?When it comes to reputational risk, the banks can?t really fall off the floor,? said Bart Naylor, a consumer advocate.
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
Diary Entry for Monday, June 18, 2012
Dear Diary,
4:30 PM Sunday- Looks like my Monday is going to start early this week.
One of my Athens readers e-mailed me that New Democracy was a slam dunk to win the election and would form a right of center, pro bailout, pro Euro (FXE) coalition government. Looks like it is going to mean a ?RISK ON? week. US Treasuries nosedive in the overnight market. Looks like we are going to get a shot at selling short the Euro (EUO) one more time.
6:30 PM Sunday-Take kids to see the new DreamWorks animated blockbuster, ?Madagascar 3?, with voiceovers by Ben Stiller, Chris Rock, Jada Pinkett Smith and David Schwimmer. Notice how the kid movies are better than the adult movies these days. There are ample double entendres and innuendos to keep the grownups laughing all the way. I loved the penguins, fowl after my own heart.
9:00 PM-Call from a friend at the People?s Bank of China in Beijing. He wants to know if they have missed the top of the Treasury bond market, and if they should start unloading their $1 trillion worth of holdings. I said don?t worry. I expect the ?RISK OFF? trade to take the ten year yield up to 1.25% on a spike at some point, and then levitate, possibly for years. The world is suffering from a savings glut and a bond shortage. Plus, you will get a double kicker with a strong dollar. But please don?t try and sell ahead of a three day weekend, like you did last time. And thanks for the Peking Duck dinner in Shenzhen last year.
9:30 PM- Hit the rack and try and catch some shuteye before the next call.
2:00 AM-One of my former staff members at Morgan Stanley calls me from a Private Bank in Geneva to tell me that the Spanish bond market was in free fall, with yields piecing 7%. Is it time to buy? I said not yet, not until the fat lady sings, and slammed the phone back on the hook to go to sleep.
Spanish 10 Year Bond Yields
3:00 AM- Call from one of the top New York trading houses. There are rumors that the Oracle (ORCL) would announce blowout earnings in a few hours. Did I want to buy anymore stock? I said no thanks, that I already had 50% of my portfolio in high tech names like Apple (AAPL) and Hewlett Packard (HPQ). Can he please come up with any new top performing industries? People are getting tired of hearing the Apple story for the umpteenth time.
5:00 AM-Woken up by an earthquake that sounds like a truck just hit the house. I turn on the TV and learn that I am directly above the epicenter. It?s the third one since Wednesday. Ah, the joys of living in California next door to the San Andreas Fault.
6:00 AM-My website administrator calls me in a panic. The store is down. A hacker attack prompted PayPal to suspend my account. Since I am one of their largest customers, I call my account rep and get it reopened.
6:15 AM-An old friend from the Swiss National Bank called asking my read on the Fed meeting this week. I said that things weren?t dire enough for a QE3, but he could count on a ?twist? extension to include home mortgage securities. The board was most frustrated my its inability to revive the real estate market with the lowest interest rates in history, and such a move could take 30 years fixed rates loans from 3.75% to 2.75% in weeks. I said I owed him a fondue diner with a bottle of Schnapps for giving me the heads up on the Swiss franc devaluation last year where my followers earned a 400% profit on the puts (FXF). But to collect, he had to take the cog railway up to Zermatt and attend my strategy seminar on July 27.
6:45 AM-I get flooded with 30 emails from Trade Alert Service followers asking if they should take profits on their long Apple calls spreads. I ignore them. Don?t bother me with the small change. I can?t hold everyone?s hand.
7:00 AM- Another call from my website administrator. The website is down. The Greek election brought a traffic spike that is causing the servers to melt. I am burning up the Internet.
7:30 AM- Conference call with support team. We agree to build in new infrastructure to accommodate a tenfold increase in new business. Couldn?t I be wrong a little more often to bring the growth down to a more manageable level? Pass.
8:00 AM- I get a call from a leading hedge fund in London?s Mayfair district. Europe is closing. Should we run the Euro short overnight? You betcha! And go have a pint of bitter for me at the Pig & Whistle next door, will you.
9:00 AM-Call from a large family office in Chicago. Should we use today?s weakness in gold to unwind out more hedges against core longs? Absolutely. Grab the brass ring. The barbaric relic is going to $2,300 before the fat lady sings, and will go higher if the ECB launches another LTRO, which is just a matter of time.
10:00 AM-Better get to work on today?s letter. I?m already behind the eight ball. I?ve gotta lead the gold story, which is starting to emerge from its long hibernation and exhibit some virile stirrings. Platinum (PPLT) looks even better.
12:00 PM-Break for lunch. Isn?t it great the way enchiladas always taste better after they have been reheated for a third day?
1:00PM- Market close with a small loss. Looks like another day of ?RISK OFF? for Tuesday.
1:15 PM-My friend, JR, a senior exec at an oil major, calls from Houston. What the hell was going on with the price of oil (USO)? Three months ago, it was at $109, then he blinked, and it was $80. I told him that the oil companies lost control of the price of Texas tea last year and the high frequency traders were now in the saddle. Better get used to the new frontier. He said thanks, and next time I was in town he would buy me a 24-ounce chicken fried steak at Billy Bob?s that spilled over both sides of the plate. I can?t wait. I?ll let my doctor have the heart attack.
1:20 PM- It?s official. Oracle earns $3.45 billion, or 69 cents a share, for the three months ended in May, compared with $3.2 billion, or 62 cents, a year earlier. The stock pops 5% in the aftermarket. Damn! I bought Hewlett Packard instead.
2:00 PM-Still haven?t started on the letter yet. I have been answering 200 email requests for information about the Trade Alert Service. This always happens whenever I have a hot trade on. The watchers want to become players. A 20.5% May and an 11% June month to date brings them in the droves.
2:30 PM- I unplug the phones and close the curtains to do a one our live show on the recent market volatility as a guest on a local radio station.
4:45 PM- Well, I got the letter done, but I?m too late. The web editor has gone to the DMV to register her new Prius, and the backup has gone to the yoga studio. Ouch! 10% sales tax for new cars in Washington state! They must be as broke as California.
4:30 PM-The traffic stats for the site have gone down. I called the webmaster, but she has gone off to a line dancing lesson in Dallas.
5:00 PM-Ooops. Forgot to take the trash out.? My garbage man, an Afghan immigrant, must wonder what goes on here. Every week, I recycle a giant bin of newspapers, magazines, and assorted broker research, but only throw out a tiny bag of actual trash. Am I green, or what? He notices that my T-shirt reads in Pashto script ?Defense Language Institute. We learn, so you don?t have to.? He says his son was stationed at Fort Hood in Texas and that he hasn?t heard from him in two months. I make a quick call Washington and find out that he has been transferred to Afghanistan as a translator. I tell him not to worry. It?s the other guys who usually die, not ours.
5:30 PM-I put on a 60-pound pack and my heavy climbing boots and head out the back door on a three hour hike to climb Grizzly Peak as I do every evening. Gotta stay boot camp ready. You never know when Uncle San is going to call again. Who cares if I?m 60? During Desert Storm, my flight commander was drafted at 65, and I heard of another guy they took who was 85. Turns out there was no one left in the Navy who knew how to run a coal fired steamship.
9:00 PM-Back to my screens. The Euro has broken $1.27. The Greek stock market is up 25% in days. Where was I last week? Asleep? If you turned off your TV, the centrist win was a no brainer.
10:00 PM-Time to call it a night and break out a bottle of Duckhorn merlot. How many wine clubs do I belong to now? 12? As of now I am committed to buy more wine this year than I can possibly drink or give away. That?s the price of living next door to Napa Valley. I?m shipping a case to my suite on the Queen Mary II so I can give away to fellow diners en route from New York to Southampton in a few weeks. The captain always likes a bottle too.
12:00 AM- Time to do some early Christmas shopping. Bonham?s in London is holding their fine jewelry auction today, and lot no. 62 is a 5 carat diamond solitaire that is a real beat.
12:10 AM-Damn! Outbid by the Chinese again, who are running up the price of luxury goods absolutely everywhere to insane levels. Time to get some sleep. Maybe next time. I?m obviously not working hard enough. I unplug my phones, as it?s the only way I can sleep. It looks like tomorrow is going to be another busy day. Does anybody want my job?
Note to Greece: Please Quit Waking Me Up!
?Now, you are starting to see people front run hedge fund books. People are front running John Paulson?s book. Everybody can see this. People are starting to line up the ducks and ask which hedge funds are going to have redemptions. Which position should I get in front of? Gold is a big problem in that environment. Guess what? The biggest position in the hedge fund community is in gold,? said a leading hedge fund manager.
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
One of my best calls of the year was to plead with readers to avoid gold like the plague, periodically dipping in on the short side only. The barbarous relic has been in a bear market since it peaked at $1,922 an ounce at the end of August last year. Gold shares have fared much worse, with lead stock Barrack Gold (ABX) dropping 36% since then and the gold miners ETF (GDX) suffering a heart rending 43% haircut.
However, the recent price action suggests that hard times may be over for this hardest of all assets. Despite repeated attempts, the yellow metal has failed to break down below the $1,500 support level that I have been broadcasting as the line in the sand.
It has rallied $100 since the last try a few weeks ago. (GDX) has performed even better, popping 23%. For the last month, the entire precious metals space has traded like it was a call option on global quantitative easing (see yesterday?s piece). Dramatically worsening economic data is increasing the likelihood of further monetary easing generating a nice bid for gold.
Now the calendar is about to ride to the rescue as a close ally. It turns out that in recent years, there has been a major seasonal element to the gold trade, almost as good as the November/May cycle that drives the stock market. Gold typically sees a summer low. Then traders start anticipating the September Indian gold season when the purchase of gifts and dowries become a big price driver. That explains why India, with a population of 1.2 billion, is the world?s largest gold buyer.
Next comes the Christmas jewelry buying season in western countries. That is followed by the gift giving and debt repayments during the Chinese Lunar New Year, during which we see multi month peaks in the yellow metal. That is exactly what we saw this year. The only weakness in this argument is that a slowing Chinese economy could generate less demand this time.
These are heady inflows into such a small space. All of the gold mined in human history, from King Solomon's mines, to the bars still in Swiss bank vaults bearing Nazi eagles (I've seen them) would only fill 2.5 Olympic sized swimming pools. That amounts to 5.3 billion ounces, about $8.6 trillion at today's prices. For you trivia freaks out there, that is a cube with 66 feet on an edge. China is the largest producer (13.1%), followed by Australia (10%) and the US (8.8%).
Peak gold may well be upon us. Production has been falling for a decade, although it reached 94 million ounces last year worth $153 billion at today?s prices. That would rank gold 5th as a Fortune 500 company, just ahead of General Electric (GE). It is also only .38% of global public debt markets worth $40 trillion.
That is not much when you have the entire world bidding for it, governments and individuals alike. Talk about getting a camel through the eye of a needle! We may well see the bull market end only when those two asset classes, government bonds and gold, see outstanding values reach parity, implying a major increase in gold prices from here. That is well above my own personal target of the old inflation adjusted high of $2,300. No wonder buying is spilling out into the other precious metals, silver (SLV), platinum (PPLT), and palladium (PALL).
The thumbnail technical view here is that we have broken the 50 day moving average at $1,610, so we may have a clear shot at the 200 day average at $1,680. There may be an easy $50 here for the nimble, and more if we break that. The current ?RISK ON? mood certainly helps this trade.
When playing in the gold space, I always prefer to buy the futures or the (GLD), the world?s second largest ETF by market cap, either outright or through a longer dated call spread. The dealing costs are far too high for trading physical bars and coins, and can run as high as 30% for a round trip. Having spent 40 years following mining companies, I can tell you that there are just way too many things that can go wrong with them for me to risk capital. They can get nationalized, suffer from incompetent management, hedge out their gold risk, get hit with strikes or floods, or get tarred by poor equity market sentiment. They also must endure the highest inflation rate of any industry, around 15%-20% a year, which hurts the bottom line.
Better just to stick with the sparkly stuff.
It?s Time to Start Dabbling in Gold Again
?If past history is all there was to the game, the richest people would be librarians,? said Oracle of Omaha, Warren Buffett.
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. Read more
The victory of the centrist pro bailout New Democracy Party in the Sunday Greek elections sparked a furious rally in the overnight Asian markets, much of it driven by hedge fund short covering. The socialist, anti-bailout parties went down in flames. As I write this on Sunday night, the Dow futures are trading up 78 points from the Friday close and the Japanese yen is in free-fall. Too bad that I?m 110% long ?RISK ON? positions in my model portfolio.
That was no surprise as 70% of Greeks want to stay in the EC. The way is now paved for a more civilized workout of the country?s financial problems which spreads austerity out over many more years, making it more tolerable and digestible for its citizens.
The latest Commitment of Traders report showed the Euro (FXE) (EUO) shorts in the futures hit yet another all-time high, and that the underlying was now worth $20 billion in the foreign exchange market. Shorts in the interbank cash market and ETF?s are thought to be much larger. On top of that, central banks have been seen unloading reserves denominated in Euros.
This witches brew of one-sided positions made up the perfect ingredients for the type of rip-your-face-off, snap back short covering rally that we have seen in past days. This is why I covered my own shorts three weeks ago when it pierced the $126 handle.
Keep in mind that the media has a lot of blood on its hands with its wild over exaggeration in its predictions of the imminent collapse of Greece and its withdrawal from the European Community that was never going to happen. It is focusing 99% of its attention on the Land of Socrates and Plato that accounts for 1% of European GDP. In the meantime, it is ignoring Germany which has 30% of GDP and is still growing, albeit at a slower 1% rate.
CNBC, in particularly, seems to be mercilessly beating this dead horse, holding it out as an example of what will happen to the US if it pursues similar high spending polices. This is why they send a Tea Party activist out to Athens at great expense every week to provide your coverage and to bait the Socialist candidates. They haven?t been this wrong since they reported that the Facebook issue was 30 times oversubscribed in Asia the night before it became the worst IPO in history.
But Greece has about as much in common with America as the US Treasury has with the bankrupt city of Vallejo, California. If anything, Greece is a perfect example of what happens when the wealthy get away with paying no taxes. Anyone with substantial means there stashes their dosh in Swiss bank accounts, leaving only the poor to cough up government revenues. Rich Greeks are just better at it than Americans. After all, they have been practicing for 5,000 years.
Greece is so small that it would be economic for Germany to just pay off half of its national debt just to maintain stability for its largest export markets. Should they spend $270 billion to protect $1.27 trillion in annual exports? It makes sense to me.
And let me give you a little back story here which you probably haven?t heard. Where did all this debt come from? Greedy unions? Careless bureaucrats? Spendthrift socialists? Expensive national health care?? A very big chunk was the result of the 2004 Athens Olympics where the government spent billions on huge sporting facilities and infrastructure that would only be used once and that it could never afford. Who constructed these massive edifices? German engineering firms. I know because I was there. There is always more to the story than the headline.
I hope my guests at my upcoming July 18 Frankfurt strategy luncheon don?t tar and feather me, or whatever they inflict on miscreants there, for expressing this opinion.
All of this is leading up to a great shorting opportunity for the beleaguered European currency. Given the current positive background, it could make it all the way back up to $127.80. That is a neat 50% retracement of the recent move down from $132.80 to $123.00. But be careful not to fall in love with it. The major trend in the Euro is still down, aiming for $1.17. And with a 0.50% interest rate cut by the European Central Bank imminent, that target could be hit sooner than later.
Don?t Fall in Love With the Euro