May 2011

May 10, 2011 - It's Full Speed Ahead for China's Nuclear Program

Featured Trades: (CHINESE NUCLEAR POWER)

3) It's Full Speed Ahead for China's Nuclear Program. To say that the partial meltdown at Tokyo Electric Power's Fukushima plant has put a chill on the global nuclear industry would be a vast understatement. Lead stock Cameco (CCJ) has cratered by 40%, while the ETF (NLR) has taken a 30% hickey. Is the disaster creating a buying opportunity?

To find out, I stayed up late one night to call a friend at China Guangdong Nuclear Power. While a crash safety review of all designs, both under construction and pending, is underway, there has been no slowdown in the People's Republic's plans whatsoever. The Soviet era designs that led to the Chernobyl disaster were discontinued many years ago. The advanced 'small nuclear' and thorium designs on drawing boards in the US are far beyond Chinese capabilities.

China has far and away the world's most ambitious nuclear program, with 100 plants on order over the next decade. The goal is to raise total generation from 10.8 gigawatts to 80 gigawatts by 2020. That will raise nuclear's share of the country's total power mix from 2% to 5%.

China has very little choice in the matter. Its demand for new sources of electric power is voracious. Any cut back in the nuclear program would have to be met with stepped supplies from other sources. Oil fired plants would increase the need for more expensive oil imports, which have already thrown the country into a trade deficit for the first time in years. More coal plants would lead to increased international complaints about China's contribution to global warming. Solar is growing rapidly, but is too small to make an impact. Hydroelectric power is already tapped out after the three Gorges Dam. If the industry is unable to generate sufficient power, economic growth will slow, and political instability will rise.

This all suggests that there is a buying opportunity setting up in the nuclear space. What goes on in the US or Japan is largely irrelevant, as they are such a small factor in today's market. This is preeminently a Chinese story. But when the sector will bottom out and resume its upward ascent is impossible to predict. This has become a highly emotional trade. My guess is that nuclear will come to the fore once again after a generalized 'RISK OFF' asset class sell off takes everything else down several notches.

-

Is This a BUY Signal?

May 9, 2011 - My Victory Roll

Diary

Featured Trades: (MY VICTORY ROLL)

2) My Victory Roll. I am writing this letter at 5:00 AM, holed up in a luxury suite at the Bellagio Hotel in Las Vegas'?still on 'stock market time,' or up four hours earlier than the rest of the country, while everyone else here is sleeping off hangovers.

It is a tradition among old traders to perform some ceremony when good fortune smiled upon them. At Morgan Stanley, the head trader in Tokyo used to take his team to a Shinto shrine and pray to the gods whenever they bagged something big, like eight digits. It is all a way of reminding oneself of the transitory nature of life and to reinforce humility.

Whenever I have an unusually hot hand, I do what I usually do, and jump into the cockpit of a souped up plane and execute some daredevil aerobatic maneuvers over the Grand Canyon in Arizona. I flew out to the Western section of the park, where no one ever goes, and executed my ritual loops, barrel rolls, whip stalls, and Immelman turns, using the stunned river rafters on the Colorado River below as my point of orientation.

Air traffic control called me a view times to ask if everything was alright. In the end, the heat waves radiating off the black basalt mountains nearby caused such severe turbulence that just keeping my craft straight and level required some serious aerobatic talent.

To get there I had to fly commercial to Las Vegas. I dropped a quarter in a slot machine on the way to pick up my baggage and hit the jackpot. When I'm hot, I'm hot, and I mean sizzling!

I picked up my usual local intelligence from my friend, the black jack dealer at the Bellagio. The crepes for breakfast at the Paris, France Hotel were perfect, as always. I took The Babe to see the Cirque du Soleil show, 'O'. Warning: do not sit in the front row! At the Bellagio the guests don't throw up in the swimming pool like they do at the Aria. They just spill their drinks.

To wind up the weekend, I bungee jumped off the 108^th floor of the Stratosphere. To watch the video, please click here at http://www.stratospherehotel.com/Tower/Rides/SkyJump ., I can't help it, but every now and then I need a shot of adrenaline to remind me that I am still alive.

-

It's Not the Falling that Hurts, But the Stopping

May 9, 2011 - Taking Another Shot at the Garlic Eaters

Diary

Featured Trades: (TAKING ANOTHER SHORT AT THE GARLIC EATERS)

3) Taking Another Shot at the Garlic Eaters. If you have to name one beneficiary of QE2, the collapse of the dollar, and a seemingly never ending 'RISK ON' trade, it has got to be the euro.

All of this strength has come from an interest rate differential of a measly 25 basis points over the dollar, the result of a modest snugging the European Central Bank executed a month ago.

Never mind that outside of Germany much of Europe is bankrupt, their banks are engaging in accounting acrobatics to obscure their negative net worth, and there is a giant crisis brewing in the widespread crossholding of sovereign debt. Did I mention that the EC may split into rich and poor halves?

So I am going to start taking shots at the euro from the short side once again. The markets are much more extended than they were before, so this time it should work.

If you can't do options, you might consider going short the (FXE). If you can't, or don't want to go short, you might consider the (EUO), a 2X short euro ETF. A lower risk option would be to buy the (UUP), a non-leveraged long of the dollar against a basket of foreign currencies. Look at the chart below and you will want to salivate. The initial target should be the old break out level of $1.425.

UPDATE: Since I wrote this piece just two days ago, a lot has happened. The ECB did not raise interest rates as expected, Greece threatened to withdraw from the euro, and the 'RISK OFF' trade found the euro with a vengeance. The European currency collapsed from $1.49 to $1.42 in a heartbeat. We are now overdue for a snap back rally.

I would sell into this. I think that the low for the year is in for the dollar. The change in market sentiment is that the Europeans have quit raising rates and will hold them level, while the US will continue doing the same. This has broken the euro's upward momentum and is hugely dollar bullish.

-

May 6, 2011 - More Proof That the Stock Market is Topping

Diary

Featured Trades: (MORE PROOF THAT THE MARJET IS TOPPING)

2) More Proof That the Stock Market is Topping. If you are looking for more proof that the markets are topping, take a look at the two sector charts of industry leaders below.

The SPDR (XLE) energy ETF has been one of the bull market's leaders, but has a clear double top developing. Close a few more cents lower, and a major break down will be at hand, potentially taking the rest of the market with it.

The oil service holders ETF (OIH) looks even more precarious. It is showing a distinct head and shoulders orientation demonstrating that the top is already in. that is where the severity of this week's down move is coming from.

If just these two charts were ominous, I normally wouldn't care. However, you can look across an entire range of assets classes in oil, gold, silver, commodities, foreign currencies, and other industrial sectors and find similarly grim formations. That, I am more than happy to bet against.

-

Is This Another Top?

May 6, 2011 - A Chat With Charles Biderman of Trim Tabs Research

Diary

Featured Trades: (A CHAT WITH CHARLES BIDERMAN OF TRIM TABS RESEARCH)

3) A Chat With Charles Biderman of Trim Tabs Research. Those of us in the research boutique business have long been familiar with Trim Tabs Research, the creation of Charles Biderman.

Trim Tabs tracks in real time the movement of capital into and out of the stock market. It has developed a number of proprietary leading indicators. It uses these to make reliable long term predictions of the direction of stock markets. I know that hedge fund legend, George Soros, uses these methods, with recurring success. Suffice to say that these days, Biderman is pretty negative.

Charles sees fundamentals for both the economy and the stock market deteriorating rapidly. Since the crash began, personal income has fallen from $7 trillion to $6 trillion, and it has yet to recover. How you get a consumer spending recover out of that, is beyond him.

Biderman argues passionately that the Fed is currently rigging all markets. There is an 88% correlation between an expansion of the balance sheet at the Federal Reserve and the S&P 500. Since 2008 that balance sheet has grown from $800 billion to $2.7 trillion. When it flattens out or shrinks, as we are guaranteed after June 30, does the movie run in reverse? If it does, you don't want to be long stocks.

Our current form of government was set up when it took four weeks to ride a horse from Mount Vernon, Virginia to New York City. That's how long it took George Washington to get to his first inauguration. Our inability to reform the system is how we got to a budget that projected $3.6 trillion in spending against $2.1 trillion in revenues. Charles thinks that President Obama will do whatever he has to do to hold the economy together for 18 months when he gets reelected. After that anything can happen.

To learn more about the ever useful products of Trim Tabs Research, please visit their website at http://www.trimtabs.com/global/index.htm .

-

Get Ready to Watch This Movie in Reverse

May 5, 2011 - Why I Am Selling the Market Here

Diary

Featured Trades: (WHY I'M SELLING THE MARKET),
(SPY), (SPX), (SDS), (TLT), (DIG), (FXE), (UUP), (GLD), (SLV)

2) Why I Am Selling the Market Here. I have started batting out short positions as fast as the market can field them. To be more specific, I am buying puts and selling calls on the S&P 500 (SPX), loading the boat with the double short ETF (SDS), and unloading other asset classes as well.

I get asked more questions about market timing than anything else. Why here? Why now? Let me give you a list of reasons I picked this particular week to hit the sell button. You will find a minestrone soup of fundamental and technical reasons. I try to use every tool in the bag when making a call like this.

*The collapse of silver. The white metal has morphed into a great leading indicator of global risk taking as a whole. The $7 plunge in London on Sunday night was all I needed to sell.

*Good news was having a declining positive influence on prices.

Hey, Where's My Rally?

-

*The calendar. Tech earnings lead every earnings season, starting it off with a bang, and the global consumers get to speak first in this process. The excitement trails off after that.

The Fireworks are Over for the Earnings Season

-

*The calendar. The first day of the month was always up big, as monthly allocations hit the market. When it wasn't on May 2, the red light started flashing.

*The calendar. Sell in May and go away. It is not more complicated than that.

*PE multiples, at 15, are in the middle of their historic range of 10-20, but at the top of what I believe is their future range of 10-16, with US GDP growth at 2.0%.

*All 'RISK ON' asset classes, from the euro (FXE), to gold (GLD), silver (SLV), oil (DIG), and bonds (TLT) have been moving in complete lockstep to the upside. This has only happened a handful of times in the last century and always ends in tears. When everything rolled over in unison this week they were begging me to sell.

*Correlation among asset classes is now at an all-time high.

*Investor sentiment was reaching extremes, with 54.9% bullish and only 16.5% bearish, saying that the market could only go down from here, as all the buyers are already in.

*Every big hedge fund manager I know has been scaling back positions since February, many cutting back positions to a few million dollars on the desks to keep the kids from getting bored.

*The Q1 GDP was a shocker, from 3.1% to 1.8%

Q1 GDP Was a Shocker

-

Weekly jobless claims have suddenly started to worsen.

*The put/call ratio has gone through the roof, hitting 2.0, as portfolio managers start piling on downside protection.

-

Everyone is Now Rushing for Downside Protection

-

*The reallocation out of risky sectors, like technology and energy, and into safe ones, like health care and consumer staples, could not have been more clear.

*Listen to Dr. Copper. He was shouting at us that the markets peaked in February.

*A number of technical programs I follow started spitting out sell signals on Monday. At a minimum, we will hit the 50 day moving average for the (SPX) 40 points lower at 1,320.

When stocks and bonds give conflicting signals, it is usually the bond market that is right. Recently stocks have been going up, meaning the economy is great, while rising bonds have been signaling a weak economy. The global bond market is ten times larger than the US stock market, meaning they have far greater resources to pour into research and analytics. Sell stocks.

May 5, 2011 - Macro Millionaire Hits New High

Diary

Featured Trades: (MACRO MILLIONAIRE TRADING SERVICE UPDATE)

3) Macro Millionaire Hits New High. For the regular readers of the newsletter only, I thought I'd give you an update on my Macro Millionaire trading and mentoring service.

The model portfolio has hit a new high for the year eight out of the last ten trading days, and boasts a 28.04% year to date return. This compares to a more modest return for the S&P 500 of 14% during the same time period. Some 20 out of 22 open and closed trades have been profitable. Overall, the fund would be in the top 1% of all hedge funds.

We are off to the races so far in May, up 1.56%. Our short position in the S&P 500 was up 25% in the first day. Our bet two months ago that bonds would move sideways to up has proved immensely profitable. This summer promises to be a very exciting and profitable one. I am on the verge of pulling the trigger on several more low risk high return trades.

If you would like more information about one of the most successful trading programs of the year, and this year's Internet investment phenomena, please email me directly at madhedgefundtrader@yahoo.com .

Thanks, John!

May 4, 2011 - Phoenix Strategy Luncheon Review

Diary

Featured Trades: (PHOENIX STRATEGY LUNCHION REVIEW), (FCX)

1) Phoenix Strategy Luncheon Review. The hotel was not hard to find. Just turn right at the cow skull, left at the tall cactus, and head directly towards the abandoned mine. That took me to the luxury resort that was hosting my April 28 strategy luncheon in Phoenix, Arizona.

At this point I have been through my presentation so many times that I tossed it, handing out the hard copies to the readers. What ensued was a three hour Q&A, much to the edification of all. By the afternoon, there wasn't an asset class we hadn't covered in excruciating detail.

An engineer from one of my favorite companies on the planet, Freeport McMoRan (FCX), informed me that I had a huge fan club there. And yes, the long term outlook for copper is great.

Another in the real estate industry told me that hedge funds were snapping up second mortgages on homes with performing first mortgages, but negative equity, for 3% on the dollar. They then resold them to the homeowners for 6 cents, eager to clean up their credit rating. The credit unions who own those have already marked them down to zero and are happy to be rid of them. A 100% return on capital with minimal risk. Nice!

And then there was the ebullient, almost bubbling, young couple who related that my short gold trade in February paid for a second honeymoon in Florida. I hear these stories every day, but still love it. I touch lives in so many ways, they almost can't be counted.

The price for the greatest distance traveled went to a gentleman from Ohio. Spend your Zimbabwe dollars wisely. They were well earned.

I arose at 5:00 am for a two hour hike in the mountains to inspect the local geology, which I often do in strange cities. It was classic gold mining country, with quartz veins everywhere. But the only turquoise I found was in Chief Dodge's Jewelry Shop. A free afternoon found me on a tour of the home of the legendary prairie school architect, Frank Lloyd Wright, known as Taliesin West, where he spent the last 25 winters of his life.

On the way home, I lost another Swiss army knife to homeland security. I ended up in economy, sitting next to a big fat sweating slob who wolfed down a dreadfully odiferous pastrami sandwich and then fell asleep on my shoulder.

The Directions Couldn't Be More Clear

-

Hanging Out at Frank's House

May 4, 2011 - Breakfast With Fed Governor Bob McTeer

Evening VIP

Featured Trades: (BREAKFAST WITH FED GOVERNOR BOB McTEER)

2) Breakfast With Fed Governor Bob McTeer. No one can explain the most complex economic and monetary issues in a simpler, more homespun fashion than former governor of the Federal Reserve, Bob McTeer. He is known for carrying around two yard sticks, one slightly longer than the other, to demonstrate to your average guy the monthly changes in employment.

Bob argues that the Fed is getting a bad rap today. Ben Bernanke's quantitative easing is neither inflationary, nor causing the collapse of the dollar. This 'money printing effort' is not actually printing any money. The $1.7 trillion QE1 was designed to buy mortgage backed securities to bring liquidity back to the market place. QE2 enabled the purchase of a further $600 billion in Treasury securities to prevent a double dip recession. On top of this, the Treasury piled the $700 billion TARP to recapitalize the major banks. All three of these programs were wildly successful.

As a result, the Fed balance sheet has grown from a pre-crash $800 billion to $2.8 trillion. Normally this would be inflationary, but it is not this time, as all of the extra money is being tied up with excess reserves at the banks. The proof of this is that the money supply, M2, is growing at a very modest 5%, barely enough to accommodate the population growth. Without the Fed programs the monetary base would have fallen off a cliff.

The challenge going forward is for the Fed to unwind its balance sheet at the same rate that the banks start paring back excess reserve through more aggressive lending. Too slow, and the Fed risks inflation. Too fast, and it risks falling back into recession. After the end of QE2, the Fed is likely to maintain a neutral stance, rolling over maturing debt instead of paying it down. Call it QE2.5.

Although it appears that the dollar is in a free fall in the foreign exchange markets, it is in fact at the same level as it was before the financial crisis. All it has really done is given back its flight to safety bid. The dollar is really a function of our international balance of payments and global interest rate differentials.? Bob feels that the next big move in the greenback is down. I couldn't agree more.

McTeer points out that the Fed has been a huge cash cow for the Treasury, and ultimately, the taxpayer. QE1 and QE2 took in $120 billion in profits over the last two years. The TARP funds paid a 5% preferred dividend and brought in tens of billions of dollars in profits from the banks, General Motors, and AIG.

Bob views Obama's $900 billion stimulus package as 'an attempt to shoot a hog with a shotgun.' The big problem is that businesses view such programs as temporary and act accordingly. Permanent changes to government policies get you more bang for the buck.

Bob, 70, was probably one of the last people in Texas to use a functioning outhouse. He grew up in rural Ranger, Georgia, the son of a truck stop operator, and his first brush with the real economy was pumping gas and picking cotton. Somehow, he scored an economics degree from the University of Georgia, and went on to work at the Federal Reserve. He was named president of the Dallas Fed in 1991, and went on to pioneer the analysis of the impact of technology on the macro economy. Bob is simple, but he is no lightweight. Today, he serves as a chancellor of Texas A&M University, with 100,000 students.

May 3, 2011 - A Day With Harry S. Dent

Diary, Evening VIP

Featured Trades: (A DAY WITH HARRY S. DENT), (STOCKS), (SPX), (QQQ), (EEM), (BONDS), (TLT), (JNK), (TBT), (DOLLAR), (UUP), (FXE), (OIL), (USO), (DIG), (PRECIOUS METALS), (GLD), (SLV), (DENT)

1) A Day With Harry S. Dent. I listen to Harry S. Dent, not because he is an iconoclast, one of the few original thinkers out there, and a complete wild man, although these are all admirable qualities to be found in a global strategist. I listen to him because he has been right.

Go no further than the titles of his books. They include The Great Boom Ahead (1993) (click here for the link),? The Roaring 2000's (1999) (click here for the link),? and The Great Depression Ahead (2008) (click here for the link) .

-

His unique blend of demographic research, identification of global consumer spending patterns, and long term cycle analysis, really makes Harry one of a kind. Foreign governments, major hedge funds, financial advisors, and individuals are all just wild about Harry. They have found his advice indispensible when navigating the sticky shoals of international finance.

So when an opportunity arose to spend a day with him sorting through the tea leaves, working through alternative scenarios for the future of disparate asset classes, and testing each other's' theories, I was on the next plane. It was nothing less than a Vulcan mind meld. And the late night Jack Daniels and 15 year old Macallan made sure we were both on a different planet.

Harry argues passionately that we are witnessing the end of the third great bubble in debt, hot on the heels of earlier forays into madness in technology stocks and real estate. Add public and private debt from all sources, and it totals $130 trillion, the greatest accumulation of IOU's in history. The Federal Reserve is now manipulating all markets, and the exercise is certain to end in tears. The only way out from this will be to suffer an economic and financial crisis worse than we have seen to date.

The triggering factor will be the continued collapse of the residential real estate market. Continued shrinking home equity means that there will be ever fewer buyers in this market. That makes a laughing stock of current bank valuations, which have yet to be marked to market, and still obscure massive losses from the last crash. Have you enjoyed Uncle Ben's wealth effect through rising stock prices? The movie run in reverse makes Freddie Kruger look like a cream puff, and the outcome will be ugly.

A key part of Harry's work revolves around generational spending patterns. Americans see spending peak when they reach the ages of 46-50, and bleed off from there. He blends this perspective in with historical data on demographics and some traditional Eliot Wave Analysis to produce one of the most refined long term views in the marketplace.

The big problem is that we have 90 million baby boomers followed by only 70 million 'echo boomers'. Falling family sizes from the1940's onward are going to come back to haunt us. Adjust for the falling earnings of the next generation, and their net consumer spending could drop by half. As I am fond of telling those who attend my strategy lunches, don't plan on selling your house to your kids, especially if they are still living in the basement.

Stocks.? (SPX), (QQQ), (EEM). Stock markets on crack are about to join Lindsey Lohan and Charlie Sheen in rehab. Harry didn't bat an eyelash when he looked me straight in the eye and told me that the Dow was going to 3,300 by 2014. The only unknown is weather the crash starts now, or whether liquidity manufactured by the Federal Reserve can keep the party going for another six months. Put a gun to Harry's head, and he'll tell you that the peak isn't coming until August. But the smart money is getting out, with the put/call ratio, great leading indicator, rocketing to 1.9 in February.

There will be no place to hide, as this will be a global event, and that reallocation towards more defensive sectors will be a waste of time. The Australian stock market will vaporize from 6,000 to 1,000, while Hong Kong will get pared back from 24,000 to 8,000. China is the greatest bubble and could take the biggest hit. The rising middle class will not take their first ever big recession lightly, and coming political turmoil is a given. Canada, with a great resource base behind it, a new government, and rising interest rates, will hold up better than most.

Bonds. While hard times for equities are ahead, bonds are about to enjoy the second coming. The traditional flight to safety bid is about to come back with a vengeance. The wholesale destruction of vast quantities of debt through default is having the unintended consequence that it is creating a bond shortage. Here we are, over two years into this recovery and the ten year Treasury bond is yielding 3.26%? Conditions for bonds are about to dramatically improve, and a 2% yield for this paper is potentially on the menu.

The Dollar. (FEX), (UUP) Just as we are going to see a return of the Treasury bond, the dollar will enjoy a renaissance as well. Harry argues that the collapse of the plethora of asset bubbles we now see will bring a multiyear bull market for the greenback that could take us up 40% from here. That could take the Euro (FXE) down to its foundation level around $0.90. Debt defaults not only create bond shortages, they foster dollar shortages as well.

Oil. (USO), (DIG). If there is one commodity not expecting another Great Recession, it is crude oil. Slow the economy more than traders expect, and Texas tea drops in value by half. Strip out the monetary demand from those seeking a dollar alternative, and it halves again. Settle down the Middle East, and it halves a third time. Yes, Harry Dent is predicting that crude will fall from $115 a barrel today (and $128 for Brent), down to $15 by 2015. Yikes!

Precious Metals. (GLD), (SLV) If oil is wearing a toe tag, will gold be far behind? Coming deflation will cut the inflationistas off at the knees. A strong dollar sends those looking for alternatives into the Looney Bin. Take these frills away, and the barbarous relic becomes just a heavy rock that will take it from $1,550 an ounce, down to $250-$400. Gold bugs are about to get doused with insecticide. As for silver? How about a move from $50 to $4-$8?

To prove that Harry is willing to put his money where his mouth is, he is advising the Dent Tactical ETF (DENT) which mirrors and executes on his views. The fund is up 20% in the past 12 months.

Harry was originally a 'good ole boy' from South Carolina, who like Federal Reserve governor Ben Bernanke, improbably went off to Harvard where he got his MBA. His career then took him to the top notch management consulting firm, Bain & Co. After years of consulting with Fortune 100 companies, he found gaping holes in their understanding of the global economy. That spurred him to take off and create his own research boutique to address these grievous shortfalls in understanding.

To learn more about Harry S. Dent, please go to his website at http://www.meetharrydent.com/