(USO) Archives

Cashing in on Freeport McMoRan

I am writing this to you from Terminal 2 at San Francisco Airport, awaiting my Virgin America flight to Chicago.

My conclusion so far is that the beef curry rice at the Japanese fast food joint Wakaba isn?t what it used to be. The meat is paper thin and full of fat and gristle. I guess everyone is trying to cut costs these days.

I saw a tall blond hustle by in a pilot?s uniform, and thought I recognized her behind as that of my former flight instructor from decades ago. But when I caught up with her, I learned she worked for American Airlines. Emmy flew for United. And I was off by a generation on the age.

That?s the problem with reaching Medicare age. You can?t see worth a damn, and all of your friends are dead. At least the landings are exciting when I am the pilot.

There?s nothing like getting in on the ground floor of a raging bull market in commodities to get your juices flowing, even for a senior citizen.

That?s what I did when I jumped into the Freeport McMoRan (FCX) May, 2015 $17-$18 deep in-the-money vertical call spread two weeks ago. This is the second time in a month I have coined it with this name, the world?s largest producer of copper.

Since (FCX) began its torrid move in mid April, the shares have added an eye popping $6, or 35%. That?s a winner and a half.

Many thanks to my many subscribers who work at Freeport, although I assure you, you had absolutely nothing to do with the recent move in your stock.

This is despite the fact that prices for the red metal (CU) have remained virtually unchanged during this period.

Instead, there is a parade of people I wish to thank for the success of this trade.

First, I have to tip my hat to Federal Reserve Chairman, Janet Yellen, for making it abundantly clear to me on countless occasions that she has absolutely no intention of raising interest rates this year. This has knocked the wind out of the greenback, forced a 5% correction, and given newfound strength to commodity stocks like (FCX).

Hey, Janet, call me!

I also want to thank the government in Beijing for the assist, which announced a major program to stimulate the Chinese economy right after I strapped on this trade, through the reduction of bank reserve requirements from 18.5% to 17.5%.

China is the world?s largest consumer of copper, and a stronger economy consumes more of the stuff, boosting prices northward.

I owe you all a Peking duck dinner for this one. Might I suggest the Da Dong Roast Duck Restaurant on Dongsi on the 10^th Alley in Beijing? They?re supposed to be the best in town.

Finally, one can?t ignore the contribution of the Houthi rebels in Yemen for inspiring a sharp rally in the price of crude oil (USO), which helped drag up the price of other commodity stocks as well, including those producing copper.

For you I owe a round of falafels and cooked sheep?s eyes, favorites of yours, I know. However, I?ll have to mail this one in, lest a CIA Predator drone strike take me out over dinner.

You can sell this vertical bull call spread anywhere around the $0.99 and lock in 92% of the potential profit in this trade. Or you can run it until the May 15 expiration, ten trading days away, and collect the last penny or two.

Either way, it?s time to declare victory on this one and move on to the next one.

The spread clocked a gain in 12.5% in two weeks. That is on top of the one day 22.5% wonder we earned with the Freeport McMoRan (FCX) May, 2015 $16-$17 deep in-the-money vertical call spread.

When it rains, it pours.

If instead of buying the (FCX) call spread, you purchased the shares outright, the First Trist ISE Global Copper ETF (CU), First Quantum Minerals Ltd. (FM.TO), Antofagasta (ANTO.L), hang on. We are going much higher.

The 200-day moving average beckons at $26.33. And if the Chinese economic recovery is real, as the stock market there seems to think, you can easily double that target.

I have a feeling that Freeport McMoRan is my new rich uncle, cutting me generous maintenance checks every month.

So I?ll be looking to roll back into the next set of strike prices higher up and a maturity farther out at the next dip in the stock.

See you There Beijing

How the Markets Will Play Out This Quarter

Diary, Newsletter, Research

I think I have figured out the course of the global financial markets over the next few months.

We are currently transitioning from an economic data flow from Q1 that was very weak, to the second quarter, which will almost certainly deliver us a robust set of numbers. This is on the heels of a white hot Q1, 2014.

Hot, cold, hot; this is a trader?s dream come true, as it gives us the volatility we need to make a fortune, as we skillfully weave in and out of these gyrations.

That is, if you read the Diary of a Mad Hedge Fund Trader.

This is not a new thing. A weak Q1 has been a recurring event over the last 30 years. The anomaly has been so reliable that not a few traders have been able to earn a living from it. :) Heaven help us if the government ever tries to fix it.

To further complicate matters, some markets see this, while others have yet to open their eyes.

The stock market (SPY), (QQQ), (IWM) agree with my view, probing new all time highs, while companies announce diabolical Q1 earnings (Twitter (TWTR)? Yikes!). So do commodities, like oil (USO) and copper (FCX), whose recent strength suggests we are on the doorstep of a great economic Golden Age.

However, the foreign exchange market (FXE), (FXY) doesn?t see it this way. They can only comprehend the last data point that just crossed the tape.

If it is weak, they assume the Federal Reserve won?t even think about raising interest rates until well into 2016. If it is healthy, they bet the Fed will jack up rates tomorrow.

You might assume this is ridiculous, and you?d be right. However, forex traders live in a world where interest rate differentials are the principal, and to many the only driver of foreign exchange rates.

One market is right, and one is wrong. Did I mention that this is also a license for we nimble traders to print money?

Of course, you can play both side of the fence, as I do. That?s how I was able to coin it with a long position in the euro (a weak economy trade) the same day my long US equity portfolio (a strong economy trade) was going through the roof.

Let me give you another iteration of these scenarios. Inside the dollar correction we are seeing a pronounced sector rotation among US stocks.

Traders are moving out of small caps (IWM) that sheltered then from a strong dollar into large caps (SPY). They are also taking profits in biotech and rolling it into financials (GS), cyber security (PANW) and solar (TAN).

Goldman Sachs (GS) gave us more rocket fuel for the bull case for of American stocks this morning. The sage investment bank, in which my Trade Alert Service currently maintains a profitable long position, says that corporations will return a mind blowing $1 trillion to investors in 2015.

Share buy back from companies should rise by 18%, while dividends should pop by 7%. It is all a continuation of a six-year trend.

Apple (AAPL) certainly kicked off this quarter?s cavalcade of higher payouts on Monday, when it added $50 billion to its own stock repurchase program and jacked up its dividend by 11%.

Markets could get even more interesting after next week, when some 80% of S&P 500 companies will have existed the ?black out? period when they are not allowed by SEC regulations to buy their own stock.

I say ?tally ho,? and ?tally ho? again.

It?s Tally Ho for the Stock Market

Iran Deal Brings on the Pax Americana

Diary, Newsletter

The peace deal with Iran is worth a stock market double and maybe more.

Add that to the double we already deserve from a cheap long-term price of energy, and it is clear that stock prices have a long ways to go on the upside from here.

The Iranian peace deal is a hugely pro global growth, pro risk development, which I have been forecasting for years.

Bring on the Pax Americana, whereby the United States no longer faces any industrial strength adversary anywhere in the world for decades to come.

That is why I have been adding to what is already a precariously bullish position in the Mad Hedge Fund Trader?s model trading portfolio, which by the way, us up an impressive 12.67% so far in 2015. Hold on to your hats, because there are still more Trade Alerts in the works to come.

New all time highs for the service are a hair?s breadth away.

After discussing the finer print of the agreement with my many friends at the State Department, the Joint Chiefs, the CIA, and Israeli Intelligence, it is a miracle that this deal got done at all.

Pouring molasses in the works were direct communications between the Republican Party and the far right in Iran, both of which have absolutely no interest in a peace deal getting done.

This led to an event almost ludicrous in the annals of international diplomacy, where moderate Iranians lectured American conservatives on the finer points of US constitutional law, and the Persians were proffering the correct view.

Christian and Islamic Fundamentalists working hand in hand? Go figure!

I?ll break down the major talking points, and their consequences. I will also draw where I can from my own knowledge of nuclear weapon construction, which I picked up while working at the Atomic Energy Commission?s nuclear test site in Nevada 45 years ago. Not much has changed since then, although it has been a while since I have heard ?nuke them till they die!?

Sanctions

Iran won?t see positive economic consequences from the deal until well into 2016. That?s because they first have to destroy 14,000 centrifuges in full public view, from 19,000 down to 5,000. The Iranians see this as a big win because the US initially demanded only 1,000 centrifuges.

Iran also has to cut its uranium stockpiles to a fraction of its current inventory, another big job. The US has offered to purchase the excess uranium at market prices to fuel its own power plants.

Not until then will only the economic and financial sanctions be lifted, not the military ones. Remember Iran still possesses a ton of US military hardware purchased by the late Shah at inflated prices (to account for the bribes), which is in desperate need of spare parts.

Those waiting anxiously for another crash in the price of oil may have to sit on their hands for a while, as it will take this long for the new Iranian crude to hit the market.

Uranium Enrichment

Iran is permitted to enrich uranium to only 3.67%, enough to run an electric power plant, but far below bomb grade 90% purity.

This deal has a ten-year maturity on enrichment. What happens after that will be subject to the next round of negotiations. The future of the deep underground research facility at Fordow is still up in the air.

However, if Iran falls out of compliance for any reason, the US could destroy this facility at any time with a single, recently upgraded bunker buster bomb. The Iranians know this.

Plutonium

This element is crucial for the development of any large atomic bombs. Iran has agreed to destroy its reactor at Arak used to produce it, setting them back several years. All heavy water (2H2O) used to run the reactor will be sold on the open market.

Inspections

They are going to get the full proctological level of international inspection. The hot stuff is not hard to find. You can see it from a satellite that is already permanently stationed overhead.

Third party international inspectors will get unrestricted access to the entire nuclear supply chain, from the uranium mines to the storage of the enriched end product. These intrusive inspections will continue for 25 years.

What Could Go Wrong?

Many things.

Domestic backlashes in either the US or Iran could easily torpedo the deal. In that case, the financial markets would quickly give back any rallies achieved so far.

Goodbye Dow 20,000!

Representatives from both sides are already making conflicting representations to their own people on what exactly has been agreed to in Geneva.

Iran has the tougher sell, to the powerful Revolutionary Guards, which are currently making a fortune from the black market that the sanctions created. No sanctions means no pay, and therefore, no play.

The Republican Party will do whatever they can to demolish an agreement, and all 16 presidential candidates have already come out strongly against it. The Republican controlled congress will certain refuse to lift sanctions, even if a final agreement is signed.

This is meaningless, as the European sanctions will be gone, where Iran conducts most of its international trade anyway. In the end, US big business will force congress to cave, lest they lose out on the immense profits about to be made in Iran.

The country has suffered from 40 years of woeful underinvestment in its oil and gas industry, and guess who the most competitive provider of that is (think yellow roses, Astros).

If the US doesn?t agree to the deal, it is likely that Europe would make the move without us, leaving America twisting in the wind. In any case, the US has the most aggressive weapons monitoring infrastructure, run by old friends of mine out of Los Alamos, New Mexico. (Hey John, call me!). So, our participation is crucial.

Also, if there is no deal, Iran would probably have a bomb in a year anyway. After all, sanctions didn?t prevent them from boosting their number of centrifuges from 300 to 19,000 over the last 15 years.

The reality is that the government in Tehran has probably done the math and found that a weapon they would probably never use anyway was not worth keeping the country in a permanent depression with dramatically falling standards of living.

The lesson here is that economic sanctions work, if you are willing to wait long enough.

For More depth on the long term global economic and financial implications of the peace deal with Iran, please read my recent piece ?Here Comes the Next Peace Dividend? by clicking here.

By the way, in this piece I predicted years ago that such an earth shaking development would crash the price from $100 to $30 a barrel and it looks like that is exactly what we are going to get.

Mad Hedge Fund Trader Hits 10% Profit in 2015

Diary, Newsletter

I am sitting here at the Lone Eagle Grill in Incline Village, Nevada, enjoying a rare solo lunch. No one is asking me about the future of interest rates, if there is any gold inside Fort Knox or if the aliens really landed at Roswell, New Mexico.

My table overlooks majestic Lake Tahoe, and a brace of mallard ducks has just skidded across the smooth surface for a landing.

My big score last night was coming across a wild bobcat, the first I had ever seen in the Sierras. After cautiously studying me for a minute with his bright yellow glowing eyes, he scampered up the mountain.

My pastrami sandwich is cooked to perfection, and would give Manhattan?s best culinary effort a run for its money. In fact, I have enough food here for two entire meals. Bring on the doggie bag!

After surviving a meat grinder of a January, putting the pedal to the metal in February, and dodging the raindrops of March, the model-trading portfolio of the Mad Hedge Fund Trader has posted a year-to-date gain of 10%.

We have generated profits for followers every month this year, and are now a mere 4.75% short of a new all time performance high.

Mad Day Trader, Jim Parker, and myself have performed like tag team wrestlers, delivering winners for our paid subscribers one right after the other. Some 12 out of my last 14 Trade Alerts have been profitable.

I managed to nail the collapse in the euro (FXE), (EUO) big time, backing that up with profitable long positions in the S&P 500 (SPY), the Russell 2000, and Gilead Sciences (GILD).

When the markets turned jittery, I coined it with short positions in Alcoa (AA), QUALCOM (QCOM) and AT&T (T).

Only a premature long in oil (LINE) and a short in Treasuries (TBT) have scarred my numbers so far this year.

Jim has been on an absolute hot streak in 2015, shaking the Bull Run in biotechs for all it is worth (ZIOP), (THRX), (ZTS) and executing some perfectly times shorts in oil (USO).

This is compared to the miserable performance of the Dow Average, which is up a pitiful +2% during the same period.

The nearly four and a half year return of my Trade Alert service is now at an amazing 162.4%, compared to a far more modest increase for the Dow Average during the same period of only 51%.

That brings my averaged annualized return up to 38.2%. Not bad in this zero interest rate world. It appears better to take on some risk and reach for capital gains and trading profits, than surrender to the paltry fixed income yields out there.

This has been the profit since my groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud.

What saved my bacon this month was my instant and accurate decoding of Fed chairman Janet Yellen?s cryptic comments on the future of possible interest rate hikes, or the lack thereof.

We got to eat our ?patience? and have it too.

Wall Street gets so greedy, and takes out so much money for itself, there is now nothing left for the individual investor any more. They literally kill the goose that lays the golden egg.

The Mad Hedge Fund Trader seeks to address this imbalance and level the playing field for the average Joe. Looking at the testimonials that come in every day, I?d say we?ve accomplished that goal.

It has all been a vindication of the trading and investment strategy that I have been preaching to followers for the past seven years.

Quite a few followers were able to move fast enough to cash in on my trading recommendations. To read the plaudits yourself, please go to my testimonials page by clicking here.

Watch this space, because the crack team at Mad Hedge Fund Trader has more new products and services cooking in the oven. You?ll hear about them as soon as they are out of beta testing.

Our business is booming, so I am plowing profits back in to enhance our added value for you.

The coming year promises to deliver a harvest of new trading opportunities. The big driver will be a global synchronized recovery that promises to drive markets into the stratosphere by the end of 2015.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, and 67.45% in 2013, and 30.3% in 2014.

Our flagship product,?Mad Hedge Fund Trader PRO, costs $4,500 a year. It includes?Global Trading Dispatch(my trade alert service and daily newsletter). You get a real-time trading portfolio, an enormous research database and live biweekly strategy webinars. You also get Jim Parker?s?Mad Day Trader?service and?The Opening Bell with Jim Parker.

To subscribe, please go to my website, ?www.madhedgefundtrader.com, click on the ?Memberships? located on the second row of tabs.

By the way, those of you who ran up huge profits with your euro shorts in January and February, and the overnight killing I scored with the Russell 2000 (IWM) this week, you all owe me new testimonials.

Ship em in!

Oh, and buy the way, there is no gold in Fort Knox. That is why Nixon took us off the gold standard in 1973. And the aliens did land at Roswell. Where do you think my iPhone and Tesla came from?

Looking for the Next Great Trade

Fed Not to Raise Interest Rates in 2015

Diary, Newsletter, Research

Yes, that is the shocking truth that Fed chairman Janet Yellen told us today with the release of the central bank?s minutes.

Of course, she didn?t exactly say that she would raise interest rates for the first time in a decade in so many words. To discern that, you had to be fluent in Janetspeak.

Very few people have the slightest idea what comprises Janetspeak. It just so happens that I am quite knowledgeable in this arcane argot. In fact I can even negotiate a menu written entirely in Janetspeak and receive a meal reasonably close to what I thought I ordered.

I learned this esoteric language through private tutoring from none other than Janet Yellen herself. These I obtained while having lunch with her at the San Francisco Fed every quarter for five years.

It was a courtesy Janet extended not just to me, but to all San Francisco Bay area financial journalists. But fewer than a half dozen of us ever showed up, as monetary policy is so inherently boring, and government supplied food is never all that great. Ask any Marine.

So let me parse the words for you, the uninitiated. The Fed removed the crucial word ?patient? from its discussion. In the same breath, it says it is unlikely that rates will rise at the April meeting.

She said that any future rate rise would be conditional on continued improvement in the labor market. As the US economy is now approaching full employment, there seems to be little room for improvement there.

Now comes the vital part. Janet also said that an increase in interest rates would also be conditional on inflation returning to the Fed?s 2% inflation target!

Here?s a news flash for sports fans. Inflation is not rising. It is falling. Look no further than the price of oil, which kissed the $42 a barrel handle only this morning.

Inflation is at negative numbers in Europe and in Japan. Even the Fed?s own inflation calculation has price rises limited to 1% in 2015. Their best-case scenario does not have inflation rising to 2% until 2017 at the earliest.

Furthermore, things on the deflation front are going to get worse before they get better. Some one third of all the debt is Europe now carries negative interest rates.

Tell me about inflation when oil hits $20, which it could do in coming months, and will have a massive deflationary impact on the entire US economy, especially in Texas.

That?s the key to understanding Janet. When she says that she won?t raise rates until she sees the whites of inflations eyes, she means it.

I love the way that Janet came to this indirect decision, worthy of King Salomon himself. By taking ?patient? out of the Fed statement, she is throwing a bone to the growing number of hawks among the Fed governors.

At the same time she shatters any impact this action might have. The end result is a monetary policy that is even more dovish than if ?patient? has stayed in.

That is so Janet. No wonder she did so well as a professor at UC Berkeley, the most political institution in the world. I feel like I?m back at college.

You all might think I?m smoking something up here in the High Sierra, or that maybe a rock fell down and hit me on the head. But look at the market action. I?ll go to the video tapes.

Every asset class delivered a kneejerk reaction as if the Fed had just CUT interest rates. Stocks (IWM), bonds (TLT), the euro (FXE), the yen (FXY), OIL (USO), and gold (GLD) all rocketed. The dollar and yields dove.

This is the exact opposite of what every market participant expected, which is why the moves were so big. It is also why I went into this with a 100% cash position in my model trading portfolio.

We lost the word ?patient? we got the ?patient? result.

I had a batch of Trade Alerts cued up and ready to go expecting a dovish outcome. But it was delivered in such a left-handed fashion that I held back on the news flash. It was only when I heard the words from Janet herself that I understood exactly what was happening.

Out went the Trade Alert to buy the Russell 2000 (IWM)! Out went the Trade Alert to pick up some Wisdom Tree Japan Hedged Equity ETF (DXJ)!

Why the (IWM)? Because small caps are the American stocks least affected by a weak Euro.

Why the (DXJ)? Because the Fed action is an overwhelmingly ?RISK ON?, pro stock action. Unlike the rest if the world, the Japanese stock market has to double before it reaches new all time highs. It is just getting started.

Won?t today?s strong yen hurt the (DXJ)? Only momentarily. The Nikkei has yet to discount the breakdown from Y100 to Y120 that has already occurred, let alone the depreciation from Y120 to Y125 that is about to unfold.

Banzai!

The Game Changer in India

Diary, Newsletter

So far in 2015 the Indian stock market has handily beaten that of the US, by 10.6% compared to 5.3%.

?The India election result is the biggest development to affect emerging markets over the last 30 years.? That is what retired chairman of Goldman Sachs Asset Management and originator of the ?BRIC? term, Jim O?Neal, told me last week.

Indeed, the stunning news has sent long term country specialists scampering. In my long term strategy lectures I have been titillating listeners for years with predictions that India was about to become the next China.

With half the per capita income of the Middle Kingdom, India was lacking the infrastructure needed to compete in the global marketplace. All that was needed was the trigger.

This is the trigger.

With a new party taking control of the government for the first time in 50 years, the way is now clear to carry out desperately needed sweeping political and economic reforms. At the top of the list is a clean sweep of corruption, long endemic to the subcontinent. I once spent four months traveling around India on the Indian railway system, and the demand for ?bakshish? was ever present.

A reviving and reborn India has massive implications for the global economy, which could see growth accelerate as much at 0.50% a year for the next 30 years. This will be great news for stocks everywhere. It will help offset flagging demand for commodities from China, like coal (KOL), iron ore (BHP), and the base metals (CU).

Demand for oil (USO) grows, as energy starved India is one of the world?s largest importers.

A strengthening Rupee, higher standards of living, and relaxed import duties should give a much needed boost for gold (GLD). India has always been the world?s largest buyer.

The world?s largest democracy certainly delivers the most unusual of elections, a blend of practices from today?.and a thousand years ago. It was carried out over five weeks, and a stunning 541 million voted, out of an eligible 815 million, a turnout of 66.4%. That is far higher than elections seen here in the United States.

Of the 552 members in the Lok Sabha, the lower house (or their House of Representatives), a specific number of seats are reserved for scheduled castes, scheduled tribes, and women. Gee, I wonder which one of these I would fit in?

Important issues during the campaign included rising prices, the economy, security, and infrastructure such as roads, electricity and water. About 14% of voters cited corruption as the main issue.

Some 12 political parties ran candidates. The winner was Hindu Nationalist Narendra Modi of the Bharatiya Janata Party (BJP), who led a diverse collection of lesser parties to take an overwhelming majority. For more details on this fascinating election, please click here at http://www.ndtv.com/elections.

It is still early days for the Bombay stock market, which has already rocketed by a stunning 20% since the election results became obvious last week.

This could be the beginning of a ten-bagger move over coming decades. Managers are hurriedly pawing through stacks of research on the subcontinent they have been ignoring for the past four years, the last time emerging markets peaked.

In the meantime, the action has spilled over into other emerging markets (EEM), their currencies (CEW), and their bonds (ELD), which have all punched through to new highs for the year.

I?ll be knocking out research o specific names when I find them. Until then, use any dip to pick up the Indian ETF?s (INP), (PIN), and (EPI).

A Note on the Friday Options Expiration

Diary, Free Research, Newsletter

We have several options positions that expire on Friday, and I just want to explain to the newbies how to best maximize their profits.

These include:

The Currency Shares Japanese Yen Trust (FXY) February $84-$87 vertical bear put spread

The Gilead Sciences (GILD) February $87.50-$92.50 vertical bull call spread

The S&P 500 (SPY) February $199-$202 vertical bull call spread

My bets that (GILD) and the (SPY) would rise, and that the (FXY) would fall during January and February proved dead on accurate. We got a further kicker with the two stock positions in that we captured a dramatic plunge in volatility (VIX).

Provided that some 9/11 type event doesn?t occur today, all three positions should expire at their maximum profit point. In that case, your profits on these positions will amount to 13% for the (FXY), 19% for (GILD) and 20% for the (SPY).

This will bring us a fabulous 5.58% profit so far for February, and a market beating 6.11% for year-to-date 2015.

Many of you have already emailed me asking what to do with these winning positions. The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck and pat yourself on the back for a job well done. You don?t have to do anything.

Your broker (are they still called that?) will automatically use your long put position to cover the short put position, cancelling out the total holding. Ditto for the call spreads. The profit will be credited to your account on Monday morning, and he margin freed up.

If you don?t see the cash show up in you account on Monday, get on the blower immediately. Although the expiration process is now supposed to be fully automated, occasionally mistakes do occur. Better to sort out any confusion before losses ensue.

I don?t usually run positions into expiration like this, preferring to take profits two weeks ahead of time, as the risk reward is no longer that favorable.

But we have a ton of cash right now, and I don?t see any other great entry points for the moment. Better to keep the cash working and duck the double commissions. This time being a pig paid off handsomely.

If you want to wimp out and close the position before the expiration, it may be expensive to do so. Keep in mind that the liquidity in the options market disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration. This is known in the trade as the ?expiration risk.?

One way or the other, I?m sure you?ll do OK, as long as I am looking over your shoulder, as I will be.

This expiration will leave me with a very rare 100% cash position. I am going to hang back and wait for good entry points before jumping back in. It?s all about getting that ?buy low, sell high? thing going again.

There are already interesting trades setting up in bonds (TLT), the (SPY), the Russell 2000 (IWM), NASDAQ (QQQ), solar stocks (SCTY), oil (USO), and gold (GLD).

The currencies seem to have gone dead for the time being, so I?ll stay away.

Well done, and on to the next trade.

Pat Yourself on the Back

The Best is yet to Come in Crude

Diary, Newsletter, Research

For the last few months, I have leapt off my biweekly global strategy webinars to check the weekly crude inventories announced minutes before. This week?s figures absolutely blew me away.

The American Petroleum Institute reported that crude stocks rose a staggering 14.3 million barrels over the past week. This is the biggest weekly build that I can remember after covering the industry for 45 years.

This comes on the heels of a breathtaking build of 6.1 million barrels the previous week.

Will someone please text me when the numbers come out during my next webinar? I hate being in the dark, even when it is just for 20 minutes.

Needless to say, crude prices (USO) fell like a stone, giving up 5.5% in hours. Prices are still plunging as I write this. It confirms my suspicion, voiced assiduously in the earlier webinar, that Texas tea has another run to the downside in store.

The 500,000 barrels a day of new production coming on line over the next four months make this a virtual certainty.

The implications for your investment portfolio are legion.

It means that a new leg down in the oil collapse is now unfolding. We may be in the process of taking another shot at the $43 low in January. Best case, this sets up the double bottom where you should buy the entire energy and commodity sectors. Worse case, we break to a new low in the $30?s.

Industry experts are keeping a laser like focus on the storage facilities at Cushing, Oklahoma. They are rapidly filling up, and will be full at 85 million barrels by June. Today?s numbers bring that day dramatically forward.

Once topped up, the industry could be facing a price Armageddon, and newly produced crude will have nowhere to go.

That will bring widespread capping of producing wells, which are never able to recover production when restored. This will be a terrible outcome for the producing companies and oil lease investors.

Consumers aren?t the only ones who are celebrating.

Oil traders are enjoying their best year since 2009, cashing in on the sky high volatility. Front month volatility is gyrating around the 55% levels. This compares to only 15.45% for the S&P 500.

Traders, eat your hearts out.

Big players like Glencore, Gunvor and Mercuria are cashing in with lower prices vastly offset by much greater turnover. Specialized energy hedge funds are also doing well.

The contango, whereby futures contracts for far month delivery are trading at huge premiums to front month ones, is also generating enormous trading opportunities.

The last time I checked, oil one-year out was trading at a 25% premium. This means you can buy a few hundred thousand barrels, charter a rusted out old tanker, and store it for future sale.

Ultra low interest rates to finance the position provide an additional kicker. Hedge funds with the right credit lines are pouring into the field.

OK, so you?re not set up to borrow billions, charter ships, and swing around huge amounts of crude. Nor am I, for that matter. However, the next best thing is also setting up.

When oil completes its next swan dive, there will be great opportunities in the options market.

One year dated calls on oil majors like Exxon (XOM), Conoco Phillips (COP) and Occidental Petroleum (OXY) and the oil ETF (USO) should rise tenfold in the next recovery if you are able to buy anywhere close to the bottom.

I?ll send out a Trade Alert when I see it.

I Think I See a Spot Over There

How to Lose Money

Diary, Newsletter

I?m really glad I watched the Super Bowl yesterday. Not only was it a great warm-up for next year?s championship game, which will be in my hometown of San Francisco. I also witnessed the worst coaching call in football history.

The Seattle Seahawks had the game in the bag. All they had to do was move the ball one foot over two tries at the goal line. Instead, they passed? Too bad I wasn?t able to find a bookie to take a last minute six-figure bet. I expected New England to win.

I have to tell you that I sympathize with Seahawks Coach Peter Carroll. For I sent out one of the worst recommendations in trading history with my BUY of master limited partnership Linn Energy (LINE) on December 1.

I then proceeded to break every rule in the trader?s handbook on how to manage this position. The errors were so many that I have to list them:

1) I scored the instant profit I was looking for, making 80 basis points within two days. I didn?t take it. Instead I got greedy, hanging on for more. It never showed.

2) I then ignored my own stop loss at $15, even though most of you bailed out then and there.

3) I then committed anther sin, waiting for the units to get back to my cost to get out, even though I constantly admonish followers never to do this. The market doesn?t care what your cost is. The market is the market. It has zero memory, and could care less who you are.

4) There were several substantial rallies that I could have sold into for a much smaller loss, to $14.80, $11.90 and $11.70. I didn?t. The ?getting out for even? syndrome strikes again.

5) I expected oil to bottom out in the low $60?s, which was much lower than most people?s targets. It didn?t. Instead, it dropped another $20 to the $43 handle. Once there is a glut of oil, there is no place to put it, as all storage is full, so it always plunges lower than you expect. With more oil industry experience than most traders, I already knew this. But I ignored the writing on the wall.

6) I waited for a yearend short covering rally to take me out of the position. It never showed. Instead, it went down faster, hitting a new five year low of $9.30.

7) I waited for a New Year rally to take me out. Ditto.

At this point, (LINN) is acting like a classic busted stock. Even though oil has bounced back by a hefty 15% in recent days, (LINN) has barely moved. If you throw good news on a stock and it doesn?t move, it is time to say hasta la vista baby.

For more depth on the grim outlook for Texas tea, please read my recent piece, ?More Pain to Come in Oil? by clicking here. Now is not the time to maintain an aggressive long in energy.

I?m sure (LINN) will come back some day, as it is well managed. In fact, it might even be the big trade of the year. But this could happen in months, or even years. And if you haven?t noticed, the name of this service is the Diary of a Mad Hedge Fund Trader, not the Diary of a Mad Long Term Investor.

Where I live, long-term is a long-winded way of saying "wrong".

Can I Interest You in Some Linn Energy?

More Pain to Come in Oil

Diary, Newsletter, Research

There are very few people I will drop everything to listen to. One of the handful is Daniel Yergin, the bookish founder and CEO of Cambridge Energy Research Associates, the must-go-to source for all things energy.

Daniel received a Pulitzer Prize for The Prize: The Epic Quest for Oil, Money, and Power, a rare feat for a non-fiction book (I?ve never been able to get one).

Suffice it to say that every professional in the oil industry, and not a few hedge fund traders, have devoured this riveting book and based their investment decisions upon it.

Yergin thinks that the fracking and horizontal drilling revolutions have made the United States the new swing producer of oil. There is so much money in the investment pipeline that American oil production will continue to increase for the next six months, by some 500,000 barrels a day.

This new supply will run head on into the seasonal drop in demand for energy, when spring ritually reduces heating bills, but the need for air-conditioning has not yet kicked in.

The net net could be a further drop in the price for Texas tea from the present $45 a barrel, possibly a dramatic one.

Yergin isn?t predicting any specific oil price as a potential floor, as it is an impossible task. While OPEC was a monolithic cartel, the US fracking industry is made up of thousands of mom and pop operators, and no one knows what anyone else is doing. However, he is willing to bet that the price of oil will be higher in a year.

Currently, the 91 million barrel global market for oil is oversupplied with 1 million barrels a day. That includes the 2 million b/d that has been lost from disruptions in Libya, Syria and Iraq.

If the International Monetary Fund is right, and the world adds 3.8% in economic growth this year, we will soak up 1.1 million b/d of that with new demand. In the end, the oil price collapse is a self-solving problem. The new economic growth engendered by ultra low fuel prices eventually drives prices higher.

Where we reach the tipping point, and the oil market comes back into balance, is anyone?s guess. But when it does, prices will go substantially higher. The cure for low prices is low prices.

The bottom line is that there will be a great time to buy oil companies, but it is not yet.

What we are witnessing now is the worst energy crash since the 1980?s, when new supplies from the North Sea, Mexico and Alaska all hit at the same time. The price of oil eventually crashed from $42 to $8.

I remember it well, because Morgan Stanley then set up a private partnership that bought commercial real estate in Houston for ten cents on the dollar. The eventual return on this fund was over 1,000%.

This time it is more complicated. Prices lived over $100 for so long that it sucked in an unprecedented amount of capital into new drilling, some $100 billion worth. As a result, sources were brought online from parts of the world as diverse as Russia, the Arctic, Central Asia, Africa, the Canadian tar sands and remote and very expensive offshore platforms.

Yergin believes that Saudi Arabia can survive for three years with prices at current levels. After that, it will burn through its $150 billion of foreign exchange reserves, and could face a crisis. Clearly, the Kingdom is betting that prices will recover with its market share based strategy before then. They are playing for the long haul.

The transition of power to the new King Salman was engineered by a committee of senior family members, and has been very orderly. However, King Salman, a Sunni, will have his hands full. The current takeover of Yemen by a hostile Shiite minority, the Houthis, is a major concern. Yemen shares a 1,100 mile border with Saudi Arabia.

Daniel says that a year ago, there was a lot of geopolitical risk priced into oil, with multiple crises in the Ukraine, Syria, Libya and Iraq frightening consumers, so trading levitated over $100 for years. Delta Airlines Inc. (DAL) even went to the length of buying its own refiner to keep fuel prices from rising further.

US oil producers have a unique advantage over competitors in that they can cut costs faster than any other competitors in the world. On the other hand, they are eventually going head to head against the Saudis, whose average cost of production is a mere $5/barrel.

A native of my own hometown of Los Angeles, Yergin started his professional career as a lecturer at Harvard University. He founded Cambridge Energy in 1982 with a $7.00 investment in a file cabinet at the Good Will. He later sold Cambridge Energy to the consulting group IHS Inc. for a small fortune.

To buy The Prize at discount Amazon pricing, please click here.

Tag Archive for: (USO)

See you There Beijing