Russ Winter

This market seems to have a proclivity to ramp off of basically nothing. The catalyst and MoT talking point du jour seems to be “Eurobonds.“.  A eurobond is nothing more than a transfer union or mechanism for what’s left of Germany’s shaky financial residual to fund the insolvents of Europe.  It is another retread of the existing Troika programs. How does this “sharing” work, because right now Italy and Spain are on the hook for about a third of the liabilities of the EFSF and ECB. Are Germany and France going to pick up this extra burden now? I don’t think so, just another hook.The second catalyst is the standard hook, drop a 100 SPX points and expect print or die.  Zero Hedge ran a post showing BofA comments on break even inflation, suggesting don’t hold you breath just yet.  I have been keying on Brent Sea oil going to a 9o handle, and we are at 108. The MIT survey for April 30 is out and shows a slight uptick in inflation over the last month.My short positions were mostly covered last Thursday and Friday, so I am watching this latest absurd market action more dispassionately.  The McClellan Oscillator (MO)  hit -350 on Friday,  and Tuesday hit -140.  I would mostly characterize this latest Hail Mary as an oversold bounce.  The MO tends go at least positive before reversing significantly. However, per the pattern,  once again the momo chasers were reversed late in the day on Tuesday. With the Treasury scam still in full effect, I feel oversold readings such as seen late last week,  force one’s hand to cover shorts.  Perhaps the next time this happens this tendency will function as my own hook,  that causes me to miss a huge swoon.  That would be par for the course, as this really feels like a dangerous market designed to fool virtually all participants.   Meanwhile I see no compelling set ups in the convergences or charts, so will stand down on positioning.  Index options premiums are too expensive to buy and a little too cheap to sell.In terms of the bigger picture, at some point and I think suddenly this debt rollover of insolvent developed countries goes front and center. Fitch downgraded Japan to Japan to A+ from AA, outlook negative.

View the full article

In the whodathunk department, Reuters is reporting that Chinese buyers are defaulting on deliveries of  iron ore and coal shipments. As I have been reporting for months, ships have been mothballed,  triggering another round of under-reportedbanking losses.  Also reported from China is a 15% drop YoY in property sales, and more importantly it saw a 19% drop in land sales. Land sales are how China’s local governments finance themselves (see China Bubble Bursts Symposium).This is all part of the general extreme maladjusted theme that I wrote about earlier on natural gas and more. This creates impossible conditions for producing firms in which to operate. It should now be no surprise that this climate is creating a bust in the shale gas area, which has now spread to the coal area. The problems with both shale gas and coal are high, capital-destroying production costs.Apparently coal companies drank the “sell to China forever” Kool Aid, and ramped up production.  As a result of the over-production, coal company stocks have experienced a historic sell off and panic.  Like shale gas producers, many coal firms are leveraged, and are now facing insolvency. In turn this has spread to electric utilities where marginal rates have collapsed. Many utilities are also now selling the marginal power below cost of production, and are thus destroying capital.In my glass-empty view, the idea that three key industries — natural gas, coal production and electric utilities — are operating well below the cost of production is not a bullish event, even if it temporarily results in price breaks for industrial users. And what are industrial users suppose to do? Ramp up production based upon the continuation of bargain prices as the three industries proceed to liquidate themselves? Of course not. Once again I ask: How does any industry plan to operate smartly in this unstable environment? I submit that this development is disruptive and very bearish. This is made even worse by the end-game Keynesian/Wizard of Oz economics of the day.As investors, these short-term booms followed by severe busts are hard to navigate. As an operating theme though, one can see that once the bust gets underway, capital and lending is withdrawn, and the market begins to see who (CHK for example) was swimming without a bathing suit when the tide went out. One can also see the potential for mezzanine“rescue deals” to materialize as these assets are thrown into the tar pit and liquidated. Interestingly, so far there has been little interest in acquiring shale nat gas assets, suggesting the capitulation is still to come.-the rest of this continues on at Actionables

View the full article

In the whodathunk department, Reuters is reporting that Chinese buyers are defaulting on deliveries of  iron ore and coal shipments. As I have been reporting for months, ships have been mothballed,  triggering another round of under-reported banking losses.  Also reported from China is a 15% drop YoY in property sales, and more importantly it saw a 19% drop in land sales. Land sales are how China’s local governments finance themselves (see China Bubble Bursts Symposium).This is all part of the general extreme maladjusted theme that I wrote about earlier on natural gas and more. This creates impossible conditions for producing firms in which to operate. It should now be no surprise that this climate is creating a bust in the shale gas area, which has now spread to the coal area. The problems with both shale gas and coal are high, capital-destroying production costs.Apparently coal companies drank the “sell to China forever” Kool Aid, and ramped up production.  As a result of the over-production, coal company stocks have experienced a historic sell off and panic.  Like shale gas producers, many coal firms are leveraged, and are now facing insolvency. In turn this has spread to electric utilities where marginal rates have collapsed. Many utilities are also now selling the marginal power below cost of production, and are thus destroying capital.In my glass-empty view, the idea that three key industries — natural gas, coal production and electric utilities — are operating well below the cost of production is not a bullish event, even if it temporarily results in price breaks for industrial users. And what are industrial users suppose to do? Ramp up production based upon the continuation of bargain prices as the three industries proceed to liquidate themselves? Of course not. Once again I ask: How does any industry plan to operate smartly in this unstable environment? I submit that this development is disruptive and very bearish. This is made even worse by the end-game Keynesian/Wizard of Oz economics of the day.As investors, these short-term booms followed by severe busts are hard to navigate. As an operating theme though, one can see that once the bust gets underway, capital and lending is withdrawn, and the market begins to see who (CHK for example) was swimming without a bathing suit when the tide went out. One can also see the potential for mezzanine “rescue deals” to materialize as these assets are thrown into the tar pit and liquidated. Interestingly, so far there has been little interest in acquiring shale nat gas assets, suggesting the capitulation is still to come.Despite the fact there has been a sizable NG rally off the bottom, the cause has not been because of a cut in production. Nat gas output is still running 3.7% ahead of last year.  I think this is because many nat gas firms have little choice but to produce to generate some cash.  Nor has there been any particular indication that switching to NG from coal is a major factor. Instead the now squeezed utilites are burning through coal stockpiles, and not reordering. As a measure of just how bad US energy capital destruction is now, considering that Powder River (PR) coal, which competes with nat gas at about the $2.75 level and has the lowest sulpher content of all US coals, sells at $8 a ton in the spot market.  PR coal costs about $9-10/t to produce.  However, this winter produced the third worst snowpack in 46 years which will impact hydro production. PR coal (more so than nat gas) will be perfectly situated to fill the breach.The actionables on all this would be to avoid nat gas speculation at this level, including futures. The futures have run too far, and this will infer with the clearing that needs to take place.  The bankruptcies are coming (and I think soon), and afterwards these fields will be put on hold.   One no doubt asks, how should one trade given everybody else trades on hooks (see Mother of All Hooks) and algo headlines?  I am thinking ultimately the opposite: somewhat bottoms up, and carefully, applying mezzanine like valuations. To this end,  there are a couple of relatively pure beaten up PR coal plays out there. One is Arch Coal (ACI), but that one is leveraged. The other is Cloud Energy (CLD) which is a pure PR play, with a clean balance sheet. I will follow separately with a write up, but I am looking for a retest of the 14-14.25 area to take a position.

View the full article

“I’m not going to feel terrible” should the worst happen.” -Jamie Dimon    My comment: The machines of the oligarchy need individuals who are good equivocators,  skilled at telling half-truth’s and 3/4 lies.

The Swiss are engaged in trying to intervene to keep a 1.20 floor against the Euro. This WSJ article describes the operation, and quotes  Jim Trott, the chief dealer for the Bank of England when it failed to hold the floor on the U.K. pound-Deutsche mark in 1992

“I think they are out of their tiny little minds to mention a target to the markets. I can see no advantage whatsoever for them saying that ‘We’re going to hold it at 1.20. That can only ever end in failure.”

Judging by the extreme commercial long positions that have been built in Swiss Francs, it looks like something is brewing.  The pair I want to trade is long Swiss against the USD, not the Euro, as the USD/Euro also looks to0 crowded with speculators (see last chart).

This trade speaks for itself, and the trigger could be any number of things.  I would suggest the primary one is a Greek re-default/Grexit, in tandem with a relative negative event involving the US.   Sentiment and preference (what Lee Adler calls the last Ponzi standing) towards the USD is finally waning following the JP Morgan fiasco which probably explains why the Euro has not cratered in USD terms.  Most of the US problems are being ignored (California and Illinois, et al, fiscal cliff, economy crapping out, more bank exposure to Europe than generally recognized, etc, etc) , while few of the European ones are.  The concern here is contagion, but as “little people” we have no real idea how this plays out.  Is it exclusively a European impact?  Little people like us have no choice in these circumstances,  but to take our clues from elsewhere.

On US bank exposure in Europe, see “Jamie Dimon’s body language”.  I have commented at length about the dearth of good collateral, so JPM potential exposure to this aspect should be no surprise.  And don’t be surprised if they just do another “chaotic” money snatch MF Global style if it gets rough.  Derivative contracts  are dominated by Too Big To Saves like Deutsche Bank, Goldman Sachs and JP Morgan.

So this Swissie trade could be described as a catch up bet against the last Ponzi in the race to the bottom sweepstakes.  The risk is that the Euro breaks down against the USD and the Swiss squander billions trying to keep up.  That event is what the speculators have already gone heavily offside betting on (see second chart).

Instruments are FXF (CurrencyShares Swiss Franc Trust), Swiss futures, or Forex trading.  I am going to use the later through my Options Express (affiliate of Charles Schwab) account. If you’ve never trading forex, take a few minutes getting the basics down (pairs, etc) , not too demanding in terms of learning curve. There are dozens of articles under a Google search of “forex trading”.

Franc/USD











View the full article

May so far is my best month since the March-April, 2009 market liftoff.  Late Thursday I reduced my aggressive short position by about 75%.   This was covered in comments.  The market have corrected about 8%, and has a long ways to go on the downside. As per usual the question is timing, and positioning.  The McClellan Oscillator is very oversold at 310.  Implied volatility has been expanding, and if this expands more, the set ups will be more geared toward short term naked call selling opportunities. I would not however jump into selling June naked calls at the first little bounce. We should look for convergences overhead and let things develop.

I am going to buy back GTAT at 4.50 or under for a 1% position of my total capital.  There are extremely high IV calls to sell against it as well. You would think GTAT was losing money, but instead they lowered guidance to 1.35 vs over-optimistic estimates of 1.55. They have a $1.8 billion sapphire backlog against a current revenue base of $1 billion. Ninety-eight percent of its revenue is in Asia.    There is about a buck net in cash.  GTAT, is a best of class in LED and solar equipment supplier  (PV crystallization furnaces). They have new products that accelerate cost reductions in solar module manufacturing, including a game changer coming next year called GT Monocast.  Now GTAT has been selling and delivering  it’s next generation of state-of-the art monocasts.  Company is pushing the envelope on developing solar manufacturing technology picking up bargains in the sector. Less than half their business is in solar. This is far from a busted business.





View the full article