I managed to catch a few comments in the distinct northern accent of Jim O'Neil, the fabled analyst who invented the 'BRIC' term, and who has been kicked upstairs to the chairman's seat at Goldman Sachs International (GS) in London.
Jim thinks that it is still the early days for the space, and that these countries have another ten years of high growth ahead of them. As I have been pushing emerging markets since the inception of this letter, this is music to my ears. By 2018 the combined GDP of the BRIC's, Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), will match that of the US. China alone will reach two thirds of the American figure for gross domestic product. All that requires is for China to maintain a virile 8% annual growth rate for eight more years, while the US plods along at an arthritic 2% rate.
'BRIC' almost became the 'RIC' when O'Neil was formulating his strategy a decade ago. Conservative Brazilian businessmen were convinced that the new elected Luiz Lula da Silva would wreck the country with his socialist ways. He ignored them and Brazil became the top performing market of the G-20 since 2000. An independent central bank that adopted a strategy of inflation targeting was transformative.
If you believe that the global financial markets will go back into risk accumulation mode by the end of the summer, as I do, then you probably should use the dip to top up your Brazil position, as it has lagged in the smaller emerging markets so far this year. Jim Chanos, you may be right about a China crash, but you're early by a decade!
https://www.madhedgefundtrader.com/wp-content/uploads/2012/05/emergingopportunities2.jpg372300DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-17 23:04:352012-05-17 23:04:35The Long View on Emerging Markets
Dennis Gartman, of the ever interesting The Gartman Letter, published an interesting analysis on the 'Monday-Friday' effect. If you bought every Friday close last year and sold the Monday close, your return would have been 14.20%, versus a 0.42% return on the S&P 500 (SPX). Virtually all the gains would accrue at the Monday morning gap opening.
If you did the reverse, bought the Monday close and sold the Friday close, then your YTD loss would have been 11.00%. Apparently, the market is paying a huge premium for traders willing to run the weekend risk, which during the financial crisis is when all the disasters occurred. I know of several desks that have been working this trade all year long, with much success. On paper you could have made 25.20% on a non-leveraged basis, and less once you take execution and other frictional costs out.
The longer this works, the more who will pile into it, until it blows up, as all of these purely quantitative approaches always do. This is symptomatic of a market dominated by short terms traders, arbs, and hedge fund where the end investor has fled. Expect things to get worse before they get better. By the way, don't try Googling the word 'exposed'. You'd be shocked, shocked.
I opened the e-mail at my usual wake up time of 4:00 am. President Bill Clinton was playing with Tiger Woods at the Presidents? Cup PGA tournament at the Harding Park Golf Course in San Francisco today. Would I have time for a chat about US economic policy afterwards?
That afternoon, in walked Bill, sunburned from his morning on the links, to chew the fat with some Bay Area business leaders. I can?t say who else was there, but I?ll give you a hint: I was the only one without a NYSE listing.
Bill says that the US needs a new job engine every five to seven years to continue growing. Reagan had the personal computer, he had the Internet, but since then there has been nothing. As a result, new job creation fell from 23 million during his administration to a net job loss of 1.5 million during the Bush years (click here for BLS stats ), causing real standards of living to fall for two thirds of all Americans.
The big challenge is how to bring back the economy without burning up the planet. $1 billion of new spending would create only 870 jobs in a conventional coal fired power plant, but 2,000 jobs for a solar plant, 3,300 for a wind facility, and 6,000 from improved building efficiencies. So creating a new job engine is a matter of political survival for Obama and the Democratic Party.
Bill believes that getting health care costs off the back of corporations is also essential for recovery. As things now stand, all of our net new economic growth is going to cover increased health care costs. And that only gets us an outcome that ranks 25th globally.
Clinton now devotes himself to his Clinton Global Initiative, on non-profit which coordinates inter-governmental cooperation in health care, education, and the environment, and has raised $57 billion for new development projects (click here for their website).
He was incredibly well informed, obviously still has access to confidential intelligence briefings, and rattled off statistics like an M60 machine gun. You really get the impression you are dealing with a Rhodes Scholar. I reminded him of the 1968 anti-war demonstration we both attended in London and he laughed. It?s great to see someone still warding hard, even when they can sit back on their laurels and coast if they choose.
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?The one thing that is not safe is the dollar in your pocket. That is certainly going to be worth a lot less over time. The greatest asset to own is your own ability,? said Oracle of Omaha, Warren Buffett, about the European debt crisis.
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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
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I took advantage of an offer to subscribe to your service in early April and in Mid April of this year, received and executed on the Trade Alerts to buy puts on Boeing, IWM, FXE and GLD. Today, May 16th, I followed up on the trade alert and closed the GLD put position with a return of 155%. Overall, on the remaining positions in IWM, BA and FXE I have a 17% return however that may understate the actual return as I also took advantage of your hedge recommendation and sold puts 1:1 against my positions in BA and FXE.
As a technical trader with experience in Forex and commodities, I was drawn to your newsletter first and subsequently to subscribe to your service by your global macro view of the markets and your ability to simply express where a "tradeable opportunity" exists in response to the warp and waft of the fundamentals.
As a subscriber, I have come to appreciate your bi-monthly webinar updates and your balanced commentary, market insights over the short, medium and longer term, along with a healthy dose of risk management. I understand that nobody is right 100% of the time and I appreciate your integrity in taking credit for the wins as well as the loses. Looking forward to a profitable year of trading with MHFT and certainly with the GLD put option trade, I'm off to a good start.
I think MHFT is an excellent investment for experienced individual traders and please feel free to share my comments with prospective subscribers.
Good trading and kind regards,
Richard
Chicago, IL
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For those who wisely ignored my advice to sell the SPDR Gold Trust Shares ETF (GLD) June $160 Puts on May 3, good for you. The options are now trading at $10.50 and you have a profit of 147%, adding 14.7% to your annual return. This will no doubt be your home run trade of the year.
If you still have these, it is time to give thanks for your good fortune and head for the sidelines. You don?t get to do trades like this very often. Selling out here allows you to avoid the time decay hit as we run into expiration on June 15.
Gold has now fallen $100 since my last ill-timed sell recommendation. Tough luck if the rumor that the International Monetary Fund was going to sell its gold reserves to bail out Europe hit the wires two days later. I had heard about this from my European central banker friends a month earlier, which is why I put on such a big short position in the first place. Alas, timing is everything in this business.
The yellow metal is now approaching both a severely oversold condition and major support at $1,510, and it would be unwise to continue to run the position. The same is true for every other risk asset in the universe, including the S&P 500 (SPX), the Russell 2000 (IWM), the NASADQ (QQQQ), oil (USO), silver (SLV), copper (CU), the Euro (FXE), and the Australian dollar (FXA).
Use whatever metaphor you want; the rubber band has been stretched to the breaking point, the paddlers have all bunched up at one end of the canoe. The dollar index is up 13 consecutive days, and the Dow is down 9 out of 10. How long do you want to keep flipping a coin and relying on heads coming up every time?
In the meantime, the big ?RISK OFF? assets of Treasury bonds (TLT) and the Japanese yen (FXY) are starting to make rather shrill topping noises, giving additional signals that it is time to shrink your book.
Finally, I have my own performance to look at, with May thankfully the most profitable in the 18 month life of my Trade Alert Service. As of this morning?s marks, I am up an eye popping 22% so far this month. If the past is any guide, big numbers like these are a great ?sell? indicator. Mean reversion can be a cruel and unfeeling bitch, worse than an Internet date, so watch out.
Take profits here and you will have plenty of dry powder to resell the barbarous relic and other risk assets in any dead cat, short covering rally that may unfold into the May month end book closing and into June. Then we can position for the final low in the summer, which should be downright scary.
Sell these ETF Alternatives:
the DB Gold Short ETN (DGZ) 1X short gold
the DB Double Short Gold ETN (DZZ) 2X short gold
or buy to cover the SPDR Gold Trust Shares ETF (GLD) sold short on Margin outright
I managed to catch my longtime friend, technical analyst, Charles Nenner, on the fly between London appointments yesterday. The must go to guy for big hedge funds, family offices, sovereign wealth funds, and high net worth individuals, says that the global markets are on the verge of completing round one of a major risk off trade, and there is much more to come.
A ferocious short covering rally could ensue as early as next week and run well into June. This is a rally you want to slam big time. A failure to reach new highs will lead to substantial new lows by August. To me, this means that the short selling opportunity of the year is in the process of setting up.
Intrigued, I asked Charles to go into as much detail on a ticker by ticker basis as London?s spotty cell phone coverage and bumpy roads would permit. I break out his answers below by asset class.
Equities
The S&P 500 will start one more run at a new high for the year next week, or the following week at the latest. A failure heralds a much more serious correction that could last into August. Use a downside break of 1,325 as a sell signal. The Russell 2000 looks much more dubious. Pierce $77.20, spitting distance from here, and we will soon be visiting $71.
NASDAQ (QQQ) has recently been underperforming recently and could lead any new charge to the downside. Emerging markets (EEM) fighting a monkey on their back with plunging commodity prices look even worse, and may not even bother to rally at all in this bounce. They look weak straight into July.
I covered a few individual high profile equities with Charles. He doesn?t like Apple (AAPL), which he sees touching $540, down $100 from the post earnings top. Ditto for IBM (IBM) which has probably squeezed out as much performance as it can for the time being. He says my short in Pulte Homes (PHM) will blow up in my face, remaining strong into July. Disney (DIS) looks pretty good and should maintain strength for a few more months. On the other hand, Boeing (BA) looks like it is rolling over and will track the indexes on any move south.
Bonds
Charles was ultra-bearish on the Treasury bond market, believing that the 30 year bull market peaked last September. The current run to those highs will fail, setting up one of the biggest short side trades in the coming decade. His favorite instrument here is the (TBT), which he recommends selling puts on four months out. The expected disorder and thin markets this summer could take ten year? Treasury yields as low as 1.57% from today?s 1.78%, but won?t be able to sustain beyond that. His downside target for the 30 year is a gob smacking 2.6% yield.
Foreign Exchange
The Euro (FXE) has already breached his first downside target of $1.2850. If we can?t recover that level soon, next on the menu is $1.2420. His longer term charts are showing a final goal of $1.00, but he refrains from mentioning this to the media because it is so extreme.
The Japanese yen (FXY) has just completed a nice one month consolidation and will resume a major long term downtrend imminently. If the cash market clears ?80.60, pennies from here, a much bigger move down is in store for the ETF, from the current $122.40 to $119.70, then $114. The Australian dollar (FXA) is looking equally sick and could be printing $89.5 in the months ahead. Further interest rate cuts by the Reserve Bank of Australia to combat a fading economy in China will add fat to the fire.
?Energy
The wily Dutchman has been negative on oil (USO) since it peaked at $110 a barrel in early March. It has already hit his initial goal of $93. If the markets move into a broader ?RISK OFF? mode, we could see $68 by November, no doubt sending chills down the spines of oil men everywhere.
Natural Gas (UNG), the worst performing asset of 2012, is enjoying a brief rally that may continue until the end of May. After that, the ETF for this unloved molecule should crater from $18.90 to below $14 this summer, around when the gas storage Armageddon hits. Longer term, he wants to scale into the long side, but not through (UNG), which has a huge contango and the worst tracking error of any ETF alive. He prefers to participate in any gas recovery through Canadian gas producer, EnCana (ECA), which derives almost 100% of its revenues from CH4.
Commodities
Nenner was early in jumping all over the copper (CU) trade, which was the first asset class to peak this year, in early February, unloading the red metal under $3.80. He thinks copper could trade as low as $2.80 in this cycle, down 28% from here. He also has been negative on the grain complex for some time, and thinks corn (CORN) has another 10% of downside to go. There he wants to load the boat for a potential double in coming years.
Precious Metals
Charles argues that the precious metals will be anything but a safe haven. We could get a bounce in gold off of $1,510 in the near future. But if that make or break level doesn?t hold, the barbarous relic could be paying a visit to $1,369, delivering the gold bugs a fatal dose of insecticide. Silver may challenge $23 soon, and substantially lower if no one steps up there.
Charles hails from Holland, and has a long career that includes stints at medical school, Merrill Lynch, Rabobank, and ten years at the Vampire Squid, Goldman Sachs. He has spent three decades developing his proprietary Cycle Analysis System, which generates calls of tops and bottoms for every major market in the world.
Charles developed a huge following after 2007, when he accurately nailed the top in the Dow at 14,500 and urged his clients to put on short positions when everyone else was predicting that the market would keep grinding higher. Today, Charles Nenner counts major hedge funds, banks, brokerage houses, and high net worth individuals among his clients. To learn more about Charles Nenner?s cutting edge research organization, please visit his website by clicking here at http://charlesnenner.com/ .
I have been following Charles? daily research reports myself for many years, and found them to be uncannily accurate. Whenever I feel like playing a three dimensional mental chess game, I call him to argue about the connections between human behavior and mathematics, a key market driver.
I thanked him for his time, and offered to share a bottle of the fiery Dutch spirit, Bols, on his coming trip to San Francisco. I also told him that the next time Holland?s canals freeze over, an event that happens only once a decade, I would race him mano a mano in the "Elfstedentocht," a 125 mile race around the country?s canals on ice skates.
My Go To Source for Charts
The "Elfstedentocht"
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?For every one book written about deflation there are 25 written about inflation. We are starting to look more like Japan every day,? said Scott Shellady at Bradford Capital Management.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/05/writing-a-book.jpg179400DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-16 23:01:552012-05-16 23:01:55May 17, 2012 - Quote of the Day
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
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