Chinese bond yields are up 10% this month.
Since the election they are up from 3.25% to 5.5%, which is up 57% in 180 days. Generally, that would be a cause for concern but nothing seems to concern this market, including the fact that tens of Billions of Dollars worth of bonds have lost 57% of their value in 6 months. $560Bn has now been chopped off the Shanghai Stock Exchange in 2017 and the small-cap (non-Government) ChinNext Index is back at its 2015 crash lows.
The G7 Finance Ministers are meeting this weekend and Chinese President Xi Jinping is having his own summit including other World leaders like Putin (no need for Trump if his boss is there), where he is promoting his $500 billion trade-and-infrastructure plan, which is called the Belt and Road Initiative. The summit begins Sunday and will showcase Xi’s plans to remake global trade patterns in China’s favor while the US moves in the opposite direction and closes its borders and taxes trade. China needs to do something to pull their economy out of a power-dive that's been accelerating since early April:
Meanwhile, Mexico, who is also meeting with China, has put the US Governent on notice that they have other places to export to if NAFTA gets torn up. "We will use (the China visit) geopolitically as strategic leverage" declared Mexican Economy Minister Ildefonso Guajardo. "It sends the signal that we have many alternatives."
"If NAFTA disappears, I can export cars (to the United States) paying 2.5 percent tariffs. If they want to export yellow corn to me, I can raise tariffs to inaccessible levels," Guajardo said. "But to make that strategy credible, I have to broaden our agreements with Brazil and Argentina."
One good bit of trade news is that the US has reached out to the World Trade Leader, China, and we have an agreement to export Natural Gas (UNG), which is great for us as Natural Gas was our Trade of the Year last year in anticipation of this and we have big position in our Options Opportunity Portfolio as well as our Long-Term Portfolio, both of which are already profitable as Nat Gas has gained 50% since last year already.
We played Nat Gas (/NG) Futures long in Wednesday's Live Trading Webinar and before that off that $3.20 line so $3.40 is good for a $2,000 per contract gain but only $1,300 per contract gained since Wednesday's Live Trading Webinar – still not bad for 2 days' work, right? Obviously it would be silly to risk the weekend and Coffee (/KC) is cheap at $134, so that's our fresh futures horse at the moment.
As a new trade on Natural Gas, we still like Cheniere Energy (LNG), who are leading the charge to export natural gas from the US and already have contracts lined up and terminals near completion ready to add tremendous capacity. If the price of Nat Gas goes up to about $4.50, as we expect, then LNG should make some astounding profits. At $47.14, you can stll sell the 2019 $40 puts for $4.50, which nets you into the stock at $35.50, a 25% discount to the current price. 10 of those nets you $4,500 and your obligation would be to own 1,000 shares of LNG at net $35,500.
That trade could be paired with a UNG bull call spread as UNG is down at $7.83 and we think $10 is a realistic target by the end of the year and the Jan $6 calls are only $2.05 while we can sell the Jan $8 calls for $0.95 for net $1.10 on the $2 spread so let's say we sell just 5 of the LNGs for $2,750 and buy 20 of the UNG spreads for $2,200 – we still have a $550 net credit which is $1.10 per long so our net is still just $38.90 on 500 if assigned ($19,450) the LNG but if UNG finishes over $10 at January expirations, we collect $8,000 against that $550 credit for a return on cash of $8,550 (1,545%) – that's not bad for a 250-day trade!
Have a great weekend,
– Phil
