Anyone who has been following Turner’s Take for a considerable amount of time (I started writing this particular newsletter since 2008) knows that as we have more macro-economic uncertainty, I tend to scale back on positions. For now we are in a wheat bear spread and a natural gas bull spread and that is fine for us right now. There are a few things going on that have given us pause this week to add any additional positions
- The Crude Oil market needs to find long term support. At $45 a barrel many US oil producing firms are no longer profitable. This leads to the big oil companies to new projects, shut off production at underperforming sites, and only produce from their best sources. Worst of all it leads to job losses. Crude Oil production will eventually taper off but it is not going to happen right now.
- The US Dollar is strong, and will most likely get stronger, as the Fed keeps policies the same while central banks around the world weaken their currencies. We need some stability in the currency markets and that starts with stability of central banks around the globe.
- Low US interest rates are bad for banks and their earning. Low Crude prices are bad for oil companies and their industry. Strong USD is having a negative impact on profits for multinational corporations (i.e. most companies in the DOW). In my estimates, this is short term negative for about 25% to 30% of the S&P but bullish long term for the other companies in the S&P due to low cost of borrowing, low cost of energy, lower commodity/input cost, and less exposure to foreign currency issues.
I think Crude sorts itself out sooner rather than later, as does the stock market. As with any commodity, we will eventually see the economic forces of supply and demand lower crude production while lower prices stimulate demand. The stock market is being sold due to short term bearish factors for a minority of the index while the long term implications are bullish for a majority of the index.
My real concern is foreign central banks. Since the US Dollar by nature has to be priced against a foreign currency in order to get a value, what central banks do around the world direct impacts the dollar (for good or for bad). I think that makes it difficult to trade outright futures. I think now more than any time in the past year I prefer sticking with futures spreads because it is the spread market that eliminates much of the currency risk, and the much of the “systemic risk” that exists in many portfolios is primarily due to currency risk.
For those of you who are unfamiliar with the concept of how your systemic risk is primarily a part of your positions currency exposure, and how futures spreads reduce that risk, please see my presentation for the CME/CBOT on “Trade Grain Futures Spreads at the CME”. The first half covers why we trade futures spreads and how it help hedge out the US Dollar, which in this case represents systemic risk.
Trade Grain Futures Spread at the CME: https://www.danielstrading.com/webinar/trade-grain-futures-spreads-at-the-cme/
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