January in Figures

January in Figures

January in Figures

January 30, 2016

January 2016 was an extremely volatile month in world financial markets.  Oil set the tone, with West Texas Intermediate crude plunging almost 31% in the first three weeks to a low of $26.19 before trimming that loss by more than half.  Beyond mid-month, stock prices in the U.S. were headed for a record January dive.  Even with sharp gains on the final business day of the month, losses of more than 5.0% occurred in the United States, much of continental Europe, and Japan.  The rally on January 29th was triggered by announcement from the Bank of Japan that policymakers had narrowly voted to introduce a negative interest rate to complement its aggressive asset buying program.  This decision arguably delivered the most electrifying central bank surprise since the Swiss National Bank suddenly ended the franc ceiling rate against the euro a year earlier.

A substantial part of January’s decline in sovereign debt yields shown below happened on the final day. The dollar registered broad additional gains in January against the Swiss franc, sterling, commodity-sensitive currencies, and Chinese yuan, but net appreciation relative to the yen and euro was modest.  Three-month deposit rates were little changed over January.

10-Yr Yield 12/31/15 01/29/16 Chg vs End-2015
U.S. 2.27% 1.92% -35 Basis Points
Germany 0.62% 0.32% -30
Japan 0.26% 0.09% -17
U.K. 1.96% 1.56% -40
Canada 1.39% 1.16% -23
Switzerland -0.12% -0.31% -19
3-month rates 12/31/15 01/29/16 Chg vs End-2015
U.S. 0.61% 0.62% +1 Basis Point
Euroland -0.13% -0.17% -4
Japan 0.08% +0.08% 0
U.K. 0.59% 0.59% 0
Swiss -0.76% -0.75% +1
FX 12/31/15 01/29/16 Pct Chg in $
EUR/USD 1.0864 1.0833 +0.3%
USD/JPY 120.17 121.08 +0.8%
USD/CHF 0.9994 1.0244 +2.5%
GBP/USD 1.4738 1.4251 +3.4%
AUD/USD 0.7293 0.7079 +3.0%
NZD/USD 0.6834 0.6476 +5.5%
USD/CAD 1.3829 1.4007 +1.3%
USD/CNY 6.4900 6.5755 +1.3%
Equities 12/31/15 01/29/16 Chg vs End-2015
S&P 500 2044 1940% -5.1%
Nasdaq 5001 4614% -7.7%
Djia 17425 16466 -5.5%
Dax  10743 9798 -8.8%
Nikkei 19034 17518 -8.0%
Ftse 6242 6084 -2.5%
Canada TSE 13010 12822 -1.4%
Swiss SMI 8818 8320 -5.6%
Commodities 12/31/15 01/29/16 Chg v End-2015
Oil, $ per barrel 37.84 33.62 -11.2%
Gold, $ per ounce 1068.30 1116.40 +4.5%

Copyright Larry Greenberg 2016.  All rights reserved.  No secondary distribution without express permission.

Tags: bonds, gold, Oil, stocks




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Commodity Based Stock Play

Commodity Based Stock Play

Our business focuses on the commodity complex. We rely on the Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report to sort out what the major players are doing in the commodity markets. Our focus lies with the commercial trader category of this report. These are the traders who either have the commodity to sell or, will be using the commodity in their manufacturing processes. Following the commercial traders category, as a whole, for a given commodity can provide us with a consensus opinion from the world’s largest producers and end users of a commodity. There are times, like now, when their collective actions in the commodity markets can pay direct dividends to equity traders, both in individual stocks as well as commodity based ETF’s.

The wild ride commodity prices have had over the last few years can be expected to continue through most of 2016 as the current, record breaking El Nino finally begins to dissipate. So far, El Nino’s effects have followed the course of history rather than the hype. We’ve played on this for nearly a year now and have written extensively on EL Nino’s effects on the global commodity markets in the past. The short version for El Nino trading is; buy the rumor, sell the fact. As we’ve seen, commodity prices have continued to decline in the face of TV’s weathermen and women. The depressed nature of general commodity prices and the commercial traders’ actions within these markets are the focus of today’s investment idea.

Declining commodity prices have two effects. First, it drops the input cost of finished products. Secondly, it pressures commodity producers’ pricing power. Today, we’ll look at the consumption side of this equation as these companies and those like them will be the primary beneficiaries.

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Beginning in 2007, commodity prices began to rally. This put a major squeeze on companies like Frito Lay and Tropicana, divisions of Pepsi (PEP) as well as Kellogg (K) and Kraft, which is owned by Mondelez (MDLZ). Further impacted were meat producers like JBS and Tyson (TSN). Companies whose key inputs were tied to commodity prices had two options. They could raise prices or, decrease the packaging volume. Many who chose to raise prices were taken to task for price gouging while those who shrunk their packaging sizes were able to sneakily pass some of the cost increase onto unaware consumers. Many of these same companies then faced the same issue during the commodity rally of 2012. The important point for investing is that as far as I’ve been able to tell, packaging volumes have remained at their smaller sizes even as the commodity markets and therefore, input costs, have declined by more than 50%.

COT column bannerThis brings us to the current situation. Tracking the commercial traders’ behavior allows us to see the action of their companies’ research departments and who doesn’t want access to the actions of Fortune 500 companies’ proprietary research? Looking at the chart below you’ll see the price of corn in the main graph and the net commercial trader position in the lower graph. We refer to commercial traders as, “value traders.” Their models are based on the ability to contribute to the companies’ bottom line. As such, they tend to be negative feedback traders; buying more as prices continue to fall and selling more as prices rise beginning with their primary assumption of fair value. Commercial traders as a whole appear to believe that corn priced under $4 per bushel will, in fact, have a material impact on their bottom lines. This was true this summer when General Mills (GIS) reported the following: “Our Convenience Stores and Foodservice segment recorded good sales growth, increased its operating profit margin, and delivered record profit results.”

You can see that we are nearing the critical floor of $3.50 per bushel in the corn market. Considering the market’s current price relative to historical context, it behooves us to take a close look at the tremendous commercial buying we’ve seen on this market’s decline. Commercial traders have purchased more than 300,000 contracts at 5,000 bushels per contract under $4 per bushel. That’s a dollar cost average of nearly $6 Billion Dollars on 1.5 billion bushels of corn. This chart shows the impact and scale of global food production as multi-nationals load up on cheap input prices.

End line commodity users like Kellogg's and JBS along with ETF's like CORN should benefit greatly from the decline in commodity prices.
End line commodity users like Kellogg’s and JBS along with ETF’s like CORN should benefit greatly from the decline in commodity prices.

Given the stock market’s already precipitous decline this year, we have our doubts about this being another record setting year. That being said, a 10% January correction is hard to ignore. Therefore, as an attempt to safely wade into the declining market, we believe companies with major food processing operations or ETF’s like CORN, have two major advantages against the broader market. First, they have a direct pricing advantage due to lower input costs relative to final market value as many of them are still charging the same prices or continuing with the smaller packaging. Secondly, if the broad market sees further declines, the defensive nature of food stocks and general demand for boxed food production should remain solid if not, increase as consumers spend less and eat at home more often.

 


This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that

Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

Saturday links: cage-free complications

Saturday links: cage-free complications

Is Moldova Another Ukraine?

Is Moldova Another Ukraine?

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MOSCOW — On the surface, huge anti-government demonstrations in Moldova, the poorest country in Europe, are mirroring recent events in Ukraine when violent standoffs in the capital, and then in the country’s south and east, were defined by allegiance to either Moscow or the European Union. But things in this former Soviet republic are more complicated.…

I Think She’s Getting It – EGM Trading Room

I Think She’s Getting It – EGM Trading Room

Everyone, even long-term traders can learn (or relearn) something from brand new traders. All this week, my 19 year old niece, Emily has been looking over my shoulder while we were in the Explosive Growth Mentoring trading room. She’s decided that maybe Forex trading is something she wants to learn, so she started a list of rules this morning and I thought they were so insightful that I would share here. Pretty sharp for a teen who didn’t even know what a “forex” was until late last week. In fact, she didn’t even have a clue what trading was. It was one of those situations I think anyone who has traded Forex for any time has run into; how do you explain to someone what you do? But that’s a subject for another day.

Emily’s List

Emily's Rules List

Emily’s Rules List

I was scanning the charts looking for a good entry. The markets started moving early today – before the typical New York market opening – so many moves had already happened, or were not quite ready. During that 30 minutes of silence, Emily was busy writing in her ever-present journal. In a few minutes she told me she had written a list of rules to start her trading plan. She wanted me to read them. Here’s her list:

  1. Don’t be stupid.
  2. Don’t be greedy.
  3. Look to the left to see patterns.
  4. Listen to Tim, he’s a smart guy (awwwww).
  5. Winging it may work for birds but never for me. Make a plan.
  6. Always try to salvage a bad situation.
  7. No trade is worth Everything.
  8. Don’t Be Stupid.
  9. Don’t trade scared.
  10. To be reckless is to be stupid and what did I say? Don’t. Be. Stupid.

So, I’m thinking that #4 is the best, but I may be prejudiced.

I think as Emily goes forward and learns more about Forex trading, she’ll be adding to this list, but for someone who has only been listening for a few days I think it’s pretty perceptive.

The Most Important Thing

I’m thinking actually the most important thing in the list is exactly what Emily believes is the most important thing: Don’t Be Stupid. We are constantly doing things that we know we shouldn’t be doing. Telling ourselves not to be stupid – before we actually do something stupid – is a very wise thing to do.

Trading Rules

While on the subject of trading rules, it’s important as a trader to have well-defined trading rules. When you’re in a crunch, you want to be able to fall back on your well-established rules, rather than emotions, to handle the situation. In addition to Emily’s list, your plan should include what pairs you will trade, what strategies you will use, where your stop losses and take profits will be, how much you will risk on each trade, when you will trade, when you will stand aside.

My Favorite Mantras

In addition to the plan, I have several mantras that I repeat to myself when I’m about to enter a position. Things like “Don’t be an idiot”, “I’d rather be out of a trade wishing I was in it, than in a trade wishing I was out”, “What if this goes against me, am I willing to sit here until I can work it out”, “Have I hit my daily profit target? If yes, pass this trade by” and so on. And yes, “My Favorite Mantras” is a nod to a 60s TV show some of you may remember.

Psychology is 90% of trading, the mechanics of the trade (entry, exit, size, etc.) are the other 10%. Make sure you have the psychological part right.

Have a great trading day,

Tim

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Using Nadex Spreads to Trade Crude Oil

Using Nadex Spreads to Trade Crude Oil

Crude oil has been on a steady downfall since October, and just broke the $30 per barrel mark yesterday. If you were a seller during this period, it’s been a very nice ride. Has oil hit rock bottom, or is there still room for it to slide? There are pundits on both sides of that question.

On Wednesday, January 8, Crude Oil was trading around 33.80 at the Opening Bell. Prices fell sharply, going all the way down to 32.64 by 11:30. Then the prices started climbing back up. Would the market go all the way back up to 33.80, or retrace briefly and keep falling?

Rockwell Trading does analysis on several indices and commodities for daily binary trading opportunities. Using their Power Crossover methodology, they publish buy or sell signals based on the agreement of several daily indicators, including a recommended strike price and historical probability of success. On this day, Rockwell was recommending a SELL on Crude Oil, with a Strike Price of 33.50.

01.08.2016_CL_Spread

Nadex Crude Oil Spread Trade

Looking at the charts, 33.50 looked like a good resistance level for selling Crude Oil. The 200 Simple Moving Average (SMA), shown in red, looked like it was acting as a decent resistance level on the 5-minute charts.  At 11:30, as the market was grinding its way back up, a working order was placed to SELL a Crude Oil spread from the 33.50 price level. Since the market was still below 33.00, it was time to be patient and wait for the market get up to 33.50 for the order to fill.

Nadex spread trades resemble traditional trading with the added security of capped risk and capped reward. The following working order was placed:

SELL Crude Oil 30.50 – 35.50 (2:30 Expiry)  This is a 500 tick spread. Every tick is worth $1.00, per contract
Price: 33.50  This is the price target to SELL from
Maximum Risk: $200  This is the difference between the Ceiling of the Spread (35.50) and the SELL Price (33.50)
Maximum Reward $300 This is the difference between the SELL Price (33.50) and the Floor (30.50)

Profit Target: 50 Ticks, or $50, per contract
Loss Target: 25 Ticks, or $25, per contract

The working order filled at 12:21. Within 10 minutes the market reversed and dove.At 1:25 pm. the trade was exited, having reached the 50 Tick profit target, resulting in a $50 profit (exchange fees not included).

As it turns out, this was a perfect exit for the trade. The market ground back upward shortly after the trade was exited, which would have resulted in a lesser profit at the 2:30 expiry.

Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.

 

Morning MoneyBeat Asia: U.S. Stocks Slide on Not-Dovish Fed

Morning MoneyBeat Asia: U.S. Stocks Slide on Not-Dovish Fed

Bloomberg

Market Snap: At the New York close: S&P 500 down 1.1% at 1882.95. DJIA down 1.4% at 15944.46. Nasdaq Comp down 2.2% at 4468.17. Treasury yields mixed; 10-year rose 0.007 percentage points to 2.003%. Nymex crude oil up 2.7% at $32.30. Gold down 0.5% at $1,116.10/ounce. WSJ Dollar Index up 0.02% to 91.37.

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How We Got Here: The market was betting the Fed would get policy-shamed into backing off its rate-hike regime. That bet did not pay off on Wednesday.

U.S. stocks fells sharply after the Federal Reserve concluded its January policy meeting with a statement that acknowledged all the world’s problems, but reiterated the bank’s confidence in the economy, keeping it on-track to raise rates in March (should it decide then to do so).

“The Fed remains relatively optimistic about the outlook of the economy,” Stifel economist Lindsey Piegza noted. The bank is encouraged by the labor market, and keeps expecting that inflation will pick up as soon as the oil market stops collapsing. Even with signs of slow growth, and the tumultuous markets, “the Fed is eager to continue along with additional rate hikes, the second potentially coming as early as March.”

After three weeks of a global selloff, and after the ECB’s Mario Draghi almost dared the Fed to stay the course, the bank mostly chose to stay the course. If many in the market were openly questioning whether the Fed made a mistake by raising rates in December, the bank’s answer today was curt: no.

Coming Up: The USD/JPY may show only a limited reaction after the FOMC wraps up its two-day policy meeting, as investors focus on the Bank of Japan policy decision Friday, says Shinichiro Kadota, vice president of research at Barclays in Tokyo. “As investors [focus] more on the BOJ meeting this time, we would see the dollar-yen pair to show only a limited reaction [to the Fed statement],” says Kadota. The BOJ will likely revise down its inflation outlook, says Kadota, but he says the BOJ will also likely leave its monetary policy unchanged. In addition, the BOJ also will unlikely to follow the approach of European Central Bank chief Mario Draghi to give a signal that easing is on the horizon in March, he says.

What You Missed Overnight

Fed Doesn’t Rule Out March Rate Rise Despite Cautious Outlook The Federal Reserve signaled renewed worry about financial-market turbulence and slow overseas economic growth but didn’t rule out raising short-term interest rates in March.

Stocks Slip as Fed Signals Renewed Worry U.S. stocks turned lower Wednesday after the U.S. Federal Reserve raised concerns about the economic outlook but didn’t rule out a March rate increase.

Oil Surges Despite Big Rise in Stockpiles Oil prices surged to gains after government data Wednesday showed last week’s addition to storage wasn’t as large as industry estimates suggested and speculation continued about output cuts from the world’s leading exporters.

Libor Brokers Acquitted of Fraud in London Trial A jury acquitted six former brokers of fraudulently trying to manipulate a widely used benchmark interest rate, dealing a major blow to a yearslong international investigation.

From The Wall Street Journal Asia

China Sharpens Efforts to Halt Money Outflow China is ramping up efforts to halt a flood of money leaving the country in response to an economic slowdown, moves that risk undermining Beijing’s ambition to elevate the yuan’s profile on the world stage.

Why China Should Welcome More Volatility When investors take economic or currency stability for granted, they take on too much risk in the belief nothing will change. That’s a lesson China has yet to take on board for the overall economy. Yet its long-term health would benefit from less state-directed stability and more market-driven volatility.

Malaysia Antigraft Agency Asks for Review of Decision to Clear Najib Razak Malaysia’s anticorruption agency said Wednesday it wants to review the decision of the country’s top prosecutor to drop investigations into how nearly $700 million was transferred to Prime Minister Najib Razak’s private bank account.

Tencent-Backed WeBank Raising Funds at $5.5 Billion Valuation Chinese Internet giant Tencent Holdings Ltd.’s online banking affiliate WeBank is close to raising fresh funds from investors including U.S. private-equity firm Warburg Pincus in a deal that values the year-old venture at more than $5 billion, people familiar with the matter said.

From MoneyBeat

See Markets React to the Fed in 8 Charts The market reaction to the Federal Reserve was swift, but it was far from violent. The S&P 500 index initially rose slightly before slipping into negative territory. Ten-year Treasury yields and the dollar fell, while gold strengthened.

The Fed, the Markets, and the Great Guessing Game Today’s policy statement from the Federal Reserve is a Rorschach test for the market, in that the reaction to it will say more about the market than it does about the mindset of the Fed decision makers. 

Apple the Latest Victim of Global Growth Worries Even the world’s biggest company can’t shake off concerns about global growth.

Market Crashes, Stock Scandals: Lessons From the U.S. Frontier  The government massively overinvested in transportation and land development. The banking system was inefficient and corrupt. State governments gorged on debt, then defaulted on it with aplomb. The stock market was crooked, rife with cronyism and insider trading. Stocks shot up and down like yo-yos. China? No, that’s the U.S. in the 19th century,

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