December 2010

December 14, 2010 - The Upgrade Fever Pandemic

Featured Trades: (ECONOMY UPGRADE FEVER),
($SSEC), (SSO), (X), (CU), (COPPER)

1) The Upgrade Fever Pandemic. I knew it, I knew it, I knew it. As soon as Bill Gross at bond giant, PIMCO, announced that it was off to the races with a 1% mark up in his GDP forecast for 2011, upgrade fever would break out all over.

I look no further than my alma mater, Morgan Stanley, which followed suit with their revision for economic growth from 2.9% to 4.0%. David Greenlaw thinks that the tax deal Obama cut with the Republicans, to the chagrin of his own party, is great for exports, consumer spending, and capital spending. A sudden fall in weekly jobless claims by 17,000 to only 421,000 suggests he may be right. A sleigh full of more economic releases arrives this week, and I expect them all to surprise to the upside, leading to a further surge in corporate profits. Needless to say, this is all hugely bullish for equities.

The other big development is that China (FXI) postponed its next interest rate rise by a few weeks, delivering a nice pop for the Shanghai market ($SSEC), and triggering a global melt up in commodities. Copper (CU) hit a new all time high today, and steel names, like US Steel (X) were on fire. I have a very heavy weighting in the sector in my long term portfolio, but my short term trading book is out for the moment, as the overheating is starting to scare me.

The 'FEAR' to 'CONFIDENCE' trade is on, and Santa Claus is mixing steroids into the reindeer feed as we speak to deliver a continued rally. Did I mention this is all hugely bullish for equities? It all makes my (SSO) position, the 200% leveraged bet that the S&P 500 is going up, smell like roses.

Optimism is Breaking Out All Over

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My (SSO) Position is Smelling Like Roses

December 14, 2010 - The Nissan Leaf Roll Out

Diary

Featured Trades: (NISSAN LEAF), (NSANY)

2) The Nissan Leaf Roll Out. With great fanfare and celebration, Nissan Motors (NSANY) at long last delivered its first all electric, 100 mile range Leaf to an ecstatic customer at San Francisco city hall today. Long time readers of this letter know that I have been banging the table on this technology for some time, starting with my now ancient recommendation to buy Sociedad Quimica Y Minera (SQM), Chile's largest producer of lithium (click here for the piece).

Offering a car which effectively uses no fuel, requires no maintenance, at a heavily government subsidized price could only be a blow out success. One of the most aggressive and ambitious adverting campaigns in history assured that even Neolithic consumers living in caves in Borneo would know about it. Nissan is confidently betting the company that the project will be a blow out success, ramping global production up to 500,000 annually by the end of next year. My local utility, PG&E, (PGE) has since upped the ante by cutting prices for electric vehicle recharges between 12:00 midnight at 7:00 am from their peak rate of 40 cents per kilowatt hour to only 3 cents, a 92.5% discount. That works out to buying all the gasoline equivalent I want at 14 cents a gallon.

I predicted that these developments would conspire to drive the shares of Nissan Motors ever Northward. Nissan has been in my model portfolio for a while as a play on the recovery of the global auto industry. Those who piled into my initial recommendation to buy the stock last July are now up a handy 30% (click here for the 'Making a New Home for My Nissan Leaf').

For those of us who have been involved in the alternative energy space, this has been a very long time in coming, some 40 years in my case. Since I am neither a movie star nor a lucky lottery winner, I will not get delivery of my own Leaf until March, 2011. But the dealer has already called, asking which options I wanted. Fully loaded with all the bells and whistles, even with the $1,200 solar cell roof that looks cool more than it is functional, it will cost me $38,000. When I do get what will undoubtedly be the most enviable wheels on the block, you'll be the first to hear about it. Buy a new two year subscription to my letter, and I might even give you a ride.

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December 14, 2010 - Quote of the Day

Diary

'This is the ultimate Keynesian stimulus. We debated all summer and Keynes won. This is $800-$900 billion of stimulus over the next two years. This guarantees that the economy will surprise to the upside,' said Greg Valliere, chief research strategist at the Potomac Group.

December 13, 2010 - Soaring With the Eagles

Diary

Featured Trades: (SOARING WITH THE EAGLES),
(SLV), (AGQ), (GLD), (TBF), (TBT), (XLF), (BAC), (YCS)

1) Soaring With the Eagles. I was sleeping like a rock last night, having one of those great flying dreams. I dove, rolled, and looped through the clouds, and soared with the eagles, my arms stretched out like wings. The phone rang. I looked at the clock. It was 2:00 am. What else was new? After 40 years in the business, I seemed to have developed a supercharged internal adrenaline pump that jolts me into full combat mode in seconds, firing on all 16 cylinders. Such is the life of a global macro long/short hedge fund manager.

It was my friend, Ming, at the People's Bank of China in Beijing. They had just raised reserve bank requirements by 50 basis points, and another interest rate hike was in the works. Leaks of the impending move had prompted traders to dump holdings of commodities, energy, and precious metals, expecting the move to cool economic growth by the Chinese economic juggernaut. This is why silver (SLV), (AGQ) dove from $30.60 to $28 in recent days, and gold (GLD) backtracked from $1,430 to $1,374.

The wheels whirred away in my mind, calculating how this news would impact my trading book, which was long US stocks (SSO) and financials (BAC), (XLF), and short Treasury bonds (TBF), (TBT) and the yen (YCS). I concluded that I was perfectly positioned, and that my longs should go up and my shorts would go down. Back to soaring with the eagles.

I was just coming out of a white fluffy cloud when the phone rang again. It was 4:00 am. A friend at bond investment giant, PIMCO, in San Diego, CA was calling to tell me that they were upgrading their growth forecast for 2011 from an anemic 2.0%-2.5% range to a more virile 3.0%-3.5%. The rerating was off the back of the tax compromise between the President and the Republican leadership, and the massive, short term government stimulus that was working far better than imagined or publicized.

If there is one guy who's every word I hang on, it is PIMCO's eclectic managing director Bill Gross. This is not just because he was an ex-hippy, former Vietnam War swift boat veteran, who worked his way through college counting cards at blackjack in Las Vegas at the same time I did. We may well have sat at the same tables (play the videotape!). I think Bill and his cohorts, Mohamed El-Erian and Paul McCulley, are one of a tiny handful of people who have nailed it with their understanding of the global economy and the consequences for financial markets and asset classes. So we are usually reading from the same sheet of music.

I could see this easily leading to a round of competitive upgrades of forecasts by other financial institutions as we run into year end. Needless to say, this is a hugely positive backdrop for stocks. The wheels whirred again, popping out the same conclusion. If anything, my trading book looked even better. It was too late to soar with anymore damn eagles, so I staggered out of bed to do some flying of a different sort. I checked prices, and was reassured that the markets agreed with my analysis. It wasn't until noon that I realized that in the dark I had put on my boxer shorts backwards.

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Come Fly With Me

December 13, 2010 - And What a Year It's Been!

Diary

Featured Trades: (SLV), (BAL), (PALL), (JO), (JJG), (CORN), (UNG), (FXE)
(WHAT A YEAR!)

3) And What a Year It's Been! Look at the year to date performance of ??the asset classes below, and it almost looks like my buy and sell recommendations I put out at the beginning of 2010. I had strong buy recommendations on the top nine performers, including palladium (PALL) (81.8%), silver (SLV) (77.9%), cotton (77%) (BAL), (72%), coffee (JO) (52.8%), wheat (JJG) (36.2%), oats (33.4%), corn (CORN) (32%), and soybean oil (JJG) (32%). Perhaps this explains why I have so many readers that are farmers, and gold and silver coins are showing up in the mail as Christmas presents from newly enriched subscribers.

I told followers to avoid natural gas (UNG) (-20.5%), like the plague, and go short the Euro (FXE) (-7.2%). Maybe this explains why I have 30 outstanding dinner invitations in Rome (pasta is made of wheat), and why I have signed 8 X 10 glossy portraits of George W. Bush coming out of my ears, all sent from the oil patch in Texas.

At this point I have to say that past is not prologue, and it's only a matter of time before the markets serve me up with a healthy, and sobering dose of humility. All I know is that the harder I work, the luckier I get.

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December 13, 2010 - Quote of the Day

Diary

'When you fly from Shanghai airport to New York airport, you're flying from the Jetsons to the Flintstone's,' said Hot, Flat, and Crowded author Tom Friedman.

December 10, 2010 - The Lost Decade For Bonds Has Begun!

Diary

Featured Trades: (A TECHNICAL UPDATE ON YOUR POSITIONS), (BAC)

2) The Lost Decade For Bonds Has Begun! In order to enjoy your coming weekend, I thought you'd like a technical update of your positions, so feast your eyes on the two charts below. They say that a picture is worth a thousand words, so here is 2,000 words worth. If you have piled on the positions that I recommended over the last two weeks, these charts should enable you to sleep much better.

I believe these charts show that we are entering a major uptrend for financials, which are asserting themselves to become the lead sector for the market for the next several months. Watch the financial press this weekend, and you will hear a parade of technicians screaming that there has been a major trend reversal, a breakout, or a sea change. This alone could trigger a new wave of cash moving into the sector. The best case scenario has these things going up right into year end. Take a look at my Bank of America (BAC) trades, where the stock has popped 10% in two days. The low risk option play is up 57%, while the high risk one has soared by 325%. The fact that this is going on against a backdrop of a broader market that is doing diddly squat makes the moves even more convincing.

The exact reverse is true for bonds, where virtually every fixed income product broke down through their 200 day moving averages. Let me draw a simple picture ??for you laymen out there. That means you should sell every rally for the next ten years. The technical set up is now so dire, that bonds are going to have a really tough time rallying from here. The momentum players now smell blood in the water, and they'll be jumping in with both feet at every opportunity. The lost decade for bonds has begun!

Of course, you knew this was coming. It is the ultimate irony that the first action of the party that campaigned hard and won the House of Representatives on promises to cut the deficit was to engineer a dramatic increase in the deficit with yesterday's package of tax cuts. The bond market is not laughing.

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Momentum Players Are Smelling Blood

in the Water in the Bond Market

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While Mad Hedge Fund Trader Readers Are Sleeping Well

December 10, 2010 - Testimonial

Diary

4) Testimonial. Signing up for your service was the easiest decision that I have ever made knowing the value that I am getting in return. Thanks for making the world of capital markets profitable for non-Wall Street guys that are busy working in other professions. Until now, I have been forced to deal with money managers or 'Company Men' that only push the products their higher ups want to sell. Finally, I have an alternative route to go. Thanks a 'Million'.

Steve
Boynton Beach, Florida

December 9, 2010 - What a Wild Day!

Diary

Featured Trades: (BAC)

1) What a Wild Day! I was looking forward to a quiet day today. I was sitting in front of the fireplace, an oak log that I had lovingly hand carried down from Mt. Diablo crackling away, reading the morning papers. Frank Sinatras' greatest hits was in the CD player (young readers please Google 'Frank Sinatra' and then go buy it).

I had listened to Strangers in the Night, and was only half way through It Was a Very Good Year when the phone rang. A sell side floor trader said the pre market in New York was seeing massive buyers of Bank of America (BAC) stock. Was it me? He was referring to the trade alert that I had put out yesterday urging readers to pile into BAC call spreads. I thought the stock might rise because of the bank's $137 million settlement with the SEC and the Justice Department over its municipal bond bid rigging practices, which was a bargain at the price. But this shouldn't generate a tidal wave of buying. Was it me?

The phone hasn't stop ringing since. The log burned out, unappreciated, hours ago, and I am only getting around to getting the letter out at this late hour. BAC ended up popping 5% on the day during an otherwise dead market, while gold and silver collapsed. My apologies, but these are the problems you want to have.

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Mount Diablo

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December 9, 2010 - Instant Gratification Alert

Diary

Featured Trades: (TBT), (YCS), (SSO)

2) Instant Gratification Alert. If you are one of the 1,000 recent new subscribers to The Diary of a Mad Hedge Fund Trader, religeously executed every trade I recommended, and ignore the naysayers and the party poopers, well done!

As I write this, the leveraged short Treasury bond ETF, the (TBT), has exploded to the upside, breaking the 200 day moving average. It has tacked on an impressive 10% from my cost last week, popping from $35.60 to $39.10. The options markets are now seeing massive buying of the December $40 calls. Of course, boosting our positions was the good old US Treasury, which slammed the market with $60 billion in new paper today. But we knew this was coming weeks ago.

The yen saw a major breakdown, sending the short play ETF (YCS) off to the races. Good job to those who acted on my trade alert yesterday and doubled up.

Stocks are holding up remarkably well against profit taking pressure off of Obama's tax compromise speech yesterday, a classic 'buy the rumor, sell the move' development. The really exciting thing is that Bank of America (BAC) is hugely outperforming to the upside, with the calls I recommended yesterday taking off like a scalded chimp. The March, 2011 $12-$14 call spread soared by 21%, while the aggressive version of this trade, paired with a short $10 BAC put, jumped by 100%. Not bad for a day's work. I knew I was good, but not that good!

New subscribers to my letter have clocked profits of up to 10% in a week, and all positions are now in the money. Some, who took on more leverage than I recommended, have seen their networth skyrocket by 20% in days. The portfolio has some nice cross hedges working, with any pullbacks in stocks more than offset by gains in short Treasuries and short yen. The strategy is firing on all 16 cylinders.

For those of you who have a need for instant gratification, you might consider cashing in here, calling it a year, and taking off for some skiing at Aspen, St. Barts for some sun bathing, or Wisconsin to visit the in-laws. In a zero return world, you don't get to coin 10-20% in a week very often, and sometimes it is prudent to take the money and run.

For those who thought this was the tenth big ticket Internet marketing scam they purchased in the past year and just sat back and watched with skepticism, don't worry. There will be other opportunities, and plenty of good entry points. There are so many rip offs out there, I will be the last one in the world to blame you for your jaundiced eye. I come from an unforegiving, uncompromising world where only results backed by cold, hard numbers have value, not empty words and hollow promises.

As for me, I'll be hanging on to my positions, and even looking to increase them. I'll be the guy who stays in the bar until they pile the chairs on the tables, mop up the spilled champaigne, flicker the lights a few times, and all of a sudden, every girl still hanging around suddenly looks beautiful. I think that I have sunk my teeth into some solid, sustainable trends here that will be good for months, if not years. I'll leave the day trading to the kids.

Watch your trade alerts. Fiat Lux.

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Will It Be Trading for Christmas?

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Or Sunbathing?