"There has never been a protracted war from which a country has benefited."
Equity markets across Asia were broadly lower this morning. There was no fire sale, mind you, but most of these markets, along with U.S. equity index futures, came under some overnight pressure. You would think it could be a lot wore than what we actually see here. Standard & Poor's had downgraded China's sovereign credit rating due to that nation's increasing debt levels. Markets no longer seem to get badly rattled by these things though, at least not when they involve major economies with their own central banks.
Then there's the case of North Korea. If anything could derail equity markets across the planet, I would think that the threat of a large-scale regional or even global war would be just that threat. If something awful were to develop in this space, I don't think you could call it a "Black Swan" event. By definition, a black swan has to come as a surprise to markets. This particular trouble spot can be seen from miles away. You have had time to prepare.
According to Yonhap News Agency (South Korea), North Korean Foreign Minister Ri Yong-ho rattled some cages from New York last night when he opined that his nation might consider a nuclear test of unprecedented scale in the Pacific. Oh, how sweet. This came as North Korean dictator Kim Jong-un warned that President Donald Trump and the U.S. will "pay dearly" for threats made earlier in the week from the United Nations in New York. Kim also referred to the U.S. President as "mentally deranged" and a "gangster."
Perhaps he owns no mirrors. Perhaps he was really venting anger. Maybe he was simply panicking in the wake of U.S. Treasury Secretary Steven Mnuchin's announcement that the President had signed an executive order enhancing his department's power to hit banks, shipping companies and ports with sanctions if they were to conduct business with North Korean entities, even if their vessels never actually reach that nation.
Clear as a Ringing Bell
Mnuchin was clear "Foreign financial institutions are now on notice that they can choose to do business with the United States or with North Korea, but not both." This came on the same day that the PBOC (Peoples' Bank of China) ordered subordinate Chinese banks to halt doing all business with North Korea. It is plain to see that if North Korea is successfully cut off from China, and from anyone who also does business with the United States or American entities, then they have an overwhelming problem. Kim has an overwhelming problem.
People with overwhelming problems do dangerous, and sometimes stupid, things. You want to know what the largest threat to complacent markets trading near the top of all-time ranges might be? You don't have to look far.
Global markets are obviously not taking this threat very seriously. Perhaps they are correct in their aggregate assumption. Perhaps they are not. I have pounded the table on behalf of the defense industry long enough. You all know, if you read me often how I feel about that, and what names I like best.
That however, may not be enough, if global equity markets were to suddenly crater. You might find safe haven in sovereign debt securities. Then again, which sovereign debt securities would remain havens in the event of such a crisis? Hmm.
Is Gold Cheap Here?
There is a wealth preserver out there. Some call it a barbarous relic. They won't call it that on the day they need it. In the wake of the Fed's policy decision, Gold has suddenly become slightly more affordable. Is Gold cheap at. or below $1300 an ounce? The general consensus would seem to be a flat "no." Demand has not really been there in 2017, at least according to the World Gold Council. Gold provides no yield, and does not produce. This makes the yellow metal appear less valuable to investors in times of tightened monetary conditions.
Whittling down the balance sheet does not help here, but it is the steep trajectory of expectations for the Fed Funds Rate that have really taken the axe to this precious metal. Gold remains up more than 11% year to date, but is also down almost 4% over the last three weeks.
If there is not demand for gold here, then where do we see it? I have long maintained that a 7.5% portfolio allocation toward physical gold is, in my opinion, the appropriate level. I resisted going to 10% as the metal screamed higher for the very reason that I did not trust the U.S. central bank to play this game in a way that would benefit gold all that much.
Where is the right price for gold? I see support in the $1260s. I see profound support much lower (no kidding, Sarge), in the neighborhood of $1210 to $1220 an ounce. The trick is that gold is volatile. Not everyone is a believer. Everyone has to decide for themselves if they want to allocate a slice of their wealth toward this space.
In fact, I might suggest segregating this portion of your book and forgetting about it. You may find this position often running negative in dollar terms. Your P/L does not need that on a day-to-day basis. The only thing that we do know for sure is that if a desperate, isolated dictator were to do something stupid, you will wish that you had already bought gold the day before. You will not have time to react after the fact.
OPEC, Yet Again
OPEC and allied non-OPEC oil producers are meeting today in Vienna. On the table are the possible extension of existing production cuts beyond the first quarter of 2018, perhaps all the way out until the end of next year. Funny thing happened though, on the way to the meeting: Saudi Arabian oil minister Khalid Al- Falih appears to be a no-show.
No reason has yet been given for Saudi Arabia's absence at such a high-profile event. The next "formal" OPEC meeting is not until November 30, so this allows some time analyze these tough decisions.
It's no secret that Libya and Nigeria were exempt from the original deal that was struck. It's also no secret that over the past year, both countries have added an approximate 550,000 barrels a day worth of increased production, greatly reducing the impact of OPEC's intent in the first place.
These nations were exempt from the deal as a result of internal strife that had badly harmed their economies. In both instances, deals have been struck with warring factions in order to pump more oil to raise badly needed revenue. Many nations participating in the freeze/cut want to hear from both Libya and Nigeria on just where they are going with their production levels. Many would like to take a harder line with them both. The Saudis have been sympathetic, and have acted as mediator.
Both Libya and Nigeria will be pressured today to cut back. It's hard to see anything positive happen as far as Crude prices are concerned -- unless the Saudis magically show up. WTI Crude has traded sideways at elevated levels all week. That is not uncommon going into these OPEC meetings -- whether formal or not. Still, even with this news breaking this morning, the commodity is hanging in there.
Hope? That's not a strategy. I want to see support around $50.50, not resistance. You get that, and you could see $51.75, regardless of what OPEC and their pals try to accomplish.
How Do I Play This Game?
As I type out this morning note, I remain long four oil names. The recent movement of the sector has dressed these positions up nicely. My favorites are still Apache Corp (APA - Get Report) , and Schlumberger Limited (SLB - Get Report) . Both of these names are now very close to my average point of entry. I likely will shave both positions today regardless of what I hear from Vienna, because I had to buy more shares of both than I really wanted to on the way down in order to manage the positions. Mission accomplished.
That said, now that the risk has been successfully managed, I am not a daredevil, and will return these positions to the sizes that I had originally intended for them. I remain long Valero Energy Corp (VLO - Get Report) . This has been my refinery play in the wake of Hurricane Harvey, and has been an absolute joy to own. I have no plans to cut back on that one. I also own one name on speculation that I consider dangerous and would caution folks against following me into. For this reason, that one goes unnamed.
As long as you understand the risk, and are comfortable with it, speculating is fine. Key to this understanding, though, is that speculation is an in-and-out game, in itself. You do not manage these positions. They are designed with strict price targets and panic points, as well as pre-defined timelines that must be followed to the letter. Disciplines must be laid out and followed. Otherwise, avoid this type of activity.
Have a great weekend, gang.
Domino's CEO digs AI.
06:00 - Fed Speaker: San Francisco Fed President John Williams spoke this morning on monetary policy design and effect, from Zurich, Switzerland. Williams, who does not vote on policy this year, has opened himself up to the media as this event has progressed.
09:30 - Fed Speaker: Kansas City Fed President Esther George is set to speak this morning on oil markets from Oklahoma City. George, who is thought of as perhaps the most hawkish official at the Federal Reserve, does not vote on policy this year. George is prepared to answer questions from the audience.
09:45 - Markit Manufacturing PMI (Sept. Flash): Expecting 53.0, August 52.8.
09:45 - Markit Services PMI (Sept. Flash): Expecting 55.7, August 56.0. According to data released by Markit, which is not very closely followed by anyone in the industry, manufacturing has remained stable all year, while the service sector has trended into strength. Given the lack of available hard numbers that will be available today, these surveys could get some attention.
13:00 - Baker Hughes Rig Count (Weekly): Last Week total 936-8, oil 756-7. Rig Counts have recently started noticeably declining, exacerbating a trend that actually started in late July that predates Hurricane Harvey by a couple of weeks. The recent strength seen in market prices for WTI Crude, as well as Natural Gas, should test that trend in the near term. This is the macro event of the day.
13:30 - Fed Speaker: Dallas Fed President Robert Kaplan will make an appearance in Oklahoma City at the same conference that Esther George speaks from this morning. Kaplan is a prime example of a voting member of the FOMC who started the year as quite hawkish and has tempered that position somewhat as core inflation cratered last Spring, and stayed there. Kaplan will take questions from both the audience and the media.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2524, 2513, 2505, 2498, 2492, 2482
RUT: 1459, 1452, 1447, 1440, 1429, 1423
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: KMX (0.94), FINL (0.11)
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