2013 Archive - Mad Hedge Fund Trader

The Rising Risk of a Market Melt Up

The risk of a major market melt up just took a quantum leap upward with the European Central Bank?s surprise 25 basis points in interest rates a few minutes ago. The move had not been expected from normally sleepy and moribund European monetary authorities for a few more months.

The ECB?s action has major positive implications for the world economy. It gives a shot of adrenalin to a global synchronized economic recovery, which was already in the cards for 2014. The effect on all asset classes will be huge.

Of course, the Euro ETF (FXE) crashed by $1.70, as one would expect, one of the largest moves of the year in the foreign exchange markets. We already took profits on a short position we strapped on in the Euro the last time it ran up to $1.38, which turned out to be the peak of a multi month move. But it has also spilled over into the other currencies, expanding into a much broader move into the US dollar.

The Japanese yen (FXY), (YCS) has just puked up 60 basis points, where we have a major short position and were looking to add. As a result, we have already gained 58% of the potential profit for a position that we added only two days ago. The Australian dollar (FXA), where I am also attempting to go long on a bigger dip, has lost 50 cents. Gold took it on the nose, again.

The other blockbuster event, which transpired this morning, was the release of the early read of US Q3 GDP, coming in at a red hot 2.8%. This was much higher than expected, with many estimates hovering around the 2.0% level. This means that the 0.5% we lost in the Washington shut down will turn out to be just a speed bump. We should make it all back, and much more, in the run up to Q1, 2014.

But wait! There?s more!! The price of oil has plunged by $20 in six weeks, thanks to the massive oversupply coming out of US fracking fields, and the movement of US-Syrian hostilities to a back burner. Even an Israeli attack on a Russian resupply of missiles at a Syrian port failed to generate any interest in Texas tea. Two months ago, this would have been worth a one day, $5 spike.

The US Energy Information Agency calculates that a $20 cut in the price of oil adds 0.4% to US GDP, and cuts unemployment by 0.1%. Newly enriched consumers spend more money and corporations with lower costs earn more profits. In other words, it cancels out the negative effects of the Washington shutdown in one fell swoop.

The University of California argues that ten out of the last 11 recessions were triggered by oil price spikes. The inverse is true as well. Collapsing oil prices create economic booms. Guess which way we are headed?

US Q3 earnings reports are generating extremely favorable comparisons, up about 10% YOY in aggregate. We have an extremely favorable calendar right now, as November and December are traditionally strong months for risk markets. Maybe it?s also that holiday grog. We also have the 2014 ?Great Reallocation? out of stocks and into bonds to look forward to, which has probably already started.

It all adds up to a first class market melt up, which could start at any time. Indeed, given the torrid market performance since the summer, and its Teflon like behavior during the October Washington shutdown, some strategists are claiming that a melt up has already started. The net net of all of this is that the world looks like a much friendlier place, and I am much more inclined to add risk than I was only a few minute ago when I dragged my sorry ass out of bed.

Below, please find the posture you should take in the markets listed by asset class.

*Stocks - ?buy the dips, running to a new yearend highs, especially in technology,? industrials, health care, and consumer cyclical
*Bonds - ?sell rallies, heading to the top of the 2.50%-3% 10 year yield range
*Commodities - start scaling in on dips in copper, iron ore
*Currencies - sell yen on any rallies, buy the Australian dollar on a China recovery
*Precious Metals - stay away, the world wants? paper assets
*Volatility - stand aside, will bounce along bottom
*The Ags - stay away until next year, great weather is killing prices, but too late to sell short

November 7, 2013 - MDT - Price Action

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.

Follow Up to Trade Alert - (XLI) November 7, 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 - (XLI) November 7, 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

Follow Up to Trade Alert - RISK ON - November 7, 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

November 7, 2013 - MDT - Midday Missive

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.

Trade Alert - RISK ON - November 7, 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

November 7, 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.

November 7, 2013

Diary, Newsletter, Summary

Global Market Comments
November 7, 2013
Fiat Lux

Featured Trade:

(SELLING THE YEN, AGAIN), (FXY), (YCS), (DXJ),
(ENJOY THE DOLLAR RALLY WHILE IT LASTS),
(FXA), (FXC), (BNZ), (CYB), (FXE)

CurrencyShares Japanese Yen Trust (FXY)
ProShares UltraShort Yen (YCS)
WisdomTree Japan Hedged Equity (DXJ)
CurrencyShares Australian Dollar Trust (FXA)
CurrencyShares Canadian Dollar Trust (FXC)
WisdomTree Dreyfus New Zealand Dollar (BNZ)
WisdomTree Chinese Yuan (CYB)
CurrencyShares Euro Trust (FXE)

Selling the Yen, Again

Newsletter

The Bank of Japan released the minutes of its previous meeting last night, so we now officially know what?s bothering them.

While the inflation rate has edged up to 0.7%, it is still miles (kilometers) away from its two year target of 2.0%. The 100% growth in the money supply promised by the end of 2014 is arriving on schedule. Since October, 2012, the central bank?s balance sheet has ballooned by an awesome 45%.

However, the desired effects on the economy are starting to fade. Real wages are still falling in September for a hair raising 16 months in a row, creating a deflationary effect on the economy that is huge. Prime Minister, Shinso Abe, is also shooting himself in the foot by raising taxes next April, and again in 2015.

It is a problem that is all too familiar to those of us here in the US. The BOJ can step on the accelerator all it wants. But as long as the Diet (their parliament) applies the brakes at the same time to keep the deficit hawks happy, the economy will go nowhere. Indeed, the recent data releases from Japan, white hot in the first half of the year, are starting to cool.

So the BOJ will do exactly as Ben Bernanke has done and throw more gasoline on the fire in the form of further, aggressive monetary stimulus. In layman?s terms this means it?s time to speed up the yen printing presses. That is the only way the central bank can offset the fiscal drag coming out of Tokyo. This is terrible news for the Japanese yen.

The BOJ is certainly going to pursue what is working. By engineering a collapse of the yen in the first half of 2013, they delivered a windfall profit for Japanese exporters. Dollar sales, when brought home are now worth a quarter more. That?s how Toyota was able to announce yesterday blockbuster earnings up 70% YOY.

Rising sales in an appreciating currency deliver a hockey stick effect on profits. The BOJ will take more of that, thank you very much.

This means that it is time to sell short the Japanese yen once again. When we peaked in March around the ?100 level in the cash markets, I thought that we could enter a sideways consolidation that could last as long as six months, since the recent move down had been one of the sharpest in foreign exchange history. That is exactly what we got. In recent months, the currency has almost been nailed to the 50 day moving average.

So I am taking this opportunity to return to a short position in the Japanese yen, the currency that everyone loves to hate. The December 20 expiration gives us a nice ?RISK ON? position in the run up to the yearend, which should be the correct way to lean. It also gives us a December position we can carry after our five November positions expire deep in the money next week.

I have written endlessly on the fundamental case for a weak yen for the past two years (for a link why you should sell short the yen, please click ?Rumblings in Tokyo?, here ?New BOJ Governor Craters Yen? , and finally here ?New BOJ Governor Crushes the Yen?.

From a technical point of view, what is unfolding here is classic chart reading 101. When you get a huge move over a short period of time, such as the 25% collapse in the yen that started in November, 2012, the consolidation and digestion period that follows can be very long. A rapidly declining 200 day moving average, now at $102 in the (FXY) should cap any short covering rallies.

Japanese portfolio managers and corporations have now had half a year to realize their windfall profits on their foreign investments in dollar denominated assets. That was generating hundreds of billions of dollar selling and yen buying that was supporting the beleaguered Japanese currency, no matter how lousy the fundamentals.

Thanks to the BOJ minutes, that support is about to end. Whoever has not sold their yen by now is in for the duration, or at least until the next 10% drop, which may be upon us. A breakdown to new lows could take us as far as ?110 in the cash market, or $88 in the (FXY).

For those who can?t play the options markets, better to just buy outright the ETF (YCS).