In Front of the Bankers

During the next two weeks, three of the world’s major central banks will be announcing monetary policy moves. The Europeans and Japanese need more economic growth, as they have already implemented quantitative easing (QE) and negative interest rates. What comes next will most likely be either action the market is already building into expectations or further talk about how more needs to be done.

The Fed also meets next week. It has been signaling to the markets that rates must be on a normalization path now that the economy is stable and employment is strong. No rate hike is expected this month but it could be as early as April that the Fed considers raising rates again. In many ways the Fed’s view has not been adopted by the markets and we feel the day of reconciliation is ahead.  Given the backdrop of how we see the markets, here is how we plan to take advantage of it to make money.

The central bankers are not happy about the current big move in gold. One of the reasons gold has been rising is waning faith in those central banks themselves. Markets have viewed recent central banks efforts as not enough or too reactive to have substantial meaning. Thus, we still expect a pullback in gold and will be adding a new position to reflect that view. Next, if the Fed is serious about raising rates, which the recent data justifies, then we expect long-term yields to rise near term. We are in position for that outcome. And finally we think oil has found a low and the rally has further to go, hence our positions in oil and Russia. Now let’s recap our open positions.

We own the iShares 20+ Year Treasury Bond ETF (TLT) April $128 puts (TLT160415P00128000). If the Fed maintains its current outlook toward the path of rate normalization, then yields should work higher over the next three weeks as the market’s view on bonds would need to be reconsidered. This position is still a buy.

We are long United States Oil Fund (USO), with an unrealized gain of 6.6%. We also bought a risk reversal on USO by buying the June $9 calls (USO160617C00009000) while selling the June $8 puts (USO160617P00008000) against it. Both legs of the trade are profitable as the spread is currently worth $1.09 versus our cost of $0.65 for a gain of 74%.  While we may adjust one of the legs in the future, this strategy is still a buy.

We are also long the Market Vectors Russia ETF (RSX), with an unrealized gain of 4.86%, and the RSX May $16 calls (RSX160520C00016000) for a gain of 18%.

Finally, we are short gold via ProShares UltraShort Gold Miners ETF (GDXS), with an unrealized loss of 22%. This is a two-times inverse position on the Market Vectors Gold Miners ETF (GDX). We still expect a sharp and short correction in gold. Our GDX March $17.5 put option (GDX160318P00017500) needs a sharp fall in the next week to get back to break-even. Since we are short on time we want to sell our March puts and enter into a new trade. Upon receipt of this email please sell the GDX March $17.50 put options and use the proceeds to purchase the GDX April $18 puts (GDX160415P00018000), currently trading at $0.84. This will allow us to still have a trade in play past March expiry.

Best,

Doug & Tom