Current Market Opinions and Trading Ideas

1

• Current Market Opinions and Trading Ideas
• Victor Adair
• www.VictorAdair.com
• Calgary Resource Conference April 4 5, 2009

2
Program Outline

• Current Market Opinions
• How I Trade / Manage Risk
• Current Trading Ideas look at a lot of charts
• What I am Doing With My Own Money
• Cautious. Savings. Trading. Income. In cash too
  early. No leverage. Wait for bargains. Risk is
  another BIG leg down in asset prices.

3
Macro Market Opinions

• THEN
• Credit Boom Asset Boom High Risk
  Tolerance
• Many years of low interest rates / easy money /
  rising asset prices fuelled a consumer spending
  boom and an attitude
• Reaching for yield / dont want to be left behind
• Borrowers and Lenders - pushed the envelope on
  risk
• NOW
• Lenders less willing or able to lend
• Borrowers less willing or able to borrow
• Risk being avoided not embraced
• BIG QUESTION
• What effect will the Authorities actions have?

4
Macro Market Opinions

• Asset price gains from 2001 to 2007 were
  extraordinary not normal
• Buy and hold is not good advice
• Throw away your previous ideas about valuations
  and risk this is a different world
• Dont buy something today because it is ½ price
  compared to what it used to be
• Inflation is history for now deflation is the
  worry for now
• Inflation will come back
• Be prepared for a lot more government in your
  lives
• Stress whats the next shoe to drop?
  Volatility
• Something BIG will breakEuro? Country default?

5
Macro Market Opinions

• Real estate prices will continue to soften
• Unemployment will continue to rise
• Previous economic growth came from rising
  consumption based on rising asset prices,
  borrowed money and leverage. Thats over.
• Expect a L shaped economy
• Expect real interest rates to rise
• Financial markets will have relief rallies but
  a weak real economy will keep a lid on gains
• Demographics Boomers will try to save more,
  spend less
• China the risks grow

6
Marco Market Opinions

• Commodities bull market is over until the last
  Johnny-come-lately bull throws in the towel and
  promises to never return. Speculators fuelled
  most of the 2002- 2008 price increase
• Currencies incredible barometers of capital
  flows - will the Euro hold? US wins the least
  ugly contest
• Stocks a slow-motion (and sometimes not-so-slow)
  crash
• Bonds great battle aheadSupply Vs. Demand
• Volatility new highs as a result of stress
  opportunity. Learn option writing strategies

7
Macro Market Opinions

• Inflation / Deflation?
• Credit crisis induced recession deflationary
• Monetary reaction inflationary
• Credit tightness deflationary
• Fiscal action bigger budget deficits
  inflationary
• Rising unemployment deflationary
• Demographic trends in West deflationary
• Rising US deflationary
• Weakness in global economy deflationary
• Competitive currency devaluations inflationary

8
Macro Market Opinions (Cont.)

• We are all currency speculators now
• 6 years of US weakness 6 years (2002-2008) of
  commodity gains
• Currency trends overshoot and make V shaped
  turns
• Currency flows are now from risky to less risky
  from the periphery to the center - as the market
  seeks to avoid risk
• The US is the least ugly
• Years of miss-matched currency assets /
  liabilities will be reversed
• European banks with massive (and bad!) emerging
  market loans
• Watch the lesser currency pairs

9
How I trade

• I develop Global macro opinions
• I may be100 in cash or up to 4x leverage
• I read a lot of different research
  www.VictorAdair.com to form my opinions
• Im not a day trader but I watch the markets all
  day
• Opinions necessary (you have to have the
  courage of your convictions) and dangerous (you
  have to give up quickly when proven wrong)
• I try to anticipate a trade before it is time to
  make the trade then Im ready when its time to
  pull the trigger
• I need a technical confirmation that my opinion
  may be right before I execute

10
How I trade (cont.)

• I trade like a mercenary (Dennis Gartman) when
  markets change I change
• I challenge consensus what if the popular
  idea is wrong, has run its course?
• I try to judge the mass psychology who has a
  weak / strong position in the market?
• Changing psychology not math moves markets
• All markets are spreads try to think like a
  spread trader what is X worth relative to Y?
• Markets are inter-related but relationships
  change
• Options Current I.V. relative to history - Use
  alone or in combination with futures

11
Managing Risk

• I know practically nothing and cannot predict the
  future
• Most likely risk my opinion is wrong
• Anything can happen
• Patience sitting in cash is OK
• Add to winners, never add to losers
• I know where I will get out (if Im wrong) before
  I get in
• Write down my reasons

12
Managing Risk (cont.)

• Max loss 1 2 per trade / use low leverage
• Accept that most of my trades may lose money
• No big losses, occasional big wins
• Relationships between markets change, but markets
  always influence one another
• Be aware of my prejudices foundation of all
  opinions
• Without risk management the road to the Poorhouse
  is paved with fine opinions
• See How To Be A Better Trader
  www.VictorAdair.com

13
Options trading ideas

• Option volatility is extremely high. Learn option
  selling (writing) strategies
• 1) you like a stock/commodity at todays price.
  Write a put option on it, collect the premium. If
  you get put you own the stock/commodity at a
  better price, if you dont get put you keep the
  premium. Repeat.
• 2) you like a stock/commodity at todays price.
  Buy it and write a call against it. if you dont
  get called you own the stock/commodity at a
  better price, if you get called you make a short
  term profit. Repeat.
• 3) Write both calls and puts at the same time
  look for the market to trade sideways. Repeat.

14
Falling Interest Rates Helped Boost Asset Prices
15
Dow Jones Industrials Stock Index (Falling
Interest Rates Helped Boost The Stock Market)
16
Average US Real Estate Prices (Falling Interest
Rates Helped Boost Real Estate Prices)
17
US Dollar Index not always a bear market!
18
Commodity Index 6 years of a bear market in US
6 years of a bull market in commodities until
Summer 2008!
19
Commodity Index Vs. US Dollar Index
20
Euro Currency Vs. US A Major Turn?
21
US Dollar Index Psychology was extremely negative
22
Euro Vs. Japanese Yen Risk thermometer, week to
week ups and downs very similar to ups and downs
of G7 stock markets
23
New Zealand Dollar Vs. Japanese Yen another risk
thermometer
24
Canadian Dollar and Commodity Index
25
Gold / Crude Oil At least a 25 year low last
summer all markets are spreads. What is X worth
in terms of Y?
26
Gold
27
Gold Reciprocal
28
Bonds
29
Copper Does copper have a Phd in economics?
Base metals have been weak (no kidding!!) lately
(Speculators exit stage left??)
30
Crude Oil Did Investors pile into the energy
markets? Did rising global demand account for a
tripling of prices in 18 months?
31
Corn global demand for better food, ethanol,
funds prices hit all time high prices what
changed to cause prices to fall 50?
32
Deere Company Another way for the public to
play the Agricultural boom Yikes!!
33
Potash Corp of Saskatchewan WOW!!
34
Philly Bank Share Index started to fall from all
time highs before the credit crisis became
front page news
35
Philly Housing Sector Index The top was made
well before the problems of the US housing market
became front page news
36
Starbucks Is the consumer cutting back on
non-essentials? Duh!!
37
Harley-Davidson Necessities not Accessories
38
Vix CBOE Volatility Index Ultra-high option
volatility creates new trading opportunities
39
Chicago Mercantile Exchange it was a triple
play on rising stocks, commodities and exchanges
what happened?
40
Summary

• The Credit Boom produced an Asset Boom a great
  Appetite for Risk This fuelled a Global
  Economic Boom driven by Consumer Spending the
  markets are now reversing this trade!
• Big Risk another major leg down in asset prices
• How I trade / manage risks
• Ultra-high option volatility creates
  opportunities to write options
• Markets I am watching now looking for trading
  opportunities
• Be cautious things have changed wait for
  bargains
• www.VictorAdair.com