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Week 2017-10-02 NFP - RBA - Weed


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This Week

A few bank holidays (see below) will provide some opportunities when spread trading across markets.

Non-Farm Payrolls will provide a brief spat of volatility. Lately, the numbers haven't been effecting the market as they once did. This may be because machines are the primary traders of these releases. HFTs are the fastest to get orders into market because they are sitting between the humans and the market. It may be better to wait for a slowing of the move and mean-reverting the move. These moves usually reverse to par within the next trading session, so if you are willing to hold an open position over the weekend (high risk chop), then you can make a decent chop out of it. Be aware that if the data is well outside of range (unlikely because the data is recalibrated after the release to reflect reality) there may be a big move, but it is unlikely that the data will be allowed to skew from the average in such a sever way as to actual give markets direction.

AU RBA

Australia and China have holidays to start the week. When USA markets make a big move (over 1%), look for a comparable decent move (0.5%) when the closed market reopens. If you are looking to trade an Australian move for Tuesday, Japan can be used as a surrogate market until Australia opens. Japan can also be used as a spread leg for such a trade, especially if trading relative to a move in China.

With the RBA releasing data later in the week, there may be a good AUD or ASX trade. The RBA hasn't moved on rates for nearly a year, so there is becoming a high probability that they will increase the rate. A rate increase is the most likely move as the government seeks to slow an overheated housing sector. However, as governments love tax dollars, and the housing sector seems to be making up for a shortfall in mining sector taxes, the push may be to keep rates as low as possible for as long as possible. Political intervention may be a factor in continued low rates.

Australia has not pulled Negative Gearing laws, even though the housing sector is horrid. Negative Gearing means that investors can buy property and then claim investment losses on their taxes. For many wealthy investors, this can greatly offset their tax liabilities especially when the property is vacant, so the rich buy property and avoid paying huge tax liabilities. This has left many vacant properties, especially in the major cities. Cities like Melbourne are trying to enact legislation to encourage occupancy, so there is the desire for change on a local level, especially in the cities. If Negative Gearing laws are changed, it will impact the overheated market with the likely outcome of causing a real estate price collapse.

The Australian government is trying to find a way to have their cake and eat it, too. This means that they don't want to pull Negative Gearing laws and collapse the housing market. They also don't want to anger their wealthy contributors by devaluing their investments (funny how this seems to be the primary motivating factor for most governments these days). The government wants to increase tax revenue from housing to make up for a struggling mining sector.

If the government pushes for a rate increase, it would be the most effective way of cooling the housing sector without killing the housing market. Most big donors are not buying multiple properties on credit. Big banks (Commonwealth, NAB, Westpac, etc.) already factor in rate increases into their loan prices while adding a healthy margin for profits, so they will not lose any money to a higher rate. Australian banks are not going to lose money, epically considering their whopping profits compared to the population of Australia. So, expect that the RBA may move on rates in the lead up to the busy summer real estate season.

Weed

Is marijuana still an investment? Change is coming soon to this industry.

This information is primarily based on the California industry. It completely ignores the black market economy.

The legal dispensaries of marijuana all have solid relationships with their suppliers. Private growers, especially outdoor or specialty weed growers, are often locked out of that supply chain. This means that the price of weed has dropped in the last ten years to nearly the cost of production. Where once prices were $7000/pound wholesale, now these prices are closer to $700/pound. This is nearly the cost of production for many farmers. Without value adding (bubble hash, keif, essential oils), production will soon be untenable for many growers. Lower prices will see a shakeup in this market, hitting suppliers of materials (fertilizers, irrigation systems, lighting systems, etc.) with hard times. This will also impact many remote communities that have thrived over the years from the high levels of cash brought in from such grow operations.

Tobacco companies have been buying land in areas considered to be good for marijuana production (Humboldt & Mendocino CA, the Blue Mountains of TN, etc.). They have not yet entered production, but the expectation for them is that a legislative change will herald their entry. When they do enter this market, the small scale farms will be pushed out of the industry with many of those low on capital seeking jobs with these companies. The entry of these big players will push out many dispensaries and providers of materials as these companies have alternate pathways for supply and distribution.

To survive as an industry, marijuana growers will have to engage in marketing, just as the luxury wine industry has accomplished. This will allow specialty growers to market their crop for a premium to specialty clientele. Until recently, many growers just relied on the fact that they are selling weed to ensure price, but in a legal marketplace that is unsustainable. The next phase of this market will either be broader markets for specialization or it will be collapsed by the entrance by massive players pushing out specialty growers with lower prices.

So, if you are heavily invested in the marijuana trade, look to diversify your risk. Take some profits out of the market. Expect that in the coming years, the market will undergo significant transformation that will limit the boom in this economy.

DISCLAIMER:

YOU ARE AN ADULT and must make your own decisions. ONLY YOU know what level of experience you possess. ONLY YOU know what level of risk you are willing to take. ONLY YOU know what your financial goals are, and to what lengths you are prepared to go to meet those goals. You will be the one to wear your losses, so trade with caution and do your own research.

Henry Ledyard is an independent trader. He has NO affiliations with banks, brokerages, funds, trading houses or markets. He trades for himself and posts trading ideas merely to share information. He does NOT want your money, advice or opinions. He does NOT want your unsolicited emails. If you require further financial advice, seek it elsewhere. Henry`s opinions should be considered as addled as his blog site:

www.addlepated.com.au




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About the author


Henry Ledyard is a futures and options trader with over 20 years of trading experience and over 10 years of experience in trading futures. Henry Ledyard holds multiple degrees: BE Electrical Engineering, BS Physics, and BA Visual Arts. He has worked as a prop-trader (AU bonds, USA bonds) but found the bond market not conducive to his trading style. He currently trades for himself, and has no associations with any brokerage or firms. He has no boss and seeks no money for his information and trade ideas.

Henry’s trading focus is primarily on futures with longer term trades (hours to days) in tangibles (commodities and equities) with a real world bias. This is because high frequency trading algorithms are in control of much of the arbitrage trades and short term volatility.

Henry is predominantly a chart reader who looks for direction changes to enter and exit markets and is not a trend follower or scalper (much). His trade ideas are based on broader market forces creating opportunity while focusing on over-sold or over-bought moves. To make money in markets, he has to combine timing, direction and risk which can be a challenge (and may not suit your trading style). He is not an FX trader, nor stock trader (mostly) and tries to avoid bond markets except as a spread for other trades. He also avoids ETFs and many derivative products because of exaggerated leveraged moves.

Henry is based in Sydney, Australia and normally trades EU pre-market through the USA session with the occasional eye to Asia trade for indicators of direction.

The trade ideas expressed by Henry are places he sees potential for profit and may be as addlepated as his blog site: www.addlepated.com.au

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