Potash stocks

Supposedly Uralkali insiders dumped their stock holdings w/ the intent of pulling out of the potash cartel.  http://rt.com/business/head-uralkali-detained-belarus-belaruskali-004/.  Since insider trading isn't illegal in Russia, as long as you party in the same places Putin does, and since it makes no sense for either party to break up a cartel long-term, I believe the analyst cited in the article more or less hits the nail on the head when he writes: “If the share prices of potash companies are plummeting, this makes it easier for Russians to take over Belarusian producers,” said Forbrig, a senior program officer at the US German Marshall Fund in Berlin, told Bloomberg. 

I'm not sure if the intent is to buyout a Belarusian producer, but you sure can buy back your shares at much cheaper, then make a fresh deal w/ the Belarusians.

Looking at the chart of Uralkali, you can plainly see that the stock sold off hard a week before the breakup of the cartel was announced, so I like that the price action confirms the story.  Now I'm just looking for evidence that insiders have/are buying back again at lower prices.  I got confirmation today w/ an upside breakout in Uralkali, so I'm buying up POT and IPI in hopes that a renewed deal is made soon.  I'm just playing the chart and I don't mean to risk more than below support areas in the stocks.

FRO is a 5-10 bagger in a year I think

Catalyst

The WTI-Brent spread has narrowed very quickly lately, and the two are now more or less equal. Years ago WTI used to trade very tightly w/ Brent, but the increased supply of Bakken and Canadian oil sands oil created a bottleneck at Cushing, so Cushing oil has been cheaper than Brent for a couple years now until basically now. Crude prices right on the Gulf of Mexico were juxtaposed between the price at Cushing and other international prices. It appears the supply constraints in getting US oil to the Gulf have been resolved as evidenced by the price narrowing, and more pipelines are due to come online later this year, as well, which should guarantee WTI doesn't drop to a steep international discount again.

Because of the glut of cheap Gulf of Mexico oil, there was no need to charter VLCC (oil tankers) to bring world crude supplies to US refineries, which are the best in the world. FRO is the pure play in this space. FRO has languished during this time, and is now priced for extrapolation into near-bankruptcy. Now that the old oil price relationships have returned, there is suddenly now a need to charter oil tankers again. It takes time to build ships, and the supply overhang of ships for the past several years should now be quickly taken up. VLCC rates have jumped in the past couple weeks, and I forsee them jumping far more as long as Brent doesn't jump back to a big premium again. Rates dont have to return to anywhere close the 200-300K/day rates of '08 for a severe inflection in equity pricing to take place as the stock gets repriced for extrapolation as a sustainable profit-making enterprise.

Trading considerations, psychology

I'm not one to pick bottoms, but I believe this is a bottom in FRO, and it can go much, much higher. A way to hedge this would be to short WTI against Brent. The idea isn't to expect any gain on the hedge, but if for some reason the spread widens back to where it was, then the small gains on the oil spreads should offset the small losses on FRO, while if the spread stays around where it is now, or WTI goes to a premium to Brent, then the small losses on the oil spread should be overwhelmed by the massive gains on FRO Another trade on this narrowing theme is to be long Dec '14 and Dec '15 WTI against short Brent futures at the same expirations because WTI is still discounted to Brent by ~$7-8/brl at those expirations, a trade which I have on as well, but FRO has much more explosive potential. I'm long and I'M NOT GOING TO TAKE A SMALL GAIN. I would not be surprised to see a 5-10 bagger on this within a year. I will not burden you w/ fancy financial projections at this time, as there is no point until the VLCC rates stabilize at a new equilibrium. Suffice it to say that any sustainable increase over the breakeven rate of 25K/day will bring about a rapid rise in the price of FRO. The short interest for FRO currently stands at ~10M shares. Perhaps that's from capital structure arbers who are long debt and have been winning. Either way, it is time for them to cover. This stock is too small to be on the radar of many funds. The higher it goes, the more buyers will come in.

I'm also long (VLCCF), (DHT), and (DRYS)

Hong-Kong REITs and Japanese bonds

It's been a good couple months for me, mostly made in small-cap land.  The fiscal cliff deal ended up not increasing carried interest or taxes on dividend more than 5%, so I immediately exited all high-dividend shorts and flipped some long on Jan 2.

For now, I have a high committment swing long running in 0405.hk, a REIT w/ property in China.  With Hong Kong having to hold the peg at 7.75, HKDs have again been flooding into HK, which should contribute to the property bubble, and may spark a fresh bubble in H-shares.  Numerous H-share REITs w/ property in either HK or mainland China have had very clean breakouts.  0405.hk looks set to go.  I have a lot at this moment.

I also just entered a short in JGB Japanese 10-year gov't notes.  There have been doomsayers in these for years, but the deflationary circumstances have kept yield down.  I hate picking tops (bottoms in yields), but there's a decent chart setup here, and the prime minister's actions to spark more inflation have killed the yen, so perhaps JGBs will make a delayed move to follow.  Note that JGBs have already sold off in USD terms b/c the yen has been killed, but I'm looking for the yields to rise at this point too.  I still have my stop loss set relatively tight on this in case I'm wrong.

Credit spreads and fiscal cliff

If tax rates increase, as is expected, the post-tax cost of equity will rise and the post-tax cost of debt will drop, everything else kept equal.  With regard to debt in particular, this means that corporations will issue less equity and more debt going forward, and they accept higher yields on the debt that is issued.  In addition, investors will demand higher yields b/c they would otherwise see less yield post-tax.  These effects will be amplified with higher-yield debt since the effect is a % of current yield.  Thus, I expect credit spreads to widen, w/ junk bonds underperforming investment-grade.  The benefit of structuring the short junk bonds position as a pair against investment-grade instead of naked or against something else is that the long investment-grade position hedges out much of the impact on junk-bond prices that I dont wish to bet on, such as general risk appetite or in/outflows to/from corporates in general.  I am using the ETFs JNK and LQD to put on the trade, and I'm taking a larger position in LQD than JNK b/c JNK's "beta" is larger.

This trade would have worked briefly in early Nov when the market was also panicking out of numerous high-dividend equity stocks.  Bond spreads have tightened and high-dividend stocks have bounced for the most part ever since until the last couple days.  My bet is that the market has been ignoring the potential effects of the fiscal cliff for too many weeks with respect to these trade categories.  Particularly w/ respect to bond risk spreads, I believe that the risk of a large tightening is limited even should politicians come to an agreement to restrict tax increases even somewhat, so I plan on taking this particular position through any upcoming political meetings, votes, decision-making sessions, etc.

In addition, the cliff will bring about a weakened economy, so this should also contribute towards widening spreads.  Of course, this trade has negative carry, so I don't want to hold too long, but perhaps several weeks or months would be appropriate to allow the markets sufficient time to price in economic deterioration and changes in post-tax cost of debt.  This might be a kind of delayed sleeper trade that works later than the other fiscal-cliff-type trades and wont work until corporate CFOs start actually raising more capital and the bond folks start seeing bond issuance suddenly spike and think of this trade.

I had written earlier about looking to short private equity firms due to risk that their carried interest benefits will be cut.  However, I neglected at that time to consider that they'll have far more buyout opportunities opened to them due to the fact that companies would be able to handle higher debt leverage ratios with the imminent reduction in cost of debt.  That could be a good reason why many buyout firms have outperformed lately.

Muni bonds have sold off in the last couple weeks ever since they became a target for a tax loophole elimination--namely, that rich investors will have to start paying taxes on muni dividends.  While that change to muni bonds is drastic, this is the same kind of consequence that should take place on a subtler scale to credit spreads.

Fiscal cliff and deadline

With the recent news that the House will be reconvening on Sunday, I just find it funny that politicians believe that there's a kind of deadline to make a law by the very end of the year, when investors must make decisions in anticipation of tax rates before then.  Long-term gains or losses must be locked in by the end of trading on Monday, not by midnight.  If one is trying to move a large position, then trades must be executed over the course of several days before the end of trading Monday.  Politicians of course have no clue that they are creating this uncertainty.  As for a self-imposed mental deadline of Monday night, I'm not sure who that particular timepoint will affect.  Of course businessmen must make decisions in general depending on tax rates, and this uncertainty continues for as long as a deal is pending.  For them, no particular date is more important for a deal than another date.  So I'm not sure why the House is needed to be rushed back now; the deadline is pretty much already blown for any large investors, and there is no particular deadline for businessmen.

I have been long numerous small cap former-losers against short large caps and high-dividend stocks pretty much all month (the January effect, which, due to the fiscal cliff, has taken place in December).  This has served me somewhat well in December, at least as far as many small caps becoming strong this month.  I would like to flip this trade for an un-January-effect trade for January 2013 as long as I can be confident that any deal that will be made will keep taxes higher for many investors.  We'll see as the news progresses...

More fiscal cliff plays

I've been making nice plays shorting high dividend funds trading at large premiums to NAV such as PGP, PHK, CFP, any other high-dividend investment firms, and mortgage REITs such as IVR.  I remain short all these at the time I'm writing this, but that may or may not change soon.  The next sector to get smacked in anticipation of the fiscal cliff could very well be buyout firms, whose 15% carried interest advantage is at risk.  They haven't really budged yet.  I will start looking to short CG, KKR, BLK, FIG etc in coming days.

Fiscal cliff

If history is any guide for disagreements like this fiscal cliff, nothing will get done until the last 24 hours, then agreements will almost certainly be made before the deadline, or else an agreement will be made to delay the cliff until an agreement is made later.  So to the extent the market is worried about it, the market willl generally sell off for 2 mo, then gap up on deadline success.  However, I'm not sure whether the market will be very worried about it.  I made keep a bearish bias until the deadline nears, however.

Gasoline

Spot gasoline collapsed quickly after my last blog post, and I had to get out for around flat after being up a fair amount.  Since then, spot prices stabilized and created another slightly bullish structure as Hurricane Sandy approached NY, so I reentered Sunday night before Sandy hit.  Today it's starting to pay out some.  No reason to get out yet...

RBOB gasoline

The spot price of gasoline in NY has been sky-high lately.  For this reason, I'm long a bunch of Nov futures at this time, hedged w/ a short in WTI crude.  A seasonal drop in gasoline spot prices this time of year isn't enough to eliminate the large backwardation that is the wind behind my back.

Today petrol inventories were released, which showed a drop for crude and build for gasoline, which temporarily took prices against me.  By the end of the day, the spread totally reversed and put me at slightly green.  It gives me confidence that the unfavorable move was news-induced.

With the election approaching, Obama may start freaking out if gasoline prices spike.  The first thing I would see him doing is releasing more of the SPR crude inventory, which would only be indirectly bearish for gasoline, but more bearish for WTI, so I feel safe in this trade were this to occur.

Precious metals

Gold/silver, platinum are now all about important swing resistance in USD terms.  Platinum in particular made a very large move up in the last 3 days.  Historically platinum tends to trade at a tidy premium to gold, but has been trading at a discount to gold for awhile now.  I bot some platinum futures this morning at around 1507 to join the extra silver I purchased above the break around 28.30 yesterday.  I think this obscene strength in platinum is telling me something.

If I don't get stopped out, I plan on holding these for very large gains for months or years to come.  It's about time the macro theme of global currency printing on the backs of low interest rates jumpstarted precious metals for another upleg.