August 2012

The World?s Worst Investor

My grandfather was an immigrant from Sicily who joined the army during WWI to attain US citizenship, lost an eye when he was mustard gassed on the Western Front, and settled down in the Bay Ridge section of Brooklyn after the war.

He bought a three bedroom brick home on 76th street for $3,000, eventually raising four kids. Back then, there was a dairy farm across the street, and horse drawn wagons delivered ice blocks door to door. During the roaring twenties an assortment of relatives chided him for avoiding the stock boom where easy fortunes were made trading on margin. When the 1929 crash came, all of them lost their homes. Grandpa finished off the basement, creating space for two entire families to move in. He never bought a stock in his entire life.

Because dad contracted malaria with the Marines on Guadalcanal during WWII, the old man moved the family to Los Angeles in 1947 for the dry, sunny weather. Unfortunately, the train stopped long enough in Las Vegas for a flim flam man to sell him five acres of land for $500. Ten years later my dad drove out to check out the investment. It was a tumbleweed blown, jack rabbit and rattlesnake ridden piece of land so far out of town that it was worthless. You couldn?t see downtown, even if you stood on the rusted out model ?T? that occupied the land. After that, the parcel became the family joke, and grandpa was ridiculed as the world?s worst investor.

Grandpa died of emphysema in 1977 at the age of 78. Chateau Thierry and Belleau Wood finally caught up with him. What German shrapnel and gas failed to accomplish, 60 years of smoking two packs a day of Marlboro?s did. His estate executor put the long despised plot in Sin City up for sale. Although the final price was never disclosed, it was thought to be well into eight figures. In the intervening 30 years the city of Las Vegas had marched steadily Southward towards Los Angeles, eventually encompassing it, sending its value through the roof. The deal triggered a big fight among the heirs, those claiming he was the stupidest demanding the greatest share of the proceeds, the bad blood generated continuing to this day. It turns out the world?s worst investor was really the best, we just didn?t know it.

What was the address of this fabled piece of real estate? Why, it is 3325 Las Vegas Blvd. South, the site today of the Venetian and Palazzo Hotels, home to the Dal Toro restaurant, the venue for the Mad Hedge Fund Trader?s last Las Vegas strategy luncheon. I?m sure grandpa is laughing in his grave.

Bought for $500 in 1947

Postscript

Diary

One day in New York a few years ago, I had a few hours to spare waiting to board Cunard?s Queen Mary 2 to sail for Southampton. So I decided to check out the Bay Ridge address near the Verrazano Bridge where my father grew up that I had heard so much about during my childhood. I took a limo over to Brooklyn and knocked on the front door. I told the owner about my family history with the property, but I could see from the expression on his face that he didn?t believe a single word.

Then I told him about the relatives moving into the basement during the Great Depression. He immediately let me in and gave me a tour of the house. He told me that he had just purchased the home and had extensively refurbished it. When they tore out the walls in the basement he discovered that the insulation was composed of crumpled up newspapers from the 1930?s, so he knew I was telling the truth. I told him that grandpa would be glad that the house was still in Italian hands. Could I enquire what he had paid for the house that sold in 1923 for $3,000? He said he bought it as a broken down fixer upper for a mere $775,000.

As I passed under the Verrazano Bridge on the Queen Mary II later that day, I contemplated how much smarter grandpa became the older I got. I hope the same is true with my kids.

Queen Mary II Passing Under the Verrazano Bridge

How the US is Getting Screwed on Its China Trade

Diary

One of the great things about running a website with a truly global reach is that readers send me material which is nothing less than outrageous. So I had to laugh when I found in my inbox an animation of two bears discussing the hopelessly idiotic approach the US government has taken towards its trade with China over the past two decades.

America gave away 25 million jobs, got nothing in return, with the end result that our standard of living is falling, while China?s is rising. The Chinese made this easy by devaluing their currency 50%, thus giving their exporters an unassailable price advantage. This has enabled the Middle Kingdom to buy an increasingly larger part of the US every year at knock down prices.

The US could address this imbalance at anytime through the imposition of punitive import duties and forcing a revaluation of the Chinese Yuan. But any attempts to do so are fought off by well-financed libertarian pro business elements spouting the principals of free trade. So China laughs all the way to the bank, and the unemployment rate here ratchets ever skyward.

To watch this irreverent video in its entirety, please click here for this link, and learn how international trade really works.

August 6, 2012 - Quote of the Day

Quote of the Day

?People think that Treasury bonds are riskless, but a 100 basis point rise in interest rates leads to an 18% capital loss,? said Andrew Neale, a portfolio manager at Fogel Neale Partners.

Trade Alert Service Punches Through to New All Time High

Diary

Global Trading Dispatch?s Trade Alert Service posted a new all-time high yesterday, clocking a 50.9% return since inception. The 2012 YTD return is now at 10.71%. That takes the average annualized return up to 30.1%, ranking it among the top five performing hedge funds in the world. Those happy subscribers who bought my service on May 23 have seen every one of my 11 trade recommendations turn profitable, reaping a 15.32% gain from my advice.

I really nailed the top of the market on April 2, piling on hefty short positions in the S&P 500 (SPY) and the Russell 2000 (IWM) within a week. Predicting that the conflagration in Europe would get worse, my heavy short in the Euro (FXE), (EUO) was a total home run. I took in opportunistic profits trading the Japanese yen (FXY), (YCS) and the Treasury bond market (TLT) from the short side. I was then able to lock in these profits by covering all of my shorts within 60 seconds of the May 28 market bottom.

In June I caught almost the entire move up with a portfolio packed with ?RISK ON? trades. I picked up Apple (AAPL) at $530 for a rapid $50 gain. I seized the once in a lifetime opportunity to buy JP Morgan (JPM) at a 40% discount to book value, picking up shares at $31, correctly analyzing that the ?London Whale? problem was confined and solvable. My long position in Walt Disney (DIS) performed like the park?s ?Trip to the Moon? ride. While Hewlett Packard (HPQ) fell a disappointing 5% on me, I was able to add 140 basis points to my performance through time decay on an options position.

My satisfaction in all of this comes from the knowledge that thousands of followers are making money in the markets that never would otherwise. I am protecting them from getting ripped off by the sharks on Wall Street with their conflicted and indifferent research. I am expanding their understanding of not just financial markets, but the world at large. And I am doing this during some of the most difficult trading conditions in history.

Earlier this week, I added a short position in the (SPY), expecting that Ben Bernanke would fail to deliver QE3. That assessment proved correct, delivering my 11th consecutive profitable trade. The roster is below:

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011. The service includes my Trade Alert Service, daily newsletter, real-time trading portfolio, an enormous trading idea database, and live biweekly strategy webinars. To subscribe, please go to my website at www.madhedgefundtrader.com, find the ?Global Trading Dispatch? box on the right, and click on the lime green ?SUBSCRIBE NOW? button.

Trade Alert Service Since Inception

Report From Zermatt

Diary

My first morning in the Swiss mountain hamlet of Zermatt, home to the Matterhorn, I was awoken by an army platoon outside my door, fully armed with fixed bayonets.

No, I was not being arrested for past indiscretions in the idyllic Alpine paradise. My often-inflammatory opinions had not even triggered an international incident worthy of military action. It was in fact, the traditional religious holiday of Corpus Christie, and the entire town was conducting a parade past my hotel, brass band and all, at 6:00 am.

Was It Something I Said?

Back in town I stopped at the Chamber of Commerce to pick up my 40-year visitor?s loyalty pin. The pin entitles me to free concerts at the 18th century church and other such frills.

When I first arrived here, the town was overrun with American college students, backpacking around Europe on shoestring budgets, using their Eurail passes to sleep on overnight trains to save the cost of a Youth Hostel. Alas, the age has passed, and today they are gone. Even the Youth Hostel here now costs $50 a night.

The weak dollar means that the only young Americans you see are the children of ?the 1%? flaunting new Rolex watches and daddy?s American Express platinum card, acting as obnoxious as they can. The locals love the business.

The Strong Swiss Franc Forced Some Economies

Since the Matterhorn has some mystical hold over the Japanese as the world?s most perfect mountain, tour groups are here en masse. At one traditional Swiss restaurant I saw one very loud, drunken fellow stagger from table to table, annoying every guest.

I knew from hard earned experience that this red-faced guy was going to throw up any minute.? I asked the owner why he didn?t throw him out. He said that the miscreant was the tour guide, if he left, his 20 big spending customers would depart with him, and he couldn?t afford to lose the business.

Can I Make a Collect Call to the 16th Century?

Zermatt has been a transit point for those traveling between Northern and Southern Europe for thousands of years. During WWII refugees fleeing fascist Italy were guided to the edge of the glacier never seen again. Hundreds are still thought to be entombed in the many deep crevasses.

On a previous trip, search and rescue was sent out to retrieve a newly discovered body. After sifting through his pockets and dating the coins, authorities realized that the unfortunate victim had been there for at least 400 years.

I always avoid the cheesy souvenir shops, as most of their offerings are now made in China, and I already have enough Swiss Army knives to last a lifetime. Instead, I do my shopping at the local hardware store and supermarket, loading up on my favorite mustard, chocolate bars, and a few cowbells.

There is a huge construction boom underway in Zermatt, with more than 20 hotels and condo buildings under construction. I asked a local business leader why this was so, with the economy of Europe falling apart. He replied that whatever they were losing with Germans, French, Spanish, and Italians they were more than making up with Asians and Arabs. Many shops now offer their chocolate, cuckoo clocks, and T-shirts with Japanese signboards.

August 3, 2012 - Quote of the Day

Quote of the Day

?It?s a bit like looking for gold in a minefield,? said Fidelity International?s China Special Situation Fund manager, Anthony Bolton, amid widespread accounting fraud in the country.

Technology Glitches Fell the Mad Hedge Fund Trader

Diary

Many apologies to the hundreds of listeners who were cut short during the broadcast of my biweekly strategy webinar on Wednesday, August 1. Despite the Herculean efforts of the staff, sometimes the technology doesn?t deliver as promised. This was one of those days.

For a start, getting the GoToMeeting software to work on an iMac is a bit like trying to shove a round peg in a square hole. While the scenery in Zermatt is spectacular, the local broadband is still stuck in the 19th century. I did a speed test and discovered, to my horror, that I was clocking 2 mb/second, compared to the blistering 100 mb/second that I get at home.

The satellite link connecting Europe with the US can go down at any time. On top of that, the London Olympics has been sucking up much of the continent?s bandwidth, slowing down everyone?s communications to the speed of molasses in winter.

There were some local issues that further complicated matters. It is the Swiss National Day, or the country?s equivalent to the Fourth of July. So everyone had the day off, and many spent the day surfing the net, further slowing speeds. Fireworks went off constantly, and the party next door started to spill over into my own chalet.

Right at 6:00 pm local time, the church bells started ringing, just as my webinar was getting started. I hope you were able to hear them in the background. Oh, and I think some local goats were chewing on my fiber optic cable. When the call came in that the audio was intermittent, I had little choice but to can the broadcast.

Please go to my website at www.madhedgefundtrader.com and log in. There you will find the PowerPoint for today?s webinar posted, along with all other past strategy webinars. I look forward to hearing from you again when I return to the 21st century next week and have US grade hardware and communications at hand. I?ll be broadcasting from a PC, so that the live Q&A chat window will be restored as well.

After my failed attempt, I headed to central Zermatt to join in the celebrations. I found the main street packed shoulder to shoulder with at least 10,000 revelers. Traditional Swiss music groups played tunes like Yankee Doodle and The Stars and Stripes Forever. Businesses had tables in front selling every imaginable kind of food. They were slinging out fondue, raclette, something called cholera, bratwurst, flamenkuche, and sushi as fast as they could make it. The beer and wine flowed freely, and people of every nationality were in an ebullient mood. I matched every stop at a food stand with two at the bakery tables. The waste line suffered.

As we approached 10:00 pm, the fireworks increased in crescendo. Then three huge signal fires were set on the surrounding mountain peaks, and the festivities moved into overdrive. They clearly do not have the same restrictions as at home, as every juvenile delinquent had an armload of skyrockets, roman candles, and firecrackers, which they put to use with reckless abandon.

Just as the town began its main display, a huge thundercloud barreled up from Italy. We witnessed an awesome duel, with enormous lightening strikes on the Matterhorn challenged by the immense booming of fireworks over the village. As we were deep in an Alpine valley, the reverberating echoes off of the surrounding mountain walls were superb. Finally, a torrential downpour sent everyone scampering for the cover of the overhanging eves of chalets.

In the meantime, good luck and good trading.

John Thomas
Zermatt, Switzerland

My Morning Commute

The Fed Says No QE3

Newsletter

As I expected, the wildly optimistic expectations for further quantitative easing by the Federal Reserve at yesterday?s Open Market Committee meeting were not matched with substance. All we got was a continuation of existing modest programs and some minor tweaking of language.

Bernanke only managed to say that, ?further stimulus will be provided as needed.? The Fed left unchanged its statement that economic conditions would likely warrant holding the benchmark Fed funds rate near zero ?at least through late 2014.? It also said it would continue swapping $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action intended to lower long-term interest rates known as Operation Twist.

Apparently, the slowdown in GDP growth from 2% in Q1 to 1.5% in Q2 was not enough to spur the Fed to action. Nor was a slowdown in jobs growth from an average 226,000 jobs per month to 75,000. The earliest the Fed can now take further accommodative action is at their next meeting on September 12-13, just seven weeks before the presidential election.

The dollar rose smartly against the yen and the Euro. Equities closed at their lows for the day. They could have fallen dramatically further. But I think that traders are holding fire until their learn the results of the ECB meeting on Thursday. If we get more rhetoric instead of action, and the Friday nonfarm payroll continues weak, then we will have a hat trick of disappointments that could trigger a more gut wrench plunge in the indexes going into next week.

At the very least, we should challenge the bottom the of recent upward channel, taking us down 50 points from here. That should double the value of my existing position in the (SPY) puts.

Ben, Where Were You?

August 2, 2012 - Quote of the Day

Quote of the Day

?The rule of thumb is to do your homework, do your analysis, and don?t give up prudent risk management for the sake of certain fads. Look for real valuations, and stay true to your time frames,? said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman.