'Bond analysts tend to be smarter than equity analysts,' said Peter Andersen of Congress Asset management.
Featured Trades: (SPX)
1) Charles Hughes on Hedge Fund Radio. My guest on Hedge Fund Radio this week is star options trader, Charles Hughes, of Legacy Publishing LLC. Charles has developed his own highly profitable and disciplined trading strategy which he markets under the names of the Market Volatility Profits Secrets, The Global PowerTrend System, and The Wealth Building Formula.
Chuck’s proprietary indicators are telling him that we have just entered the greatest bull market for stocks in our lifetime. If the market reverts to the mean and makes up for the recent lost decade, then we should earn 22% a year over the next decade. We have a lot of catching up to do.
Chuck’s advisory service offers five different trading strategies which he updates real time at his website. Stop losses and strict risk control insure that 60%-70% of his trades are profitable.
Chuck started out 25 years ago as a ‘systems trader’ and was soon making so much money in the market that he was able to take early retirement and devote himself full time to trading. Through a long period of trial and error, he has refined his system to deliver the eye popping results that he is getting today.
Chuck has a three step process to identify winners. First, he employs 50 and 100 day exponential moving averages to establish medium term price trends. When the 50 day average is over the 100 day you are in an uptrend. As a backup, he looks at the one month versus the 20 month EMA to give a longer term confirmation. Chuck never likes to trade against the trend.
Second, he subjects his picks to a number of other filters. He narrows his focus to stocks making new 52 week highs. These are companies where buying pressure is overwhelming selling, giving them powerful upside momentum. Another is an up sloping ‘On Balance Volume Line’ to see where the size money is going. Third, is to pick a good entry point. For this he uses ‘Keltner Channels’ to illuminate overbought and oversold price levels. A break below a lower Keltner Channel is a major buy signal with a high probability of success. All of this data is easily available through public websites, like www.stockcharts.com .
To pick a winning options trade, a number of additional hurdles must be breached. Chuck favors putting on deep in-the-money call spreads which have lot of intrinsic value, but minimal time value. Durations are four to six months. Deep in-the-money option spreads can profit if the underlying stock increases in price, stays flat, or falls as much as 20%-30% in price at expiration. The deep in the money call spreads work particularly well in today’s volatile markets.
Chuck is based in the bucolic coastal village of Carmel, California, which enables him to do some world class hiking whenever he likes. He has become one of the top producing options traders in the industry. In 2009, a year in which many traders got trashed, Chuck brought in a stunning 122% return. That approach enabled him to win the International Championship no less than seven times.
Chuck started out life as an Air Force pilot (C-141’s), and later went on to fly for a major US airline. He believes the discipline he learned in the military has been a key to his own personal success in the markets. As a former jarhead pilot who flew in Desert Storm myself, I couldn’t agree more.
To learn more about Chuck Hughes and Legacy Publishing, please visit his website at http://www.chuckhughes.com/ . To listen to my interview with chuck Hughes on Hedge Fund Radio in full, please go to my website by clicking here.
2) Note to Los Angeles Based Hedge Fund Managers and Traders. I will be available for a limited number of one-on-one meetings with individual hedge fund managers and traders at their offices during my upcoming visit to Los Angeles on December 3, 2010. This is an opportunity for me to privately consult on your strategy and risk control procedures, praise you for your wisdom, berate you for your ignorance, and possibly offer a few tweaks and changes. If interested, please email John Thomas directly at firstname.lastname@example.org.
'The commodities are overdone here. But if we get a break next year, I would think that is a great buying opportunity,' said Jeremy Grantham, the legendary founder of money manager Grantham, Mayo, Von Otterloo.
SPECIAL FOREIGN EXCHANGE DOUBLE ISSUE
Featured Trades: (FXE), (EUO)
Currency Shares Euro Trust ETF
ProShares Ultra Short Euro ETF
2) Has The Euro Turned? The call that a turn in the dollar was imminent by Brown Brothers Harriman’s Mark Chandler is looking more prescient by the day (click here for the call). September and October was all about pricing in Ben Bernanke’s quantitative easing, and that is looking pretty much done. The next play in this soap opera will see ‘uncertainty’ emigrate from the US to Europe, sending the dollar off to the races and the Euro in for rehab. Lindsay Lohan, eat your heart out.
A reemergence of the ‘PIIGS’ disease, concerns about the deteriorating quality of the lesser sovereign credits in Europe, is now unfolding as the triggering event. US interest rates rising at the long end are adding fuel to the fire, shifting interest rate differentials overwhelmingly in Uncle Buck’s favor. It also helps that 95% of traders are bearish on the dollar, the surest indicator you’ll ever see that it is about to go the other way. To quote hockey great, Wayne Gretzky, ‘You don’t want to aim where the puck is, but where it’s going to be.’ While America’s trade deficit remains massive, that shortfall is being overwhelmed by enormous amounts of foreign capital pouring into our stock and bond markets, on which Ben has painted a giant bullseye.
It all adds up to the $1.4250 print we saw on the Euro two weeks ago marking the high. Rallies from here in the European currency are to be sold. Players new to the space can achieve this through buying the (EUO) ETF, a leveraged 200% short bet against the Euro. Looking at the charts and the momentum, we could see a plunge below $1.33 by year end. Analysts are targeting $1.17 sometime next year, which would out the EUO at $24, a tidy 24% potential return. Overshoot could take us as low as $1.10, taking the EUO to $26 and a gain of 37%. Don’t go on this date without protection, so keep a stop at $1.42.
The Fat Lady is Singing for the Euro
Follow Wayne Gretzky’s Advice on Where to Aim
SPECIAL FOREIGN EXCHANGE DOUBLE ISSUE
Featured Trades: (FXA)
Currency Shares Australian Dollar Trust ETF
3) Why I'm Singing 'Waltzing Mathilda' in the Shower. If you want to participate in the global carry trade in its purest form, take a look at the Australian dollar. The central bank has been the first and fastest to raise interest rates because of rocketing commodity prices and booming business with China.
They call Australia 'The Lucky Country' for a reason. It has that perfect combination of huge resource and energy exports, a strong economy, rising interest rates, a small population to support, and great looking women.
For a start, you get a nice yield pickup of an annualized 4.75% by strapping on this trade, which is the interest paid on overnight Australian dollar deposits. Leverage up five times as many forex traders do, and that balloons to 23.75%. That's what you make on the spread if this currency goes nowhere. If more investors pile into this trade after you, or if the yield spread widens, then you can count on a substantial capital gain on top of this. Now you know how so many traders earn their bread and butter. If you want to know how the big boys are coining it, this is the way.
There is only one thing wrong with this trade. It has been running for two years now appreciating an eye popping 75% against Uncle Buck, from 58 cents all the way up to 102.50. That gives it something of a 'last year's trade' flavor. There are hundreds of billions of dollars ahead of you from the big hedge funds, so there is a risk you could get shaken out if you get involved here, especially if you use leverage. So I would only start to scale in after a 10%-20% pull back, which we may see sometime in 2011, especially if my strong US dollar scenario pans out. So for now, just keep a pin up of the Aussie on your locker room wall.
My Favorite Australian
Another Favorite Australian
SPECIAL FOREIGN EXCHANGE DOUBLE ISSUE
Featured Trades: (FXC)
Currency Shares Canadian Dollar Trust ETF
4) The Loonie Takes Flight. Many of the same arguments that make the Aussie so attractive on a long term basis also apply to the Canadian dollar, which forex traders affectionately call the ‘loonie’.
The Bank of Canada has been consistently raising interest rates, the first G-7 country to do so, making it one of the highest yielding currencies out there. Overnight loonie rates are now at an attractive 1%, which beats the daylights out of the 0% you get now with US dollars. The central bank has had to cool off a white hot real estate market, and an economy that has been growing nicely. No double dip up here.
I have been a fan of the Canadian dollar for some time now (click here for the call), expecting that parity was just a matter of time. Canada is a huge commodity exporter, the largest foreign supplier of oil to the US (bet you thought it was OPEC), with a small, hard working, English speaking (well, almost) population. They also do banking the old fashioned way up North, with the government requiring 20% reserves that limits leverage to 5:1, versus the 100:1 seen at the peak with some of our banks. That means they missed the financial crisis, and the soul searching, angst ridden self examination and re-regulation that followed in the US.
There will be more to come, with at least another decade of commodity bull markets to follow, the source of the country’s lifeblood. Expect more rate rises, and a strong Canadian currency to follow. However, the loonie shares the same problem with the Aussie in that it is not a new trade. So better to confine it to your watch list for now, and not play until we see a decent 5%-10% dip. Until then, here is a gratuitous picture of my favorite Canadian, Pamela Anderson to study. It’s the only one I could find where she has clothes on. And no, I don’t know how to sing ‘I’m a Lumberjack, and I’m OK.’
My Favorite Canadian
Another Favorite Canadian
Featured Trades: (TREMORS IN THE MARKET)
1) Tremors in the Market. Yes! There is risk in the market! That was the hard lesson learned by latecomers to Ben Bernanke’s quantitative easing party who, having watched the prices of all assets climb relentlessly for the last 2? months, jumped in at the end and got burned. Perhaps they didn’t want to be the last one in the locker room at the country club to profess their admiration for everything hard this year.
Let’s start with a forensic examination of the wreckage. There were gut wrenching plunges in everything that had raced up the most, including precious metals, copper, sugar, coal, the commodity currencies, and technology stocks. The markets with weaker fundamentals that hadn’t moved much, like the broader US stock indexes, managed only a whimper instead of a bang.
There were more possible triggers than found in an Agatha Christie murder mystery. My favorite is the weakness of the Euro, which I have been predicting is the new canary in the coal mine for global risk taking (click here for the piece). Another smoking gun is the hike in Chinese interest rates, which calls into question their economic miracle that is enriching everyone. Also suspicious is a computer glitch at the Federal Reserve that scared traders into thinking that the central bank’s first bond purchases for QE2 had been a complete failure.
Suffice it to say that the trading short term books had piled risk higher than Mount Everest, and also had a hair trigger to bail at the first sign of trouble. Could it be as simple as buy the rumor and sell the news?
You can use days like Friday as a great crystal ball for the future. This is what the shadowy spirits are communing to us. That it is a binary ‘?RISK ON’, ‘?RISK OFF WORLD’. When things go bad, there is no place to hide but cash. The CFTC raised silver margin requirements, and corn and sugar get trashed? Even flight to safety, Treasury bonds were unloaded in size. Everything went up the most went down the most, regardless of fundamentals. And that we are dealing with a substantially higher level of risk than only a couple of months ago.
Living in California, one gets used to monthly earthquakes that rattle the dishes, rock the water in the swimming pool, and scare small children, but little more, so we ignore them. However, we all know that ‘The Big One’ that will flatten the city is coming someday. I think the current pull back is only a minor tremor. But the ‘Big One’ for the markets is coming, and could unfold as early as the next quarter. Please tighten up your stops and your risk control accordingly.
What is the Market Trying to Tell Us?
Not the ‘Big One’
Featured Trades: (TOYOTA), (TM)
2) Taking Toyota Out for a Spin. After silver’s meteoric rise last week to nearly $30, I decided to take some profits and launch my own personal stimulus program. So I cashed in a chunk of my position, shoveled $50,000 in cash into a backpack, and sent a friend off to buy a new car. As the price of the white metal soared past $27, $28, and $29, I kept calling her on her cell phone, and kept directing her to increasingly more expensive dealers. First, it was Hyundai, and then Ford. My confused friend finally ended up at Toyota, where she picked a new Highlander Limited Hybrid, a seven passenger, 280 hp V-6, four wheel drive SUV that gets 28 miles per gallon. It also talks to you.
I had more than transportation on my mind when I sent her on the errand. Nearly 40 years ago, when I was starving in Japan while waiting for the financial journalism thing to start paying off, I took a weekend job in Hakone to teach managers at Toyota Motors (TM) how to speak English. Their Plan was to learn our impossible language and then start aggressively marketing their low priced cars in the US.
As we approached the hotel, I saw a dozen men lined up out front wearing cheap polyester suits, starched white shirts, and conservative ties. Each one took turns picking up a baseball bat and beating the daylights out of a severely shredded dummy on the ground before them, screaming a maniacal samurai scream. I asked my driver what the hell was going on. He deadpanned: ‘They’re beating the competition.’
This was back when Toyota made laughably tiny cars that looked like a giant ostrich eggs on wheels and had to get a running start to get up a freeway onramp. By 2006, the company had seized 18% of the US car market, and GM and Chrysler were wearing toe tags. I guess I taught them well enough.
Today Toyota, the world’s largest car maker, has been slammed by the perfect storm that has taken its share down a gut churning 25% from its 2010 peak. They took eight years to find a defect in an American made accelerator component that caused thousands of accidents, and dozens of deaths, forcing a worldwide recall of 10 million vehicles. Toyota is one of the worst performing stocks in the market this year.
To me, this all adds up to a great screaming? ‘BUY.’ You can start with the recall, the largest in history, covering eight models, which promises to be speedy, lavish and generous. It prompted a production shut down, an unprecedented measure in auto history. The company is going all out to reinforce customer loyalty. Toyota still makes great cars. And let’s face it, many people would rather die than drive an American car, the Mad Hedge Fund Trader included.
It’s usually a great idea to buy when there is blood in the streets, and in the auto industry it doesn’t get any worse than this. Toyota has become the BP of the auto industry. I know the Toyoda family well, and they have assured me that they are pulling out all the stops to restore their brand, as well as their own name. When heads roll in Japan, they really do.
There are a few additional angles here. Since the company is Japan’s largest exporter, it would benefit greatly from any weakness in the yen, which I consider as the world’s most overpriced currency. Think of the stock as a long dated yen put. Look at the charts for Ford, US cars sales, and the palladium used for catalytic converters, and it is obvious that the world is seeing a surge in global car sales.
I know the philosophy, and the strengths of this company intimately, and they will come roaring back. Let the ruckus over the recall burn out, and add Toyota to your ‘buy on dips’ list. Keep in mind that this is not a day trade, but something to bury in your portfolio and then lose behind the radiator. It will also not be immune from the calamities that strike the stock market.
Meet My New Wheels
Featured Trades: (NUCLEAR POWER), (NLR), (CCJ)
3) Nuclear Energy Makes a Comeback. Better drag your leisure suits, bell bottoms, and Bee Gee’s records out the attic. The seventies are about to enjoy a rebirth.
The nuclear industry, which has been comatose since the accident at Three Mile Island in 1979, is gearing up for one of the greatest comebacks of all time. There is absolutely no way we can deal with our impending energy crunch without a huge expansion of our nuclear capacity, which sits at a lowly 20% of our total power generation. France has already achieved 85%, followed by Sweden at 60% and Belgium at 54%, and the last time I checked, none of these Europeans were glowing in the dark. The BP disaster only brings the day of reckoning closer.
Unless you’re an underpaid nuclear engineer toiling away in total obscurity at some university, you are probably unaware how far the technology has moved ahead in the last 30 years. Generations I and II produced the aging ‘joint use’ behemoths we now see on coasts and rivers, which generated both electricity and fuel for atomic weapons, but could potentially melt down if someone forgot to flip a switch. Think Chernobyl. Generation III has spent decades trapped on the drawing board.
There are over 100 Generation IV designs, and many are certain to get built. The most popular is known as a ‘pebble reactor,’ which relies on a new form of fuel embedded in graphite tennis balls cooled with helium that is just hot enough to generate electricity, but too weak to allow a disaster. Also known as a Very High Temperature Reactor (VHTR), these plants enable a 50% increase in thermal efficiencies. The built-in safety of the design let’s you eliminate many redundant backup systems, cutting costs. No surprise that the only operating prototype is in China. Low grade waste can be stored on site, not shipped to Nevada or France. Other feasible designs include using thorium fuels, fast neutron reactors, and liquid lead, sodium, or salt cooling variants. Plants are also about to get a lot smaller too.
Speeding the resurrection of this once dead industry is some cheerleading from none other than the same demonizing, apocalyptic environmentalists that shut the industry down thirty years ago (remember Jane Fonda in The China Syndrome?) That is helping shorten the permitting process from 15 years to four by confining new construction to existing facilities instead of green fields.
Nuclear power generates no carbon dioxide, an important consideration if we’re all about to suffocate on the stuff. Each new nuclear plant will take one or two of our 400 coal fired plants offline. Do you think they noticed that there has not been one nuclear death in the US since the sixties, while tens of thousands died globally in coal mining disasters or from the black lung that follows?? And I’m not even counting millions of respiratory illnesses brought on by ubiquitous air pollution. That’s why at least 30 new reactors are expected to start construction in the US over the next five years, and over 100 in China.
I stampeded readers into the great equity plays in this sector a year ago, which have done spectacularly well since (click here for the call). The Market Vectors Nuclear Energy ETF (NLR) is the easiest way in, and has popped by 29%.
This ETF’s largest component and the world’s largest uranium producer, Cameco (CCJ) (click here for their website) was sucked into the commodities and hard asset boom, and rocketed by an eye popping 42%. As with all of my other commodity recommendations, don’t chase here, but wait for the inevitable 20%-30% pull back that will come in 2011. So for now, just put this on your ‘watch list’.
And while you’re at it, you might start practicing those moves for your ‘hustle’ once again.
Three Mile Island
Better Start Practicing Your ‘Hustle’