2013 Archive - Mad Hedge Fund Trader

Dinner with Eliot Spitzer

I couldn?t for the life of me figure out why New York?s former governor and federal prosecutor, Eliot Spitzer, wanted to invite me to dinner. He wasn?t flogging a book or promoting a movie, and he certainly wasn?t running for office again. But I went anyway, thinking perhaps the notorious ?Client No. 9? might let me peek at his famous black book.

Eliot, who showed up wearing a classic New York blue pin striped suit that seems oddly out of place in San Francisco, is currently running his family?s commercial real estate business.

He told me the advantages that the US enjoyed over the rest of the world in 1945, such as a monopoly in skilled labor, are now long gone. The driver of the world economy has switched from America to Asia in the nineties.

As a result, income distribution here has morphed from a bell shaped curve to a barbell, with both the wealthy and the poor increasing in numbers, squeezing the middle class. The financial crisis compressed 30 years of change into two, taking us from libertarian Ayn Rand to pay czar Ken Feinberg in one giant leap.

Having cut his teeth prosecuting the Gambino crime family in the eighties, Eliot had some views on the need for more regulation. We only need to enforce the laws on the books, not pass new ones. The ?white collarization? of organized crime has been a secular trend since the sixties. He said the ethical lapses in the run up to the crash were best characterized by a quote from Merrill Lynch?s Jack Robins; ?What used to be a conflict of interest is now a synergy.?

AIG getting 100 cents on the dollar from the federal government was the greatest scam in history. The US did not extract a high enough price from top paid executives and shareholders of financial institutions for failure, and should have let more firms go under. As for his own scandal in 2008, Eliot admitted that he failed, that his flaws were made publicly apparent, and that other politicians should be smarter than he was.

Although Eliot had some good ideas, I was still puzzled over what this was all about as I ploughed through my cr?me brulee. Perhaps the governor has a pathological need to be in front of the spotlight, even at the risk of flaming out. And no luck with the black book.

May 8 Las Vegas Strategy Luncheon

Diary, Lunch, Newsletter

Come join me for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Las Vegas, Nevada on Wednesday, May 8, 2013. An excellent meal will be followed by a wide-ranging discussion and an extended question and answer period.

I?ll be giving you my up to date view on stocks, bonds, currencies, commodities, precious metals, and real estate. I will also explain how I have been able to deliver a blowout 40% return since the November, 2012 market bottom. And to keep you in suspense, I?ll be throwing a few surprises out there too. Tickets are available for $179.

I?ll be arriving at 11:00 and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets. The PowerPoint presentation will be emailed to you three days before the event.

The lunch will be held at a major Las Vegas hotel on the Strip, the details will be emailed with your purchase confirmation. Please make your own hotel reservations, as business there is booming.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.

The Hard Numbers Behind Selling in May

Diary, Newsletter

If I had a nickel for every time that I heard the term ?Sell in May and go away? this year, I could retire. Oops, I already am retired! In any case, I thought that I would dig out the hard numbers and see how true this old trading adage is.

It turns out that it is far more powerful than I imagined. According to the data in the Stock Trader?s Almanac, $10,000 invested at the beginning of May and sold at the end of October every year since 1950 would be showing a loss today. Amazingly, $10,000 invested on every November 1 and sold at the end of April would today be worth $702,000, giving you a compound annual return of 7.10%.

My friends at the research house, Dorsey, Wright & Associates, (click here for their site at http://www.dorseywright.com/) have parsed the data even further. Since 2000, the Dow has managed a feeble return of only 4%, while the long winter/short summer strategy generated a stunning 64%.

Of the 62 years under study, the market was down in 25 May-October periods, but negative in only 13 of the November-April periods, and down only three times in the last 20 years! There have been just three times when the "good 6 months" have lost more than 10% (1969, 1973 and 2008), but with the "bad six month" time period there have been 11 losing efforts of 10% or more.

Being a long time student of the American, and indeed, the global economy, I have long had a theory behind the regularity of this cycle. It?s enough to base a pagan religion around, like the once practicing Druids at Stonehenge.
Up until the 1920?s, we had an overwhelmingly agricultural economy. Farmers were always at maximum financial distress in the fall, when their outlays for seed, fertilizer, and labor were the greatest, but they had yet to earn any income from the sale of their crops. So they had to borrow all at once, placing a large cash call on the financial system as a whole. This is why we have seen so many stock market crashes in October. Once the system swallows this lump, it?s nothing but green lights for six months.
After the cycle was set and easily identifiable by low-end computer algorithms, the trend became a self-fulfilling prophecy. Yes, it may be disturbing to learn that we ardent stock market practitioners might in fact be the high priests of a strange set of beliefs. But hey, some people will do anything to outperform the market.

It is important to remember that this cyclicality is not 100%, and you know the one time you bet the ranch, it won?t work. But you really have to wonder what investors are expecting when they buy stocks at these elevated levels, over $159 in the S&P 500.

Will company earnings multiples further expand from 15.5 to 17 or 18? Will the GDP suddenly reaccelerate from a 2% rate to the 4% expected by share prices when the daily data flow is pointing the opposite direction?

I can?t wait to see how this one plays out.

Thank Goodness I Sold in May

Only Buy Companies You Hate

Diary, Newsletter

Dilbert cartoonist Scott Adams argues that you should invest in companies you hate, because only the most unprincipled and rapacious firms make the greatest profits.

Moral bankruptcy is a great leading indicator of success, and the best ones can get you to balance your wallet on the end of your nose and bark like a seal, as you buy products that you utterly despise. Companies with the work ethic of a serial killer, like British Petroleum (BP) come to mind, but you can also add other firms to the list, like Goldman Sachs (GS), Citicorp (C), Pfizer (PFE), and Altria (MO).

Adams initially started investing in companies he loved, like Enron, WorldCom, and Webvan, and absolutely lost his shirt. His advice to (BP) is not to waste money on artificial, sincere, maudlin ad campaigns apologizing, but get us to hate them more. Bring on more dead bird pictures!

Hand Me a &%@ Buy Ticket!

April 29, 2013 - Quote of the Day

Quote of the Day

?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.

Follow Up to Trade Alert - (GLD) April 26, 2013

Trade Alert

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

Trade Alert - (GLD) April 26, 2013

Trade Alert

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

April 26, 2013

Diary, Newsletter, Summary

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)

Why I?m Covering My Bond Shorts

Newsletter

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

Steve Jobs? Last Laugh

Diary, Newsletter

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!