August 2013 Archive - Mad Hedge Fund Trader

Which One Did You Say I Should Buy?

Wow! That was some speech! Secretary of State, John Kerry, was certainly rattling the saber last night when he laid out the irrefutable evidence confirming the use of chemical weapons in Syria. Defense Secretary, Chuck Hagel, then upped the ante by asserting that US military forces are ?ready to go.? Oil (USO) hit a two and a half year high at $109, and gold (GLD) finally resumed its ?flight to safety? character by spiking up $30.

I happened to know that the Joint Chiefs of Staff have been war gaming for Syria for over a year now, and have presented President Obama with a list of graduated levels of response. What is new is the movement off assets to the immediate area, like a major carrier task force, which will park 100 miles offshore in the Eastern Mediterranean for the foreseeable future.

My pick is for a no-fly-zone, which the administration should have executed a long time ago. It is cheap and can be implemented remotely, with no risk of casualties. Drones will come in useful too. F-16 fighters now carry smart missiles with a 70 range. If a pilot in Syria takes off, then poof, they?re gone in 30 seconds.

Although the financial markets are expecting immediate action, we may not get it. When traders started speculating about military strikes, you want to run a mile. Obama is first and foremost a pacifist and needs more than overwhelming evidence to fire a single shot. He even hesitated over taking out Osama bin Laden. He also is a lawyer, so he won?t move until the needed international legal framework is in place, such as a United Nations resolution.

The great irony in all this is that the current crisis has absolutely no impact on the actual supply and demand of oil. Syria doesn?t produce any. It is a net importer of oil. All of the other major crude producers in the Middle East are backing US action, except for Iran, a marginal producer at best. Pure emotion is driving the price here. That is why oil and gold have been going up in tandem, until recently a rare event.

If anything, there is a severe imbalance developing in the crude markets that will soon send prices sharply southward. Thanks to a triple barrel push of improving economic data, Egypt, and then Syria, Wall Street has built up a record long in the oil futures market of some 1.9 million contracts. That works out to an incredible 95 days of daily US consumption, or 256 days of imports. That is a lot of Texas tea sloshing around the books of hot handed traders.

We are just coming to the close of the strongest driving season in 31 years, and demand will soon ebb. And guess what? The economic data is now softening. Unwind just a portion of the speculative long position in oil, and we could quickly return to the $92-$95 range that prevailed before the multiple crisis.

Don?t just stop at oil. Syria?s president, Bashar al-Assad is setting up a buying opportunity for the entire range of risk assets, including longs in US stocks and short positions in bonds, yen, and the euro.? If we get no Fed taper in September, as I expect, it could be off to the races once again.

Meet Your New Trading Strategy

Meet You New Market Timer

August 28, 2013/by Mad Hedge Fund Trader

Order Execution 101

Diary, Newsletter

New Global Trading Dispatch subscribers have requested guidelines on how to execute my trade alerts. So I thought I?d take some time today to expound on the basics of order execution 101.
There are three basic ways to intelligently get an order into the market:

1) The No Brainer Average In. Buy half at the receipt of the alert and half at the close. It?s that simple. If there is a tight spread and lots of volume, just go to the market. This is what a lot of institutions do, and is why you get the volume spikes in the market at the opening and the close every day.

If you are trying to get into an illiquid position, such as a far month option, the spreads can be quite wide, possibly as much as 10%. Going to the market can mean giving up a large chunk of your profit up front. So place a limit order in the middle of the spread, giving the market makers time to lay off risk in the underlying security, or in the futures. That will enable them to tighten up the spread and fill your order without taking you to the cleaners

2) The Principal Method. If you are a large, high net worth individual or institution, you can call you broker and ask him to make a market in any security. He will give you a bid and an offer wide enough to compensate for the risk he is taking, and you just lift the leg you want. Warning: if your broker consistently losses money trading with you, he will quit returning your phone calls.

3) The Discretionary Method. Find a broker you trust to execute on a best efforts basis at his discretion. He will want to grow your business and will do the best price he can. Expect to pay a higher commission for this service, as you should. But a good broker worth his salt will usually earn his keep and then some, so it is worthwhile. He has the news feeds right in front of him, has access to in house and third party research, like this newsletter, and is talking to clients and other traders all day long. So he should use this information to your advantage. Don?t expect his service to be price competitive with discount online execution services. You get what you pay for. Better not to be penny wise, but pound foolish. Caution: many brokers won?t take these orders unless they know you well, as they are afraid of getting sued.

Be very careful of using limit stop losses these days. In the big flash crash, some unfortunate investors got filled down 50%, especially with ETF?s. Better to let your broker ?use a ?pocket? stop loss where he will call you before executing.

If you get a trade alert from me and the security has already moved 10%, don?t chase it. This has been happening a lot lately, with the recent extreme volatility. Sometimes merely going for a refill on your coffee, taking out the trash, or reading the morning papers is enough to miss an opportunity in this market. I know because I have done it plenty of times myself. Keep your discipline. Wait for the price to come back to you, or wait for the next trade alert. There are plenty of fish in the sea, and it is just a matter of time before another juicy one swims by.

Which One Did You Say I Should Buy?

August 28, 2013/by Mad Hedge Fund Trader

The Great Copper Crash of 2013

Diary, Newsletter

When Dr. Copper (CU), the only commodity with a PhD in economics, suddenly collapses from a heart attack, risk takers everywhere have to sit up and take notice. Since the 2011 top, the red metal has collapsed a shocking 35%.

So called because of its uncanny ability to predict the future of the global economy, copper is warning of dire things to come. The price drop suggests that the great Chinese economic miracle is coming to an end, or is at least facing a substantial slowdown. This dark view is further confirmed by the weakness in the Shanghai index ($SSEC) which has been trading like grim death all year. Will China permabear, Jim Chanos, finally get his dream come true?

It?s a little more complicated than that. Copper is no longer the metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals are now hoarding 100 pound copper bars and posting them as collateral for loans. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash.

The high frequency traders are now in there in force, whipping around prices and creating unprecedented volatility. You can see this also in gold, silver, oil, coal, platinum, and palladium. Notice how they seem to be running the movie on fast forward everywhere these days? Because of this, we could now be seeing an overshoot on the downside in copper which may never actually materialize to this extreme in equities or other asset classes.

Watch Dr. Copper closely. At the first sign of any sustained strength, you should load up on long dated calls for Freeport McMoRan (FCX), the world?s largest producer, which also has been similarly decimated. The gearing in the company is such that a 50% rise in the price of copper triggers a 100% rise in (FCX).

So what is copper telling us today? The longer term charts show a prolonged bottoming process. If this holds, we could be seeing the early days of a resurgence in the global economy. Just get Syria, Egypt, the debt ceiling crisis, and the taper out of the way, and we could be in for a major run. That is a tall order. But just to be safe, I am buying long dated calls in the next major dip in (FCX), which may have started today.

A Penny for Your Thoughts on Copper?

August 28, 2013/by Mad Hedge Fund Trader

August 28, 2013 – Quote of the Day

Quote of the Day

?TARP was the most successful government program since it bought Alaska,? said Dick Bove, vice president of equity research at Rochdale Securities.

August 28, 2013/by Mad Hedge Fund Trader

August 27, 2013 – MDT Midday Missive with APPL Follow Up

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.

August 27, 2013/by Mad Hedge Fund Trader

August 27, 2013 – MDT – SPU/Bonds & VIX

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.

August 27, 2013/by Mad Hedge Fund Trader

August 27, 2013 – MDT – Drumbeat of War

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.

August 27, 2013/by Mad Hedge Fund Trader

August 27, 2013 – MDT Pro Tips A.M.

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.

August 27, 2013/by Mad Hedge Fund Trader

August 27, 2013

Diary, Newsletter, Summary

Global Market Comments
August 27, 2013
Fiat Lux

Featured Trade:
(THE TECHNICAL/FUNDAMENTAL TUG OF WAR),
(SPY), (INDU), (IWM),
(AND MY PREDICTION IS?.),
(TESTIMONIAL),
(THERE ARE NO GURUS)

SPDR S&P 500 (SPY)
Dow Jones Industrial Average (INDU)
iShares Russell 2000 Index (IWM)

August 27, 2013/by Mad Hedge Fund Trader

The Technical/Fundamental Tug of War: Who Will Win?

Newsletter

For the last few weeks, I have had two groups of analysts screaming in my ears.

Fundamental researchers are asserting that at $105 per share in earnings, generating a price earnings multiple of 15, stocks are at the historic middle of a 10-22 range. Q2 earnings are over, and modestly outperformed on the upside, although not with the magnitude seen in recent quarters. Plus, the taper is on the table, and the Federal Reserve may deliver a surprise at its upcoming September meeting.

Furthermore, risk assets are about to enter a period of seasonal strength. If you ?sell in May and go away?, you should then ?return in September and buy, fill your boots.?

No, no, cry the technicians. Although the small caps (IWM) have been going gangbusters, the large cam Dow and S&P 500 indexes have failed to put in new highs, raising the risk of a failed double top.

What is a befuddled individual investor to make of all this? My belief is that fundamentals always win out over the long term, and that technical cues are at best, a lagging indicator. I use charts for guidelines on where to place orders on a short term basis. The longer you stretch out your time frame, the less relevant they become.

At best, technicals are right 50% of the time, right in the same league as a coin toss, and most of the brokers and investment advisors out there. How many technical analysis hedge funds are out there? None. They are all fundamentally driven. The same technicians making the incredibly bearish prognostications today were making equally convincing bearish arguments last November.

However, since we are descended from prehistoric hunter-gatherers, we are all visually oriented. We respond to stimuli we can see much more rapidly than those we can conceive. A picture truly is worth 1,000 words, and probably a lot more. That?s why so many brokerage firms use them to sell research. I employ charts to back up my fundamental arguments because they are so easy to understand, definitely not the other way around.

So I think the fundamentals will eventually win out, and that we will get the autumn rally that I have been predicting. In fact, we may be only four years into a seven year bull market that is in the process of boosting price earnings multiples from 10 to 18 or 19. The mountain of cash sitting on the sidelines, and the failure of the major indexes to pull back more than 7.5% this year are telling you as much.

Exactly when will the big move up happen? Don?t ask me. Go ask a technician.