It's a race to the bottom.
Who will be the first country to begin printing 1M denominations? We've seen this play out before and it's only a matter of time before one of the Global currencies completely collapses. The Yen is halfway there with 10,000 Yen notes, just one more zero before they are in stage one of Zimbabwe's 2008 hyperinflation, where the country was forced to print Trillion Dollar notes before they finally gave up, defaulted and revalued their currency. The boy in the picture needed that money to buy a quart of milk!
Oddly enough, Japan WANTS more Yen devaluation ASAP and their Finance Minister said just yeasterday that 105 Yen to the Dollar is not enough and they will be forced to devalue if the Yen gets any stronger (and we discussed Yen dynamics in last week's post). In fact, since last Thursday, our Toyota (TM) trade has already gained $1,275, which is a 566% gain on our net $225 cash outlay in 7 days – the trade idea for our Long-Term Portfolio was:
- Sell 5 TM Jan $90 puts for $4.80 ($2,400)
- Buy 5 Jan $100 calls for $7.50 ($3,750)
- Sell 5 Jan $115 calls for $2.25 ($1,125)
We knew that the BOJ would intervene or at least say they would intervene last week simply because we pay attention to all these boring Fundamentals that most traders ignore (see Thursday's post for my rant on that). In fact, as I said in the last line of that post: "That's why an "ugly" chart like TM doesn't bother us – we KNOW what the company is worth, even if our fellow investors do not."
We still like TM for the long-term, the trade will pay $7,500 if TM finishes the year over $115 and we're confident so you can still make $6,000 (400%) if you take a net $1,500 today – it just sounds kind of lame compared to our $225 entry last week – but that's the difference between taking a fundamentally good entry and waiting for the trend to reverse before buying a stock.
In yesterday's Live Trading Webinar (and you can check out our video archives here) we looked to lock in our Nikkei profits by shorting the index into the weekend. It's my premise that, this week, the BOJ is in a no-win situation because there's an OPEC meeting on Sunday and they will either come to an agreement and oil will head back towards $50 or they will fail and oil will crash back to the $30s (now $42).
For the BOJ, if oil goes up to $50, that's $14 (40%) over where it started the month and a huge shock to a nation that imports 100% of it's petroleum so they can't, at the same time, devalue their currency and it's likely the Nikkei will fall as it's up mainly on expectations of further currency devaluation. If, on the other hand, oil goes down, the World markets will pull back (half our recent gains have been from the energy and materials sector) and take the Nikkei down with them and, again, it would be a terrible time to also devalue the currency.
So, on that basis, we do not expect BOJ action this weekend and the no win scenario (Kobayashi Maru) led us to make a short bet on /NKD, which is still at 16,830 this morning.
Our Futures were off this morning on a poor CPI report (0.1% vs 0.2% expected) but Dennis Lockhart was on Bloomberg and essentially said a rate hike at the next Fed meeting is officially off the table (it's his Atlanta Fed that has downgraded GDP growth to near zero). I can't imagine who actually thought it was on the table but it set off a flurry of buying that took us back into the green ahead of the bell – a pattern that's been repeating itself all week.
Once again we're seeing these low-volume, gap higher at the open, completely BS rallies that often presage a downturn and once again I'm calling for CASH!!! or, in the very least, very good hedges. We've gotten our Member Portfolios more neutral this month and we'll be pushing more of our ill-gotten bullish gains into our hedges into the weekend's uncertainty. At this point (2,080 on the S&P), we're happy to sit out the next 20 points of gains if we're going to have another test of 2,100. Meanwhile, we like this line short on the /ES Futures as well as 4,550 on the Nasdaq (/NQ) and 17,850 on the Dow (/YM).
Be careful out there!
