I Can’t Fight This Feeling

Commodities have gotten white hot in a very short window.  The sheer amount of headlines around inflation and raw material pricing is insane.  I don’t have a nifty little Google Trends chart to show you but I’m pretty sure I already know how it looks.

Every other financial article or analysis is about inflation or commodity pricing.

Commodities are on top of everyone’s mind right now, which of course means a reversal is imminent.  Which in turn should drive the buck upwards as commodities are priced in dollars and heavy amounts of short-term capital will have to hide there while steam is let out of this commodities rally.

Have a look at DBC.  You can see when recent capital started jumping in enmasse as a result of commodity price action and the narrative heating up around inflation.

DBC Weekly (10-22-2021)

It’s all a bit too much, too fast.  A correction may have already began last week and I wouldn’t be surprised at all to see DBC come off 15%.  However, there are a ton of Calls outstanding on this ETF compared to the Put total with tons of theta purchased out to January of next year.

Gamma sways everything.

Still though, my gut tells me the narrative around oil and copper is simply too hot.  I’m probably a bit early here, so if one were intending to go short on select commodities, be sure to purchase enough theta on one’s own Puts.

Just look at the raw YTD performance of the energy complex!  And copper is easily outperforming the S&P 500 and NASDAQ.

Commodity Inflation YTD (Oct. 2021)

A couple months back, I thought a harder selloff in the commodity complex might trigger selling action in the equity markets.  Instead, equities took their own little breather in September as volatility rose.

But I don’t think we’re quite out of the woods with equity volatility.  This “buying of the dip” has a delicate feel to it, as if fear was not properly washed out last month.  I continue to stand by my hypothesis that commodity weakness will lead to general equity weakness.

Of course, the commodity weakness will be transitory along with any equity weakness.  I expect to have a solid end of year rally in stocks.

Assuming my hypothesis is correct, oil and copper should be the triggers.  Copper’s decline has probably already begun with last week’s 5% selloff (and more to come).

Oil would be the real trigger for overall weakness across markets.  Observe this bit of backtesting on oil, courtesy of SentimenTrader.  If the trend over the last 30 years holds true, then we should expect a rocky month in oil regardless of narratives and “shortages.”

Oil After 21 Consecutive Days Above 10-Day MA & 2yr Hi (10-21-2021)

Couple this with some end of month historical tendencies towards equity weakness, and we have the makings to pull the rug out from recent dip buyers.

From Tom Bowley of Earningsbeat.com via his weekly segment at Stockcharts.com,

One historical fact is that, at the close today, we will be entering the worst historical week of the year. The October 21st close through the October 27th close has a tendency to show weakness. Before I show you the numbers, keep in mind that the 19th through 25th of EVERY calendar month has produced annualized returns of -8% on the S&P 500 since 1950. So this October weakness is really nothing new. It just happens to be the worst of the bunch. Below are the annualized returns by calendar day (since 1950) on the S&P 500, followed by the NASDAQ:

Annualized Returns Since 1950 by Calendar Day - Tom Bowley at EB via Stockcharts (10-21-2021)

But then these annualized returns are immediately followed up by historical strength in the S&P 500, so any weakness should be relatively short and shallow, but very scary.  It is Halloween, folks.  Observe the next 9 days of annualized results (since 1950) for the S&P 500:

Annualized Returns Since 1950 by Calendar Day S&P500 Only - Tom Bowley at EB via Stockcharts (10-21-2021)

Summing up:  The inflation narrative and commodity pricing are too hot.  Expect weakness there.  This would then catalyze weakness in equity markets with overall weakness driving capital into the USD.

All sound far fetched?  Have a look at the USD and performance when CoT shows Large Traders at a wide disparity to Commercial Hedgers.

USD FinViz Monthly (10-24-2021)

Some hefty rallies noted.  I don’t expect a monster run; just enough for a short-lived rally while capital hides.  It’s only a hypothesis, but one has to trade their beliefs and manage risk accordingly.  Can’t reiterate that enough.

The Best Part of Waking Up

The Best Part of Waking Up Attention Grabber

Wow, what an ignition for coffee.  This all-important soft has shot up a rough 20% in three days as of today.  That’s smoking momentum.

Props to those who are grabbing or grabbed a piece of that squeeze.

However, capital is nervous these days.  One can feel it across multiple asset classes and sectors.  That general nervousness could cause capital to quickly shift out of coffee and into some other asset bearing a superior portfolio correlation.  The move this week feels like a firework as opposed to a rocket headed to the moon.

FinViz Daily ChartFinViz Coffee Daily (7-22-2021)

And fireworks fizzle out.  Now maybe this is a legitimate breakout.  Destination?  Moon.  I don’t identify as a commodity market expert in any futures category so there are definitely legitimate fundamentals factors that I’ve spent zero time assessing.

In fact, I don’t identify as an expert in anything.  I just like to surf the swells of extreme price action across various sectors and assets classes.  Simple as that.  Sometimes I win big.  Most times I lose small.  Just trying to net higher and higher.

Let’s zoom out to a monthly chart of coffee (FinViz Monthly with COT).  The blue circles below show every time the big-money, savvy traders get a bit out over their skis against the smart-money commercials.

FinViz Coffee Monthly (7-22-2021)

Over the last 16 years, it would’ve paid to heed this signal more often that not.  In 2010, it was a total bust during that commodity super bull coming out of the GFC.  But other than that, futures and options would’ve paid out nicely betting on a sharp change in trend.

I’m a simple man.  Simple mind.  Simple life.  Simple trading tactics, and Puts on the JO ETF could provide a solid reward to risk if a reversal is essentially imminent.

The spreads suck, but there’s enough liquidity.  If coffee is to see holders start grabbing profits just as fast as they’ve made them, then the zone highlighted in yellow below looks like a logical place to explore opportunities.

Stockcharts Coffee Weekly (7-22-2021)

Ideally, we’d like to see profit taking tomorrow (Friday 7/23/2021), in order to add a wick to the top of the current weekly candle.

Again, beware of that price action in 2010.  And the Great Mother asks you to kindly stop brewing your morning drug with single-use plastic pods.

It’s Like the Old Days in Commodities

For the traders out there, action in commodities has been highly volatile presenting opportunities as if it was the 80’s.  Basic technical analysis has been rather effective, especially within the softs and agriculturals.  Now the precious metals swell appears to be breaking, if only to regroup for the next move

It’s important to remember that large-scale traders and high-frequency traders are the beginning, middle, and end when it comes to trading.  Not only do they control breakouts and breakdowns, but they often make the market, too.  It’s important to exercise patience before positioning into a play.  Before a larger breakout or breakdown is firmly established, there can be see-sawing volatility that can jar traders out of position.  Patience allows you to skip a few waves before finding that swell you decide to ride.

What’s been hotter than the precious metals or related investments in 2016?  Not a whole heckuva lot, and silver has been on mad recent run but price action says it’s time for a pause.  The price of silver has already started turning over the last two weeks.  Because of the intrinsic volatility in the metal, it could be a quick ride down to the breakout point around $17.75.  I think this breakout in the precious metals is the real deal and I suspect we could see a sort of V-bounce right back up to the two-year highs once the breakout point is retested.

Silver Weekly (7-21-2016)

One of the calls I made in my last post was that sugar was looking blow-offy.  I wasn’t precise on the timing but clearly the action is looking corrective.  More importantly, the price action has been controlled to squeeze final long-profits and allow positions to be lightened.

Sugar ETF Weekly (7-21-2015)

I think sugar’s action could go one of two ways.  One, it could be like in the chart above where we see a downmove and then a bounce where final profits are taken and it gets sold off pretty hard down to a natural support point.  Or the market-controlling speculators could just sell the sweet stuff down in a hard, volatile move.  My gut tells me the first option is the probable play.  If you haven’t positioned for a sugar short, there’s still time.

Trading intense moves in an asset class is a lot like trying to catch a metro train.  You may have missed it going away on a long, but you can always catch it when it comes back on a short.

I don’t know nor can I explain why basic resistance/support chart analysis has been working so effectively since late 2015.  Maybe it’s the patience.  Maybe I’ve learned to read the action with HFT-tinted glasses before executing.  I don’t know.  All I know is that I don’t feel like I’m doing a whole lot different from most other years, but 2016 has been one for my own trading record book.  Who knows?  Maybe that whole 10,000 hours thing actually means something.

Let’s take a final look at bonds.  They’ve been driven up right along stocks.  In a bizarro turn, American equities are being viewed with virtually the same risk premium as corporate bonds and even treasuries, primarily because of solid credit ratings coinciding with high relative yields and developed-world central bank backing.

However, the boat is awfully crowded on the one side of interest rate direction.  The world has negative rates everywhere.  The crowd thinks there’s no way rates can move upwards just because the central banks are not in a position to act.  That is fallacious logic.  Observe:

10-Year Yields Weekly (7-21-20156)

Remember, the Fed’s final QE announcement in 2012.  You see that upmove in 10-year rates?  That was a market-driven move, not Fed-driven.  And yet money is allocated today as if there ain’t no way the market can drive rates up again in any sort of treasury selloff.  There is a widely held belief that American debt is one of the only pure safe havens, and it is to an extent.  That doesn’t mean that market controllers won’t inflict maximum pain for bettors letting their guard down.

We’ve already seen a sharp move up in rates recently.  Is there more to come?  I’d bet that the odds favor a continued, but possibly choppy ascent in interest rates.  This provides logical plays shorting TLT.

It’s not just developed sovereign debt that has seen a run.  Corporate debt has been plowed into as well.  Trading the exuberance on US corporate debt is as easy as some puts on LQD.  Have a look at the upward spike since Brexit:

LQD Weekly (7-21-2016)

LQD is already beginning to turn.  It may not fall down to support but hedging within a structured option play is well documented and easy to execute.

For my few followers out there, don’t give up on me.  I’ve been extremely busy with very little personal time.  I hope to post more regularly in H2 of 2016.  Have fun out there with your money.  Just don’t blow it.

Evaluating Markets Not Called Stocks

In my last financial post, I stated that I thought the market would move sideways for approximately 7 weeks before a catalyst would present itself to drive the market higher going into the beginning of the summer. So far, so good. Yes, the market is up about 1.5% but it appears to be the start of a sideways consolidation as the market exhales some energy.

I suspect we see a little downside move over the next week or two, as part of the sideways action, followed by a move back up to current levels about 3 maybe 4 weeks from now. By then, that catalyst should present itself for the resumption of the trend back up to new highs. Will my hot streak continue? If past is prologue…

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Right now, I want to talk about the US dollar and its potential effects on various commodities. Specifically, we want to watch oil, precious metals, and the grains.

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It’s easy to observe the stiff support at $94 and I think this time is no different. I suspect we get a slight bounce of about $4 up to about $98. This is in line with previous bounces off of $94 during this 15-month consolidation. There are plenty of analysts out there who think the USD bull will renew to move a lot higher. The thesis of the trade being a fear-based allocation in light of a pessimistic international outlook to various economies and the worthless, respective monetary policies currently employed by central banks.

I disagree. When the big one hits, the real correction across all markets, the USD will at first be a bastion of relative strength but that sentiment will be temporary. The problem with the thesis that we are in the early phases of a USD bull is that it runs counter to the other widely held thesis that the next financial crisis will be co-focused around an international collapse in confidence in the USD. That’s a discussion for a future post.

I believe the momentum has shifted for commodities. I suspect the worm has turned in the precious metals complex. Corn, wheat, and soybeans are potentially at the beginning of a spike. Oil has been unstoppable, but that DOHA meeting of the controlling powers will have a heavy influence on trading behaviors. It’s not inconceivable that the USD and commodities could run in the same direction but that belies decade’s worth of a consistently negatively correlated relationship.

Specifically, I’m referring to short-term action. Months not years. But let’s look at multi-year charts for gold and the grains, of which I’ll use my typical go-to trading medium of JJG.

Gold:

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What goes up generally comes down. Gold has held strong with a sideways move off the hard spike higher to start the year, but with the pending move in the USD, I think we’ll finally see the correction that many have been calling for. You can see that around $1,140 represents a stiff area of support. I suspect that could be gold’s next destination over the next several weeks or months, however that still represents a higher-low leaving a new uptrend intact. If one were inclined to trade, that’s $100 of movement to design a short-term, multi-month play as it moves lower and then begins a recovery. One pattern to watch, if you believe in such hokum, is the little head & shoulders that has formed since February. Will the break of the right shoulder-base be a catalyst?

Grains:

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I have had a lot of luck trading this grains ETF. Some of my biggest returns in the shortest amount of time have come from scalping the market for a nice rip on these multi-month grain rallies. Sentiment, professional hedging, and seasonality point towards the potential of another run. More importantly though, price action agrees. It looks like a based-low was established to start the year and last week represented a possible higher low. The price action was especially promising to end the week. Position accordingly.

But if the USD is about to bounce, won’t that hurt commodities? Even agriculturals? Not necessarily. Oil will very likely be affected but again the speculator positioning by huge players could potentially cause another squeeze as much as the DOHA meeting could negatively affect prices. Gold sentiment was stretched anyways. But the grains don’t always run counter to the dollar. In fact correlations between the USD and grains do not share an easily deciphered message. Grains can and do run in lockstep with the dollar at times. Have a look below.

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In two of the last 3 rallies, the grains (blue-dotted) ran concurrent with the USD. Even though the USD is potentially beginning a bounce, so could be the grains.

As stocks continue their consolidation, the USD should be the dominant theme in the markets as it moves upward over the next several weeks. Watch associated commodities. If you’re feeling really brave, try trading the other currencies with a rising USD as your foundation for analyses. Good luck out there.

A Green Island in a Sea of Red

Like many a speculator, I’ve dabbled in the juniors. Specifically, I’m referring to junior gold and silver explorers and miners. Before 2011 it was a successful endeavor, post 2011, not so much. One of the things I did before altogether stopping the placement of new capital in any juniors was to compile a list of what I deemed to be some of the top opportunities for when precious metals finally make their turn back to positive. For the record, I don’t know when that’s going to be. The gold price languished for 20 years in the 80’s and 90’s. Do I think we’re in that type of 20-year-bear? No, but I don’t have a clue as to when the ship will right itself.

I simply believe in the long-term thesis for holding gold, but more importantly, I believe in the cyclicality of the commodity markets and historical precedence. There are any number of arguments in favor of allocating capital into precious metals, but for most speculators, the current price action in gold and silver pretty much tells the entire story. A declining market is not exactly the best moment to deploy new capital into the most riskiest ventures of a loss-leading sector. Thusly, it’s been at least 2 years since I speculated with any capital in a junior.

Which brings me to the list. One of the companies I had kept a passive eye on was Duluth Minerals. If you’re unfamiliar with their story, they’re the proud majority-owners of some prime property through a joint venture in the Twin Metals complex in Minnesota. Their land package and joint venture partner was what first attracted me to them. Duluth possesses one of the most promising platinum group metals (“PGM”) resources outside of Africa or Russia. In fact in North America, there’s really only two primary PGM producers of consequence, and they are Stillwater Mining and North American Palladium. So access to a nice PGM resource in a jurisdiction like North America is coveted.

However, PGM’s won’t even be the primary metals mined at Twin Metals. It’s primarily a copper and nickel mine. The PGM’s are a just a very nice by-product. Hence Antofagasta’s interest and investment in Duluth. Just a little background on Antofagasta (“Anto”), they are one of the largest, pure copper players in the world. Based in Chile with 4 operating mines, 90% of the company’s revenues are derived from mining operations. In 2013, they generated approximately $6 billion in revenue which is in line with large US copper player Southern Copper (SCCO) but far below the diversified mining giants such as Vale (VALE), Rio Tinto (RIO), or Freeport-McMoRan (FCX).

Before getting to the point of this post, some additional background is in order. So we have a major copper player with concentrated interests in Chile attempting to diversify their portfolio with the Twin Metals joint venture. In 2010, Antofagasta partnered with Duluth and over the next few years provided approximately $220 million in funds in order for Duluth to develop the properties. Duluth completed a ton of drilling to really prove out the potential of Twin Metals. They contracted with Bechtel, one of the largest and most powerful privately owned corporations in the US, to assist with the planning for the build-out of a mine.

But by 2014, Duluth had not done enough to build investor sentiment behind their company and access to capital was drying up in light of overall commodity underperformance, let alone precious metals performance. The stock price was badly languishing. Duluth’s cash reserves were drying up fast, and in July, Anto neglected to capitalize on an additional financing round that would have increased their ownership stake in the mine and provide much needed capital for Duluth. Clearly, Anto saw the writing on the wall and knew a better opportunity would avail itself very shortly.

One month later in August of this year, Duluth released a highly detailed presser of its Pre-feasibility Study (“PFS”) for the Twin Metals. The PFS was essentially a disaster as expectations were way too large. The stock price, trading at $0.40 a share the day before the PFS release, dropped 25% down to $0.30 a share on the day of the release. I think too many speculators in Duluth thought an outlandish estimate of PGM production was going to be reported, and that was obviously foolish. I sincerely believe that speculators really thought Twin Metals could annually pump out 300k or 400k ounces of PGM’s along with a couple million ounces total of combined silver/gold output.

The numbers were very solid, though. Specifically, the report estimated a 30 year mine life with total estimated production of 5.8 billion pounds of copper, 1.2 billion pounds of nickel, 1.5 million ounces of platinum, 4.0 million ounces of palladium, 1.0 million ounces of gold, and 25.2 million ounces of silver. Annually, that breaks down to approximately 88,000 tonnes of copper, 18,000 tonnes of nickel, 50,000 ounces of platinum, 133,000 ounces of palladium, 33,000 ounces of gold, and 840,000 ounces of silver. At spot prices for each of these commodities as of August 20th, that would’ve resulted in approximately $612M in copper revenues, $340M in nickel revenues, $187M in total PGM revenues, and $59M in gold & silver revenues. All product sales would theoretically total about $1.2 billion at those prices if the August 20th spot prices were the average for an operating year.

Now I don’t know about you, but for the right price, that’s definitely a resource I’d like to have my hands on. And that’s exactly why Anto did not participate in the July scheduled financing. They figured why bother. They’d already funded over $200M in project development. Duluth management was floundering while swirling the drain of bad finance options. Why not strike at the opportune moment and simply own the entire asset versus partnering in a JV. Just 9 days ago, that’s precisely what happened. This chart, courtesy of Inka Kola News, tells the story via price action.

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The PFS calculated a net present value of the Twin Metals project at $1.4 billion USD using an 8% discount rate. Anto already owned approximately 10% of Duluth. So Anto already invested approximately $220M into Twin Metals and only has to come up with roughly another $85M(including convertible debt and additional operating funds) to own the asset outright. That’s an absolute steal and congratulations to Anto’s management for deftly structuring the deal in obtaining the buy-in of Duluth’s board and of Wallbridge as well.

Now the reason this little sale is a green island in a sea of red is because I was able to perfectly time this trade. I watched the stock languish all year and when I saw that move two Friday’s ago, where Duluth dropped from 12 cents a share to 7 cents a share, I decided it was time to pull the trigger. I maintain a portfolio for my children’s future. It’s reserved for only the best businesses with the best long-term outlook that possess the best brands and continue to raise dividends decade after decade; names like Hershey and McDonalds. However, I thought why not buy a several-thousand block of shares as a little lottery ticket. At $0.07 a share, I simply thought the risk-reward was well justified for my wee ones in light of the quality of the underlying asset.

The wager paid off a lot faster than I expected. Waking up the following Monday morning and reading various headlines from various sites I frequent, I read that Duluth was selling itself to Anto. I immediately jumped over to Yahoo Finance to see this:

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Well, hot damn! From a percentage gain standpoint, this is by far the most I’ve ever earned in a single trade for only holding a single trading day. I won’t annualize it as I’m sure I’ll probably never get this lucky again. Of course, the net income off the trade is minimal in light of the total amount of capital risked, but still it’s a nice little boost for the year to my children’s future. I haven’t actually realized the gain yet as I’m holding for a little currency translation to work in my favor first. Mistake? I don’t think so, as I think Canada will approve the sale of Duluth so I have the $0.38 locked in at today’s Loonie rates. The dollar looks set for a little breather and I suspect that just may translate into the higher liquidation price I’m reaching for.

Coming back to Anto and what the future holds for Twin Metals. They’ve admitted they have a long way to go, with their own projections putting production out to 2020 at the earliest and possibly even farther. The next step from the PFS is the Bankable Feasibility Report (“BFS”). It’s this report which will allow Anto to secure financing for the construction of the mine. Actually, they probably won’t even bother. Consider that the pre-fease reported mine construction expenses at $2.8 billion. We know that’s aggressive, so I think it’s safe to arbitrarily add another $400 million onto that total. Conservatively, building the mine is going to cost approximately $3.2 billion. But even with a staggering expense number like that, Anto should have no issues securing financing.

This is especially so if the cost of capital continues to stay cheap for players with access to the liquidity. Looking at free cash flow (“FCF”) for Anto, they’ve averaged $1.9 billion USD in FCF for the last 4 years. With that kind of cash generation, I don’t think they’re going to have a hard time obtaining financing at favorable rates. The money is not the issue. What’s more worrisome is of course receiving all the requisite permits to construct and operate the mine. The project is located in a state that calls itself “the land of a 1,000 lakes.” That’s a lot of water ways that can be affected. There will be a tremendous amount of pushback from environmentalists who will attempt to deter Anto. Just look at Pebble and the fight in Alaska. However, with a safe and environmentally friendly construction plan along with a superabundance of funds allocated to remediation of the lands, I feel confident Anto will pull it off. Just not without a fight. Although they do have this going for them:

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When you have a day named after you in a state, I think it’s pretty safe to assume that the state is going to be very cooperative in light of the economic benefits to be garnered.

Just remember, you had a chance to own a fractional share in a billion dollar mine for a little over a nickel a share. The junior space is beginning to heat up as quality assets are beginning to be circled. The sharks are starting to get restless as a vast majority of the juniors simply will not be able to obtain sustainable financing in light of their current share prices. We’re talking about companies that simply throw cash down a hole with zero immediate economic return and too much G&A digging into value creation. New Gold snatched up Bayfield to round out its Rainy River package. Nord Gold is positioning on Columbus. Romarco just received all of its final permitting and negotiated a $200M dollar debt package that will allow them to begin construction immediately on their Haile mine. How long before a bidding war starts on their potential 150k ounce per year mine?

There’s value to be had and money to be made in the junior space, but it’s highly dangerous and not worth the capital risk for the average investor. I’ve been fortunate on a few junior trades in this terrible gold market with Romarco, Lake Shore, and now Duluth. I could easily replace the word fortunate with lucky, however, I did my homework on those companies. I’ve also screwed the pooch in names like Aurcana, Kaminak, and McEwen Mining with poorly timed purchases. All companies that have very good potential if or when the precious metals resume a bull market.

Despite my luck in the Duluth trade, I am a strong proponent of buying the right stocks for long-term holdings. As I stated before, that means companies with mega-brands who produce enormous amounts of free cash flow and consistently raise their dividends. Buying these kinds of companies when they go on sale is essentially a sure-fire bet to building wealth, but a little flyer every now and then is worth the risk.