Trading Oil? Here's How We see the "Trade"

Oil, and commodities in general, remain in an intermediate down "Trend". That doesn't mean you can't making money on the immediate "Trade" using an upside bias. Below is how our models flush out in terms of trading oil directionally. We'd be a better buyer under the $54/barrel line and a seller on rallies to the $60 level.

The US$ is starting to lose its upward momentum. As we get closer to another free money rate cut by the US Federal reserve in December, we are getting interested in getting long some commodity exposure (US$ down, CRB up = “Trade”). Currently, we have zero commodity exposure in the 'Hedgeye Asset Allocation' model, and that's been a good thing for performance over the course of the last few weeks. Look for that to change if we get our price in oil.


At World's End - Pirates!

“The only rules that really matter are these: what a man can do and what a man can’t do.”
-Captain Jack Sparrow (Pirates of the Caribbean)
As I was driving past Stamford, CT this morning, a light snow blew in… the morning was her usual self, plenty dark, and very quiet… it was 430AM, and all of a sudden a radio news program broke in suggesting that I should beware of pirates. No, not the Disney kind – real Somali pirates!
By the time I got to the office and grinded through the news of markets selling off overseas, fear had become me. The US futures “are selling off” cried a CNBC entertainer… the global economy “is in a recession” sulked another… “hedgies are selling”… a “Great Depression” cometh…  even the immortal bankers at Goldman may not get paid this year… the Black Pearl is here – we must be “At World’s End!”
C’mon, get serious. While it is true that “Somali pirates” boarded and took control of a Saudi oil ship last night, this isn’t that scary. After all, since the world is no longer “awash with liquidity” (as many of my investment strategy competitors can be ‘You Tubed’ as having said no less than 9 months ago) does a $100 million worth of oil banging around in a pirates barracks really matter? The Saudi stock market has been in free fall ever since we called the “Fast Money” commodity top in May. This morning the Saudi market is down another -3.5% and the United Arab Emirates tape is getting tagged for another -5.1% loss. This isn’t new. This is called deleveraging. This is “The New Reality.”
The simpleton math says that since Goldman was all bulled up on oil prices in July, we have seen a -63% decline in the value of the said Somali pirates’ newfound treasure. In America, we have a US Treasury Captain, who only 28 months ago loaded that very Goldman ship up to the gills with leverage. Some of the most lucrative prop trading gains in world history were cash bonuses paid out on the high seas of Wall Street “sell side” desks. Oh wait, were those “buy side” prop desks? I can’t for the life of me see through the fog. Them must have been pirates!
Save a banker or trader’s bonus here and there, who really cares anymore? This has basically been revealed as the biggest pillaging of the US Treasury since whenever. What can we do about it? Well… Larry Summers and Robert Rubin finally sat down with Captain Hank “The Market Tank” last night, and called him out on enough issues for any viewer to feel the tensions associated with a difference of opinion. The best thing Obama can do is have Captain Hank walk the plank. This Disney movie is over guys – the US economy is real. There are families to feed and a “New Reality” of American Capitalism that needs to take hold. “Lead, follow, or get out of the way.”
Back to our pirate ship of ‘Hedgeye Portfolio’ treasures. We signaled yesterday that we had taken advantage of the market’s proactively predictable market squeeze and sold into it. This morning our treasure trove is sitting comfortably on a 79% position in US cash. A few of the shipwrecked pirates bumped up against my inbox again yesterday questioning who, how, and why I could be trading around my exposure like I have in the last 3 trading days, and my answer is the same as Captain Jack’s: “the only rules that matter are these: what a man can do and what a man can’t do.”
There are no rules against buying low and selling high. There are definitely no rules against buying high and trying to, as “Fast Money” used to say, “sell high-ah”… but there are silly new rules like ‘You Tube’… so you better be careful out there. If you want to get in the game and manage money with pirates in the waters, sleep with one eye open. It’s really really getting scary out there…
My upside target for the VIX is 71.17 and my downside target for the S&P500 is 833. At those scary levels, we’ll be buying/covering stocks into the darkness of market weakness. I am praying for the snow to last. According to just about everyone in the media this morning, the forecast is for the “world’s end.” If we are all going to go down, it may as well be in the fluffy white stuff. In the meantime, the best way to beat the pirates is to be one. Argh!

Best of luck out there,


Keith – YUM - is one of the tougher ones, big support down at 24.28, Chinese chickens?

Howard – YUM - I’m warming up to YUM, but I would really like to get past 4Q08. So far in the 4Q08 we are hearing that sequentially KFC and PH sales trends have slowed, while TB remains more resilient. Over all, the US business is in a secular decline and the international business is having a difficult time making up the difference. Financial engineering is the only way they can get to the EPS guidance.

Keith – SBUX - under $8, I buy the triple shot

Howard – SBUX - As I said in my last SBUX post, I see fundamental support at $7-$8 and that has not changed.

Keith - CAKE - Take your CAKE and eat it too! 6.28 next

Howard – CAKE – CAKE’s real estate strategy over the past 5 years is really hurting them: a mall based concept with a high concentration of stores in FL, AZ and CA. Also management does not give you a warm and fuzzy feeling that they are being proactive about the macro environment.

Keith - WEN starting to show some + divergences, if it holds 3.48, I like it on the long side

Howard - WEN - The Wendy’s concept had a decent same-store sales performance in 3Q08. Management needs to prove the cost cutting/margin story, and that will take time. I have a positive bias, too.

Keith – EAT - has been eaten, looks like it could eat the shorts however if we buy it down at 6.33

Howard – EAT - is the poster child for casual dining. Management is doing everything they can do to offset the macro, including a liquidity event, but who cares. Three of Chili’s competitors in the bar and grill segment are in serious trouble – Applebee’s, O’Charley’s and Ruby Tuesday’s – but who cares.

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SP500 Levels Into The Close...

Since Thursday afternoon, I have made 19 consecutive sales (long sales and short sales) in the 'Hedgeye Portfolio'... with the SP500 at the top of my trading range, I am incrementally bearish. At the bottom of that range, I am incrementally bullish. This isn't my religion. This is my investment process with volatility (VIX) running in the high 60's. This is a market that needs to be traded.

See chart below for my updated levels post the 3PM refresh of my model's pricing:

BUY "Trade" = 839
SELL "Trade" = 901

The "Shark Line" is the great white dotted one on this chart up at 927. Beware of it.

Japan's Bottom Is Not In...

See the chart below. While it is not new news that a country that gives its people zero interest rates on their life savings ends up wallowing in their own economic misery, it was apparently new to the media this morning that Japan could drive itself into another recession...

Do not mistake the 2008 Japanese recession for the one we witnessed in 1998 (where the Nikkei looked past the news and ripped higher ahead of accelerating economic growth). This Japanese bailout policy is going result in protracted economic stagnation.

We remain short Japan via the EWJ etf. This is a position we have held since opening the firm in May.

UA: Eye On Insider Buying

Amidst all the market noise, most people probably missed the insider buying at UnderArmour last week. Was it massive in size? Nah… But notable in that it was only the second insider buy all year. Harvey Sanders, member of the Board since 2004 and Chair of the Compensation Committee, boosted his stake in UA by 19% at $21.68 (i.e. where it is now). Equally as important is that Mr. Sanders has been a reasonably astute buyer and seller over time. – having lost money on 1 out of his 5 trades. In addition, his largest trade to date was 1,900 shares. This transaction was for 10,000.

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