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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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  • Mistakes Made -- (Part 2) The Fallacy Of Focus On The Wrong Inputs To Drive Intermediate Term Market Movements.

    I find I learn best through mistakes made and realized.

    Markets continue as a humbling mechanism.

    I have been down this path before but feel the need to reiterate the following summary of what I believe is and is not important in making investment decisions, as I will through this brief post.

    It is critical to focus not on what I think rationally markets Should focus on to Value asset prices, but what they are focused on.

    Note me that my comments apply to the intermediate term time frame of investing, mainly, and should be received in that context.

    Summary.

    1. Central Banks far and away remain the overwhelming #1 input for price discovery for intermediate term price movements. This has been proven again, and again, and trumps geopolitics, organic growth trends, economic data, and even earnings trends. This is not to say such fundamentals don't matter -- but central bank policy rules.

    Perhaps it always has, and I have not seen enough cycles. But one would have to admit we are in somewhat uncharted territory.

    Rather than attempt to defend this thesis, one chart proves it: the German DAX over the last year. Simply breathtaking. To those who doubt Central Banks are not the dominant factor, I simply ask, what else has changed in Germany?

    ^GDAXI Chart

    ^GDAXI data by YCharts

    2. This will last, simply until it doesn't. Not fully and completely embracing this fact has been one of my great investment mistakes over the past 6 years. I have been solidly profitable as a trader through that time, and am seeing steadily improving results, but fighting this factor through index or individual short sale trades has mainly been an exercise in frustration and stress, even when profitable.

    3. Bond markets lead, and will lead. We are in a world willing to lend to high risk countries like Italy or Spain for 10 years at under 1.5%, due to QE programs. Many yields are negative. In this environment, debating market or stock valuations are nearly always a fools errand. Without fixed income competition, TINA rules and money will be forced into stocks, even those with high risk or valuations.

    4. To the above -- valuation alone is neither a market or stock timing tool for short selling or top calling. There must be a catalyst above and beyond valuation measurements, and usually a loud, powerful one. Even overwhelming short thesis trades, like many in commodity stocks, are "hard" trades, requiring great patience.

    Those shorting internet stocks in 1999, got carried from the building.

    5. Overthinking potential future macro developments, especially of a negative nature, more often than not, anti- productive.

    Now some commentary on my thoughts and position changes post - FOMC. Hopefully this will be of some help to others as it is to me to reflect on.

    The below are copied from comments I made to past blogs, and reposted here.

    For my time period which is intermediate, in a world where there is no competition from safe yielding assets --- which should be the defining issue -- what is the competition -- valuation is a total red herring.

    I have been, overall mistaken to attempt valuation shorts in an environment where investors are willing to lend money to Italy and Spain at 1.5% for 10 years, and to Coke for the same yield, even though many shorts had a substantially profitable outcome.

    Looking at a list of the best valuation short candidates that have occurred, CAT has grinded lower from 100 to the 80 area, during a period of collapsing sales, management issues, FOSL about the same -- while their business in under huge threat from the APPL watch. Even oil stocks, with oil making new lows, won't easily go down.

    Thinking this through -- if investors are willing to lend cheaply to Italy, why not Exxon -- or weaker oil stocks? Therefore -- they continue to exist in a healthy fashion that would be quite different in a tighter credit market.

    Shorting a stagnant economy due to valuation, again, also makes little sense, barring complete collapse. Even then, US QE would return in a flash.

    All in all, it's just not worth it, considering one pays the borrowing fee and dividend. Shorts will only be truly productive if and when rates spike due to inflation, and that doesn't seem on the radar. A good rule -- would be shorting may be more productive once there is no QE, anywhere in the world, as QE dollars move around the globe. And that doesn't seem likely near term, either.

    My recent posted shorts included such names as BABA, MU, and several oil names. Brief comments for clarity.

    In no way do I see the fundamental risks involving these companies as diminished, and I think they are all highly risky buys for reasons I have commented in detail on.

    However one of the hard lessons I continue to relearn as a trader is just because I see a stock as an overvalued, highly risky purchase, doesn't mean it's a wise short candidate. There is a middle ground and the extraordinary liquidity from the world's central banks means valuing stocks and risk by traditional means for evaluating short candidates is extremely risky, even dangerous and stressful --- and wrong.

    There are those with extraordinarily deep pockets, patience and vision to ride through this period, who may be short various assets today. I realize I do not have the willingness to ride such positions to a different credit period, and cannot foresee when this tidal wave of liquidity will end with implications for valuations.

    I expect on balance of probabilities the oil stocks, Micron, and Alibaba are likely to continue to under perform their benchmarks, and the dollar to continue higher.

    I also think, taken as a whole, short positions in all three, (barring a violent collapse in oil / further massive dollar spike for the oil stocks) are likely not worth it from a risk / reward / stress point of view, either long or short, compared to alternatively using capital in productive long positions, established hopefully on dips.

    Here are a few charts reflecting this / comparative to their major index or ETF and (Shanghai for BABA) -- quite dramatic to see a 50% collapse in a stock while its benchmark soars!

    Oil stocks // SPX, Micron / QQQ, Alibaba / ASHS (Shanghai)

    LINE Chart

    LINE data by YCharts

    RIG data by YCharts

    MU Chart

    MU data by YCharts

    ASHR Chart

    ASHR data by YCharts

    I hold a number of core long positions including in emerging market countries that greatly benefit from lower oil prices. I would be better served focusing on these ideas instead, or on infrastructure, US housing, and solar, all where I remain long term constructive.

    Thanks all for following, and I look forward to your comments!

    Mar 21 3:06 PM | Link | 38 Comments
  • King Dollar And The Deflationary Growth Steamroller.

    In the aftermath of the Fed's latest policy statement, I am resolved to certain conclusions that have become more and more apparent.

    In a world already largely at the zero - bound rate structure, with increasing numbers of yields now negative, but with entrenched powerful deflationary forces abundantly evident, I am resolved to conclude, Central Banks simply cannot stimulate growth in regions of the world (which is to say all of the developed world) where it is restrained for secular reasons.

    Central banks can attempt to Compete for the limited supply of growth, through currency devaluation and increased exports, but cannot create it. With all central banks attempting the same trick, it becomes by definition a zero sum game.

    Although US consumers for example have substantially deleveraged, and have apparent credit and spending ability, zero rates have been unable to force increased spending preferences.

    There are reasons for this, including, no need, and no desire, both of which are related to the number one problem facing developed economies -- aging demographics.

    Older people, simply do not need to consume as much. They buy less homes, furniture, gasoline -- everything. We are between generations in the US, and are awaiting the next generation to move into their peak earnings, spending and investment years.

    When we look at the world, Europe is older than the US, and Japan is older still. This explains a lot of why Japan has had economic demand issues prior to Europe's, then the U.S., all of whom are facing the same problem -- a lack of robust, organic demand. Don't look now, but China is rapidly aging, as well, and may become a major issue in this regard.

    Fiscal policy, which is a potential solution to bridge the gap, has been weak in all of these locales, as there is little political appetite for the added debt this would require. Nonetheless, I see it as only a matter of time before an overhaul of fiscal policies is demanded from the voters. It may take a crisis of growth to light this fuse demanding change.

    All of this background leads back to my title -- King Dollar. In light of the deflationary forces entrenched in developed economies, and the eventual flows into the U.S. dollar, set loose by the conclusion of US QE programs, it should be no surprise to see commodities under sustained pressure and in a secular bear market -- I am only just hearing this term accepted!

    One by one, like dominoes, commodities have been locked into sustained downtrends -- starting with coal and iron ore in the aftermath of China's slowing structural growth rate, progressing to copper, and now to oil and grains.

    Some 5 year charts for perspective: Coal

    ^DJUSCL Chart^DJUSCL data by

    And leading producer Peabody Energy (NYSE:BTU)

    BTU Chart

    BTU data by YCharts

    Copper, then leader Freeport:

    JJC Chart

    JJC data by YChart

    FCX Chart

    FCX data by YCharts

    USO Chart

    USO data by YCharts

    And finally Oil, followed by leader Exxon Mobil, which is rolling over:

    XOM Chart

    XOM data by YCharts

    The point I am trying to make is this: The U.S. dollar is a steamroller, as the undisputed reserve currency in a world without a viable alternative. When you consider the U.S. dollar rationally, considering the state of the world, where would you rather keep your funds safe? The U.S. dollar looks awfully good right now, with China slowing and having to do more and more to avoid a hard landing, and the Euro's very stability an open question mark. (At least in my mind!)

    Any future crisis would only serve to heighten this effect, and barring a new US QE program, I expect dollar inflows to continue against most world currencies.

    Id like to point out something else of critical importance to energy sector investors. As you will note in the charts above, the major damage to the leaders and financially strongest companies in Coal and Copper respectively, BTU and FCX, has occurred well AFTER most of the damage to their respecting commodities. FCX has been cut in half just since mid last year, and BTU by a further 2 thirds. I reiterate these are 2 of the strongest, blue chip names in their sectors.

    I believe the extended period of commodity weakness is battering the financial position of these companies (not to mention the sheer devastation in the smaller, weaker names).

    The risk implications for investors attempting to pick the bottom in energy producers, oil servicers, construction equipment (NYSE:CAT) should be obvious. IF crude oil does not rebound sharply within the next number of months, this group of stocks is likely to financially weaken further. The sell off we have seen to this point, may just be wave number 1 of a secular bear move in the whole group.

    Considering the amount of credit extended to US shale oil projects, this has continuing implications for credit markets, as well.

    The further implication for the strong dollar, commodity deflation story, is following copper, oil and coal, what other "commodities" are subject to deflationary forces: I can think of 2 areas of focus: construction / mining equipment and semiconductors.

    First (CAT) and (NYSE:JOY). Cat continues to report soft sales summaries, including today, and Joy recently reported a weak quarter, again:

    CAT Chart

    CAT data by YCharts

    CAT data by

    JOY Chart

    JOY data by YCharts

    JOY data by YCharts

    Semiconductors have long been a cyclical, commodity like product.

    I note following a large stock price run-up, Intel just warned on revenue guidance. I also note the continued struggle of Micron Technology to advance, in spite of a very positive corporate story:

    INTC Chart

    INTC data by YCharts

    INTC data by YCharts

    MU Chart

    MU data by YCharts

    MU data by YCharts

    Money continues to flood into areas like Biotech, masking the underlying cyclical weakness. IBB has gone parabolic:

    IBB Chart

    In closing, the fact that these deeply cyclical group of stocks are continuing to weaken in the face of zero interest rates should be concerning, and encourage a cautious intermediate term posture towards US growth stocks.

    I continue to be a long term bull on the U.S. economy, but am cautious at this juncture about financial markets decoupling from the organic growth in the real economy. More proactive fiscal policy and a successful "handoff" to the younger generation would be a great positive in this regard.

    IBB data

    Tags: XLE
    Mar 19 6:36 PM | Link | 25 Comments
  • My Editorial Of The Fed. Actions And Possible Outcomes.

    I write this feeling like the victim of a rope a dope that is the run up and response to Fed meetings these days.

    Or perhaps that's what both the Federal Reserve and markets have in common --- aim to keep the maximum number of partcipants off guard. Bring the market down with hawkish commentary, reverse to extremely dovish, crush the dollar, spike markets. Rinse, repeat.

    In any event, I continue to bang my head against the wall, and tell myself, repeat the following: This Fed is forever dovish -- signals to the contrary via Fed speeches irregardless --- and repeat after me:

    Don't fight the Fed -- aka economic data is increasingly irrelevant, along with currency movements, sovereign debt, earnings warnings and trends, and valuations. Particpants care about one thing -- central bank liquidity -- how much, and how long?

    My life would be somewhat simpler if I only paid attention to Fed inputs -- and nothing else. However -- I don't know about you, but it seems the Fed keeps changing the rules of the game -- the metrics it targets for normalization come and go, and they switch to different metrics. And why not wait?

    There appears to be no downside to staying easy forever. Why do analysis -- I should do what I heard a CNBC pundit exclaim at the close-- "just buy everything"!

    Certainly the bond market doesn't mind, and the issue of "Fed Credibility" is only a concern of monetary purists it seems. Most everyone else, has gotten quite used to their sugar fix of forever easy policy, worldwide. L

    Its clear to me, this is more and more an overt currency war and no central bank will tighten until they are literally forced by their currency or fixed income markets. IMO this sets up for bubble valuations whether in sovereign bonds, coporate credit (both trading at or near negative yields in Europe) or increasingly in private equity valuations like Uber or Pintrest valued in the 10's of billions.

    Corporations are borrowing to repurchase shares like there is no tommorrow, and who can blame them?

    To me the real bubble is in credit -- KO just borrowed 20 year money at 1.6% -- 8 billion worth -- 20 billion in bids. Amazing.

    I Don't pretend to know the end game -- I was not short bonds or equity indexes, but did come in today short some energy stocks, which did spike hard on the weaker dollar.

    Its amazing to me to see Tesla, which I am also short, back over 200 on a simple tweet from Elon Musk about increased range.

    As I close I wonder as this currency war intensifies, that it doesn't morph into an all out trade war -- return to the 1930's. I don't see how blowing up asset prices is supposed to be productive for the economies of the US, Japan or Europe, but it is what it is.

    I invite discussion as I am finding it extremely difficult to pay the current valuations offered for stocks given the backdrop.

    I invite other perspective.

    Best wishes to all investors.

    Tags: SPY
    Mar 18 8:52 PM | Link | 2 Comments
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