August 2012

Testimonial

I am a UH-1Y Huey helicopter pilot in the US Marine Corps. I am currently deployed aboard the USS Boxer as a Forward Air Controller with Battalion Landing Team 1/1, 13th Marine Expeditionary Unit. Our area of responsibility is the Middle East, which is where I?m writing this from now.

I have been a follower of madhedgefundtrader.com for over a year now. A friend of mine from my squadron initially recommended your website to me and I was immediately hooked. I was drawn to the refreshing way in which you neatly tied together financial markets, macroeconomic trends, politics, and just about every other subject you read about in the news. It is a coherent, well-packaged, Theory of Everything which seemed to explain and predict market trends and movements with a grace and accuracy I had never seen before, or even knew existed.

I have always had an interest in investing and the stock market (indeed, just enough of an interest to be dangerous?), but have never seemed to allow myself to ?bite-off? on the image of banking and investing sold by pundits on MSNBC, or in the thousands of get-rich-quick investing books on the shelves of any bookstore. It always seemed like there was some secret that the really successful investors knew which would just never end up in a TV segment, or for sale on a bookshelf.

I was at once impressed and intrigued by the way you were able to step back from the microscope of analyzing price movements and hype in the market, and instead focus on the big global picture and how all of the pieces fit together. This, is art.

It was clear that I could learn a lot of that from you. Right around the end of April though, as your ?RISK OFF? predictions began coming true, I was able to cash in on some successful positions, and I decided it would be well worth my money to sign up for your Macro Millionaire program. Since the first week of May, I have been a Macro Millionaire. I decided to commit 100% to your program and jump in with both feet to try to get the most out of it and have a true shot at success.

I downloaded your spreadsheet for keeping track of positions. I read every article I could find on your website, and a couple of books you?ve recommended. I?ve been able to sit in on your live webinars on three separate occasions from an Internet connection in Djibouti, Africa, where you have personally answered my questions.

I?ve followed every Trade Alert you?ve sent out (as best as I could considering the difficulty of trading stocks on a deployment), and have even begun using the techniques you?ve taught me and your broad market predictions to make a few profitable trades of my own.

I continue to see the greatest value of your product in an education on finance, economics, and the world, which I will carry with me for the rest of my life. You?ve somehow managed to take a whole bunch of topics I?ve been interested in studying, and weave them carefully together to show me a new way of looking at the world, and business. This education alone is worth the fee.

As I am on a ship with no phone, you have my permission to use this testimony in any way you see fit. Take care, and thanks for your efforts.

Sincerely,
Justin Savino-Sullins
Captain, USMC

August 13, 2012 - Quote of the Day

Quote of the Day

?I used to tell lies. But I?ve given it up, because the field has become overrun with amateurs,? said the great American 19th century humorist, Mark Twain.

Trade Alert - (SPY) August 10, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

When Bad Becomes Good and Worse is Even Better

Newsletter

Welcome to the ?Heads I win, tails you lose? market. The prospect of imminent quantitative easing by the US, Europe, China, and even Japan is supporting asset prices globally. The worse the economic data reports, the greater the likelihood of such action, and the higher prices can rise. In this topsy turvey world, bad becomes good, and worse is even better.

The only reason for the central banks not to act is if the economy starts to reaccelerate on its own without outside intervention. So the choices presented to investors are really quite limited: you either buy, or you buy. This is the twisted logic that has allowed traders to run the markets up to within 2% of the four year highs on incredibly small volume.

There is only one problem with this approach to the market. It requires mental gymnastics that would earn a gold medal at the London Olympics.

The harsh reality is that this impressive gain in the market has occurred in the face of decidedly deteriorating fundamentals. American companies managed to eke out a 5% gain in earnings in Q2, down from a 15% increase a year ago. Adjust for inflation and this growth rate approaches zero in real terms.

What is particularly disturbing is that they achieved these scanty results in the face of falling revenues. They did this by cutting costs, primarily through the firing of workers. This is why the unemployment rate remains at a stubbornly high 8.3%, despite some of the most impressive stimulus measures in history. Companies are burning the candle at both ends to gin up extremely modest positive results. They are literally eating their seed corn.

Needless to say, this does not support any kind of thesis for long term investment. All it does is move us from the bottom to the top of a six month range. I can?t imagine that you are going to see many aggressive buyers higher than here. Edge up from here, and you might witness the disgusting sight of traders throwing up on their shoes as they rush to cover premature shorts.

That is when you want to hold your nose and establish your shorts. Even the most bullish forecasts have the S&P 500 going up only 5% from here to 1,475, before it heads back down again.

This is not the first time that the market action has divorced itself from the fundamentals. I watched the Japanese stock market go from strength to strength for ten years before it knocked itself out crashing into the ceiling at ?39,000. Last night it closed at ?8,978, some 22 years later. Those analysts at Morgan Stanley obsessed with fundamentals only during the 1980?s saw their offices moved next to the elevator, then the men?s bathroom, the one with the big punching bag hanging from the ceiling, and finally, out of the building completely.

At this point you have to ask how much of QE3 is already priced into the market. If the Federal Reserve instituted this aggressive monetary expansion policy two months ago, they might have been able to engineer a 200 point move in the (SPX) or 2,000 points in the Dow. If they do it today, they might get only 50 (SPX) points, 500 Dow points, and perhaps none at all, followed by a sharp drop.

Lighten up your book, take short-term profits, sell short-dated-out-of- the-money calls, and meaningfully reduce your risk. Find something else to trade besides stocks. That is unless you have the luxury of staying out completely. The traders who don?t remember to sit down when the music stops playing will get burned badly.

Don?t Ask Me How I Got Here

Bring Back the Uptick Rule! 2012

Diary

When the Dow crashed 514 points on August 8, 2010, the market lost a staggering $850 billion in market capitalization. High frequency traders were possibly responsible for half of this move, but generated a mere $65 million in profits, some 7/1,000?s of a percent of the total loss. Are market authorities and regulators being penny wise, but pound foolish?

The carnage the HF traders are causing is triggering a rising cry from market participants to ban the despised strategy. Many are calling for the return of the ?short sale test tick rule?, or SEC Rule 17 CFR 240.10a-1, otherwise known as the ?uptick rule?, which permits traders to execute short sales only if the previous trade caused an uptick in prices. The rule was created eons ago to prevent the sort of cascading, snowballing selling that we are seeing today. It was repealed on July 6, 2007. Check out a chart of the volatility that ensued and it will make your hair raise on the back of your neck.

Those unfamiliar with how algorithmic trading works see it as something akin to illegal front running. ?Co-location? of mainframes with exchange computers, or having them in adjacent rooms, gives them another head start over the rest of us. Much of the trading sees HF traders battling each other, and involves what used to be called ?spoofing?, the placing of large, out of the market orders with no intention of execution. Needless to say, if you or I tried any of these shenanigans, the SEC would lock us up in the can so fast it would make your head spin.

Many accuse exchange authorities of a conflict of interest, allowing members to reap sizeable custody fees from HF traders, while the rest of us get taken to the cleaners. Co-location fees run in the hundreds of thousands of dollars per customer. This is happening while traditional revenue sources, like proprietary trading, are disappearing, thanks to Dodd-Frank. There is no doubt that the volatility is driving the retail investor from the market. August has seen the highest equity mutual fund redemptions in history.

In fact, HF trading has been around since the late nineties, back when the uptick rule was still in place and colocation was a term out of Star Trek. But it was small potatoes then, confined to a few niche players like Renaissance, and certainly lacked the firepower to engineer 500 point market swings.

The big problem with this solution is that HF trading now account for up to 70% of the daily trading volume. Ban them, and the market volatility will shrink back to double digit trading ranges that will put us all asleep. The diminished liquidity might make it difficult for the 800 pound gorillas of the market, like Fidelity and Caplers, to execute trades, further frightening end investors from equities. It is possible that we have become so addicted to the crack cocaine that HF traders provide us that we can?t live without it?

August 10, 2012 - Quote of the Day

Diary

?My feeling is that the bond market is grossly overvalued. We?re going to have 2%, 3%, 4% inflation. That?s what Bernanke is really saying. If we are going to have interest rates at zero for two years, that is actually going to push inflation up higher,? said professor Jeremy Siegel of the Wharton School of Business.

Trade Alert - (SPY) August 9, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

Europe?s Big Problem

Diary

Europe has a big problem. No, it is not the continuing sovereign debt crisis, the lack of leadership, or the possible departure of up to a quarter of its membership, although these are all major worries.? Nor is it the Euro, the currency that everyone loves that has been declining for the last two years. No, the problem I am talking about is much worse than that. It is in fact so extreme that the union may not survive unless it is dealt with soon.

A Big Mac hamburger in Milan, Italy?s downtown Galleria cost me $7.50 on Monday. No, that is not for the entire meal, which includes the supersized Coke and French fries. That is just for the burger alone. This compares to $3.50 back home in the USA and only $3.00 in China.

And I can tell you that there is absolutely no difference between these three heart attacks on a plate, because I have eaten all three of them over the past year. The only real benefit of buying the Italian version is that they also had this cool espresso machine so you could wash down your lunch with a cappuccino or caf? latte.

I have written many times in the past about the Big Mac?s usefulness in measuring the relative value of foreign currencies using the theory of purchasing power parity. It is, after all, one of the few products sold in almost every country in the world which is uniformly identical. Thank American management for that, along with the world?s largest food logistics operation.

I have followed this indicator in earnest since my old employer, The Economist magazine in London, wrote it up as an April 1 spoof during the 1970?s. To their shock, their own arguments carried some merit and achieved a life of their own.

Last week, The Economist updated their closely watched indicator. It showed that the Norwegian kroner is 60% overvalued, fueled by its huge oil exports. The Hong Kong dollar sits at the bottom with a 50% undervaluation, gaining an edge from the cheap cost of labor and a low tax regime.

In the good old days, Italy could simply devalue the lira to make its Big Macs, and everything else it produces, internationally competitive. But since 1999, it has been trapped inside the European Monetary System, making this kind of instant cost cutting impossible. As long as Italy is pricing its Big Macs in Euro?s, it might as well be pricing them in in the old Deutchemarks. The same is true for Spain, Portugal, Ireland, and Greece. This does not bode well for the future of Europe.

Of course, if the Euro continues to fall, Italy might get some respite. But even if the Euro plunges to its old all-time low of 88 cents, down 28% from here, it would still have one of the world?s most expensive hamburgers. Maybe it?s time for Italians to become vegetarians. Maybe that is what is knocking the stuffing out of McDonalds (MCD) shares today.

Musings of a Dinosaur

Diary

I often get accused by readers of being a dinosaur, of being insensitive to the feelings of others, and of living as a relic from a previous age. Well, you all may be right. So it is with some amusement I run a piece that I have lifted from my friend, Dennis Gartman?s, The Gartman Letter, on the difference between going to school in 1957 and 2010:

Scenario 1:
Jack goes quail hunting before school and then pulls
into the school parking lot with his shotgun in his
truck's gun rack.
1957 - Vice Principal comes over, looks at Jack's
shotgun, goes to his car and gets his shotgun to show
Jack.
2010 - School goes into lock down, FBI called, Jack
hauled off to jail and never sees his truck or gun again.
Counselors called in for traumatized students and
teachers.

Scenario 2:
Johnny and Mark get into a fist fight after school.
1957 - Crowd gathers. Mark wins. Johnny and Mark
shake hands and end up buddies.
2010 - Police called and SWAT team arrives -- they
arrest both Johnny and Mark. They are both charged with
assault and both expelled even though Johnny started it.

Scenario 3:
Jeffrey will not be still in class, he disrupts other
students.
1957 - Jeffrey sent to the Principal's office and given a
good paddling by the Principal. He then returns to class,
sits still and does not disrupt class again.
2010 - Jeffrey is given huge doses of Ritalin. He
becomes a zombie. He is then tested for ADD. The family
gets extra money (SSI) from the government because
Jeffrey has a disability.

Scenario 4:
Billy breaks a window in his neighbor's car and his
Dad gives him a whipping with his belt.
1957 - Billy is more careful next time, grows up normal,
goes to college and becomes a successful businessman.
2010 - Billy's dad is arrested for child abuse, Billy is
removed to foster care and joins a gang. The state
psychologist is told by Billy's sister that she remembers
being abused herself and their dad goes to prison. Billy's
mom has an affair with the psychologist.

Scenario 5:
Mark gets a headache and takes some aspirin to
school.
1957 - Mark shares his aspirin with the Principal out on
the smoking dock.
2010 - The police are called and Mark is expelled from
school for drug violations. His car is then searched for
drugs and weapons.

Scenario 6:
Johnny takes apart leftover firecrackers from the
Fourth of July, puts them in a model airplane paint
bottle and blows up a red ant bed.
1957 - Ants die.
2010 - ATF, Homeland Security and the FBI are all
called. Johnny is charged with domestic terrorism. The
FBI investigates his parents - and all siblings are
removed from their home and all computers are
confiscated. Johnny's dad is placed on a terror watch list
and is never allowed to fly again.

Scenario 7:
Johnny falls while running during recess and
scrapes his knee. He is found crying by his teacher,
Mary. Mary hugs him to comfort him.
1957 - In a short time, Johnny feels better and goes on
playing.
2010 - Mary is accused of being a sexual predator and
loses her job. She faces 3 years in State Prison. Johnny
undergoes 5 years of therapy.

So True!