Mad Hedge Fund Trader

Japan is Just Getting Started

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Constantly chained to my MacBook Pro at home writing this letter, it is not often that I am in the room when a major market-moving event occurs. That is what happened at the SkyBridge Alternatives Asset Conference (SALT) in Las Vegas on Thursday (click here for the link at http://www.saltconference.com/).

I was listening to one of the legendary titans of the hedge fund industry make the case for Japan. According to the rules of engagement, I can?t tell you who he was, or I would have to kill you. I don?t want to do that because if you?re dead, you might not renew your subscription, and that would be bad for business. But I can pass on the gist of his arguments, which are already well known to the readers of this letter.

He said Japanese companies have tremendous leverage to a falling yen. The Bank of Japan was doing what was necessary to move the yen down from ?100 to ?110 to the dollar. The game changer will come when the government announces its restructuring plan in a few months.

Therefore, Japan?s TOPIX Index at a 13-14X earnings multiple looks cheap. That?s why his fund has been running a major long Japanese stock/short yen position since last year. If he is right, a Nikkei average of 20,000 is in the cards, up another 36% from last night?s close.

I was watching the Currency Shares Japanese Yen Trust (FXY) tick on my iPhone 5s as he spoke. It immediately gapped down 100 basis points. I surveyed the room and saw many heads bowed, fingers furiously typing the news to trading desks, or entering their own ?SELL? orders into online trading platforms.

That smashed the cash market through major resistance at the ?100 barrier, a new four year low. If I had been as digitally endowed, I would have sent out my own Trade Alert to dump the yen. But I?m not. By the Friday opening the next day, (FXY) had given up an additional 100 basis points.

I had been holding back on selling the yen in recent weeks for several reasons. First, we have covered a lot of ground very quickly, the beleaguered Japanese currency plunging 25% in just six months. That is prompting Japanese owners of the $2 trillion in direct and indirect foreign assets to realize some of the recent $500 billion in paper gains. That creates yen buying and downward pressure on the dollar.

Finally, my own trading gains have been so enormous this year, up some 35%, that I am becoming less inclined to stick my neck out and take inordinate risks. Trading has become more of a cherry picking game.

However, the yen?s move through ?100 has been so violent, and on such big volume, that it looks like the real deal. That means the old ?100 upside resistance level now becomes support. That equates to $101.00 in the (FXY). So my (FXY) June, 2013 $100-$103 in-the-money bear put spread actually looks pretty cautious.

This lines up nicely with my own long term downside target for the yen of ?150. This may sound like one of those outrageous predictions one finds so often on the Internet. For me it is not such a stretch. When I first arrived in Tokyo in 1974 and Nixon was taking the US off the gold standard, the yen had just devalued from the old Dodge Line of ?360 to ?305. The move I am predicting represents a give back of only a quarter of the gains since then.

If I am right, it would make my hedge fund friend?s upside predictions for the Nikkei look downright conservative. It would take the ProShares Ultra Short Yen ETF (YCS) from $68 to over $110. It would also boost the Wisdom Tree Japan Hedge Equity ETF (DXJ) from $49.67 to as high as $100.

I indicated to readers at the beginning of the year that this could be the trade that keeps on giving, like having a rich uncle. It looks like, so far, I am right.

FXY 5-10-13

YCS 5-10-13

DXJ 5-10-13

Japanese Girl Looks Like We?re Just Getting Started

Mad Hedge Fund Trader

May 13, 2013 - Quote of the Day

?Everything begins and ends with quantitative easing?, said Jeffrey Gundlach, the CEO of hedge fund Doubleline Capital, and the new bond king.

Finish Line

Mad Hedge Fund Trader

Follow Up to Trade Alert - (FXY) May 10, 2013

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

Mad Hedge Fund Trader

Trade Alert - (FXY) May 10, 2013

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

Mad Hedge Fund Trader

May 10, 2013

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Global Market Comments
May 10, 2013
Fiat Lux

Featured Trade:
(THE REAL ESTATE MARKET IN 2030)
(BREAKFAST WITH FED GOVERNOR BOB MCTEER),
(TAKE A RIDE IN THE NEW SHORT JUNK ETF),
(SJB), (JNK), (CORN)

ProShares Short High Yield (SJB)
SPDR Barclays High Yield Bond (JNK)
Teucrium Corn (CORN)

Mad Hedge Fund Trader

The Real Estate Market in 2030

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Long time readers of this letter know too well that I have been hugely negative on the sector since late 2005, when I unloaded all of my holdings (click here for ?The Hard Truth About Residential Real Estate?).? However, I believe that ?forever? may be on the extreme side. Personally, I believe there will be great opportunities in real estate starting in 2030.

Let?s back up for a second and review where the great bull market of 1950-2006 came from. That?s when a mere 50 million members of the ?greatest generation?, those born from 1920 to 1945, were chased by 80 million baby boomers born from 1946-1962. There was a chronic shortage of housing, with the extra 30 million individuals never hesitating to borrow more to pay higher prices. When my parents got married in 1948, they were only able to land a dingy apartment in a crummy Los Angeles neighborhood because my father was an ex-Marine. This is where our suburbs came from.

Since 2005, the tables have turned. There are now 80 million baby boomers attempting to unload dwellings on 65 million generation Xer?s who earn less than their parents, marking down prices as fast as they can. As a result, the Federal Reserve thinks that 45% of American homeowners either have negative equity, or less than 10% equity, which amounts to nearly zero after you take out sales commissions and closing costs. That comes to 70 million homes. Don?t count on selling your house to your kids, especially if they are still living rent-free in the basement.

The good news is that the next bull market in housing starts in 10 years. That?s when 85 million millennials, those born from 1988 to yesterday, start competing to buy homes from only 65 million gen Xer?s. The next recession will probably knock another 25% off real estate prices. Think 1982 again. Fannie Mae and Freddie Mac will be long gone, meaning that the 30-year conventional mortgage will cease to exist.

All future home purchases will be financed with adjustable rate mortgages, forcing homebuyers to assume interest rate risk, as they already do in most of the developed world. With the US budget deficit problems persisting beyond the horizon, the home mortgage interest deduction is an endangered species, and its demise will chop another 10% off home values.

To make matters worse, Ben Bernanke?s current massive monetary expansion assures that there will be one at least one, and possible two interest rate spikes by 2030. If you think the real estate market is bad now, wait until mortgage rates hit 18%.

For you millennials out there just graduating from college now, this is a best-case scenario. It gives you 10 years to save up the substantial down payment banks will require by then. You can then swoop in to cherry pick the best neighborhoods at the bottom of a 25 year bear market, much like your grandparents did in 1954. People will no doubt tell you that you are crazy, that renting is the only safe thing to do, and that home ownership is for suckers. That?s what people told me when I bought my first New York coop in 1982 at one-tenth its current market price.

Just remember to sell by 2060, because that?s when the next intergenerational residential real estate collapse is expected to ensue. That will leave the next, yet to be named generation, holding the bag, as your parents are now.

Real House Prices

House on fire

Mad Hedge Fund Trader

Breakfast With Fed Governor Bob McTeer

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No one can explain the most complex economic and monetary issues in a simpler, more homespun fashion than former governor of the Federal Reserve, Bob McTeer. He is known for carrying around two yardsticks, one slightly longer than the other, to demonstrate to your average guy the monthly changes in employment.

Bob argues that the Fed is getting a bad rap today. Ben Bernanke?s quantitative easing is neither inflationary, nor causing the collapse of the dollar. This ?money printing effort? is not actually printing any money. The $1.7 trillion QE1 was designed to buy mortgage backed securities to bring liquidity back to the market place. QE2 enabled the purchase of a further $600 billion in Treasury securities to prevent a double dip recession. On top of this, the Treasury piled the $700 billion TARP to recapitalize the major banks. Then came QE3. All four of these programs were wildly successful.

As a result, the Fed balance sheet has grown from a pre-crash $800 billion to $3.5 trillion. Normally this would be inflationary, but it is not this time, as all of the extra money is being tied up with excess reserves at the banks. The proof of this is that the money supply, M2, is growing at a very modest 5%, barely enough to accommodate the population growth. Without the Fed programs the monetary base would have fallen off a cliff.

The challenge going forward is for the Fed to unwind its balance sheet at the same rate that the banks start paring back excess reserve through more aggressive lending. Too slow, and the Fed risks inflation. Too fast, and it risks falling back into recession.

Although it appears that the dollar is in a free fall in the foreign exchange markets, it is in fact at the same level as it was before the financial crisis. All it has really done is given back its flight to safety bid. The dollar is really a function of our international balance of payments and global interest rate differentials. Bob feels that the next big move in the greenback is down.

McTeer points out that the Fed has been a huge cash cow for the Treasury, and ultimately, the taxpayer. QE1 and QE2 took in $120 billion in profits over the last two years. The TARP funds paid a 5% preferred dividend and brought in tens of billions of dollars in profits from the banks, General Motors, and AIG.

Bob views Obama?s $900 billion stimulus package as ?an attempt to shoot a hog with a shotgun.? The big problem is that businesses view such programs as temporary and act accordingly. Permanent changes to government policies get you more bang for the buck.

Bob, 72, was probably one of the last people in Texas to use a functioning outhouse. He grew up in rural Ranger, Georgia, the son of a truck stop operator, and his first brush with the real economy was pumping gas and picking cotton. Somehow, he scored an economics degree from the University of Georgia, and went on to work at the Federal Reserve. He was named president of the Dallas Fed in 1991, and went on to pioneer the analysis of the impact of technology on the macro economy. Bob is simple, but he is no lightweight. He served as a chancellor of Texas A&M University, with 100,000 students. Today, he serves asa Dirctor of Beal Bank (Plano) and Beal Bank USA.

Mad Hedge Fund Trader

Take a Ride in the New Short Junk ETF

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When you look at the profusion of new ETF?s being launched today, you find that they almost always correspond with market tops. The higher the market, the greater the demand for the underlying, and the more leverage traders bay for it. The resulting returns for investors are disastrous.

But occasionally a blind squirrel finds an acorn, and if you fire buckshot long enough, you hit a barn. That was the case a year ago when the corn ETF was launched (CORN), after five months of stagnant performance by the grain. I smelled a bargain for my readers, piled them into the ETF the day it launched, and caught a quick double in six weeks, just as the Russian fires were igniting.

That?s why I am getting interested in the new ProShares Short High Yield ETF (SJB). After riding the bull move in junk all the way up with (JNK), I have recently turned negative on the sector. Junk bonds have moved too far too fast. Current spreads for junk paper are now only 300 basis points over equivalent term Treasury bonds, and investors at these levels are in no way being compensated for their risk.

If the stock market starts to roll over this summer, as I expect, then the junk bond market will follow it in the elevator going to down to the ladies underwear department in the basement. Keep in mind that when shorting the junk market, you run into the same problem you have with the (TBT), a leveraged short ETF for the Treasury bond market. Buy the (SJB) and you are short a 6% coupon, which works out to a monthly costs of 50 basis points. That is a big nut to cover. So timing for entry into this fund will be crucial.

SJB 5-7-13

JNK 5-7-13

Car-Junk

Mad Hedge Fund Trader

May 10, 2013 - Quote of the Day

?Transparency is a good idea. Like my shower door, it lets in the light, but keeps out the flies,? said former Federal Reserve governor, Bob McTeer.

Janet Leigh

Mad Hedge Fund Trader

May 9, 2013

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Global Market Comments
May 9, 2013
Fiat Lux

Featured Trade:
(THE RECEPTION THAT THE STARS FELL UPON),
(NLR), (CCJ), (CORN), (WEAT), (SOYB), (DBA),
(EUROPEAN STYLE HOMELAND SECURITY)

Market Vectors Uranium+Nuclear Enrgy ETF (NLR)
Cameco Corporation (CCJ)
Teucrium Corn (CORN)
Teucrium Wheat (WEAT)
Teucrium Soybean (SOYB)
PowerShares DB Agriculture (DBA)

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