?It's very difficult to navigate a business through a paradigm shift. You must hard wire your system to second guess all the time, questioning what is next, and then what is next. You've got to retain optionality for both investment portfolios and the business your run to navigate this well,? said Mohamed El-Erian, co-chairman of the bond house PIMCO.
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
Global Market Comments
April 26, 2013
Fiat Lux
Featured Trade:
(WHY I?M COVERING MY BOND SHORTS),
(TLT), (TBT)
(STEVE JOBS? LAST LAUGH), (AAPL),
(GRAPES OF WRATH REDUX)
iShares Barclays 20+ Year Treas Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
Apple Inc. (AAPL)
I am going to bail on my (TBT) position at close to cost. For me, it is amazing that we got a 350-point rally in the Dow and ten-year Treasury bond yields only manage to eke out a gain from 1.68% to 1.72%.
I scoured the bond trading pits in Chicago yesterday, and the answer came back the same everywhere. Overwhelming Japanese buying is pushing up the prices of not just bonds, but all asset classes, including stocks, gold, silver, and even Apple. Not only that, the Japanese driven price dislocations are going to get worse before they get better.
Last month, the world was wringing its hands over the possible loss of quantitative easing. Instead of losing the program we had, we got a second one instead, of equal magnitude, about $85 billion a month. For that, you can thank the new government of Shinzo Abe and his appointment of hyper aggressive Haruhiko Kuroda as the new governor of the Bank of Japan. Think of Ben Bernanke cubed, as his easing program is three times greater than America?s on a per capita GDP basis.
As a result, there is a brand new ocean of liquidity sloshing around the world that doesn?t know where to go. Therefore, it is going everywhere. Japanese institutions are using the huge government bond-buying program in unload their holdings of Japanese government bonds (JGB?s) and replace them with much higher yielding, stronger currency denominated, US Treasuries.
The scary thing is what happens next time we get a selloff in stock prices. With the stock rally now six months old and May nearly upon us, this is not a wild and reckless assumption. You could easily get a surge in bond prices and a drop in yields to 1.50%. There are some outlier forecasts as low as 1.40%. You don?t want to be short any bonds in this potentially extreme situation.
You especially don?t want to wait out a return to sanity in the bond market if you own the (TBT), the 200% leveraged short Treasury bond ETF. Since you are short double the coupon of the long bond, that will cost you about 5% a year in negative interest carry. Add in the management fees and other expenses, and the cost of carry for this ETF comes to about 50 basis points a month. That is a big nut to cover in a negative interest rate world.
Looks Like We?re Getting Another Wave of Japanese Buyers
Nothing beats instant gratification. Bragging rights are nice too.
On Monday, when I strapped on this trade, angry readers emailed me to tell me that I was truly out of my mind. Apple was an ex-growth company, had lost its ability to innovate, shed its ?cool? factor, and had fallen behind Samsung with its large screen smart phone. The shares were clearly in a free fall to under $300, and I had to be ?Mad? to urge people into the stock at $395.
The Tuesday Q1, 2013 earnings changed everything. Revenues blew out to the upside at $43 billion, profits surprised at $9.5 billion, and earnings shocked, coming in at $10.09. Analyst forecasts minutes earlier ran as low as $8. The company sold a stunning 37.4 million iPhones and 19.5 million iPads.
Best of all, it returned a wad of cash to shareholders; increasing the dividend by 15% and boosting its share buyback program to $60 billion. It can afford to do so because it has an unprecedented $145 billion in cash on its balance sheet.
Not only is Apple now a value stock, it is a high yield value stock, offering investors a 3% annual yield at these prices, compared to only 2% for the S&P 500. Pension funds will not ignore this for long.
All of a sudden, Apple has recovered its ?cool? factor and is back at the forefront of innovation. Its dominance in apps and iTunes gives it a huge sinecure in risk free income. The six or so new products it will launch in the fourth quarter of this year, like a low end smart phone for emerging markets, Apple TV, the iPhone 5s, a deal with China Mobile, and new generations of iPods and iPads, all look incredibly interesting. What a difference three days makes!
So it is time for me to take profits on my (AAPL) May, 2013 $320-$350 Call spread. I?m really doing this so I can print out the confirm and carry it around in my wallet next to my spare condom. That way I can whip it out and prove any bar challengers that I made money in Apple on the long side this year, no easy task.
I am also encouraged to take profits here because I have captured 95% of the potential profit in the call spread. Why bother carrying a position in one of the most volatile stocks in the market for three more weeks for an extra 2 basis points?
For options traders, there was something really interesting that happened to Apple this week. Although the shares have risen only $15, or 3.8% in three days, the value of my deep out-of-the-money call spread has soared by 11.4%. That is because implied volatilities on the options have completely crashed. This suggests that the last bottom in Apple shares at $392 is the final one.
I think there is a high probability that the final bottom is in for Apple shares. Sure, the Q2, 2013 revenue forecast was dire at only $33.5-35.5 billion, but everyone expected this. We will know for sure if the stock can break the 50-day moving average at $435. If it does, then it is off to the races once again, and $500 becomes a chip shot. That means flipping from selling rallies to buying dips, possibly for years. But it will take years to breach the old high of $706 once more.
Let me tell you how they could get there. What if the Federal Reserve normalizes interest rates and raises overnight rates from zero to 2%? Apple?s $145 billion cash mountain would throw off an extra $3 billion in interest income a year, boosting the company?s profits, and possibly its share price, by a third. Imagine that? Steve Jobs? ghost must be laughing!
Looks Like Steve Will Have the Last LaughIt?s another sign of the times when the weekend fruit picker population is doubled by people hard hit by the economy, looking to save money on food costs.
After driving through miles of undulating brown hills studded with oak trees, passing mile upon mile of horse ranches, rusted out cars, and abandoned mobile homes, you come to Brentwood, the fruit capital of Northern California. There, thousands of families, half from Asia, harvest ripe bing cherries and peaches at the wholesale price of $1 a pound, fruit that normally costs $6 a pound at the supermarket. It all is a great opportunity to teach young kids the value of hard work, and where their food comes from. Anything you eat in the orchard is free, an old California tradition. No doubt none of these people are counted in the government?s employment statistics.
It is all a great deal if you don?t mind having purple fingertips at the end of the day. Just watch out for the cars pulled over on the side of the road on the way home, their occupants puking out all their excess cherries. In a nod to the 21st century, growers in this Grapes of Wrath industry compile lists of email addresses, and notify their itinerant fruit pickers which crops are ready for harvest via the Internet. Also on the calendar this season are grapes, apples, apricots, plums, loquats, nectarines, mandarin oranges, and wheel chair accessible walnuts (?)
At the end of each harvest, professional crews sweep through and pick up what?s left, if the prices will bear it. If you wonder why we put up with the earthquakes, high taxes, gridlocked politics, and a non-functioning state government, this is the reason.
By the way, does anyone know what to do with 50 pounds of cherries? Send me your recipes.
?Never go to a fight you are invited to,? said famed short player, Jim Chanos, of Kynikos Associates.
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