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Kevin Davitt
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Kevin brings his unique experience in derivatives to RCM Asset Management. Following graduation (Marquette University – Evans Scholar 1999) Kevin started working for LETCO Trading on the CBOE floor. Between 2000 and 2007 Kevin traded a variety of Equity and Index options products as a market... More
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  • Detroit Bankrupt - All Time RUT/DJIA/S&P Highs 0 comments
    Jul 21, 2013 11:06 PM

     

     

     

     

     

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    __________________________________________________

    ENERGIES | METALS

    By Kevin Davitt

    To discuss this commentary in more detail, email me at kdavitt@rcmam.com or call 312.870.1520.

    There was a time not that long ago where the saying "as goes Detroit, so goes the nation". The Big Three (Ford, Chrysler, and GM) were humming along and leading the world in manufacturing terms. Those days ended long ago, but it's still pretty amazing to see the country's 18th largest city (and one of very few seeing population flight) declare bankruptcy. I'm not making an argument, I'm no apologist for 1950s America, but if you told somebody 30 years ago that Detroit would declare bankruptcy on the same day the S&Ps made all time highs - well, I imagine you would get some strange looks. Then again, Detroit didn't look like this back then -

    If I were a BUY and HOLD type (which I'm not) I would unequivocally HEDGE a significant amount of my portfolio risk going out 3-6 months given the recent ramp higher. I'm not picking tops. Who knows if we go to 1700, 1750....whatever, but we have yet to get (and we may not) a 10% pullback in 2013 and I would be surprised if there aren't some waves up ahead.

    If I were a speculator, I would employ creative options expressions to get some "soft" short deltas in the RUT or S&Ps.

    With respect to the Energies - WTI is nearing the $110 level (which capped the rally in March of 2012). I also believe we're flirting with the pivot point where higher energy costs become a drag on other areas and margins. See also: retail and restaurant spending.

    Aggressive types could SELL Sept 115 calls v. BUYING Sept 100 puts for .05 credit. Unlimited upside risk. (Spread to cap).

    Passive types could pay .45 for the Sept 100 puts and risk $450+ frictional cost and have about a month until expiration.

    On a trade, we (small) assumed a LONG BRENT v. SHORT WTI (Sept) this morning. It traded to .15 wide. We feel on a short term basis we're due for a bit of mean reversion.

    In Natural Gas, the market got a boost by yesterday's inventory data. Based strictly on my own personal use in Chicago's Ukrainian Village lately - consumption is up. From a trading standpoint, we advocated for long deltas on the pullbacks over the past two weeks to the $3.60-3.50 area. Hopefully readers were able to capitalize.

    For firm clients some short puts were covered yesterday with flat price around 3.82.

    As far as the Metals are concerned......

    Gold is flirting with $1,300 again and it's been outpacing Silver, but lagging Platinum.

    The October PL v. August GC spread looks like this (below). Since election time (early November) Platinum has vastly outperformed Gold with the exception of the couple of weeks after Cyprus.

    But Silver is the laggard, and the Gold Silver ratio is now up to 66.5. Here's a 5 year look at that ratio:

    Somewhere between here and 70:1 this spread appears compelling. When Silver plays catch up, it tends to do so with considerable velocity.

    Coffee, a market I've mentioned on a handful of occasion over the past few weeks had a key reversal yesterday (and today?). Brazilian weather scared the market a bit, but could not hold the 134 area.

    For equity options types - it's expiration day which means some hedges roll off. I think we're going to get a swift and meaningful pullback before long. If you've benefited from recent move......why not lock some in? At bare minimum have a target and tighten stops.

    This chart comes from Zerohedge yesterday. I can readily admit that they cater to a slightly more apocalyptic reader.....hardcore Libertarians, Austrian economic proselytizers, etc, but the 1987 analogy gave me some pause.

    The Nikkei reversed today after a nice multi week run:

    Finally, just after the European close, here's how the primary commodity markets look on the Week.

    Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions ("Forex") before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.

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