Monday markets churn: Trump, oil, Fed or short squeeze?

Monday markets churn: Trump, oil, Fed or short squeeze?

Stocks and bonds remain largely inexplicable. Bulls breathe a sigh of relief. Federal Reserve governors can't shut up. Commodities seem to have halted their deflationary decline. For now.

Alice and the Cheshire Cat. (Public domain image)

WASHINGTON, March 7, 2016 – “Curiouser and curiouser” observed Lewis Carroll’s Alice (who had for the moment “quite forgot how to speak good English.”) Alice’s Wonderland, however, could not have been curiouser than Monday morning trading on Wall Street. Opening weakly in the red—to be expected given the extremely overbought condition of stocks last week—we seemed as of the noon hour today to be back firmly in the green.

What’s driving this insistent rally? Frankly, we wish we knew. The continuing upward trend of crude oil is certainly helping. (WTI is currently trading over $36 bbl., a roughly $10 increase over its recent bottom.)

The continuing triumphs of The Donald on the campaign trail might also be helping in a perverse way that’s hard to explain. Additionally, we still feel that this rally has stayed in overbought mode for so long because it’s also part of an epic short squeeze on materials, commodities, and everything else that was deflating until about yesterday.

The previous tsunami-like waves of selling we saw in January and February were clearly overkill that needed to be addressed, generating the last few days of equal and opposite upside overreaction.

But as we approach 2 p.m. EST, the S&P 500 and the NASDAQ are backing off a bit again as at least two Fed governors have been opening up their yaps this afternoon giving opposing views on where the Fed should be setting interest rates next—and when. It’s one of those “My brilliance is much better than your brilliance” moments, which generally ends up proving that neither party is a genius at all.

Every time they stage one of their public, puffer pigeon monetary policy debates, these genius Keynesians send the markets careening in one direction or another for no particular reason. Perhaps it’s time for them to keep their most profound thoughts to themselves for a change instead of blabbering their innermost thoughts to the general public whenever they decide to have them. Behaving exactly like politicians pushing an agenda, they are helpful to absolutely no one who invests and set off needless speculation that’s exacerbated by the HFTs every time. That’s not their job. As Jim Cramer once said in another context, “They know nothing!” They need to shut up.

As far as stocks themselves are concerned, Monday should have been giving us some kind of corrective move, given last week’s robust (but low volume) rally. Maybe we’ll take that hit tomorrow.

On the other hand, one of our information services noted this morning that the metal and mining ETF known as the S&P Metals and Mining SPDR (symbol: XME) has surged up to break through its 200-day moving average. Which means, to non-technical traders out there that, at least as of now, it’s broken through the resistance zone set up by its earlier bearish direction. If it can stay pinned above this line for at least a few days, this could mean that materials are off and running, at least in the short term. Which could mean that the commodity deflation we’ve seen for well over a year could be coming to an end.

Time will tell as to whether this plays out, however.

Some stocks aren’t waiting to find out, however. Steel stocks, which have dwelt in the crapper for what seems like years are coming out into the sunlight once again. Ditto some of the resource stocks and ETFs. Too early to declare a bullish move here, since, as once expressed in the title of an old Broadway show, these stocks “Been Down So Long It Looks Like Up to Me.”

Even Cleveland-based iron ore and coal mining giant Cliffs Industries (CLF), a company that until recently was preparing to follow the dodo into extinction as it approached becoming a penny stock in terms of price per share, has caught a bid over the last few days.

CLF is up a whopping 17% this afternoon, marking quite a turnaround in the stock’s (mis)fortunes. That said, its 48-cent move today only puts the share price at $3.38 or so. That’s a far cry from its price only a few years back, when SLF regularly exceeded $100 per share and paid a fat dividend as well. Nevertheless, Cliffs shareholders must be at least a little bit happy today.

Today’s trading tips:

We have a number of stocks we like here and are delighted to see this rally happen, even though we think it might be the tail-end of an epic short squeeze, particularly in energy.

On spec, we have picked up a few hundred shares of beleaguered oil tanker company Teekay Tankers (TNK). It’s a special situation, with a story that, we think, has momentarily caused it to be significantly underpriced. It’s a self-contained subsidiary of a holding company, Teekay Holding (TK) that’s run into trouble lately—although the mother company’s problems have actually zero to do with TNK and don’t affect its profitability.

That said, Teekay Tankers “tanked” several weeks ago when its holding company foundered and caused dividend cuts at a pair of its other subsidiaries. Even though TNK’s dividend was not cut (and likely won’t be), the stock is currently offered under $4 per share, usually a bad sign.

But its sustainable yield (dividend) is 12 cents a share—nearly 12 percent. Even better, its current price-earnings ratio (PE) is an absurdly low 2.91. Normally, stats like these are your clearest indication that a company is about ready to go toes-up. In this case, investors seem to have equated TNK with the other members of the Teekay family that are having issues.

Time will tell, and yes, we could be wrong. But we’ve jumped on board here and are prepared to endure a bit of volatility. But again, this is a spec (speculative) investment, our buys are based on a hunch, which, in turn, is based on current information. The suddenly increasing price of oil here could also help fill Teekay’s tankers. We think. So we shall see.

In addition, on every dip, we’ve been buying tiny bits of Swiss gold and silver bullion ETFs SGOL and SIVR, which actually hold metal against their shares in trusty, safe Swiss vaults as opposed to the paper contracts other precious metals ETFs employ. It also helps that these shares trade without a commission via the brokerage we use. So we don’t have to factor commissions into our tiny trades.

As we noted in an article around the turn of the year, after a disastrous early foray (which we exited and then re-entered) we’re back into a trio of vulture capitalist stocks: Blackstone (BX), Carlyle (CG) and KKR (KKR). All three bottomed severely in January-February 2016 and are trying to recover. In the meantime, they’re paying out colossal dividends Wile-U-Wait. So we think they’re in hold/accumulate mode right now.

We’re up significantly in all three, but we need to be careful this time. These puppies are très volatile, so we probably need to start putting trailing stops underneath them to protect the really big but really short term profits we’ve made on them thus far.

If stocks correct here at least a bit, which they should, we may have additional buy orders coming up. It’s generally a favorable season right now for stocks. But beware of May. It’s coming up soon.

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