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Greetings,

With a lot going on in the market, I’m sending out an early edition before you all disappear for the holiday weekend (week for many of you), and we’ll start by checking in on Indonesia. As VIP subscribers already know, selling Indonesian stocks has been one of my best shorts of 2015. Much of the thesis was predicated on a dramatically weaker Indonesia Rupiah (IDR), which developed a classic cup and handle chart formation over the past few years.

Trust in IDR has been fragile ever since the Asian Financial Crisis of 1998, when its value collapsed and Indonesia was forced into an IMF rehab program. Fast forward 17 years and IDR is again one of Asia’s worst performing currencies, down 7% against USD this year. This week, in a move that seems a little bit panicky, Indonesia’s central bank pushed through a regulation prohibiting foreign currencies, including USD, from being used in domestic transactions. The bank hopes this will stabilize the local currency, but given the market’s dislike of surprises, uncertainty and capital controls – it seems likely the exact opposite will occur. Foreign firms operating within Indonesia could face higher risks and operating costs, especially prominent commodity miners with inherent USD exposure.

Many fear these new regulations will scare away business investment that the country needs desperately. President Joko Widodo needs funding for infrastructure projects that are badly needed to support the world’s fourth largest population. GDP growth hit a 6-year low in the first quarter and confidence in the current government’s ability to manage the economy is falling.

It doesn’t help that the country faces a constant onslaught of disasters – both natural and man-made. This week a military transport aircraft carrying 120 people crashed into a residential area in Medan, the country’s fourth largest city. This comes just six months after 162 passengers were killed when an AirAsia flight crashed into the Java Sea. Volcanic eruptions and landslides are also ongoing issues. Academics have taken to calling Indonesia a “disaster laboratory.”

All of this leaves Bank Indonesia in a pickle. The central bank can’t raise interest rates to support IDR because that would choke off its meager economic growth. It can’t support growth with lower rates because that would push IDR even lower. Instead, they’re opting for capital controls, which rarely work. Stronger growth from Japan or China, which combine to take in 27% of Indonesia’s exports, would give the bank some much needed breathing room, but that seems unlikely (more on this below). These regulations show Indonesian policymakers are aware of the problem, there’s just not an easy way to fix it.

The Cup & Handle Fund is up around 2.5% on the year, and +17.0% since August (inception). I covered a few short positions this week, one was timed perfectly, and the other was too early. But we can’t get greedy after realizing profits. I also added to a short commodity position that’s driving the portfolio for now. I’m ready to start writing my investment letter for July, but it’s a tall order to match the returns of the past few months! If you’d like to start receiving these letters click here.

Today’s letter will cover several topics, including:

• A Commonwealth Bailout?
• Bitcoin Breakthrough
• China’s Slippery Slope
• Chart of the Week

With that I give you this week's letter:

July 2, 2015

As always, if you have any questions or comments or just want to vent, please send me an email at mike@cup-handle.com.

Until next time, tread lightly out there,

Michael Lingenheld

Managing Editor – Cup & Handle Macro