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The Day After Tomorrow: The Fed, Energy and Charts to Watch

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Trade carefully, Minyans. These are not times to practice heroism.

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Ready, Set, Fed!

Anyone who may be seeking wisdom on how various asset classes will react to whatever the Fed decides to do should also consider that the backdrop of this particular move by the Fed is nothing like what we have seen in the last 100 years, if ever.

For one, this is the first time in history in which corporate debt can be and is being shorted with leverage-on-steroids (Credit Default Swaps), and this is not a market that lends itself to easy manipulation by the Fed.

Second, the heart of today's problem is precisely that no one knows whose bodies are buried and where. Hence I am inclined to think that any move by the Fed has about equal odds of calming things down as it does to set off a whole new set of implosions. Seriously, when something that happened in the U.S. over the last four years causes a 1907-style run on a major lender in England, how can anyone dare suggest that they have a decent idea of what's coming next?

Energized Risk

Away from the macros, over the weekend I developed a rather uneasy feeling about the energy complex.

This chart, which shows the net position of commercial oil traders (white line) and the price of crude (red line), reveals that when "commercials" have gotten as bearish as they were in mid-August, often times a meaningful correction in the price of the commodity was just around the corner.

A similar pattern applies between the "commercials" and the Oil Service Trust Hldr (OIH). The flip side is that based on the last six years, the OIH is entering a pretty good seasonal period; and the "commercials" net short position has decreased significantly over the last couple of weeks. If I sound like I am waffling it's because I am – or perhaps I am just more generally aware of the creeping risks that come with new highs.

FCStone's Road Ahead

FCStone's (FCSX) quarter closed at the end of August and confessional is expected in early October. With the caveat that this is a risk manager operating in an environment froth with risks, the key drivers of its business – volatility and trading volumes in the agricultural and energy markets – remained firmly in place throughout the quarter.

The few estimates out there are all over the place, but somewhat weaker interest income (lower rates and lower balances), as well as a hit from the Sentinel bankruptcy, should not be a surprise. However the stock might react and my inclination is to keep focused on the longer term (the two "drivers", plus net revenue-per-broker) while continuing to trade the eye-popping volatilities in the options.

If tomorrow were not likely to scuttle the best-laid plans, here are this weekend's chart-spots:

  • I "don't do" retail, mostly because I don't recall ever making money on the long side of it, but if I were to give it a run American Eagle (AEO) and Coach (COH) are pretty nice charts.

  • Cell tower construction and agricultural irrigation systems: where has Valmont Inds. (VMI) been all my life? From the looks of the chart, in a bunch of other portfolios.

  • Explosive scanning equipment. Who would have thunk it? American Science & Engineering (ASEI) is either at a great entry point, or about to fall apart.

  • I chose the weekly chart to underscore West Pharma (WST) train-wreck potential, but the daily chart looks about the same if not worse.

  • Talk about being in intensive care for a while, but Rehabcare Group (RHB) is showing the first signs of life in many years.

  • Blackboard's (BBBB) space (electronic learning infrastructure) is intuitively appealing. But this chart is an-all-in-one class for what a short looks like. A P/E of 78 and a P/E-to-growth ratio of almost two doesn't help either.

Trade carefully, Minyans. These are not times to practice heroism.

Positions in OIH, FCSX.
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