I really like your daily take on the markets and world issues. You have earned your stripes over and over. You are a statesman of the money world. I will see you on your next visit to Seattle.
Stay safe,
Mike
Seattle, Washington
?The old yardsticks don?t seem to be working anymore,? said Art Cashin, a strategist at UBS.
I think that Ben Bernanke?s QE3 is such a game changer, that we have to throw all existing strategies into the trash and start all over again from scratch. ?Suddenly, investors and traders have to face the prospect of adding $500 billion to $1 trillion to the Fed?s balance sheet, taking it to a record $3.7 trillion. ?All of this new money will go into risk assets.
This demands that I radically change my approach to the market. ?You can kiss the big September correction I was expecting goodbye and the ones for October, November, and December goodbye as well. ?The markets might even continue up for the rest of 2012.
In December, 1944, General George S. Patton accomplished one of the greatest feats in military history by wrenching the focus of his Third Army?s attack on Germany by 90 degrees to the North on three days? notice in the midst of a blinding snow storm with minimal supplies. ?The result was the relief of the besieged 101 Airborne Division at Bastogne and victory in the Battle of the Bulge. ?It is time for such a move in the markets.
Don?t try to apply any kind of fundamental analysis to this. ?You might overthink your way out of a job. ?This is a pure liquidity play. ?It means buying stocks solely on an anticipated multiple expansion from 14.5X today to a 15X or 15.5X multiple. ?Actual corporate earnings in the upcoming quarterly earnings cycle will be flat to down small.
I am not calling for the market to go ballistic here. ?I think a rise of 50 to 100 S&P 500 points to 1,500 or 1,550 is in the cards here. ?Why didn?t the market continue to rocket after the first day of QE3? ?I believe that there is a ?deer in the headlights? effect going on here. ?Everyone is so stunned from the magnitude of the Fed action that they have gone catatonic. ?Trading desks are awaiting a big dip to buy that isn?t happening.
I am not a person who is accustomed to buying market tops. ?I am the ultimate bargain seeker. ?I?m the guy who goes to garage sales in poor neighborhoods so I can find a full case of prime Japanese sake for $5, as I have done. ?But you don?t get a quantitative easing with these implications dumped on you very often either.
This augurs for an index that doesn?t crash, or doesn?t even have a substantial correction. ?It just continues to grind up slowly. ?There is too much cash sitting on the sidelines to allow otherwise. ?The most hated rally in stock market history is about to become even more despised. ?Best case, we add 7% by year end. ?Worst case, we continue to chop sideways and finish 2012 around these levels.
There is one stock that is certainly not going to announce an earnings disappointment, and that is Apple (AAPL). ?The roll out of the iPhone 5 is occurring faster than previous models. ?It will be offered for sale in 100 countries by yearend compared to only 53 for the iPhone 4s during the same period. ?So unit sales could reach 8 million by the end of Q3 and 49 million by Q4. ?This will create an unprecedented surge in Apple?s reported quarterly earnings. ?Those waiting to buy on the next big dip could end up missing one of the most impressive multi decade growth stories in history. ?This will impact the entire market sentiment, as it did in Q1.
On top of this, there is a serious reallocation trade going on whereby institutions are shifting money out of Treasury bonds and into the entire risk spectrum. ?This is why the Treasury bond ETF (TLT) has been hammered yet again, taking it down to a four month low. ?So the amount of money about to pour into risk assets will be a multiple of the $1 trillion mentioned above.
I?m not expecting any contribution to the economy from housing. ?So many millions of homes still suffer from negative equity that the Fed could take the 30-year conventional fixed rate mortgage rate to zero and it still will not generate much new construction where it can most-positively affect the economy. ?But from a market point of view, we don?t need their help for the time being.
What could go wrong with this scenario? ?Israel could attack Iran. ?There is no doubt that there is a partial mobilization of armed forces going on in Israel as I write this. ?I am getting frantic emails every day now from friends there about movement of troops, cancelled vacations, reserve call ups, and senior staff put on notice. ?When generals don?t return my phone calls, something is up.
But my Mossad friends tell me they aren?t going to pull the trigger. ?Prime Minister Benjamin Netanyahu is just reacting to the collapse of the Romney campaign in the U.S. presidential election. ?He has realized in the past two weeks that he is going to have to rattle his own sword from now on instead of counting on Romney to do it for him after November. ?Even if Israel does act, the impact on financial markets is likely to be brief and largely confined to the price of oil.
The other risk is that Romney could win the election. ?When Bernanke?s current term expires in January, 2014 he would be replaced by an austerity oriented, anti-quantitative easing hardliner. ?In that case, goodbye QE3, hello Dow 6,000. ?But at this point, this is an extreme outlier. ?You don?t see the Intrade betting on an Obama win surge from 57% to 66.3% very often, as it has done in the past week (click here for their site). ?If nothing else, Bernanke?s move on QE3 has certainly deep sixed any chance Romney had of winning.
What about the ?fiscal cliff?? ?It all boils down to the election. ?The Senate is now a Democratic lock, thanks to Mr. Todd Aiken of Missouri. ?There is a 50% chance that the Democrats retake the House on the coattails of the Romney crash. ?If they do, the fiscal cliff will disappear weeks after the election to be followed by another $1 trillion reflationary package entirely focused on infrastructure.
If the Republicans hold on, you can bet on Congress to weasel out of the mid-December deadline by kicking it forward two months. ?By then, recalcitrant losing Tea Party members will be flushed out of their seats, making the party much more manageable for the leadership and paving the way towards a real final agreement. ?Either way, we don?t go over the cliff, extending the present bull run for equities until Q2, 2013.
Taking all the above into consideration, I think the way to play here is through deep in the money call spreads in risk assets with December expirations. ?The strikes should be pegged 10% to 20% out-of-the-money so you could handle a 5% market correction without sweating it. ?The December expiration will allow you to wimp out just before the November 7 election and still keep a substantial portion of your profit.
The names I will be focusing on will be gold (GLD), silver (SLV) Apple, (AAPL), Google (GOOG), Qualcomm (QCOM), and Disney (DIS). ?I will attempt to scale into this portfolio and will send you urgent trade alerts when I see entry points. ?If the market goes down small, sideways, or up, as I expect, this should enable you to add 25% to the value of your portfolio by yearend.
Call me cautious, but you don?t get to be old by being incautious. ?In flight school there is a favorite saying: ?There are old pilots and bold pilots, but there are no old, bold pilots.?
Think of this as our ?bulge? moment. ?Isn?t life interesting? ?Oh, and thanks Uncle Al for the Bastogne angle, and sorry about the two toes you lost to frostbite there. At least you got a decent Veterans Administration disability check out of it.
Our "Battle of the Bulge" Moment.
As opposed to the mentality of the last couple of years where you faded every piece of good news, we may be moving to a period where you fade the bad news because you know there is a clear game plan below it,? Jim O?Neill, chairman of Goldman Sachs International in London.
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. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
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. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
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
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. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
In view of Federal Reserve Chairman, Ben Bernanke, yesterday: ?it is time to reassess one?s investment strategy. ?The former Princeton professor didn?t give us QE3, he gave us QE3 with a turbocharger, on steroids, with an extra dose of adrenaline. ?He could spend another $1 trillion before all is said and done. ?If ever an economic theory was pursued to extremes, this is it. ?No doubt future PhD candidates will be writing theses on this move for the next 100 years.
If the QE3 guessing game was driving you nuts this year, you better sign up for frequent flier points with your psychiatrist. ?After the initial commitment, the Fed reserves the right to renew quantitative easing, with the decision to be rendered on the last business day of each month in any size to buy any securities. ?Yikes! ?Will the market now flat line every month and then gap up or down 500 points on the final day when the August decision is announced? ?Double Yikes!
I am not going to sit in my throne at the beach like King Cnut and order the tide not to rise and wet my feet and robes. ?It is not for us to trade the market we want, but the market we have. ?It is interesting listening to the commentary on all of this. The fundamentalists are pissed off because their hard work led to a near universal conclusion that the economy was tanking, only to be met by a stock market surging to a new five year high. ?The technicians are cautiously optimistic trumpeting new upside breakouts. ?The index players (what few are still in the market, anyway) are ecstatic, now that going to sleep is paying off once again.
The basic strategy here is to throw risk out the window and gun for yield, which the Fed has put squarely back on the table. ?That means buying junk bonds (JNK), (HYG), at a 7.00% yield, emerging market sovereign debt (PCY) at a 4.72% yield, and high-yield equities like the telecoms, such as Verizon (VZ) and AT&T (T), which both yield around 4.70%. ?At least this way, you get paid for waiting out any heat on the downside.
You could even buy exactly what Ben Bernanke is buying: mortgage-backed securities. The central bank will be purchasing half of the $140 billion a month in mortgage backed bonds that Fannie Mae (FNM), Freddie Mac, and Ginnie Mae sell to meet its new commitments. You can easily do that through picking up the Nuveen Mortgage Opportunity Term Fund (JLS), a closed end fund selling at a $2% premium to net asset value. It carries a hefty 7.7% yield, but not for long.
It is 73% invested in residential mortgage-backed securities, 12% in commercial mbs, and 7% in agency collateralized mortgage obligations. ?It does use leverage and hedging strategies to achieve this acrophobic yield, and already had a big gap up in price yesterday. ?But what are the chances that it discounted the next year of Fed bond buying in just one day? ?About zero.
I don?t just think he hates me, he truly despises me. ?In fact, he does everything he can to put me out of business.
Take yesterday, for example, when the Federal Reserve Open Market Committee gave me and my views a complete thrashing. ?QE3 was the last thing in the world I was expecting because it was not justified by the current fundamentals. ?Most other independent analysts agreed with me, including several Fed govenors.
He could have let me off easy by announcing some minor back-door easings, like expanding his ?operation twist? to include mortgage-backed securities for the first time, or ceasing interest rate payments on deposits from private banks. ?But, no, Ben decided to make me look like a complete idiot, not by just announcing QE3, but one infinite in size that goes on forever. ?Talk about pouring salt on my wounds.
It?s not that I am not an all right guy. ?I am kind to children and small animals. ?I donate generously to many charities. ?I send my mother cards on her birthday (happy birthday mom!), even though she is 84 and not expected to last much longer. ?I even occasionally escort little old ladies across the street, although this is a holdover from my days as an Eagle Scout.
It?s just that Ben Bernanke and I don?t see eye-to-eye on a lot of important issues. He wants stocks to go up. ?As a hedge fund manager who plays from the short side more often than not when the economy is growing at a paltry 1.5% rate, I want them to go down. ?He wants bonds to go up too, as he clearly elicited with his ?twist policy? last year when he bought long term Treasury bonds and shorted overnight paper against it. ?I, on the other hand, want bonds to sell off because I know that when the bill comes due for all of this monetary easing, the crash will be momentous.
These are not the only matters we differ on. ?He wants to create jobs. ?He can wish this until the cows come home, but he?s not going to get them because of the gale-force demographic headwinds the country is now facing and the massive deleveraging by the public and private sector. ?The 6 million jobs we exported to China are never coming back.
However, all he has to do is make a mere mention of his desires, or even just mention the letter ?Q?, and asset prices go through the roof, forcing me to stop out of my shorts at losses. ?This is why I was in such a foul, acrimonious, and detestable mood during the first quarter, when stocks went up almost every day.
My problem is that Ben Bernanke isn?t the only person who dislikes me. ?President Obama doesn?t think much of me either. ?And it?s not because I refuse to buy a cold chicken dinner at his St. Francis Hotel fund raisers for $35,000, and $70,000 if I bring a date. ?He talks about jobs too. ?He frequently speaks about the need to improve our education system, even though I know he is poised to slash the budget for the Department of Education as part of some deal with the Republicans. ?Ditto for Social Security and defense.
Fortunately for me, I wrote off any prospect of getting a retirement check a long time ago and have made other arrangements, like becoming a hedge fund manager. Either the payments will be too small for me to live on, or they will be made in worthless Zimbabwean dollars.
I get along with Treasury Secretary, Timothy Geithner, OK, which keeps me on his ?must see? list whenever he stops in San Francisco on his way to Beijing to ask to borrow more money. ?But we go way back. ?There are only four people in U.S. history who can discuss Japanese monetary policy of the 1920?s in depth, and do it in Japanese just for laughs (it was clearly too easy, but they had to reflate after the 1923 Great Kanto Earthquake. ?Some things never change).
Two of them, Senator Mike Mansfield of Montana and Harvard professor, John K. Fairbank, died ages ago. ?So he is kind of limited in his choices. ?Besides, there are not a lot of people out there who can give him a 40 year view on the global economy, and I am one of them.
There are plenty of others who don?t think I am so hot. ?Try making a fortune in a market crash when everyone else is losing their shirt. ?While others in the locker room at my country club are slamming doors, tearing their hair out, and breaking golf clubs in half when they see the price feed on CNBC, I am chirping happily away about selling short at the top. ?I might as well be letting out a loud fart in Sunday church service. ?This explains why I stopped getting invitations to dinners ages ago.
It?s not that my relationship with Ben Bernanke is totally hopeless. ?When the demographic picture turns from a headwind to a tailwind and individuals and corporations cease deleveraging and return to re-leveraging, we?ll probably be reading from the same page of music. ?But according to the U.S. Census Bureau, the earliest this can happen is 2022. ?By then, he probably won?t be the Fed governor anymore and I won?t care if he likes me or not.
Besides, I may be able to make a new friend or two in the meantime. ?If Mitt Romney wins the presidential election he says he?ll fire Ben Bernanke on his first day in office. ?He can?t really do that, but Ben?s term does expire a year later. ?His two most widely rumored picks to fill the post are president of the Federal Reserve Bank of Dallas, Richard Fisher, and Stanford University professor, John Taylor.
These two are not in the least bit interested in all this quantitative easing malarkey. They are much more similar in philosophy to Herbert Hoover?s Treasury Secretary, Andrew Mellon, who popularized the ?let the chips fall where they may? approach to economic policy. ?Kick the props out from under this market and all of a sudden Dow 3,000 is on the table, as argued by Global strategist and demographics maven, Harry Dent.
They might even go as far as unwinding the Fed?s hefty $2.7 trillion balance sheet. ?That would give the Chinese, who hold $1 trillion of these bonds, a heart attack. ?But who cares? It would create the mother of all trading windfalls for me. ?Hell, they might not even care if I torture small animals, beat children with a switch, and leave little old ladies in the middle of onrushing traffic. ?I think we would get along just great.
Screw Social Security, and Ben Bernanke too.
The Great Kanto Earthquake of 1923
