2011 Archive - Mad Hedge Fund Trader

Tea With Secretary of State George Schultz

Having spent time as an economics professor at MIT, Dean of the University of Chicago business school, Treasury Secretary, and Secretary of State, George Schultz has certainly covered all the bases. Now 89, he is the senior statesman and eminence gris of San Francisco, as well as a major philanthropist.

When I read his bio, I feel like my own life in comparison has been wasted watching Archie Bunker on TV in All in the Family. I first ran into George in the seventies as the CEO of Bechtel, and pursued him while in the White House Press Corp. I have since occupied the box next to his in the San Francisco Opera, and joined him in several Marine Corps charities.

George said that America?s health care headache started in WWII, when wages and costs were controlled, but not benefits. So companies competed for labor by offering increasingly generous, tax free benefits programs. And when something is free, you lose a lot of it, driving total costs through the roof. The end result is large misallocations of resources that you don?t see in other businesses.

Private American companies have made possible tremendous medical advances for a profit, and this system should be allowed to continue. But we need to incentivize future advances with cost containment. We need a universal, subsidized plan that heads off intergenerational conflict by not allowing healthy young people to escape obligations, nor denying older people with preexisting conditions.

Allowing consumers to buy private insurance across state lines, which is now impossible, would be a start. Today your average 65 year old lives for 20 years, compared to 13 years in 1965, and two years in 1900. An equitable system would enable those who wish to continue working after 65, without burdening employers with health care costs, adding $1 trillion to GDP that will help us pay for this all.

Quote of the Day: October 25th

Quote of the Day

?Freedom of the press is only true if you own a press,? said A.J. Liebling, a famed journalist for the New Yorker.

September 26, 2011 - Market Carnage Revisited

Diary

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.