September 2011

September 26, 2011 - Market Carnage Revisited

Featured Trades: (SPY), (IWM), (RSX), (EEM), (CU), (GLD), (JNK), (TBT), (TLT), (GLD), (USO), (FXA), (FXE), (UUP), (VIX)

1) Market Carnage Revisited. I have never seen a single word cost me so much money. That word would be 'significant', the word that the Federal Reserve added to the language in its recent release about the current risks to the economy. To the market, this translates into down 1,000 points on the Dow. For copper it means shedding 50 cents per pound. And for the (TBT) it converts into down five points. Ouch, and double ouch!!

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The newsletter business is a great one to be in, except when it isn't. My workload is so staggering that when the slightest thing goes wrong, it all falls apart like a house of cards. Right when the Dow had plunged 500 points and NASDAQ was bleeding 100 points, the price action melted my computer. I quickly batted out a backup letter for Friday, which is why I was talking about the wonderful world of ETF's when we were facing Armageddon. I then spent the rest of the afternoon using my best Hindi trying to get Dell to fix my machines from Bangalore.

I called the market action going into the Fed release dead on, the S&P rallying all the way up to a healthy 1,220. Over the past six weeks, the 1200 handle has been as rare as a sighting of a blue footed boobie in the middle of the Sahara Desert. I was also accurate in forecasting a post statement rally. Only my timing was off. Instead of giving me a whole day with which I could pound all asset classes at the upper end of their recent rallies, especially stocks, oil, and the euro, the spurt lasted all of 27 seconds. That is how long it took the big hedge funds to mobilize billions of dollars with which to decimate the indexes.

It was a perfect 'RISK OFF' day. Shares suffered their worst week in three years. Crude splashed $9. The industrial metals were shoveled under the carpet. Junk went back to the dump. The Euro was slashed four cents; the Ausie dollar touched 96 cents, down a whopping 15 cents since July. All of a sudden Uncle Buck was everybody's favorite relative. Even Apple was down $20. My goodness!

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The carnage was global in nature. Commodity based countries and their currencies took the biggest hit, with Russia (RSX) down 11% in a single day. Emerging markets (EEM) outperformed developed ones in the downside, as investors suddenly grew homesick and took their money with them. It seems that an economy downshifting from 6% growth to zero generates a more dramatic trip south than one slowing from 2% to zero. This is the usual pattern. Looking at the charts, the emerging markets are already deep into bear market territory.

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Somebody has got this all completely wrong. I have never seen a greater disconnect between the financial markets and the real economy, which the data releases show is continuing to improve. Even on takedown Thursday, the leading economic indicators for August showed a surprisingly strong 0.3%.

This all means that October is shaping up to be a very interesting month, as one of two things has to happen. The data will catch up with reality and show a dramatic decline with the September releases, in which case the recent collapse of asset prices has been fully justified. Or the data continues their modest rate of improvement, meaning that traders have just laid a huge egg. That would trigger a huge short covering rally that could take us into year end, possibly tacking on up to 27% in the S&P 500.

I vote for the latter. Watch those weekly jobless claims, which come out every.? Thursday morning at 9:30 EST!

The good news is that I finally got my computer working. Now, if I can only get everything to shift 90 degrees to the right. Maybe I'm supposed to lie on my side? And, oh, I think that I'm engaged to someone in India. Abhishek in technical support seemed like such a wonderful person, I thought why not.

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Suddenly, Everyone Loves Uncle Buck

September 26, 2011 - Quote of the Day

Diary

'If you're really long term, you should be really long term scared. At the end of the day, long term risk management is what you should be thinking about. '?Long term' meaning only being bullish is ridiculous. You should be managing risk aggressively,' said Keith McCullough of Hedgeye Risk Management.

September 22, 2011 - Do the Ratings Agencies Need New Typists?

Diary

Featured Trades: (DO THE RATINGS AGENCIES NEED NEW TYPISTS?),
(TLT), (BAC), (C)

3) Do the Ratings Agencies Need New Typists? If there were ever a deep lagging indicator, it is a downgrade by a ratings agency. While the housing market peaked in 2006, these despised institutions didn't get around to marking paper down from triple 'A' to junk until four years later.

Then in August, Standard and Poor's downgraded US Treasury bonds. Since then, they have gone up like a rocket, with the yield on the ten year bond plunging from 2.8% to an eye popping 1.86%. Could it be that this is a simple typo? Did an underpaid and errant typist confuse the word 'down' for 'up'?

Today, I hear that Moody's downgraded the major banks, including Bank of America (BAC) and Citigroup (C). I have since been flooded with emails from readers asking if they should be going short banks here. I respond that it's too late, that they're an hour late and a dollar short, and that they missed the boat. Shorting (BAC) is something you do at $12, as I recommended on national TV last spring, not here at $6. The risk reward ratio here is not good.

Part of the reason behind the Moody's move is that they have completely lost faith in the American political system. I totally sympathize with them. The Republicans now have a vested interest in crashing the economy so they can blame it on Obama and win the presidency.

So there is zero chance of a TARP 2 getting through the congress in the next financial crisis and saving the banks once again. Tough luck if you and I are unwilling passengers in this demolition derby. Can you blame investors for throwing up their hands in disgust and walking away from equities, as they appear to be doing in large numbers?

Here is another way to look at the banks. Much of the bank meltdown that has occurred since February is due to the enormous Treasury bond rally. The incredibly flat yield curve that has resulted, squeezes the free lunch that the banks have been relying on to recapitalize themselves. So shorting banks here is the risk equivalent of initiating new longs in bonds at these levels. Neither is a good idea.

Does Moody's Need a New Typist?

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No Matter What Happens, Blame It On Obama

September 22, 2011 - Quote of the Day

Diary

'The next phase in the development of China is the empowerment of the consumer. That is happening as we speak. The Chinese consumer is in much better shape than the American consumer,' said Daniel J. Arbess of Xerion Capital Partners.

September 21, 2011 - Macro Millionaire Punches Through to New All Time High

Diary

Featured Trades: (MACRO MILLIONAIRE PUNCHES THROUGH TO NEW ALL TIME HIGH),
(SPY), (USO), (FXE), (FXF), (GLD), (IWM), (BAC)

2) Macro Millionaire Punches Through to New All Time High. Macro Millionaire, my innovative trade mentoring program, punched through to a new year to date return of 39.15%. Suring the same time period, which began on December 1, 2010, the S&P 500 posted a paltry 2% gain.

Since the August 8 low in the stock market, I have closed ten consecutive profitable trades in the S&P 500 (SPY), the United States Oil Fund (USO), the Euro (FXE), the Swiss franc (FXF), gold (GLD), the Russell 2000 (IWM), and Bank of America (BAC). September alone is up 16.56%.

As we mark to market our portfolio daily, these results are net of losses that I am running in the short Treasury bond ETF (TBT) and Caterpillar (CAT). Take away the drag from this pair of losers, and my performance would be up 47.64% YTD.

For those who wish to participate in Macro Millionaire, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put 'Macro Millionaire' in the subject line, as we are getting buried in emails. This is the best chance you will ever have to learn the strategy, logic, risk control, and execution methods employed by the top hedge fund managers.

September 21, 2011 - IMF Rings the Alarm for the Global Economy

Diary

Featured Trades: (IMF RINGS THE ALARM FOR THE GLOBAL ECONOMY)

3) IMF Rings the Alarm for the Global Economy. The International Monetary Fund just substantially revised down their growth outlook for 2012, saying that the global economy has entered a 'dangerous new phase.' Specifically, the world was cut from GDP growth of 4.5% to 4%, the US from 2.7% to 1.8%, and European from 1.7% to 1.1%.

Keep in mind that the IMF, like the Federal Reserve, is a deep lagging indicator when it comes to making accurate economic predictions. For example, The Mad Hedge Fund Trader cut his 2011 GDP expectation to 2% last January, well in time to position your portfolio to take maximum advantage. Often it is a case of these agencies closing the barn door after the horses have bolted.

To me, the most glaring downgrade out there is that for Europe. It makes total nonsense of the current short term interest rates for the Euro, which the European Central Bank raised twice this year by 0.25%. When they cut back to zero, where they should be, the Euro will crater against the dollar. And downgrades are just like cockroaches. You never find just one.

I think that a Euro short is one of the cleanest trades out there. I am just waiting for another bogus spike up to reestablish my short.

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Cockroaches: You Never Find Just One

September 21, 2011 - Apple's Next Stop: $1,000

Diary

Featured Trades: (APPLE'S NEXT STOP:$1,000), (AAPL)

4) Apple's Next Stop: $1,000. Watching Apple (AAPL) post a new all-time high today, I was struck by a wave of nostalgia. When I took a young, cocky, long haired, Levis wearing Steve Jobs around to meet Morgan Stanley's institutional investors to pitch an Apple secondary share offering 28 years ago, I vowed never to buy anything from the man. He was such a great salesman, and possessed such a messianic devotion to his product, the risk of getting legged over had to be great.

This proved a good strategy for the next 18 years, when the company nearly went under three times, and the stock repeatedly plunged from its initial listing price of $22 down to $4. Disastrous products like the Apple Newton came and went, and then poor Steve got fired. Ouch!

Living in the San Francisco Bay Area, I was also creeped out by the fanatical cult following that Steve enjoys. Criticize an Apple product here, and you risk getting attacked, ostracized, deleted from address books, chopped off Christmas card lists, banned from Facebook pages, and ejected from Twitter accounts. There was also no end of abuse from my IPod, Imac, and Tablet addicted kids who accused me of being a dinosaur sticking with my Windows based PC and Blackberry.

I have to confess now that my prior prejudices lead me to miss the boat on Apple for the last decade, when the stock soared from $4 to $420, eventually topping Exxon (XOM) with a gargantuan $390 billion market plus capitalization. To see the company bring out a ground breaking, high end $499-$829 product like the IPad and sell 2 million units in a short two months during unstable economic conditions is nothing less than amazing.

The recent stock performance has also been miraculous, bouncing back from a flash crash low of $195 to challenge its old high in a matter of weeks, while the rest of techland lay in ruins. Forecasts for the global smart phone market are ratcheting up by the day on the back of surging demand from emerging markets. Sales could reach 250 million units annually by 2012, of which 17% currently is sold by Apple.

The company has become a monster cash flow generator, spewing out $12 billion over the last 12 months. It sits on a cash mountain of $66 billion. Apple now has the envious problem in that sales of several of its products are going hyperbolic at the same time. Some analysts have Apple's earnings skyrocketing from the current $25/share to $30 over by next year, which at the current 16 multiple would take the share price up to $480.

If the company's multiple expands to its pre-crash average of 35 X, that would take the stock to a positively nose bleeding $1,050, giving it a 250% return over the next two years. Call me crazy, but if corporate American finally starts supporting Apple products in their own business applications, which I hear is in the works at several Fortune 100 firms, that forecast could be low.

I'm not saying that you should rush out and load up on stock today. But it might be worth taking a stake on the next wave of fear that strikes the market. For momentum players, buy yesterday!

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What a Long and Winding Road It's Been

September 21, 2011 - Quote of the Day

Diary

'A year from now the dominoes will be falling in Europe. The world is going to be a more destabilized place'?.The risk free rate isn't risk free any more. We're not growing as we should be because there is a diminishing rate of return for each additional dollar of debt. In a year, we're going to be in recession again,' said Kyle Bass, of the Dallas, Texas based hedge fund, Hayman Capital.

September 20, 2011 - Traders Are 'Lost' With the Economic Data

Diary

Featured Trades: (TRADERS ARE 'LOST' WITH THE ECONOMIC DATA)

1) Traders Are 'Lost' With the Economic Data. Traders can be forgiven for believing that they are reliving an episode of the cult mystery TV show, 'Lost.' The economic data was truly a mixed bag last week, with lagging reports showing us that the economy is fine, while the most important leading indicators threatening a serious deterioration. They give more credence to the view that the Tea Party inspired near debt default and Standard and Poor's Treasury bond downgrade generated a real dip in the economy last summer.

The July trade deficit showed a stunning decline, from $51.6 billion to $44.8 billion. Due, no doubt to the advantages American exporters are reaping from the weak dollar, the report normally would have been cause for celebration by investors, politicians, and business leaders alike. But they are understandably nervous, gun shy, and punch drunk, and will await further confirmation to sound the 'all clear' signal.

It didn't help that the most crucial of leading indicators, the weekly jobless claims, worsened, rising 11,000 from to 428,000. The four week moving average rose 4,000 to 419,500. Capacity utilization remains in the basement at 77.4%.? This is a stunning figure, as our unused capacity would rank as the fourth largest country in the world, if it were carved out as a separate country. And August inflation rose at double the expected rate, popping 0.4% to a 3.8%., raising the ugly specter of stagflation.

The choppiness of this data suggests that the double dip risk is still on the table, and that market volatility will continue. This is great news for nimble and agile traders like myself, but terrible for long term investors. Watch for those trader alerts!

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Sell the Rallies, Buy the Dips, or Both?

September 19, 2011 - Bill Ackman's Hong Kong Dollar Play

Diary

Featured Trades: (BILL ACKMAN'S HONG KONG DOLLAR PLAY), (EWH)

2) Bill Ackman's Hong Kong Dollar Play. You are all well aware of my love affair with the Chinese Yuan (CYB), which I expect to appreciate substantially in coming years off the back of China's continuing economic miracle. Bick Ackman, of Pershing Square Capital Management fame, has come up with his own variation, that of piling on a leveraged long in the Hong Kong dollar.

I often tell investors that Hong Kong is the way to play China if you want to sleep at night. As a holdover from its days as a British Crown Colony, which ended in 1998, it still employs largely western style accounting and corporate governance standards. Blowups of the variety that we are seeing in mainland companies, like Sino Forest, are much less common.

The Hong Kong economy is growing at a 6% annual rate, with 5% inflation, and a 3% unemployment rate. These are numbers that any developed country finance minister or politician would kill for. But because of an accident of history, the Hong Kong dollar has always been pegged to a foreign currency, first the British pound, and for the last 27 years, the US dollar. So while it's economic policy is, in effect, made in Beijing, monetary policy is determined in Washington. This can't last.

Since the peg was established in 1983, Hong Kong has risen from an up and coming frontier market with almost laughable volatility to a triple 'A' credit. (A close friend of mine received an Order of the British Empire from Queen Elizabeth for engineering the scheme). Despite this stellar performance, the peg has made the Hong Kong dollar one of the weakest currencies in Asia. It really should be trading on par with the Singapore dollar, which has been moving from strength to strength for similar reasons. Let it float, and you could see a very rapid 30% appreciation from its current 12.84 cents.

Ackman has taken his position in the form of highly leveraged over the counter, out of the money call options that do not trade on any exchange, and were most likely custom written by a major investment banks. There is no Hong Kong dollar ETF, and the Hong Kong iShares ETF (EWH) gives you exposure to both the currency and local blue chip equities.

Big hedge funds can do as Bill did and buy some custom options, although this is an expensive way to do it. Those with large credit lines can put on this trade through the interbank market where you can get 10:1 leverage. Individuals are limited to buying outright cash in Hong Kong dollars, or invest in the ETF and take the equity risk as well, where the long term prospects are excellent.

The Hong Kong currency could be dragged up by any move by China to float the Yuan, which is just a matter of time. But recent leaks from senior officials at the People's Bank of China suggest that this is at least five years off.

Bick Ackman is not that patient. He expects the Hong Kong dollar to go ballistic within the next 12-18 months, which is the maturity of his options position. Longer than that, and he will simply roll forward the position when it expires. When is the next potential trigger? Next April, when local elections may tempt bold moves on the monetary front.

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A Peg Worth an OBE