Super Sunday


As I sit in my Green Bay Packers t-shirt at my keyboard I am still quietly lamenting that I will not be watching my team in the Super Bowl today. There is some consolation, I do like Russell Wilson, I have friends from Boston who will feel good if the Pats win and at least I’ll get to hear Katy Perrry Roar even if I can’t see a Packer score.

Anyway, there was a lot going on this week. The markets continued to be volatile and we finished with a down month in January which a lot of people take to mean there will be a down year in the markets. I’m not so sure about that yet, but I do see at least a 2011 type year shaping up and maybe worse, although that is far from the type of certainty I like to invest in. 

A Few Words about My Recommendations and Why I Don’t See a Crash Imminent…

Before I get started on some important things, I’ll first address a few concerns I know anxious investors have. I mentioned that I was starting to look at short positions this week on Scutify.com. That should not mean that I am recommending that most people go short. I manage some accounts that oblige me to hedge the portfolio. If you are not well into the six figures or seven figures, what I am doing is not really for you since I do not have a high level of confidence in the positions yet. If I start pyramiding the positions as they rise in value and I think a trend has been established, that is when I would make that recommendation.

What is a good idea for most folks, is to be heavy in cash right now. We know that there is a topping process in the markets going on. That does not mean however that we are due for a crash. It might simply mean a volatile period that round trips through a run of the mill correction or two, ala 2011, which I discussed in this article on MarketWatch – Look for Increasing Volatility, but No Collapse in 2015. 

My simplified rationale to not expecting an outright collapse is that there is simply too much liquidity for it to happen just yet. Also, low oil prices will be stimulative to the U.S. economy for about $200 billion which I discussed somewhere on Scutify.com. If the ECB hadn’t decided to buy debt I think my mind would have changed. As it stands, my original thesis that the next “big one” hits around 2017 is still intact. 

I have recommended that most folks ought to be 25% to 50% in cash depending on their risk tolerance and approach to investing. I’ll stand by that. While I do not think a collapse is coming, I do think a relatively volatile year that ends around flat is likely. Holding cash gives you great “optionality” to strike when the iron gets hot and protects you in the meantime.

For those who do want some short positions, again, for hedging, not speculation, owning some SPDR S&P 500 puts that are about 5% out of the money and several months out makes sense me and so does owning some SPDR Financial ETF (XLF) puts about 10% out of the money with a January 2016 expiration. I also think that being effectively short China is a fairly good position by owning puts on the FTSE/Xinhua China 25 Index ETF (FXI) about 10% out of the money with a January 2016 expiration. That’s it, nothing huge, a couple percent of a portfolio each until (if) the trades move in your direction.

What’s Going On…

A number of things jumped out at me as I read this weekend. 

First was the jump in oil prices on Friday and all the posulating and pontificating as to why it happened. I’ll give you a couple things to think about that it might have been related to.

I could have been simple profit taking that got a little busy as traders who fell behind because they were late to the short party tried to exit as oil rose and that created some momentum.

It could have had something to do with the surprise announcement by the Russian Central Bank that they were lowering interest rates from 17% to 15%. How could that impact oil you ask? I’m glad you asked.

Remember on MarketWatch I gave three scenarios that could lead to a faster than many expect rebound in oil. One of those things was Russia cutting deals on Eastern Europe and pressuring Iran on a permanent (as permanent as anything over there gets other than fighting) nuclear deal. Well, Russia lowering interest rates in the fashion they did smacks of interference with the Central Bank (In Russia? No way!) due to some desperation. A desperate Russia either makes deals or trouble. Let’s hope for deals.

The rise in oil could also have been somebody in the know making some bets. Hmmmmmm, who could that be. Who would know whether oil was likely to collapse or rise in coming months. Let me see. It would have to be somebody smart, fashionable and shiek I think. Ohhhhhhhh, yes, I am saying somebody who doesn’t answer to the SEC might be using insider information. 

Enough oil, I’m getting tired of it. Let’s switch to something totally different, natural gas.

Natural gas is starting to build inventories that might cause even lower natural gas prices if we don’t see a cold snap soon or a very warm summer. We’ll see. That could set up an interesting trade as some LNG starts being shipped to Europe in Q4 which I anticipate will help solidify natural gas prices, along with an inevitable rise in oil prices.

I read an article on Zero Hedge which I won’t link because it was downright hucksterish that talked about how the uber-rich are preparing hideaways. I think the article was more than a little exxagerated. I’d say it was bullshit, but this is the internet and I don’t want to offend anybody. Here’s what I know, if the rich were truly that scared of social collapse, maybe they’d give everybody who works for them a raise. Just a thought.

I’m hearing the first whispers of campaign season. It’s so wonderful to hear the same old stuff – once again I’d say bullshit, but you know – again. I sure hope we get to fight the same ideological hair splitting non-factors again for old times sake. I’d hate to actually work together to fix anything when we can just keep the divide and conquer game going full tilt. 

Oh Yeah, the Markets…

As I alluded to above. The U.S. and some other major markets – China – are topping. There is little doubt about that. Collapse in this environment is unlikely though. It is much more likely we simply see volatility as liquidity keeps filling in the holes in the bucket that form. Eventually there will be a collapse, but it will be consistent with a drying up liquidity. That just hasn’t happened yet. 

I think there is more bubble blowing to go, although I do believe there are fewer breaths today to put into the balloon than there was a few years ago. As Jesse Colombo points out this week on Forbes, while understanding a bubble is forming is important, it doesn’t mean its pop is imminent.

I have very little I want to buy right now. I’ve made several picks for subscribers which carry low risk and good upside, but those are few and far between. When we get this week’s numbers on Monday night, maybe I’ll see something new. For right now though, I’m just sticking with my handful of favorite lower risk, higher potential holdings.

To make really good money, many think they need to reach out for risk right now. That’s wrong. The better idea, as I mentioned above, is to hold cash, make a list and wait for an opportunity. That’s mostly what I’m doing.

Kirk Spano