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Margin Call Monday - Yuan Falls Limit Down to the Dollar

|Includes: GLD, GOLD, GS, JPM, The United States Oil ETF, LP (USO), XLE

It's amazing what the MSM ignores these days

The PBOC raised the Yuan exchange by 0.0005 and that microscopic move set off a panic that dropped the Yuan it's daily 0.5% limit against the Dollar - marking a huge and violent reversal to the recent trend and signaling that China's usual tight control of their economy may be starting to unravel.  Chinese banks scrambled to buy Dollars to meet a Central Bank rule that bars them from having Dollar short positions overnight but it's doubtful that all were able to comply in that violent action.  

The Shanghai Composite fell 1.5% this morning (Hong Kong was closed) but it does not show up in the charts on the WSJ's main page nor is it mentioned on CNBC - perhaps because it conflicts with the weak-Dollar narrative they are using to drive the speculative commodity frenzy.  Ignoring problems in China was a big theme of the summer of 2008 - as we rallied into the second biggest stock market collapse in history from Dow 11,000 in mid-July to 11,782 on Aug 11th and we were still testing 11,600 through Sept 1st but then things started going wrong as we broke below 11,000, then 10,000, then 9,000, then 8,000 - finally stopping at 7,500 (down 33%) on Nov 20th.

Special Report:  How to Make Millions in Metal and Oil:

As I keep telling Members, we don't have to be worried about missing a sell-off, it will be long and relentless when and if it comes as will the rise we get as inflation begins to kick in.  Gold is now over $1,500 for a week and, before you waste money on gold - let's look at an alternative:  GLD is the ETF that tracks gold and, if you think Gold is going to $1,600 - rather than plunk $1,500 down on an ounce of gold to make 6.6% on a move up, you can buy the GLD $140/160 bull call spread for $790 (1 contract spread at $7.90).  As GLD is currently at $146.74, that spread is currently $674 in the money and carried a $116 premium BUT - for about 1/2 the cost of an ounce of gold, if GLD gets to $160 (approximately $1,600 an ounce) then that spread is worth $2,000 - a $1,210 gain on that same $100 move up in gold!  

What's the catch?  The catch is the same leverage you gain on the way up goes against you on the way down.   Your break-even on gold is about $1,530 so you enter the trade at a disadvantage.  On the other hand, since you make 12x on the way up, look at it as risking $790 instead of $18,000 on 12 ounces of gold to get the same upside on a move to $1,600.  If you are worried about missing on the upside, you can "layer" the trade by buying the $145/165 spread when gold crosses $1,550 and the $150/170 spread when it crosses $1,600 so you only have to commit the next $790 after you have already locked in gains on the previous round.

By playing gold this way, if gold goes to $2,000, you would end up with 10 spreads that cost you about $8,000 that return $20,000 whereas buying $15,000 worth of gold at $1,500 would give you a gain of just $5,000 - IF gold goes all the way to $2,000.  This is the kind of money options traders make when there's inflation and that's why we're so gosh-darned excited about it!  On the way down, we can also make exceptional money as the metals crash and, in fact, the gains are so spectacular that we can also layer our hedges so we make money on a big move in either direction - this is why GS and company have so much fun jacking up and then destroying the markets over and over and over again - it only hurts the little people, right?  

Let the Glenn Beck crowd run around buying physical gold, the more demand from them, the more money we make.  We can set up similar spreads on silver and copper as well as - OIL!  Nothing is more exciting than oil these days and you can similarly use options to gain tremendous leverage on the price of oil.  In fact, back in December, I put up my "Secret Santa's Inflation Hedges" and our oil hedge was using XLE to make the following trade:  

  • Buy 2 XLE Jan $55/60 bull call spreads for $2.60 ($520)
  • Sell 1 XLE 2013 $50 put for $4 ($400) 

The total outlay on that spread was $120 per set and that trade was supposed to run for the year but XLE is already at $78.98 and the Jan $55/60 bull call spreads are now $4.50 ($900) and the 2013 $50 puts are $2.40 ($240) for net $660 off the $120 entry for a nice 450% gain in just 4 months - now THAT'S how we stay ahead of inflation!  

Rather than messing around on the NYMEX with a 1,000-barrel oil contract that would have set you back $90,000 in December and would be up to $112,500 today (up $22,500 or 25%), just $5,000 worth of the spreads would have returned the same amount while $90,000 would be $405,000 already - more than enough to gas up the new Range Rover!  We're actually betting oil to go the other way now so I hate to put up a bullish trade idea I don't believe in but, if you MUST play oil defensively bullish - then:

USO July $43/47 bull call spread is $1.70 and you can sell the USO Jan $35 puts for $1.30 for net .40 on the $4 spread with 1,000% upside if USO gains 5.6% (oil about $120) and USO hasn't been below $35 since November, when oil was $85.  

What I love about these inflation plays is that they are self-hedging.  If your family is going to spend $5,000 on gas this year ($100/wk) then your risk if oil falls below $90 is you will own 100 shares of USO at $35 for $3,500 but, a fall of 25% in oil prices will save you $1,250 so you are good for almost a 50% drop from there and if USO drops another 50%, then oil is $45 and you save another $1,500 so you pretty much can't lose to the downside (and you keep USO until the next time oil spikes) BUT - IF USO goes HIGHER and gets over $47 (oil about $120), then your $1,200 cash commitment turns into $10,000 and you have FREE GAS or, in the very least - the increase is offset, right?  

These are very basic hedges that anyone can do - including airlines - to lock in prices.  Of course the same layering strategy can be used if oil moves higher but keep in mind, as I said, we're shorting oil at $113 ($112.50 is our cross line in the Futures!) as we don't believe the average consumer, who has no ability to hedge, can afford to carry this expense for very long.  You can spike oil up to any price you want for any BS reasons you want but, eventually, you have to sell it to the masses - the same masses that can't afford to pay their mortgages or grocery bills but, unlike a mortgage - you do need money to buy gas and you can't go 6 months in arrears....

So no, I do not have my heart in either the oil or the gold trade as I think the Dollar is oversold and we're waiting for much better entries on both but we will be happy to go long when we get them - I just feel it's a good time to remind Members that we don't miss anything by waiting patiently for strong signs before committing because we can out-earn the suckers buying physical gold and oil 10 to 1 on a run up so it's up to them to PROVE to us that they have the conviction to take things higher.  

I'm certainly not against using a long or two like the ones above to hedge our short positions but, fundamentally - these commodity prices are a joke of a manipulated market and the Manipulator in Chief speaks to us on Wednesday as The Bernank conducts his first public spin session scheduled right after the Fed meeting at around 2:15.  

The Bernank better have some AMAZING spin this week as Timmy needs to sell $52Bn worth of TBills this week so we can keep the lights on in this country and, as noted in Stock World Weekly this weekend, there's no POMO at all on Wednesday and "just" $24.5Bn worth of free money being handed out to the IBanks by Uncle Ben in the other 4 days, despite letting them go hungry on Friday as well (holiday).  

The Big POMO day is today, with $8Bn being pumped into the market by the Fed around 11:20 and that times in perfectly with the 11:30 3-month and 6-month TBill auctions but Wednesday is weird as we have the Fed Meeting, the 5-year note auction and then Ben's press conference at 2:15.  Needless to say - this is NOT a day we want to be away from our trading set-ups!  Also as noted in Stock World Weekly: 

Lee Adler of The Wall Street Examiner wrote last week,  “The market sailed through a week of light Treasury supply with reduced POMO support. A big Treasury paydown this week put extra cash in dealer trading accounts and it did exactly what we expected it to. S&P threw a little glitch into things on Monday by putting the US on a negative watch. They probably just had a big client with a huge buy order outstanding.  A little negative news and Voila! Done!"
 
Next week, Lee thinks, will be a little more interesting.  “POMO will be insufficient to absorb $52 billion in new supply. With that much paper to sell, the government will want to see yields lower. So be on the lookout for a 3 AM stock futures selloff in the pre market probably Tuesday and/or Wednesday. There’s nothing like a little stock market liquidation to get a buying panic going in Treasuries. If that doesn’t happen, then something will need to take a hit around May 2. That’s settlement day for $45 billion in new notes." 

Sounds like we're under the gun, doesn't it?  Well B-B-B-B-Bennie and the Fed know this just as well as Lee Adler does and it's no coincidence that this week (April 27th), The Bernank feels the need to address the masses in some delusional belief that his woeful public speaking style is going to reassure the markets.  

Notice in the above video that, when cornered, Ben's definition of the value of the dollar is FOOD AND ENERGY!  He actually says the value of the dollar should be measured in its buying power over the things that people actually use every day.  Unfortunately, Congress is not a court and any lame answer a Fed Chairman gives to a Congressperson once his time expires is considered "sufficient."  At the next session of Congress where Bernanke is to appear - I would urge everyone to write to their representative and ask them to ALL give their time to Ron Paul!  Let Ron go at Bernanke for a full 2-hour session and expose him for the fraud he is and take the lid of the Federal Reserve scam that leads to the numbers we see on this chart.  

Keep this in mind when Bernanke comes on television and begins lying to you the way he lies to Congress.  His definition of inflation is whatever gets him out of trouble until his next appearance and then he goes right back to the Fed and begins printing money again, relying on the uneducated public's lack of understanding that the money he prints and hands out to the IBanks, aside from becoming additional debt that the American public has to pay off later - also IMMEDIATELY devalues our currency.  That's YOU SALARY, that's YOUR SAVINGS and, due to the gross understatement of the CPI to REAL inflation, that's also YOUR RETIREMENT that the Fed is washing away in a sea of free money for their friends.  If you can't think of it as a crime against America - at least wake up to the fact that this is a crime that is being committed against you as surely as if Bernanke and Geithner hit you over the head with a baseball bat and stole 10% of your live savings (and 10% of your future earnings as well) since the beginning of this year as the Dollar has dropped from 81.32 to 73.74.

farmers get 2 percent of value photoAnyway, that's my public service announcement to the masses as this sickening spectacle begins this week.  If you don't care enough to write to your Congressperson or send this article to your friends to make them aware of how we are being robbed - then I wash my hands of it.  As I noted - we really don't care because we know how to make 450% when gas goes up 27% - just like Bennny and Timmy's pals at GS, JPM et al.  The only difference is I don't get $30Bn worth of POMO handed to me each week to take full advantage of it but we do OK and if you don't care enough to get off the couch and do something about it - we will be the guys buying your couch along with the home that surrounds it at the foreclosure sale...  

It's all a scam, though.  As you can see from the graphic on the right, the actual price of grain is only 2% of the price of a box of cereal.  What happens is if grain goes up 50% from 0.02 to 0.03, then the Food processor says "well, I usually mark it up 690% so now I'll charge 20.8 cents instead of 13.8 cents to keep up with inflation."  Then the wholesaler is told by the food processor that grain costs (one penny increase really) have caused a 50% increase in prices so they mark their 10.9 cent charge up to 16.35 to maintain their "profit margin" etc...  All "reasonable" actions along the supply chain but even that accelerates when you hit the Transportation and they pass in their extra fuel charges as well.  This way you are hit with oil twice - once in the Farmer's cost and again in the Transportation costs.

Before you know it, a box of cereal that cost $2 is suddenly costing $3 or $3.50 for the consumer - all because the price of grain went up a penny!  We're being hit the same way with gasoline as $4 per gallon with 42 gallons per barrel means consumers are paying $168 a barrel for oil.  Last year, a barrel of oil was $67 in May and a gallon of gasoline was $1.90, effectively $79.80 a barrel.  So the mark-up went from $13.80 a barrel last year to $55 a barrel this year - 300% more mark-up for the speculators!  

The funny thing - the joke that has the speculators yucking it up as they spend Ben Bernanke's money to drive up commodity prices to ridiculous levels - is that not only don't American's know when they are being raped but there are many, many political morons who will sit there and defend the speculators and the Banksters and the Fed as if they are somehow, as Lloyd likes to say - doing God's work and, therefore, their actions are beyond reproach.  

This is bullshit and you are fools to put up with it.  I hope that's plain enough...