Where Obama Meets the Dollar

There are a number of trades that require your immediate attention.  Please read carefully and, where necessary, move with alacrity to ensure profits.
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We opened a trade back on April 11th that asked you to buy and sell equal numbers of the XLF September 16 PUTS (buy) and SPY September 93 PUTS (sell), both of which traded (then) for $0.85.  The trade cost you nothing net of commissions to set up and shapes up as follows today:

The XLF September 16 PUT now changes hands for $1.50.
The SPY September 93 PUT is now trading for $0.03.

We recommend you close the trade today for a profit of $147 per pair traded.

Second, we opened a zero premium trade back on May 10th using Banco Santander and Wells Fargo shares, with the goal of profiting on WFC strength and an overall weak Euro and European banking sector.  The markets slumped as we expected, but for whatever reason, the Spanish banking giant has outperformed the American outfit, and we’re now holding options at a loss of roughly $3.90 per pair.

For those of a strongly conservative investment bent, the best course is to take a loss here and move on.  But for those who are willing to bear a modicum of risk, we prefer to hold on to the trade, let the STD September PUTS expire and, if necessary, roll out the WFC October PUTS if and when that becomes warranted.  We don’t see continued weakness in the overall market lasting a lot longer, and we do expect the WFC PUTS to expire worthless at some point in the not too distant future.  We feel strongly that all who took on the trade should stand pat.  We will continue to monitor it and update you.

Finally, hold on to your CHL calls and any CLMT stock that you bought.
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And now back to this week’s situation.

Mid-Term Election Fallout

We don’t like to mix politics with investments, but at times it becomes downright inevitable – and appropriate – that we speak to those truths that affect our savings and investments.

These mid-term elections stand to be every bit as revolutionary as those that brought the Obama administration into power in 2008.  A turn in the balance of the House of Representatives and potentially (but less likely) the Senate could have a very strong influence on markets going into 2011.  In the same way that the Republican takeover of the House in the early 1990’s launched the greatest bull run in American market history, so, too, could a similar story unfold come November.

That’s, of course, if it happens.  More important for us at this juncture is the relative uncertainty that it will.

That is, prior to elections that are very close calls (like this one), the market tends to drift and/or sink in proportion to the fog that envelops the electorate during the lead-up to the polls.  Because there’s so much at stake here and the outcome is so uncertain, we expect a further erosion in the general price level of equities until such time as the election outcome is more widely ascertainable.

And that, my friends, could come any time before November 2nd.

And when it does, we expect markets to resume their upward arc, but until then we hope to profit from any sustained or even sudden weakness that appears.

More on that in a moment.

What does it mean for the bond market?

It’s likely that the credit markets will continue to move bullishly – despite the already impressive gains they’ve made of late.  Take a look at TLT, the iShares Barclays 20+ Year Treasury Bond ETF:

Our read of the chart speaks to continued bullishness as November approaches:

1.    The trendlines (in red) are still bullish,
2.    Former resistance at 102.5 (in black) now offers additional support,
3.    The current pullback appears to be a fill of the gap created during the mid-August spike (in blue), and
4.    The longer term moving averages are also unfolding bullishly (in green)

All told a continued bullish picture, and supported by a non-confirmation between the RSI and MACD indicators, which will not indicate a sell until the latter dips below its ‘waterline’.  At this juncture, that event appears to be at least a week or two away – if it is destined to happen at all.

We Are Not Trading Bonds, We are Using Them

That said, we introduce the bond market here because it supports our contention that we will shortly see a strong rebound in the dollar.  That’s borne out by the overall level of uncertainty in world markets and politics (viz. Afghanistan, Iraq, Iran, etc.) and the general tendency of global investors to fly to U.S. dollar denominated securities (read: Treasuries) whenever the future gets too foggy.  American investors should also continue to increase their flows into treasuries until the election.  All of which, again, is dollar bullish.

The other reason we watch the bond market is because it has traditionally been a more sensitive gauge of investor sentiment, and a superior marker of trend turning points than any other single indicator we are aware of.

That is, we fully expect the bond market to turn on a dime and sell off significantly once the results of the election become clear.  Again, that could happen anytime between today and November 2nd.

We are therefore recommending a short term, speculative trade on the dollar.  Here’s the buck for the last six months:

The dollar appears poised to jump from current levels – after two months of retreat and another three grinding weeks of sideways movement.

The economic and political pictures are now creating the backdrop for a perfect U.S. Dollar storm.

To that end, PowerShares and Deutsche Bank offer an ETF they call the US Dollar Bullish Fund (NYSE:UUP) that now trades for $24.04.  We say you go long the UUP December 24 CALLS.

And remember, this is a speculative position.  Don’t go betting the farm.

Wall Street Elite recommends immediate purchase of the PowerShares DB US Dollar Bullish Fund December 24 Calls, now trading at $0.54.

With kind regards,

Hugh L. O’Haynew

Your Next Profit Play and Clarification on Last Week’s Puts

Before all else, I see that there’s a good measure of dissonance on the talkbacks regarding last week’s trade and what action, exactly, was to be taken regarding the SPX PUTS.  Know that I take full responsibility for the confusion and urge readers, before doing anything else, to take profits on the position immediately.

Moreover, a hearty dose of thanks to those of you who took the time to read the report carefully and write us regarding the obvious contradiction therein.

Now the explanation.

The confusion regarding whether to hold or sell the PUTS stemmed from an unfortunate delay in publication of the piece, which was supposed to be in your hands at the beginning of last week.  Due to forces beyond our control (yes, this still happens in the computer publishing age!), the report was late in getting to you.  Therefore, you saw this:

Last week’s recommendation to buy September SPX 1000 PUTS is still a keeper, even though we’ve lost a little ground since then.  We see a potential gain on the position as early as the open on Monday.  Hold on for now.
(exhibit A)

The “open on Monday” referred to was last Monday, the 9th of August.  It was then that we recommended holding the position as it was still not profitable.

As the week advanced and the averages fell, I was in contact with my editors regarding changing the recommendation at the conclusion of the piece.  The original recommendation appeared as follows:

Wall Street Elite recommends readers hold all positions, and in the event of a steep mid-week drop in the averages, look to take profits on the open SPX PUTS.
(exhibit B)

When the ‘steep mid-week drop’ became a reality, my editors at Oakshire agreed to recommend taking profits in the PUTS at the earliest possible publication date.  The final recommendation, therefore, arrived in your hands looking like this:

Wall Street Elite recommends readers hold all positions, and considering the steep mid-week drop in the averages, it’s time to take profits on the open SPX PUTS.
(exhibit C)

Unfortunately, the earlier section  (exhibit A), was not reedited due to the haste with which we endeavored to transmit the already tardy dispatch.

Hence your confusion.

Our sincerest apologies regarding the confusion.  We will do everything in our power to see that it does not occur again.  And we hope that this perhaps too lengthy explanation suffices to clarify the issue.
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Now to the markets.

With a great measure of success, we have been recommending high yielding equities with solid cash flows and strong balance sheets to investors attempting to wade through the current uncertainty.  And today we continue in the same vein.  At this stage caution is categorical.

The markets continue to waver about a potential tipping point in the S&P 500 1060 range.  If that level fails to hold, we expect a quick drop to roughly 1020.  Below that it’s anyone’s guess.

Our call to take profits on the SPX PUTS is based on our view that we might see a short term rise after the losses of the last week – hence the sell recommendation late last week.  As an option is a security whose value decays with time, we prefer not to take chances.  Pocket your money while the going’s good.

Then take a look here:

The picture for the S&P 500 is not so simple.  On the one hand, three fan lines (in red, above) speak to a possible conclusion to the downdraft we’ve experienced since late April.  Should the price action rise above 1125, we’ll count ourselves neutral and call off all our shorts and PUTS.  Chances for further gains at that point become more likely.

Should the average break below roughly 1055, however, look for a follow through to the long term MA which currently sits at the lower black line at 1009 (in yellow, above).  It’s quite possible we’ll see further downside at that point, with much depending on economic news – particularly jobs data – scheduled to be released in the coming month.

RSI and MACD are Mixed

The RSI and MACD indicators are mixed to bearish here.  Yes, RSI is now below its midway ‘waterline’, but MACD hasn’t yet confirmed.  It’s dropping, to be sure, but unless we see the thing actually dive below the zero line, we have to be circumspect.

Call it a draw with advantage to the bears.

And then look at this.  It’s a chart of an old friend whose looking every bit as convivial today is he did when we first recommended him back in February of this year.

The chart shows six months worth of daily trading on a wonderful, high-dividend paying stock recommended back on February 8th at $19.  On its rise to $22.44 in early April, we bailed out with a nice 18% gain – not to mention the dividend, but more on that in a moment.

Stock in Calumet Specialty Products Partners, L.P. (NASDAQ:CLMT) looks very good to us at the moment.

After a precipitous climb through April the stock corrected violently, returning to its long term moving average at $15 before resuming its climb to the $19 range.  Since then the stock has been climbing higher, making a series of higher highs and higher lows (in blue, above).

Its latest retracement has brought it to $17.39, where, despite an apparent weakness in the RSI and MACD indicators, we’re suggesting readers once again take on Calumet.  Current RSI and MACD patterns give us confidence those indicators will be back on the bullish side within a few weeks (see in red, above).

The company is structured as a Master Limited Partnership (MLP) and pays a robust 10.47% annual dividend.  Calumet manufactures everything from solvents and waxes to lubricants, diesel fuel and gasoline from crude oil and other feedstocks.  It’s therefore not as reliant on a higher oil price to maintain its margins.

Wall Street Elite recommends purchase of CLMT stock between $16.60 and $18.00, with a stop loss at $16.21.

With kind regards,

Hugh L. O’Haynew

A Market Awaiting a Trigger

The talk continues in a lively manner from nearly every quarter about 1) a double dip recession, 2) the weakness of the U.S. consumer, and 3) the likelihood of more Federal Reserve ‘Quantitative Easing’ (money printing) to get the economy moving.

There’s been an undeniable stall in activity for more than a full quarter now, and the worrywarts are ratcheting up their warnings to near hysterical levels.  But the question remains: just how dire is the mess we’re in? and is it beyond the scope of the economy, the banking system and American business as it’s currently constituted to do anything about it?

Hmmm…

The issue is in focus today because the U.S. Federal Reserve will be meeting this week to discuss the current lacklustre state of affairs and to determine exactly what action needs be taken to address it.

It’s a given that the nation’s top bankers will be leaving short rates alone for an ‘exended period’ – we don’t expect any change in their language relating to interest rates.  What is of interest is where they see fit to venture next.  Simply put, there’s a clear and present need for action.

Aside from the employment numbers, which just this Friday showed themselves less than optimistic, retail sales numbers are expected to be anything but upbeat when released this coming Friday.  Here’s the way things shape up with the American consumer:

Consumers are not buying.  Retail sales are down for two months running and this Friday’s report is expected to bring only a slight rise in the reading.  No wonder, really, after sentiment numbers have been falling and the weather has been so bloody hot!

Remember, too, that the U.S. consumer is presently in savings mode.  With the savings rate now hovering around 6%, it could well be there’s enough cash in the bank to go on a buying binge; just don’t look for it to happen while the current funk is upon us.

Consider, instead, that the Fed will again begin dropping money from helicopters.

Americans are Afraid

Here’s a look at the yield on the benchmark U.S. Treasury bond, as sure an indicator as any that investors are in a defensive posture.  Spending on stocks, too, appears off the radar for the moment.

Remember, yields move inversely to price.  The following chart is bond bullish.

The current bond picture is clearly bullish, as can be seen from the RSI and MACD indicators, as well as the neatly defined falling (yield) channel (seen in red, above).  All told, it looks good for fixed income, but we believe the current trend may be due to correct for a spell – perhaps even as early as the Bernanke Fed confab this week.

For that reason, we recommend taking profits in PKO, our recommendation of June 28th (see: Any Interest in Buying Junk from TED?).  At the time, PKO was trading at $24.74.  It now sits at $26.49, a gain of 7%, not including the two monthly dividends you pocketed along the way, which should bring your gain to just over 10% for about six weeks’ work.

Any further strength here in the bond market should be seen as a time to unload this holding.  And while PKO may continue to be a key holding going forward, we see a time to jump back in after some consolidation in the fixed income sector.  Stay tuned.

And While We’re at it…

Why not take a little more money off the table from the zero premium trade we instituted on July 19th, in Trading Retail for Real Estate.  Our recommendation was to buy and sell equal numbers of options in the Real Estate and Retail ETFs (respectively), in an offsetting trade that cost nothing but commissions to initiate.  Both were trading at the time at $1.80.

The market has now moved in our favour to the tune of roughly $0.80 per pair traded ($80).  We’re cashing out now for a nice return on what was essentially a free trade.

And last but not least…

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Like PKO, another one of our favorites that has moved well in the last market burst is (NYSE:MO), Altria, the old Philip Morris, which we bought for $20.01 back on June 7th in our letter entitled, All Weather, Smokin’ Sales Potential.  MO shares are now 12.6% higher, last trading at $22.54.  We don’t mind holding this one (like PKO), but we see another leg down in the short term, so we figure it’s better to take what’s on offer and avoid falling in love with the thing.

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Last week’s recommendation to buy September SPX 1000 PUTS is still a keeper, even though we’ve lost a little ground since then.  We see a potential gain on the position as early as the open on Monday.  Hold on for now.

Some recent statistics on cash flows are also giving us reason to believe we’re in for a dump here.

The American Association of Individual Investors (AAII) keeps statistics on a broad array of issues concerning small investors – everything from sentiment to stock and bond buying patterns.  Here’s a chart of theirs that we found particularly noteworthy.

What’s key here is that last month saw increased flows into bonds from both stocks and cash – even though the S&P 500 was up over 6% in July.  It’s a trend that has been in place for some time now, and we don’t see it climaxing for a while – certainly not in the months ahead.

Investors are edgy and unsure of market direction and appear increasingly sceptical of a continued bull market.  And while this forms a perfect sentiment base for a continued expansion of multiples, what’s lacking is a trigger.

Earnings season is now (virtually) over.  No trigger offered there.  Economic news is dribbling in – in patently unimpressive fashion.  No trigger there, either.  In our view, there’s only one trigger remaining that could possibly lead to a meaningful reinvigoration of buying.

A meaningful selloff.

Wall Street Elite recommends readers hold all positions, and considering the steep mid-week drop in the averages, it’s time to take profits on the open SPX PUTS.

With kindest regards,

Hugh L. O’Haynew

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