TIB: Today I Bought (and Sold) - An Investors Journal #249 - Semiconductors, Bulk Shipping

Market jitters are squeezed by tariffs and OPEC rumours. Options expiry gives me one winner and one loser. Cryptocurrency markets track sideways on a directionless drift tending down.

Portfolio News

Tariff Tantrum Markets had a chance to absorb the tariff news on Friday and more detail came out over the weekend.

US markets were sanguine and drifted. The rest of the world seemed a lot less comfortable with Hang Seng down 2% in China and Europe down 1%. Monday will be a tougher story as the retaliation starts to flow from China and India and Japan, for example. Here is a snapshot of Japan markets at lunchtime on Monday. (they do have an earthquake in Osaka which could affect markets too)

I must say I am beginning to get very nervous about the risk of trade war. I do not think Donald Trump really grasps what the widest ramifications are of what he is doing. He is looking at country to country imbalances and not at the bigger picture. Let's look at some data. This chart shows the relative trade flows between US and its top 5 trading partners. I have tallied up the imbalances.

The chart labels: exports are exports from US.

http://theconversation.com/4-charts-showing-why-putting-tariffs-on-your-friends-is-a-bad-idea-97582

Yes. Donald Trump does have a point. There are trade imbalances between US and these 5 trading blocs. There may well be changes that can be made to re-balance some of this. There is a simple reality that the trade flows do not show. The US is considerably larger in economic power than all its trading partners. GDP of Europe is 36% lower than US, China is 40% lower and Japan is 73% lower. There should be an imbalance for that reason alone - American consumption and investment demand has to be fed.

There are a few things that stand out for me:

• Economic size is a driver of trade imbalances. Technology advances drive them too - e.g., in engineering and chemicals
• US has actively worked NAFTA to use Canada and Mexico as lower cost suppliers disproportionaltely to their size. Canada GDP is 92% the size of US and Mexico 94%
• Canada and Mexico are absorbing a lot more US exports than their size would indicate. That tells me that NAFTA is an anti-competitive trade bloc way bigger than the European Union. If I normalize the trade flows based on size Canada and Mexico are benefiting to the same scale as China's normalized surplus to the US.
• Europe is the largest importer of US goods - a trade war with Europe could be catastrophic to US exporters
• The more telling number is the size of the imbalance - $630 billion.

This is the part that I do not think Donald Trump fully grasps. What if he can re-balance even half of that? Will that trade be replaced in some other way - e.g., by trading with another country or by local production? How many jobs does that cost? How many new jobs will be created? What is the knock on effect on the trading partners?

The answer is going to differ depending on which side of the war a country is on. For Canada and Mexico, it is going to result in lost jobs. If we assume half the trade flows get rebalanced in total and Canada and Mexico get a proportionate share, they will lose between 300,000 (Canada) and 500,000 (Mexico) jobs. The Trump idea is to recreate US jobs. Again if we assume half the trade flows get rebalanced and the US gains a proportionate share, they will need to create more than 3 million jobs = 2.5% of the workforce. With a 3.8% unemployment rate, this is going to be a stretch to fill, skills wise and location wise. For context, 2.24 million jobs added in the USA in the last 12 months.

Now if China absorbs its share of the rebalancing and cannot replace it with parallel trade, they stand to lose close to 7 million jobs. They have to respond and respond hard.

Now it is a bit fanciful to assume that half the trade flows go especially as the latest US-China measures are only aiming for $50 billion of trade. Let's use that as the factor and scale the trade war impact as a function of $50 billion coming off the net imbalance for China - equates to a 20% rebalancing. This then flows through to a need for 1.4 million jobs in the US, and loss of 140,000 jobs in Canada, 240,000 in Mexico and 3 million in China and 1.3 million in Europe.

Of course, what Donald Trump is hoping is that the $50 billion with China is the total impact and there is no spillover of trade worldwide. I think this is the biggest flaw in this thinking - there has to be a bigger spillover into other trading partners - i.e., as I have modelled with a 20% impact.

What is the big message? The trade war does not make sense in 2018 because the USA is almost at full employment. They do not have the capacity to take up the slack. The knock on effects on job losses elsewhere are massive and will create huge pressure especially from coalition governments in Japan and Europe to retaliate to protect jobs. And then we should take into account the impact on inflation which could jump and encourage Central Bankers looking for inflation to increase interest rates.

Data: GDP data comes from TradingEconomics.com. Calculations for job productivity Using GDP per capita data from CIA.

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html

Market Jitters Markets did get the jitters from the tariff tantrum. Add to that is the upcoming OPEC meeting on June 22.

Oil prices sagged in Friday trade and again in Monday Asian market trade. It certainly had a big impact in my portfolios which are leaning somewhat heavily for a rising oil price. There appears to be a divergence of thinking going on. Saudi Arabia and Russia are behaving as if they have already agreed to increase production. A few of the smaller producers, especially, Venezuela, Iran and Iraq, are keen to keep the cuts in place because they want to see higher prices and are not able to match the increases (also Nigeria, Libya, Mexico, Angola). Add in some production bottlenecks in US supply which could be filled by increased OPEC production to complete the picture (from where is a good question as Venezuela is out and Mexico is capacity constrained)

https://www.smh.com.au/business/markets/opec-tensions-loom-as-the-production-rich-meet-the-production-poor-20180618-p4zm42.html

There is a strange dynamic in pricing which might hold the clue. There is a growing divergewnce between West Texas Intermediate (WTI) and Brent crude prices which is not explained by the positioning. Middle Eastern and Russian oil is typically priced in Brent terms and US production in WTI terms. The WTI price is falling and Brent holding. If there were supply bottlenecks in US, I would expect WTI prices to rise. If there was an agreement to increase production from Russia and Saudi Arabia I would expect Brent to fall. It does not stack up in my head at all. The answer will come from the demand story - if that keeps growing that will smoke out any supply bottlenecks and the market will decide what the right price for oil should be. I wonder what future shipping prices are doing? They should be rising if oil is to be shipped from Brent markets to US to fill supply gaps there and to cover Iran sanctions based cuts..

https://shippingwatch.com/secure/carriers/Tanker/article10682152.ece

World Cup Today's Google search for Russia tells me more about the Western media view than it does about Russia

We have fear about the nuclear threat, ridicule about an official suggesting Russian women be banned from having sex with tourists and some football news. The sex ban was just a speech comment but it did end up with Vladimir Putin making a statement that he felt Russian women could look after themselves.

Football news did have some shocks and some surprises. Mexico beat Champions Germany. Switzerland drew with favourites Brazil. Australia pushed France to the wire just as Optus TV streaming to Australian subscribers failed. Minnows Iceland scraped a draw. And LGBT visitors express their discomfort about Russian ways.

In my portfolio Russian stocks, both RSX and RSXJ dropped with all markets

Bought

VanEck Vectors Russia Small-Cap ETF (RSXJ): Russia Small Caps Index. I averaged down my entry price on Russian small caps. I am sure that the World Cup effect and more oil pumping will flow through to small business profits.

Expiring Options

QUALCOMM Incorporated (QCOM): US Semiconductors. Options expiry did end up being touch and go with a down market holding back the exuberance the market showed in extended hours trading the day before when the NXP Semiconductors (NXP) deal was approved by Chinese regulators. Price closed at $59.86. Stepping back: My expiring trade was a little complicated - a 55/60 bull call spread and a 50 sold put. I watched the market open soft and felt that price would stay below $60 all day BUT I could not be sure. I did want to take delivery of the extra 100 shares but did not want to run the risk of them being called away. The markets will become rational about the deal when it stands on its own merits away from the market noise. I closed out the 55/60 bull call spread and let the 50 put expire worthless. Net premium received amounted to a 103% profit in one month.

I replaced this with a July expiry 60 strike call option and I doubled up - i.e., for each contract I sold I bought 2. Premium was $1.76 (2.9% of strike and of closing). I have updated the price chart with the new bought call (60) contract shown as pink rays and the expiry the dotted red vertical line.

We have seen two strong run ups in price following news events in the last 18 months (the pink arrows). If we get a repeat of that sort of move (and we are already half way through the new move), the trade will yield a 420% profit. I am comfortable that this is possible as it takes price to a level it has seen twice in the last 2 years. I will explore adding a sold call say at 67.5 strike to reduce the net premium and increase the profit potential.

Scorpio Bulkers Inc (SALT): Bulk Shipping. I wrote in TIB248 about trades going to the wire. Scorpio Bulkers did exactly that and was trading above the bought call strike at $7.55 when I called it quits an hour after market open. Price closed at $7.40 - a mere 10 cents shy of the strike. That left the 7.5/10 bull call spread expire worthless. I did look at rolling over the contract to a December expiry but my broker would not allow me to sell the sold call leg until the current position was closed.

A December 2018 7.5/10 bull call spread has a net premium of $0.30 which offers a 733% profit potential if price can get past $10 by December 21. Price has not been anywhere near $10 - highest was $8.70 in the last 12 months. A 7.5 strike call is possible at $0.60 (mid price between bid and ask) and offers the potential of 100% profit if price reaches that high again.

I am sure the tariff tantrum is going to play out into bulk shipping categories, especially if the Chinese retaliate on agricultural products. The wise investor will be sitting on the sidelines though a punt of $30 on one contract is less than the price of a dinner out.

Income Trades

All income trades expired worthless making for a 100% success rate last month. Market correction has pulled a few stocks below my entry price which means I might have a shorter list of stocks to offer for sale this month.

Cryptocurency

Bitcoin (BTCUSD): Price range for the weekend was $333 (5.0% of the high) and has basically drifted down all weekend in ever tightening bands. There is just not enough positive sentiment to drag the buyers to the markets. It is anybody's guess as to what comes next - hold the support and break up or continue the drift down to test the bottom of the channel it is in.

Ethereum (ETHUSD): Ethereum price gave up most of the gains it made after the SEC news on whether it is a security but held the support level.

CryptoBots

Outsourced Bot No closed trades on this account (212 closed trades). Problem children was unchanged (>10% down) - (18 coins) - ETH, ZEC (-46%), DASH (-45%), BTS, LTS, ICX, ADA, PPT (-53%), DGD (-46%), GAS (-58%), SNT, STRAT (-45%), NEO (-56%), ETC, QTUM, BTG (-56%), XMR, OMG.

ETC did improve to come off the -40% list. Worst is something of a tussle between NEO, GAS, BTG and PPT.

Profit Trailer Bot No closed trades. Dollar Cost Average (DCA) list was unchanged at 12 coins with only 1 coin (VEN) improving, 1 coin trading flat and 10 worse.

New Trading Bot Positions dropped 2 points to go back over the 50 marker to -50.6% (was -48.7%).

All coins traded down with ETH worst with a 3 point drop.

Currency Trades

Forex Robot did not close any trades and is trading at a negative equity level of 1.9% (higher than prior day's 1.8%).

Cautions: This is not financial advice. You need to consider your own financial position and take your own advice before you follow any of my ideas

Images: I own the rights to use and edit the Buy Sell image. News headlines come from Google Search. Trade flow data and shipping headline are credited below the images. All other images are created using my various trading and charting platforms. They are all my own work

Tickers: I monitor my portfolios using Yahoo Finance. The ticker symbols used are Yahoo Finance tickers

Charts: http://mymark.mx/TradingView - this is a free charting package. I have a Pro subscription to get access to real time forex prices

June 15, 2018