Long Legged Copper Trade (FCX,OSX,DIA,C,FAZ)

Long Legged Copper Trade (FCX,OSX,DIA,C,FAZ)

We’re going to give you a number of things to think about today, most notably the prospect of rising interest rates and the effect they’ll have on commodities.  We’re going to mix in a discussion of inflation, too, as that up-and-coming star will likely play an outsized role in just how these two items (rates and commodities) interact.

Before we get to it, however, we have to review two open trades, both of which require your attention.

 

We’ll start with our September 1st initiative, from a letter called Oil Services About to Spill, in which we urged you to purchase the OSX March 135 PUT for $9.80 and sell the DIA March 176 PUT for $6.20 for a total debit of $3.60.

 

The DIA PUTs finished far out-of-the-money, and as you can see from the chart below, OSX is nowhere near the 135 mark, despite selling off dramatically over the last seven weeks.

Unfortunately for us, selling what remains of the option’s time value would only net us a few cents, so we have to look for a different means of recovering our initial debit of $3.60.

 

And this is how we’re doing it.

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We would also note that 1) the 145 PUT is currently situated below strong support at 147, the stock’s 52 week low (in red, above), and 2) after falling for the last three years, OSX’s moving averages have now unfurled and are trending higher for the first time since July of 2014 (in blue)!

 

That bodes extremely well for the oil services group as a whole, and we’ll be looking for potential entry points for a long OSX trade in the very near term.

 

In the Meantime…

 

On to our second trade.

 

On the 19th of January, in a letter called Short Sellers Disappeared? Time to Short!, we had you sell the C March 17th 60 CALL for $1.10 and buy the FAZ March 17th 23 CALL for $1.05.  Total credit on the trade was $0.05, and, all told, it’s turned out borderline bad.

 

The FAZ CALL is far out-of-the-money, but with Citigroup now trading at $61.44, the C 60 CALL is in-the-money, and carries a value of $1.60.

 

So we’re rolling it out.

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We’re going to begin with a few fundamentals.

 

  1. Commodities generally move in inverse correlation to the dollar. As they’re priced in greenbacks, it stands to reason that as the buck gains in strength, the price of commodities, as a group, will fall.
  2. Consider now, what makes the dollar rise. Among other things, rising interest rates, which attract global currency flows to our shores to take advantage of better fixed income returns.
  3. Ipso facto, you would think that rising interest rates are a net negative for commodities, and, indeed, great chunks of recent history would prove you right.

 

But it’s not always the case.

 

And given our current reality, it’s our firm belief that commodities will shortly experience a significant run.

 

Our thinking is as follows.

 

The Inflation Wildcard

 

We believe that nearly everything that happens in the financial world over the next two to three years, and perhaps longer, will be predicated on inflation.  By inflation, we mean both the headline CPI numbers as well as those ‘shadow’ figures that are regularly tossed about.  We also mean the rate at which it’s rising and the speed after which the Federal Reserve is running to contain it.  Moreover, we’re focused on those areas of economic and financial life that are experiencing inflation most acutely, rather than those that are not feeling the pinch.

 

And regarding all these elements, we’ll have a great deal to say in coming months, because taken together, they’ll be instrumental in helping us figure out the future march of the markets.

 

As it currently stands, however, best estimates are that the Fed will raise interest rates as many as four times in calendar 2017, incrementally, to be sure, and in our opinion not quite fast enough.

 

Why?

 

Have a look –

 

Inflation has already taken hold, friends, and we believe the next bout of price rises – particularly amongst financial assets, but also in the commodities – is going to have all the momentum, thunder and madness of a buffalo stampede – AND THAT THE FED WILL BE LATE AND SHORT IN CORRALLING IT.

 

That’s been their tendency in the past, and we see no reason why it should be different today.

 

The resultant trample will do far greater damage than anyone would like, as both wages and prices are sent catapulting into an upward spiral.

In fact, it’s already clear to us that the price of copper has bottomed and begun its ascent.

 

Look here –

Known as ‘Dr. Copper’ for its economic predictive prowess, the red metal is now clearly in technical bullish mode, with all her salient moving averages unwound and trending higher for the first time in better than four years (red square).  RSI and MACD readings are also bullish and soon-to-be bullish, respectively, indicating the current range of $2.50 to $2.75 will shortly be broken to the upside.

 

It’s noteworthy, too, that much of the spike that occurred in November (a 30% rise!) derived from the prospects of the Trump administration’s infrastructure plans, after which prices plateaued and the buying cooled.

 

But it’s not over.

 

We’ll see higher copper prices going forward, and we’re playing it with Freeport McMoRan (NYSE:FCX), among the world’s biggest copper producers, as their stock should see a significant lift along with any breakout in the price of the metal.

 

So…

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Freeport now trades for $12.89.

 

Many happy returns,

 

Matt McAbby

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