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Those who followed my advice to buy Apple a year ago are now drowning in riches (click here for ?Buy Apple on the Dip?). Since the July, 2013 bottom, the shares have risen by a meteoric 92%. It is the largest company in the world once again.
As a result, I have heard of my readers shopping for second homes on Lake Tahoe, sponsoring NASCAR teams, or buying new Rolex watches for significant others.
I recommended China Mobile (CHL) then as well, the big beneficiary of a new deal with Apple, whose shares have also gone ballistic.
The question of the day is: ?Now what do we do?
You are right to ask the question. The company?s stock is notorious for running up massively into every major product launch, and then giving back a big chunk afterwards.
So while the expected announcement of the iPhone 6 on September 9 is welcomed as producing a major new source of revenue, it could also signal the end of the current run.
Take a look at the long-term charts, and the hair on the back of your neck should stand up. The fanfare for the iPhone 6 will almost exactly come at a potential double top in the stock price. Could we be setting up for the greatest ?buy the rumor, sell the news? of all time?
The last time we visited this territory, which we visited on the launch of the iPhone 5, Apple?s shares plunged a gut churning 45%, prompting some shareholders to dump their iPhones in the trash.
Certainly the problems that caused the rally to fail last time are kicking in once again. The law of large numbers applies once more. Apple?s market capitalization is at $607 billion today. There may not be enough equity investors in the world to push the shares up appreciably from here.
Oh, and because of the recent rapid appreciation, most institutions are now overweight Apple, as they were in September, 2012. The only difference is that Apple accounts for only 3% of the S&P 500, compared to a hefty 5% two years ago.
The shares are now at a 15.5 earnings multiple, up from under 10 at the recent bottom, and 7 if you took out all of the cash. That is still a discount to the main market, as well as most other technology stocks.
The truth is that this is not your father?s Apple.
CEO Tim Cook has shown a much greater respect for investors compared to founder, Steve Jobs, who despised Wall Street with a passion. I know, because I escorted Steve to meet with institutional investors looking at a secondary share issue during the early 1980?s. It was not a happy time for me.
There is a $50 billion stock buyback program in place, which soaked up a ton of shares at the bottom.
We also now have a 2% dividend yield, a mere 37 basis points through ten year Treasury bond today, another idea Jobs poo pooed.
The company is also strategically in a much stronger position than it was in 2012. Apple has a far broader, more attractive, and more advanced product range than it did only 24 months ago. The China Mobile deal has kicked in big time.
There is immense demand for the new larger screen, faster iPhone 6, which will offer consumer untold bells and whistles. Some 50% of the iPhones in existence are 4s?s or older, so upgrades from the installed base will the largest in history.
This will enable it to retake market share from hated rival, Samsung, which moved to a big screen in 2013. This will open the way for an expansion of Apple?s profit margins, possibly by 25% or more.
Samsung?s smart phone strategy all along has been to copy Apple?s patents and milk them for whatever they are worth, before they inevitably lose the next infringement case in court. As I never tire of telling listeners at my speaking engagements and luncheons, you can?t steal your way to the top in technology.
I would expect, at the very least, that the market has to put the double top theory to the test at least once. That alone will prompt a 10% correction, back down to $92.
Then, if we really are still in a bull trend, it will bounce off that number and head to new highs. If it doesn?t, then it?s game over until the run up to the next big product launch. The iPhone 7?
So the clever thing to do here has to be to do a buy write and sell short Apple September, 2014 $105 calls against you existing stock position.
At this moment, you can get 96 cents for them, with September 19 expiration. If you are braver still, you can go out another month and take in $2.01 for the October 17, 2014 calls. Don?t go farther out than that, or you might miss the yearend rally.
That way, if the stock keeps rising, you will sell your shares out at the higher price of $105. If it falls, your average cost declines by 96 cents, or $2.01. Either way, it is a win-win.
Isn?t that what you pay me for?
Meet Your New iPhone
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?Oh, how I despise the yen, let me count the ways.? I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.
To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:
* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates. * This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets. * Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more. * The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 240% of GDP, or 120% when you net out inter agency crossholdings, Japan is at the top of the list. * The Japanese long bond market, with a yield of only 1%, is a disaster waiting to happen. * You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.
When the big turn inevitably comes, we?re going to ?110, then ?120, then ?150. That works out to a price of $200 for the (YCS), which last traded at $62. But it might take a few years to get there.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?83 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.
It?s All Over For the Yen
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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
00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-08-26 14:09:122014-08-26 14:09:12Trade Alert - (FXE) August 26, 2014
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. Read more
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We have snatched 92% of the potential profit in the Currency Shares Euro Trust (FXE) September, 2014 $133-$135 in-the-money bear put spread, riding the Euro (FXE) down on the short side, from $1.33 down to $1.30.
The risk/reward of continuing with such a large position is no longer justified.
So I am going to reduce my overweight position down from 20% back to a more normal 10%. If you are similarly overweight the ProShares Ultra Short Euro ETF (EUO), I would also be lightening up, retuning to a normal weighting there as well.
I have not suddenly fallen in love with the beleaguered continental currency. I think we are headed towards $1.27, $1.20, and eventually $1.00. This is just a short-term tactical move.
That way, if by some miracle, we get a two-cent rally in the Euro, I will have plenty of dry powder to reload with and add more shorts.
The big event of the weekend was European Central Bank President, Mario Draghi, ramping up his war on his own currency.
On Friday evening, after the markets closed and traders were long gone for the Hamptons, Bal Harbor, or Napa Valley (oops), Draghi ramped up his rhetoric, warning that he would use ?all available tools? to spur Europe?s economy. This is central banker talk for throwing down the gauntlet at the feet of the monetary hawks (read Germans).
He then threw the fat on the fire, opining that the recent decline an inflation expectations were a concern, and this was a topic for the coming September 4 ECB meeting. Translation: this is a central banker?s equivalent to giving the hawks the middle finger salute, and then putting the pedal to the metal on the easing front.
The bottom line for all of this is that the ECB is almost certain to cut Euro interest rates next week. As interest rates differentials are the primary driver of foreign exchange markets, this is great news for the greenback and terrible news for the Euro.
After that, we may get a small rally in the Euro, as short sellers, like me, take profits. This has been the pattern with other Euro interest rates reductions in the past. That is the rally I want to resell into.
You can expect this pattern to continue until Europe solves its structural monetary problems, which will take years. The current flawed system dramatically undervalues Germany?s currency, while overvaluing the currencies of Italy, Spain, Portugal, and Greece.
This is why the German economy is healthy, while everyone else?s economies suck. Without the Euro, the old deutschmark would be double or triple what it was, demolishing the country?s massive export business. In the meantime, the other countries would be devaluing their own currencies like crazy.
We caught the entire reaction to Draghi?s verbiage at this morning?s opening, with the Euro gapping down a full half-cent against the dollar. The stop loss selling was severe.
I wish all my trades were this easy. Since I doubled up on the short side, the Euro has been in a complete free fall. European dithering has been one of the lowest risk bets of 2014.
That said, I think I?ll get back to cleaning up my earthquake damage.
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