January 2012

SOLD OUT! Beverly Hills January 23 Strategy Seminar

Come join me for the Mad Hedge Fund Trader?s Global Strategy Seminar, which I will be conducting in Beverly Hills at 1:30 pm on Monday, January 23, 2012. A 45 minute PowerPoint asset class review will be followed by an open discussion on the crucial issues facing investors today. Coffee and snacks will be made available. The bar will open at 4:30 when we get into the really heavy stuff.

I?ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $195.

I?ll be arriving early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.

The event will be held at a Beverly Hills venue that will be emailed directly to you with your confirmation.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store here and click on ?Beverly Hills.?

Buy Flood Insurance With the VIX

Newsletter

I am one of those cheapskates who buys Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar because my eleven month return on capital comes close to 1,000%. I also like buying flood insurance in the middle of the summer when the forecast here in California is for endless days of sunshine. That is what we are facing now with the volatility index (VIX) where premiums have just broken under 20%, a six month low. The profits you can realize are spectacular.

The CBOE Volatility Index (VIX) is a measure of the implied volatility of the S&P 500 stock index, which has been melting since the ?RISK OFF? trade peaked in early October. You may know of this from the talking heads, beginners, and newbies who call this the ?Fear Index?. Long term followers of my Trade Alert Service profited handsomely after I urged them to sell short this index with the heady altitude of 47%.

For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The (VIX) is the square root of the par variance swap rate for a 30 day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever useful Black-Scholes equation. You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?

For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don?t know what an SAT test is, this is what you need to know. When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. End of story. Class dismissed.

The (VIX) is expressed in terms of the annualized movement in the S&P 500. So today?s (VIX) of $19 means that the market expects the index to move 5.5%, or 72 S&P 500 points, over the next 30 days. You get this by calculating $19/3.46 = 5.5%, where the square root of 12 months is 3.46. The volatility index doesn?t really care which way the stock index moves. If the S&P 500 moves more than the projected 5.5%, you make a profit on your long (VIX) positions.

Probability statistics suggest that there is a 68% chance (one standard deviation) that the next monthly market move will stay within the 5.5% range. I am going into this detail because I always get a million questions whenever I raise this subject with volatility deprived investors.

It gets better. Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006. Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the ?hedge? in hedge fund.

But wait, there?s more. Now, erase the blackboard and start all over. Why should you care? If you buy the (VIX) here at $19, you are picking up a derivative at a nice oversold level. Only prolonged, ?buy and hold? bull markets see volatility stay under $20 for any appreciable amount of time.

If you are a trader you can buy the (VIX) somewhere under $20 and expect an easy double sometime this year. If you are a long term investor, pick up some (VIX) for downside protection of your long term core holdings. A bet that euphoria doesn?t go on forever and that someday something bad will happen somewhere in the world seems like a good idea here.

Will Gold Coins Suffer the Fate of the $10,000 Bill?

Diary

The conspiracy theorists will love this one. Buried deep in the bowels of the 2,000 page health care bill was a new requirement for gold dealers to file Form 1099's for all retail sales by individuals over $600. Specifically, the measure can be found in section 9006 of the Patient Protection and Affordability Act of 2010.

For foreign readers unencumbered by such concerns, Internal Revenue Service Form 1099's are required to report miscellaneous income associated with services rendered by independent contractors and self-employed individuals. The IRS has long despised the barbaric relic (GLD) as an ideal medium to make invisible large transactions. Did you ever wonder what happened to $500, $1,000, $5,000, and $10,000 bills?

Although the Federal Reserve claims on their website that they were withdrawn because of lack of use, the word at the time was that they disappeared to clamp down on money laundering operations by the mafia. In fact, the goal was to flush out income from the rest of us. Dan Lundgren, a republican from California's 3rd congressional district, a rural gerrymander east of Sacramento that includes the gold bearing Sierras, has introduced legislation to repeal the requirement, claiming that it places an unaffordable burden on small business.

Even the IRS is doubtful that it can initially deal with the tidal wave of paper that the measure would create. Currency trivia question of the day: whose picture was engraved on the $10,000 bill? You guessed it, Salmon P. Chase, Abraham Lincoln's Secretary of the Treasury.

Ever Wonder Where The $10,000 Bill Went?

January 23, 2012 - Quote of the Day

Quote of the Day

Steve Jobs offered me one third of Apple for $50,000 and I was so smart that I turned it down. It?s funny when you think about it now, except when I?m crying,? said Nolan Bushnell, the founder of game company Atari and Jobs? first employer.

The Weekly Jobless Claims Blockbuster

Diary

Traders were taken aback this morning when the Department of Labor announced a 50,000 drop in weekly jobless claims to 352,000. The street had been expecting a decline of only 19,000. It was the lowest report in almost three years, and the sharpest weekly decline in seven years.

I tell people that, if stranded on a desert island, this is the one weekly report I would want to call the direction of the economy. So I am up every Thursday morning at 5:30 am PST like an eager beaver awaiting the announcement with baited breath.

The impact will not be as great as the headline number suggests. Nearly half of the figure represents a take back of the 24,000 increase in claims for the previous week. But there is no doubt that it represents an upside surprise for the economy. And you have to put this in the context of a long steady stream of modestly positive economic data that has been printing since the summer.

The release was only able to elicit a small double digit response from the stock market. That?s because we are now up nine out of eleven days, taking the S&P 500 up 4.5% on the year, a far more blistering performance than many expected. That takes us right up to the level of 1,312, which many analysts predicted would be the high for the year.

Break this on substantial volume, and we could reach my own upside limit of 1,370. If you believe that we are trading to the top of a 300 point range from 1,070 to 1,370, as I do, then there is not a lot you want to do here when you are 81% into that move, unless you want to day trade.

At this point, I would like to refer you to my October 30, 2011 piece, ?The Stock Market?s Dream Scenario? by clicking here. Since then, two of my three predicted ?black swans? have occurred, progress on the European sovereign debt problem and the first interest rate cut by the People?s Bank of China in three years. The third, a multi trillion dollars budget and tax compromise in Washington, was dead on arrival. But hey, calling two out of three black swans is not bad!

Arriving on Schedule

January 20, 2012 - Quote of the Day

Quote of the Day

?You can?t keep on firing people. We?ve gotten so mean and so lean that you naturally get to the point where there are fewer people to let go,? said Steve Ricchiuto, chief economist at Mizuho Securities.

2012 Strategy Luncheon Schedule

Diary

Many of you have asked for this year?s strategy luncheon calendar so you can make advance travel arrangements, so here it is. This is understandable, since the Orlando luncheon saw visitors from Brazil and Australia, the Los Angeles one had subscribers from Alaska thawing out, and at the London event the distinctive accent of Johannesburg was heard.

This year I am going into the cruise business, holding a seminar in the penthouse suite of the Cunard transatlantic liner, Queen Mary II, en route from New York to Southampton, England. The gathering will be held as we sail over the wreck of the Titanic just to keep us all humble. I promise the captain will be British, not Italian! The events in bold are already listed in the store at www.madhedgefundtrader.com under ?LUNCHEONS?. The rest will be posted in coming months. There are still a couple of Beverly Hills tickets left, so if you want to come, get a move on.

January 23 Beverly Hills
January 27 Las Vegas
February 9 Houston
February 10 Orlando
April 20 San Francisco
May 3 Phoenix
June 11 Beverly Hills
June 29 Chicago
July 5 New York
July 6-13 Queen Mary II Cruise
New York to Southampton
July 16 London
July 17 Frankfurt
October 26 San Francisco
November 8 Orlando
January 3, 2013 Chicago

Fade the Second Half of January

Diary

Let me tell you about the real January effect. Many pension and retirement funds only reshuffle weightings between different asset classes once a year, mostly in January. That has created a temporary surge of stock buying and bond selling that exhausts itself by the middle of the month. After that, the market sells off. During the second half of January in 2009, the S&P 500 dropped by 3.5%, in 2010 it plunged 5.9%, and in 2011 it pared back 0.54%.

Will history repeat itself a fourth time? The global economy is facing certain slowdowns in Europe, China, and India. The bull run in equities is rapidly approaching the advanced age of four months, long in the tooth by recent standards. I am betting that it will, but will keep my short positions small until I?m sure. The next bad headline from Europe will be the trigger.

Is the Bull Market Now a Senior Citizen?

January 19, 2012 - Quote of the Day

Quote of the Day

?The journey is the reward,? said the late Apple founder, Steve Jobs.

Carnage in the Grain Pits

Diary

I have been warning readers away from the agriculture space for the past few months, and on Thursday you found out why.
More than 90% of the street was positioned for a bullish report, expecting that the last summer?s blistering drought and ongoing dryness in South American would lead to inevitable shortages.

Instead, the US Department of Agriculture dropped a bombshell, predicting in its closely watched crop report that there would be copious oversupplies of every major grain for 2012. Prices utterly collapsed, with corn (CORN) closing limit down on the day.

This is not the first time this has happened. Over the past year, the USDA has lost, and then later found, 100,000 million bushels of corn, twice, sending prices gyrating each time, and putting traders through a meat grinder. Conspiracy theorists suspect political manipulation, insider trading, or just shear incompetence. Budget cuts are a more likely cause. The less money the government agency has to spend, the more volatile and less reliable its numbers are becoming. This is a major reason why I avoid the sector like a plague going into these reports.

I?ll tell you what happens from here. After a few weeks or months, these new developments will get digested by the marketplace. A few bodies will float to the surface, as overleverage by small traders reaps its grim harvest. Liquidation of their positions will give us our final low.

Then the long term bull market in food will resume its inexorable climb, and the grains will begin a slow grind up. The bottom line is that the world is making people faster than the food to feed them. Of the 2 billion souls who will join the global population over the next 40 years, half will come from countries unable to grow enough of their own food, primarily in the Middle East. It is just a matter of time before the weather turns hostile once again. There is the ever present tailwind of global warming. And who knows? The next USDA crop report could surprise to the downside, sending prices soaring.