January 2014

A few Thoughts on Trading Strategy

After one of the wildest rides in recent memory, the stock market has ground to a complete halt. So have virtually all other asset classes as well.

You can see this in the activity of my Trade Alert service as well. After sending out Alerts as fast as I could write them for the past three months, some three or four a day, the action has slowed to a snails pace. What gives?

I think that the sudden, universal optimism we saw break out all over in November and December ended up pulling performance out of 2014 back into 2013. Traders were picking up positions not only for the yearend rally, but the January one as well.

As a result, there is nothing for us to do in January. Our New Year asset reallocation rally happened last month. The net result has been one of the most boring starts to a new year in history, with trading confined to tortuous, frustrating low volume ranges.

What have been the best performing assets so far in 2014? Gold (GLD), gold miners (GDX), (ABX), and bonds (TLT), (TBT), the worst performing ones of 2013. Don?t get your hopes up. These are only dead cat bounces prompted by short covering with broader, longer term bear markets.

In the meantime, the stars of last year have become the dogs of this year, like consumer cyclicals and banks. Suddenly, it has become an upside-down world, with the good becoming bad, and the bad good. Don?t expect this to last. It never does.

It gets worse. What if we didn?t pull forward only in January and the end of last year, but February and March as well? We could be sitting back on our haunches for quite a long time. Sounds like a good time to catch up on those old back issues of Diary of a Mad Hedge Fund Trader that we didn?t have time to read because trading was too frenetic.

As for me, I am getting an early start on my tax returns this year so I can figure out how much my Obamacare is going to cost me. Thanks to my spectacular, once in a lifetime performance in 2013, Uncle Sam and I have quite a lot to talk about. What? You mean a $2,000 bottle of wine purchased in Portofino on the Italian Riviera (the seaside resort featured in The Wolf of Wall Street) is not deductible? If it is for Morgan Stanley, why not me?

Another reason for the sudden silence is that investors have suddenly become very cautious. We have just had a run for the ages. From my June 14 low I made a staggering 41.15% profit for my followers. My last 14 consecutive Trade Alerts have been profitable, as has every one so far in 2014. Those are serious numbers. While almost no one else matched these numbers, quite a few traders did well too.

Suddenly protecting performance has become far more important than catching that next marginal trade. When everyone else is in the same boat, markets go very quiet, until the boat tips over.

Things aren?t going to remain this dead forever. It reminds me of a witticism voiced by President Nixon?s chairman of the Council of Economic Advisors, Herbert Stein: ?If something cannot go on forever, it will stop.?

When the Trade Alert traffic dies down, I get barraged by daily complaints from readers that I?ve gotten lazy, I?ve gotten too rich to focus on this anymore, and that I ought to be doing more. Can you blame them? With an 85% success rate with my Alerts, who wouldn?t want more?

One of the reasons that my success rate is one of the highest in the industry is that I know when to quit trading. Some 45 years trading the markets has taught me one thing. If you chase a trade that?s not there it?s a perfect formula for losing money. There is no law stating that you always must have a position. That?s what brokers want you to do, a mug?s game at best.

My advice to you? Go out and spend some of the hard earned money you made last year from my Trade Alert Service. I understand there are great deals to be had on large screen HD TV?s at Best Buy. Unfortunately, my hometown San Francisco 49ers blew a playoff game in the last 22 seconds, depriving me from a trip to New York for Super Bowl XLVIII. But if you?re from Seattle or Denver, you definitely have something better to do for the week leading up to February 2.

Out With the Old?

And In With The New...

There Goes My Super Bowl Trip

Another Dinner With Robert Reich

Diary, Newsletter

I never tire of listening to economics guru, Robert Reich, speak about the economy. He was former Labor Secretary under Bill Clinton, and ran against Mitt Romney for governor of Massachusetts (he lost). He has published 13 books. Oh, and he dated our recent Secretary of State, Hillary Rodham, when they were in law school together at Yale.

I got to know Bob well when I took two of his courses at UC Berkeley, on public policy and labor statistics. His insights into the long-term evolution of the US economy are nothing less than breathtaking. New students are ordered to the bookstore to buy 400 pages of photocopied jobs data, which they must commit to memory. And he is damn funny.

Not everything Bob has to say makes pleasant listening. The central challenges for the economy are jobs and wages, not deficits or inflation. A rush to trim spending too fast unnecessarily robs the economy of growth. Look no further than Europe, where ill advised and ideologically driven austerity policies have led to near economic collapse. If similar policies are implemented here, they will no doubt bring the same result.

Past economic recoveries brought far more dramatic snap backs. After the 1929 crash, the GDP fell a staggering 28% over the following three years. Then in 1934 it bounced back by 8%, in 1935, by 8%, and 1936 by 10%. The stock market recovered two thirds of its losses. That compares to today?s tepid 2% growth rate.

Then in 1937, a rush to end stimulus prematurely sent the country into the second leg of the Great Depression. That didn?t end until 1942. Stocks fell again by half. The big question for us today is whether 2014 will be a replay of 1937.

All middle class coping mechanisms to deal with falling incomes have been exhausted. First, women entered the workforce during the seventies to offset spouses? declining wages. Then both began working longer hours. Today, Americans work 300 hours a year longer than Europeans and Japanese.

Finally, they turned to the home ATM in desperation during the nineties and 2000?s to make ends meet. Those cash machines abruptly shut down in 2008. Today, families have no resources left to maintain standards of living. This is why there has been no growth in the American median wage for 30 years. The declining consumer spending these trends inevitably produced our present slow growth economy.

There were two turbochargers that assured the downfall would be as dramatic as it has been. Globalization suddenly meant that the $75/ hour blue-collar worker was competing head to head against a $2/day Chinese wage slaves. The Internet made this face off practical.

Technology also created robots to replace workers on an enormous scale. Bob like to tell the story of an invitation he received to speak at a much-publicized factory reopening in the Midwest. When he took the tour, he found only 13 workers staring at computer screens running the place that had replaced 3,000 before them.

While we are seeing a weak recovery now, entry-level positions are paying a fraction of what they did a decade ago, not far above minimum wage. Those with only a high school education or less have taken the biggest hit, seeing unemployment rates soar to 15%. By contrast, college educated workers have an unemployment rate as low as 5%.

Of course the challenge for me has always been to translate Bob?s lofty, 30,000-foot views, steeped in millennia of history, into Trade Alerts tomorrow morning which make money for you, the reader, by Monday. That?s easier said than done.

Given my 130% net trading profit since the service started 38 months ago, I?d say so far, so good.

January 24, 2014 - Quote of the Day

Quote of the Day

?You are going to do really well this year ignoring the noise and thinking about the long term fundamentals,? said Rob Secham of UBS Private Wealth Management.

January 23, 2014 - MDT - TBT Trade Alert Correction

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 - (TLT) January 23, 2014

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

January 23, 2014 - MDT - TBT Trade Alert

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.

January 23, 2014 - MDT - 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.

January 23, 2014 - 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.

January 23, 2014 - 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.

Trade Alert - (T) January 23, 2014

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