(CAT) Archives - Page 9 of 9 - Mad Hedge Fund Trader

Taking Profits on Caterpillar

So, I?m sitting here in my Turkish redoubt, fighting off unusually aggressive flies and going over my charts. It?s further proof that no matter where in the world you travel, work follows you.

There is truly no rest for the wicked.

As a respite, I have the Best of the Guess Who playing on iTunes.

I noticed that the market priced our Caterpillar (CAT) July, 2014 $97.50-$100 in-the-money bull call spread at $2.50 at last night?s close. This is despite the options still having ten days left to the July 18 expiration. This means that the market is effectively pricing the inverse, the Caterpillar (CAT) July, 2014 $97.50-$100 in-the-money bear put spread at zero.

It?s not just Caterpillar that is doing this. I see this happening across the market, where downside protection is being thrown away for nothing. I see anomalies like this happening from time to time, but not very often. Think of it as complacency in the extreme, on adrenaline and with a turbocharger.

It always ends in tears, but who knows when? I priced the alert at $2.48 just to allow two cents for you to get an execution done. This should add 1.04% to your total return for 2014. If some high frequency dummy is willing to work for pennies, that?s fine with me. Nobody works for free.

If you don?t get done today, then re-enter the order on Monday. You will almost certainly get taken out after they remove the long weekend time decay.

Taking profits here does give you some black swan protection. We could have a flash crash at any time, if not in the main market, then certainly in single names. It also removes a 9/11 type risk. Sure, you say, this is all very improbable. But then, 9/11 was viewed as an impossibility on 9/10.

This has been a bang up trade for us in an otherwise detestable trading environment. We caught a nearly 10% rise in the shares in a market that was otherwise quiescent. I managed to do this with a half dozen other names as well.

It?s not that I have suddenly fallen out of love with the maker of heavy construction and mining equipment. I think (CAT) will continue to appreciate for the rest of 2014, possibly rising to $120-$130/share.

I have been following this company for 40 years and it is one of the most solid, best-managed companies out there. And I love their cool, yellow baseball caps.

(CAT) has finally crossed the wide desert and will continue from strength to strength (there goes those Middle East metaphors again!). And if China manages to engineer a recovery, then it will be really off to the races. So will the rest of the entire industrials sector for that matter.

The other problem with taking off a trade here is that there is nothing to replace it. Zero premiums mean there is not another risk-controlled position to replace the outgoing (CAT) position.

So don?t expect a lot of joy from me on the Trade Alert front until August.

I always take this as an invitation to say, ?Thank you very much, Mr. Market? and take a profit. It is also a sign of how far volatility has fallen, and by implication, option premiums.

Thank you, Mr. Caterpillar!

The Bipolar Economy

Diary, Newsletter

Corporate earnings are up big! Great! Buy! No wait! The economy is going down the toilet! Sell! Buy! Sell! Buy! Sell! Help! Anyone would be forgiven for thinking that the stock market has become bipolar. There is, in fact, an explanation for this madness. According to the Commerce Department?s Bureau of Economic Analysis, the answer is that corporate profits accounts for only a small part of the economy. Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly, or are too small to have much of an impact. Wages and salaries are in a three decade long decline. Interest and investment income is falling, because of the low level of interest rates and the collapse of the housing market. Farm incomes are up, but are a small proportion of the total. Income from non-farm unincorporated business, mostly small business, is unimpressive. It gets more complicated than that. A disproportionate share of corporate profits are being earned overseas. So multinationals with a big foreign presence, like Apple (AAPL), Intel (INTC), Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes. They really get to have their cake, and eat it too. Many of their business activities are contributing to foreign GDP?s, like China?s, much more than they are here. Those with large domestic businesses, like retailers, earn far less, but pay more in tax, as they lack the offshore entities in which to park profits. The message here is to not put all your faith in the headlines, but to look at the numbers behind the numbers. Those who bought in anticipation of good corporate profits last month, got those earnings, and then got slaughtered in the marketplace. Buyer beware.

The Bipolar Economy

Diary, Newsletter

Corporate earnings are up big! Great! Buy! No wait! The economy is going down the toilet! Sell! Buy! Sell! Buy! Sell! Help! Anyone would be forgiven for thinking that the stock market has become bipolar. According to the Commerce Department?s Bureau of Economic Analysis, the answer is that corporate profits account for only a small part of the economy. Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly, or are too small to have much of an impact. Wages and salaries are in a three decade long decline. Interest and investment income is falling, because of the low level of interest rates and the collapse of the housing market. Farm incomes are up, but are a small proportion of the total. Income from non-farm unincorporated business, mostly small business, is unimpressive. It gets more complicated than that. A disproportionate share of corporate profits are being earned overseas. So multinationals with a big foreign presence, like Intel, Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes. They really get to have their cake, and eat it too. Many of their business activities are contributing to foreign GDP?s, like China?s, more than they are here. Those with large domestic businesses, like retailers, earn less, but pay more in tax, as they lack the offshore entities in which to park them. The message here is to not put all your faith in the headlines, but to look at the numbers behind the numbers. Those who bought in anticipation of good corporate profits last month, got those earnings, and then got slaughtered in the marketplace. Caveat emptor. Buyer beware.

What?s In the S&P 500?

Has the Market Become Bipolar?

A Perfect Storm Hits the Grain Trade

Diary, Newsletter

Grain traders have suffered a terrible 2013, a perfect storm of great news for farmers and terrible news for prices. But while farmers can make up for low prices with higher production, no such convenience exists for grain traders.

In January, right out of the gate, the USDA predicted that the US would produce the largest corn crop in history, or some 96 million bushels. That would be the largest since 1936. It now appears that this could be a low-ball figure.

Some private estimated see the total reaching 100 million bushels before the crying is over. Some 63% of the corn crop is now rated good/excellent, well above the five-year average of 58%, and trending northward.

Geopolitics has also conspired to drive prices southward. Egypt, with its burgeoning 83 million population, with a single river (the Nile) and a bleak desert to support it, is far and away the world?s largest wheat importer. A recent coup d??tat on the heels on an economic collapse promises to remove it from the marketplace soon. Buyers without cash are not buyers at all, no matter how dire the need. Only food aid from the US government or the United Nations can step in at this stage to head off mass starvation.

As if the news were not bad enough, the Russian cartel that controls two thirds of the world?s $22 billion a year potash supply, a crucial fertilizer used globally, collapsed last week over a price dispute. Known to chemists like me as Potassium carbonate, potassium sulfate, or potassium chloride, this compound is a key factor in strengthening roots during the growing cycle. One analyst said that the breakup of the cartel is akin to ?Saudi Arabia dropping out of OPEC.?

The move promises to take potash prices down from the 2008 peak of $1,000/tonne to $300 by yearend. Potash stocks crashed worldwide, with lead firm Potash (OT) diving 30%. Agrium (AGU) was down by 15%.

This will enable farmers to buy more fertilizer at cheaper prices next year, driving down the prices on far month futures contracts today. Too bad the Canadian government didn?t allow the sale of Potash (POT) to China go through on national security grounds. The shareholders must be kicking themselves.

The move promises to demolish the entire grade trade for this year. Not only has the Potash industry been hurt, so have agricultural equipment manufacturers, like Deere (DE) and Caterpillar (CAT) and the Powershares Multisector Agricultural Commodity Fund ETF (DBA).

Long gone are the heady days of last year, when scorching temperatures induced by global warming caused grain prices to nearly double. Some nine out of the ten last years have been the hottest in recorded history. Global warming denier-in-chief, Texas governor Rick Perry, saw his state suffer 100 consecutive days of over 100 degree temperature.

For me, these developments put the grain trade off limits for the foreseeable future. The only kind thing to be said here is that this will eventually lead to a final bottom that we can eventually trade off of. That would set up a killer position for the nimble if hot weather returns in 2014.

Potash Crystals

I Don?t See Any Grain Buyers Here

The Bipolar Economy

Diary, Newsletter

Corporate earnings are up big! Great! Buy! No wait! The economy is going down the toilet! Sell! Buy! Sell! Buy! Sell! Help! Anyone would be forgiven for thinking that the stock market has become bipolar.

There is, in fact, an explanation for this madness. According to the Commerce Department?s Bureau of Economic Analysis, the answer is that corporate profits accounts for only a small part of the economy. Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly, or are too small to have much of an impact.

Wages and salaries are in a three decade long decline. Interest and investment income is falling, because of the low level of interest rates and the collapse of the housing market. Farm incomes are up, but are a small proportion of the total. Income from non-farm unincorporated business, mostly small business, is unimpressive.

It gets more complicated than that. A disproportionate share of corporate profits are being earned overseas. So multinationals with a big foreign presence, like Apple (AAPL), Intel (INTC), Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes. They really get to have their cake, and eat it too. Many of their business activities are contributing to foreign GDP?s, like China?s, much more than they are here. Those with large domestic businesses, like retailers, earn far less, but pay more in tax, as they lack the offshore entities in which to park profits.

The message here is to not put all your faith in the headlines, but to look at the numbers behind the numbers. Those who bought in anticipation of good corporate profits last month, got those earnings, and then got slaughtered in the marketplace.

Buyer beware.

Strong Dollar Spells Death for Commodities

Newsletter

Panic is on deck, to use the baseball terminology that my foreign readers are often attempting to decipher. That is the only conclusion one can reach after getting gob smacked by the price action this morning. Copper got spanked for eight cents, oil burned $2, gold shed another $26, and silver puked 70 cents.

The tantrum like stock behavior in producing and equipment companies, like Freeport McMoRan (FCX) and Caterpillar (CAT) has been atrocious. How many of you out there know that JP Morgan (JPM) is the largest holder of futures contracts in the silver market and just got hit with a massive margin call? Why is all this happening on the 100 year anniversary of the sinking of the HMS Titanic?

Blame it all on Uncle Buck, whose recent steroid treatments has enabled him to unload the pounds, shed the fat, and adopt a new, more virile attitude towards life. Every other currency now looks like a 98 pound weakling. We now awake each morning to be greeted by the latest disastrous headline from Europe that accelerates the capital flight from the continental currency.

The Euro (FXE), (EUO), is deteriorating from bad to worse, with the foreign exchange community now clearly gunning for the next short term support at $1.26. Look at a ?10 note these days and it has recently printed upon it ?Abandon hope all ye who enter here.?

Traditional diversification currencies, like the Australian (FXA) and Canadian dollars (FXC) are now biting the hands that fed them, dragged down by their export commodities? pitiful performance. Hard as it is to imagine, the Ausie has been the world?s worst performing major currency this year, even underperforming the dreadful euro. Australian readers who followed my advice to pay for their summer vacations in advance at the $1.10 that prevailed at the beginning of the year are smiling. Those they didn?t are now looking for a discount caravan at a remote, dingo plagued campsite somewhere in the Outback.

The Japanese yen, the currency that everyone loves to hate, has perked up to a flight to safety bid while the rest of the world goes to hell in a hand basket. We are currently in between Bank of Japan quantitative easings there, so don?t expect this to last much longer. The tipping point into hyper debt driven, economic Armageddon there creeps ever forwards with each passing day on the calendar.

Take a look at the charts below for the US Dollar Index and it is obvious that things may soon get a whole lot worse. For starters, the dollar has only rallied back to the midpoint of a multiyear range. To get back up to the top of that range it needs to appreciate another 10%. To understand why this is a problem, look at the second chart that proves a tremendous inverse correlation between the dollar and commodities. A strong dollar always leads to falling demand for the hard stuff.

The third chart suggests that the other grotesquely overvalued asset class, US stocks, is also cruising for a bruising. Commodities led equities in this downturn by three months, as they usually do. If they break support here, then they will easily drag the (SPX) down to my medium term target of 1,275, off a heart thumping 10.3% from the recent top. If the economic data continues to worsen on a daily basis, as I have been chronicling on a daily basis for the last two months ad naseum and ad absurdum, then we have a clear shot at the fall, 2011 low at 1,060.

Oops, There Goes My Equity Portfolio

China GDP Data Sends Bulls Fleeing

Newsletter

The market hung on tenterhooks all last week, waiting for the Chinese Q1 GDP figure. As recently as Thursday, rumors swept the market that the number could be as high as 9%, well above the consensus figure of 8.4%, taking the Dow up a red hot 181 points. When the flash hit in the afternoon Beijing time confirming 8.1% the equity futures flipped into sell mode. By the time the crying was over on Wall Street, virtually all of the day?s previous gains had been wiped out.

There are a few lessons to learn here for the aspiring trader. Never believe rumors, especially when they are supposed to originate from governments on the other side of the world. They are almost never true. They often originate from someone trying to unload an unfavorable position. Whoever dumped their portfolio of US stocks Thursday afternoon at the close did exceedingly well.

The second is that all is not well with the global economy. I heard China experts speculating that this quarter might be the bottom of the Middle Kingdom?s slowdown. But they are China experts to the extent that the probably ate in a Chinese restaurant once and watched one Bruce Lee movie. So much of what you hear about China in this country is nothing more than guesswork and I never pay attention to it.

I have a somewhat different take. There is no sign whatsoever that China?s growth recession is ending. Sure, domestic loan growth this month rose from ?700 billion to ?1 trillion, but much of that increase is due to carry over demand from the lunar New Year holiday of the previous month.

The biggest problem is that China?s main export customers are in distress. Its biggest, Europe, is in a serious recession and we have no idea how long that will last. The weakness of the Euro certainly says longer. Japan is falling off a cliff. Demand from a weak, 2% a year growing US is recovering, but is a shadow of what it once was. You can see that is the rapidly improving American trade surplus, which dropped from an eye popping $51 billion to $46 billion last month.

Think of the Chinese economy as a battleship. It is not going to turn on a dime. To complicate matters, China is only at the opening stages of a serious real estate bust. You can count on low end housing starts to plunge from 15 million to 5 million this year as the air comes out of the real estate bubble. That why copper has been so dead this year.

Two small easings of reserve requirements since November are not going to halt this slowdown. In fact, I think that Q2 could be even slower than the last. This is a big reason what I am looking for a prolonged ?RISK OFF? scenario over the summer.

Perhaps my old friend, Steven Roach, the former chairman of Morgan Stanley Asian and now in retirement as a Yale professor, put the best lipstick on this pig. The 8.1% report is down only 3.2% from the peak 11.3% growth rate. The 2008 crash saw the growth rate fall 8.2% from the top. We are a long way from that, thankfully.

There is a far more important message in the quarterly figure. This is not a temporary slowdown; it is a permanent one. There is never going to be a return to a continuous, white hot 11% GDP growth rate of the past. Recent years have seen the Middle Kingdom lose many of its competitive advantages.

Runaway wage inflation is rapidly eroding the country?s cost advantage. Oil over $100 a barrel is probably hurting China more than any other country. Remember, much of America?s infrastructure was built at $1 a barrel. This is why ?onshoring? will become the new economic trend of the decade (click here for ?Onshoring: The New Global Trend?).

But, as I never tire of pointing out in my meetings with the Chinese government, slowing the country down to a steady 8% rate is a good thing. This is a more sustainable and achievable rate that the country can live with. It reduces the volatility of the economy, not just for China, but for the world as a whole. Still, I often get back concerns about the country?s ?bicycle? economy that has to move forward quickly or risk falling over. These are leaders well aware that their country has a history of retirement in front of a firing squad instead of at at country club.

The whole affair also shows how important foreign developments have become for US financial markets. Look at the news flow driving markets these days and it all about China and Europe, with 5 minutes left over to wonder about whether Ben Bernanke is going to bring us QE3. That?s why you have to pay attention to someone like me who has been playing the game for 40 years and has pipelines straight into the key foreign ministries.

I think there is going to be a great buy in China sometime this year. Right when traders are jumping out of windows, managers are rending their hair, Merrill Lynch puts out a call to sell everything, and the Dow is down 2,000 pints? you want to back up the truck and load up on Chinese stocks.

This excursion should include international names like Caterpillar (CAT), Freeport McMoRan (FCX), BHP Billiton (BHP), and Rio Tinto (RIO), as well as domestic ones like China Mobile (CHL), China Telecom (CHA), and Baidu (BIDU). These are the companies that will far outperform everyone else in any sustainable Chinese recovery. You will also want to pick up some ETF?s like (FXI) and (CAF). But that time is definitely not now.

China?s Bicycle Economy

Tag Archive for: (CAT)

Thank you, Mr. Caterpillar!

What?s In the S&P 500?