russia: (NYSEARCA:RSX) (NYSE:MBT) Little is more out of favour, or cheaper, than Russian stocks. And perhaps because of oil's recovery, (up sharply again as I write this) or smart money allocation, Russia is starting to really motor. Russia's large telecom company, I have profiled in earlier writings.

    RSX Chart

    RSX data by YCharts

    MBT Chart

    MBT data by YCharts

    Next, talk about out of favour, Brazil's national Oil company, (NYSE:PBR). Now it is rocketing, perhaps because of oil, perhaps because they have promised to release financials finally, but more importantly because China is extending a financial backstop, as recently reported.

    Do we then follow the "Smart Money" here? (China) Is it reasonable to assume -- If China is willing to risk billions of dollars here, they know what's going on within the company, and the resolution to the corruption scandal that has engulfed ?

    PBR Chart

    PBR data by YCharts

    Next, metals plays. I am reading increasing reports that the "big players" expect actual copper SHORTAGES by 2017 or so. This is a variant perception if ever one was heard, as we are bombarded by record low iron price reports amid China's slowing economy.

    Lets look at Copper for second (NYSEARCA:JJC) ETF. I note that even with the Iron Ore price, and strong US dollar, Copper is showing signs of building a base here, as is one traditional leader, (NYSE:FCX). There are a number of stocks, both senior and junior, to consider here. I am long a few junior names, which are breaking out from long downtrends, as well.

    JJC Chart

    JJC data by YCharts

    is blasting higher today. (although they have energy exposure).

    FCX Chart

    FCX data by YCharts

    One last specific idea, with a high risk and reward quotient, is battered offshore driller (NYSE:SDRL) This name has been crushed due to Russian connections and low oil prices. However -- looking ahead -- they have the youngest, best offshore drilling fleet in the business, and older rigs are getting scrapped. IF oil comes back, (a big if, admittedly) these guys may start printing money.

    SDRL Chart

    SDRL data by YCharts

    Summary -- even as part of a balanced portfolio, I believe exposure to this area is timely for the investor.

    Best Wishes!

    Apr 15 8:45 PM | Link | 23 Comments
  • Position Update -- Second Quarter 2015

    I thought it would be a good time to update my positions going into 2nd Q 2015. I expect a brutal 1 Q GDP number but then acceleration in Q2, led by housing, a major theme of mine.

    As I've recently written I am avoiding short plays at this time, due to the sheer liquidity in the system.

    So without further preamble -- here are positions and brief thoughts on each:

    1. India related: (OTCPK:FFXDF) (NYSE:TTM) (NYSE:HDB)

    I am long an Indian Fund run by Prem Watsa, Chairman of Fairfax financial, along with Tata Motors and a high quality bank, HDB. These are core positions tied to my Indian thesis I have written extensively about. After a large run-up India is in a consolidation phase.

    I believe India to have a huge potential secular growth story.

    HDB Chart

    HDB data by YCharts


    I am long Philippines, Holcim (an internationally focused Aggregates company that is merging with LaFarge) I've re-established my position in MBT, a Russian / Ukrainian Telecom company, and a small position in Brazil. I am very bullish on Asian EM at this time as a market rotation, Holcim is perfect as it has extensive Asian operations and is tied to infrastructure spending in this fast growing region. (Including Indian operations)

    Brazil is a small Spec holding in the hopes of Gov't change there, Russia's MBT is similar very cheap and out of favor.

    MBT Chart

    MBT data by YCharts

    EPHE Chart

    EPHE data by YCharts

    3. US Housing and related. (FNMAS) NDB.TO (NYSE:BANC) (NYSEMKT:BHB) (NYSE:VMC)

    I am long Fannie Mae Preferred shares on a bet of a hopeful return of this conservatorship situation to shareholders. The better Housing data helps this position both technically and from a legal point of view. This is a special situation. I am also long 2 regional banks, a US aggregate company and a major Canadian timber producer (NDB.TO) to complete this theme. I expect a very strong spring selling season. Note new highs on (NYSEARCA:XHB)

    VMC Chart

    VMC data by YCharts

    BANC Chart

    BANC data by YCharts

    XHB Chart

    XHB data by YCharts

    4. Energy, materials, engineering basket: This out of favor basket contains energy names Callon and Crescent Point, (NYSE:CPE) (NYSE:CPG) and Engineering co (NYSE:FLR) along with small allocations to diversified materials name Teck (NYSE:TCK) and 2 promising copper / metals juniors. This is partially the "inflation" part of the portfolio.

    CPE Chart

    CPE data by YCharts

    FLR Chart

    FLR data by YCharts

    5. Other / Trading positions:

    a. Blackberry -- (NASDAQ:BBRY) A turnaround story with a security focus; something very in these days. Watch for their new secure smartphone.

    b. Lumber Liquidators (NYSE:LL) -- Premise is worst possible scenario is priced in. High risk; I am short expensive puts, looking for a simple bounce to 40+ as clarity from the government received.

    LL Chart

    LL data by YCharts

    C. Herbalife (NYSE:HLF) Short puts, long calls. Looking for a ruling in coming months, a fine and orders to restructure, as in LL's case, would likely result in a big rally.

    d. Solar -- Sun Edison. (NYSE:SUNE) -- more of a core position tied to the growth of solar in emerging markets.

    SUNE Chart

    SUNE data by YCharts

    e. Insurance (Bet on higher long rates) FairFax financial; (FFH.TO), excellent run company. Core position.

    FRFHF Chart

    FRFHF data by YCharts

    Positions change frequently; especially in the trading or commodities baskets. We are working off overbought conditions here, Kind of expect a choppy year. Hence; my portfolio overall is much more correlated to EM than to the S&P 500.

    Good Luck to all investors; I welcome constructive comments!

    Tags: EEM, XHB
    Mar 31 5:03 PM | Link | 25 Comments
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