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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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  • Market Update: Watching CPI, The Fed, TLT.

    This week we will look at a few charts and discuss a macro thesis, which is based on key beliefs, which I will discuss below.

    This investment premise today is essentially based off of a set core world views, and placing long term bets on those world views as to CB action and where we are in the business cycle.

    It is less about making grand predictions about the end or continuation of the U.S. bull market or even setting SPX targets, all of which are increasingly meaningless to my methodology.

    My approach is to favour to favour undervalued assets, which today would be selected emerging markets and commodity assets, and escrew overvalued / popular assets, which today could include areas like speculative US biotech stocks.

    This approach will not outperform in the short term, but I'm confident buying assets when nobody wants them and exercising patience, is the path to long term outperformance. I'll discuss a few ideas below.

    Core world views, and related probabilities, with associated trades:

    1. CB's are determined to create inflation, are terrified of repeating mistakes of the 1930's by tightening too soon, and will not be rushed. They continue to talk a responsible game about tightening (aka the Fed) but in the end will not tighten until forced to by increasing inflation expectations, and resultant sell off in long term bonds. This is similiar to many past cycle's. Eventually Bond markets will lose patience with the Fed and other CB's, and move rates for them.

    Btw --- The long term Fed Funds curve is predicting a very, very slow rise in short rates. The risk here is definately that the market has it wrong.

    Related probability: A large chance of sector outperformance in inflation - related stocks, like metals, agriculture, and energy, and a move higher in long term treasury rates.

    Trade: Buy inflation assets, and short long term treasury bonds.

    On a long term chart, TLT has broken down from a spike top at the beginning of 2015. A reasonable target might be the 2014 lows around 105. Time will tell if this move would affect stocks adversely, or a bigger move would be required. I believe the answer would be the markets perception on whether the move is caused more by increasing inflation expectations vs healthy growth rates.

    I will reiterate historically the average real yield, or yield plus core inflation, has been 2% for 10 year bonds. Currently, with core CPI at 1.8%, this would make 10 year yields 3.8%, vs 2.2% currently.

    TLT Chart

    2. Inflation expectations are increasing, and the prerequisites are there for higher levels of increase:

    Wages are increasing at the bottom end -- I think this is key. A slew of fast food outlets, restaurants, and retailers have (been forced to by labour supply) to raise wages. I believe this is the start of a trend, with almost record low jobless claims, and will feed into CPI in time.

    Oil appears to have bottomed.

    Health care costs are up.

    Rental and housing costs are soaring. Their is a huge underlying housing demand because of this and household formation outstripped new home sales for a number of years.

    While much of this -- like wages -- are good for the economy, I think the jury is out on how good these developments will be for financial assets, after so many years of markets thriving on weak wage growth and middling economic data. What do markets want, is the question -- a roaring economy or permanent zero bound rates? We will see in time. For now if these changes develop, asset allocation is key.

    The Trade: Short companies affected by higher wage growth, and potentially, higher food costs. (I'm short 2 of these) So far, my bets on agriculture (corn and soybeans) have not worked out, in spite of a firmer oil price, and the most lopsided bearish sentiment on these commodities since at least 1991.

    However, 2 related Ag companies are breaking out here from long term bases, and I am long both, (NYSE:CF) and (NYSE:DE) Stocks often lead commodity movements. I firmly believe, these commodities may move higher soon, and I am waiting on a trend reversal to re-enter these trades.

    DE Chart

    DE data by YCharts

    CF Chart

    CF data by YCharts

    USO data by YCharts

    US Core Consumer Price Index Chart

    3. U.S. markets are overowned, popular, and pricey, while emerging markets (except China) are ignored, much cheaper, with both higher growth rates and greater margins of safety.

    Probability: EEM emerging markets will outperform SPX over the next major bull cycle.

    The trade: Allocate to EEM broadly long term capital, or to selected regional or country ETF's. Let's conclude by looking at one distressed country that at one time was one of the worlds brightest stars, Brazil. (NYSEARCA:EWZ).

    There is no doubt Brazil is a huge mess today, but one must look ahead. What if the present government is impeached (a fairly good possibility according to reports) and a new, pro capitalism government takes power, that regains the trust of investors and the public, at the same time a higher inflation period takes hold, favouring commodity assets so important to Brazil?

    A subset of this would be instead of buying US Shale oil producers with high debt loads and (according to some) questionable reserves, allocate to international, cheap conventional names. Everyone is chasing yield today, but with my view on higher rates, that's exactly the wrong thing to do.

    2 suggested names would be Seadrill (NYSE:SDRL) and Petrobas (NYSE:PBR) PBR is affected by confidence in Brazil -- but what is overlooked is their absolutely massive, proved reserves. Now the risk that has been priced into the stock is nationalization and to do with the recent scandals -- but that's when one should take a look, as China has, extending a massive credit facility.

    SDRL blew up over their Russia connections and low oil prices --- lets remember they have the best, youngest offshore drilling fleet in the world.

    To close, From my chair of 16 years as a floor trader turned investor, there are few industries more ethically questionable than the vast majority of mutual funds, hunting down Mom and Pop through their "licensed and certified" , your Financial Adviser or Certified Financial Planner.

    These folks are so often nothing but salesmen for the mutual fund industry, and it's all about AUM -- assets under management -- and driving those fees. Switching fees, front end fees, back end, trailer, the list is endless. Churning accounts, special leveraged loan products, nothing is too much in the search for fees.

    There are few industries I have greater disdain for. Be careful who you listen to. There are some good advisors out there, but rare. The conflicts of interest are great.

    PBR Chart

    PBR data by YCharts

    SDRL Chart

    SDRL data by YCharts

    Buy assets when no one wants them. Best wishes to all investors.

    EWZ Chart

    EWZ data by YCharts

    EEM Chart

    EEM data by YCharts

    Tags: TLT
    May 24 12:08 PM | Link | Comment!
  • Mid - May Market Update, And The Uselessness Of Grand Predictions

    I'll start with a bit of humor on the fallacy of Grand Predictions by the newsletter - Pundit crowd, and we all know who they are.

    This Group comes in many flavors, like Freezer - Burned Ice - Cream, and is consistent in the uselessness of their commentary.

    The common theme in all of these are, They are never wrong; either they are "early" or the market is irrational, (not them)

    Lets look at the flavors:

    1. The "secular Bull Market" callers: This wise group expects readers to fall at their feet as they repeatedly chant "secular bull", distracting us from their brutal sector and individual stock picks, and the fact they haven't beaten the S&P 500 since, Oh 1970 or so.

    So; I timidly raise my hand to the great and powerful OZ.....please define a secular bull market?? YOU NAYSAYER -- BEGONE! -- I hear. (The real answer is the secular market quoted depends on whether OZ is long or short of that asset, and little else)

    2. They switch between technical and fundamental arguments, depending on whether their asset of choice is (NYSE:A) making new highs (technical) B) Consolidating, flat to lower (combination of Technical mumbo - jumbo and fundamentals -- you start to hear "long term story" once the asset falls over 20%; and C) getting crushed (pure fundamental arguments along with vitriol about "naysayers" and "short sellers" and their foolishness.

    I've actually read here --- I kid you not -- many times on this site regarding certain stocks, that have fallen 50% -- or much more -- both that they are still in a "secular bull" and the "naysayers" are dead wrong! How's that work, exactly? Makes great comedy!

    3. The "hedge funds" are a contrarian indicator -- if the Hedge funds are short my favorite stock -- and the Hedge Funds are "buying up my stock" -- -- so that s good news! How can the Hedgies both be always wrong, and always right?

    To add to the above: There is a lot of commentary out there on the economy, again from the ivory tower that can't beat the S&P 500. Now that we mention it, I propose a new, self governed rule. For those pundits -- that's most of them -- who cannot even achieve the simple task of beating the S&P 500, I propose you don't opine on markets or the economy until you do. Graduate kindergarten and then you are permitted to speak. Fair?

    Anyway the point is -- for those economic experts -- who cares? I don't trade the economy. I trade the market, and at its core, I trade risk. Grand economic predictions don't make us any money, if one can't choose sectors and individual equities worth a darn.

    Experts, when you even figure out the above phrase, let me know. Maybe then you will be allowed into grade 1.

    Anyway enough humor -- on to the update following my Article, "Its all about the Bonds" --- Boy am I looking like a dope for selling my Jan TLT 2016 puts late last week (at a 50+ % profit ), looking for a bounce in TLT. Yeah we got it -- for one day!!

    Thankfully, (while away yesterday) I hammered the bonds this morning in the futures market on the housing data -- remember how I've been bullish on Housing all this time? -- and I still have a big chunk on Jan 2017 TLT puts that I won't trade.

    In the context of ECB chatter and Euro bonds rallying, the action in US long term bonds is EXTREMELY bearish !

    TLT Chart

    TLT data by YCharts

    I make no grand predictions about secular this or that -- but on long term charts it sure looks like an ATTEMPT at trend change; gleaned through OBSERVATION not Grand Prediction, may be in development - with profound implications for various asset classes.

    As to other positions; I remain short 2 Shale plays, (NYSE:PXD) and (NYSE:CLR) ; and Canadian oil Sands, COS.TO. The first 2 --are not related so much to a "grand" call on Oil itself, but their debt levels -- in a sense its another play on a bond selloff spilling into highly indebted sectors.

    CLR Chart

    CLR data by YCharts

    On (COS.TO), its all about the Alberta election, and higher royalty rates and regulations from the new NDP government.

    Lumber Liquidators (NYSE:LL) is not working out as yet, but I believe they will work through this, and a strong housing market won't hurt. It seems there are not clear regulations that apply to anyone here. I'm giving this more time as a distressed play.

    (NYSE:PBR), (NYSE:FCX) and (NYSE:SDRL); I am happy to see these pull back as long term holds, as I've already completely hedged these stocks with short June calls, which are getting crushed. I hope they expire and I keep the stocks.

    AS a whole, Indian stocks (NYSE:HDB) and (NYSE:TTM) have done nothing, I am flat on the position, but have a big gain on my third Indian holding, Fairfax India Fund (FFXDF or FIH.U.TO) -- depending on your quote service. Standing Pat, will give these lots of time and space.

    HDB Chart

    HDB data by YCharts

    (NYSE:MBT) Russian Telecom, (NYSE:SUNE) Solar co, and (OTCPK:HCMLY) Holcim Aggregates co look solid here. I trimmed MBT for nice gains and sold calls (poorly) against SUNE, thus are the mistakes, selling calls and then seeing stock take off. I like Sune and will add on any notable dip.

    SUNE Chart

    SUNE data by YCharts

    (NYSE:TRQ), Turquoise Hill which I also lightened, is taking off this morning on a new agreement re the underground mine with the Mongolian Government. This stock has huge very long term potential.

    TRQ Chart

    TRQ data by YCharts

    (NYSE:TRN) Trinity short Put position is working as stock is over 30 -- they were expensive puts and I'm happy to see them go to dust. I'm not sure if the stock will make a lot of fwd progress, hence I only shorted puts here.

    Lastly, still waiting on special situation Fannie Mae Preferreds...(FNMAS) stock spiked about 10 days ago, I should have sold some, and missed. I do think a strong housing market helps their ultimate, free market valuation. Patience.......

    That's it for the update. Best wishes to all investors!

    Tags: TLT
    May 19 10:21 AM | Link | 9 Comments
  • 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 | 17 Comments
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