The election is in the books, and after all
of the hoopla, debates, campaign ads, and overblown rhetoric, the
government is basically the same today as it has been for the past two
years. President Obama is at the helm of the executive branch, Democrats
remain in charge of the Senate, and Republicans remain in control of
the House of Representatives. This is basically the same group of
politicians that last summer put in place a stop-gap measure on the debt
ceiling that's led us up to the so-called "fiscal cliff."
Indeed,
Wall Street
(and the rest of the world) has started to fear the worst when it comes
to the damage inflicted by a poisonous cocktail of automatic spending
cuts to crucial sectors such as defense, and automatic tax increases.
The combination of these two events could take a $600 billion-plus bite
out of
GDP,
so it's no surprise that traders, investors and really anyone with skin
in the economic game is so worried about a potentially disastrous
outcome.
Resolving this issue will likely be a game of
brinksmanship on both sides; however, time is of the essence. Some
semblance of a solution to avoid the automatic cuts and tax increases
must be worked out by Dec. 31, or the country could be staring down the
barrel of a
recession.
Now,
as they so often due, commodities traders already have begun to
foreshadow a coming recession. If we look at the action in Wednesday's
trade, we see that gold and grains moved higher, and were basically the
best performers in the
commodity pits. Conversely, we saw a big sell-off in energy and base metals.
Traditionally,
commodities such as gold and grains are not driven by economic growth.
The flipside here is that commodities such as energy and base metals are
very much fueled by economic growth. The thesis here is that if the
fiscal cliff fails to get resolved in time, or even if there is some
patchwork, kicking the can down the road like last year, then the
economy is in for some very choppy waters.
For traders looking to
profit from this thesis, you can do so with several exchange-traded funds (
ETFs)
poised to profit from the circumstances. You want to be long
commodities that are economically insensitive and short commodities that
are economically sensitive.
On the long side, there are funds such as the
SPDR Gold Shares (NYSE: GLD), which is pegged to the
spot price of gold, and the
PowerShares DB Agriculture (NYSE: DBA), a basket of commodities such as cattle, coffee, corn, sugar, lean hogs and wheat.
On the short side, you have funds such as
United States Short Oil (NYSE: DNO), an
ETF pegged to deliver the inverse of West Texas Crude Oil prices, and the
PowerShares DB Base Metals Short ETN (NYSE: BOS), a fund designed to deliver the inverse of a basket of base metals that include aluminum, copper and zinc.
Here's a breakdown of the trades as I see them:
SPDR Gold Shares
Recommended Trade Setup:
-- Buy GLD at the
market price-- Set stop-loss at $153.17
-- Set initial
price target at $183.14 for a potential 10% gain in three months
PowerShares DB Agriculture
Recommended Trade Setup:
-- Buy DBA at the market price
-- Set stop-loss at $26.50
-- Set initial price target at $31.69 for a potential 10% gain in two months
United States Short Oil
Recommended Trade Setup:
-- Buy DNO at the market price
-- Set stop-loss at $37.56
-- Set initial price target at $44.91 for a potential 10% gain in two months
PowerShares DB Base Metals Short ETN
Recommended Trade Setup:
-- Buy BOS at the market price
-- Set stop-loss at $19.93
-- Set initial price target at $23.82 for a potential 10% gain in two months
According to my friend and colleague, Tom Essaye of
The 7:00's Report, "The
market
is pricing in the expectation that fiscal cliff negotiations will drag
on, and reduce economic activity, just the way the debt ceiling debate
in the summer of 2011 did."
If
Tom is right, and he almost always is, then these pair trades could
make you a tidy recession/fiscal cliff profit in the weeks to come.
Now that the presidential election is over we can hopefully look
forward to some respite from the perpetual bombardment dished out by
both the Republican and the Democratic Party machines. President Obama
has been re-elected so we can expect four more years of a Washington
centric controlled economy with a rolling program of borrow, print,
spend and pretend, similar to the last four years. The so called fiscal
cliff will not be met head on, the approach will be one of extending
some of the tax cuts now in place and a watered down strategy of fiscal
prudence. Budget ceilings will come and go and the deficit will grow
ever larger as the economic recovery will be considered far too fragile
for any serious attempts at financial reform. All in all nothing has
really changed, the slow motion train crash will continue and the
fallout will affect everyone.
