March 14, 2013

Global Market Comments
March 14, 2013
Fiat Lux

Featured Trade:

SPDR S&P 500 (SPY)
iShares FTSE China 25 Index Fund (FXI)
WisdomTree Chinese Yuan (CYB)

2013 Strategy Luncheon Schedule

Come join me for lunch at the Mad Hedge Fund Trader?s Global Strategy Luncheons, which I will be conducting throughout the US and Europe over the next five months. 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. And to keep you in suspense, I?ll be throwing a few surprises out there too. Tickets will vary according to each city, depending on local costs, but will be around $200 per person.

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. You never know who is going t show up for these events, and I always manage to learn something new. I find the discussions and debate with my guests incredibly productive.

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

April 12 San Francisco
April 19 Chicago
July 2 New York
July 8 London, England
July 12 Amsterdam, Neth.
July 16 Berlin, Germany
July 18 Frankfurt, Germany
July 25 Portofino, Italy
August 1 Mykonos, Greece
August 9 Zermatt, Switzerland


The Elton John Market

I remember 1997 like it was yesterday. Bill Clinton was president, the US government was running a balanced budget, and the Dotcom IPO bubble parties in Silicon Valley were happening almost every day.

The Florida Marlins beat the Cleveland Indians in a seven game World Series, where the last game went to a heart stopping 11 innings. Elton John scored the top hit of the year with ?A Candle in the Wind.?

1997 was also the last time that the Dow average closed up for nine consecutive days. Sure, the market only managed to eke out a 5.22 point gain. But hey, up is up.

The market was on its way to losing its winning streak until hedge fund legend, my old buddy David Tepper, spoke to the press. He mentioned that the Dow could end up 20% in 2013. That means we still have another 9.5% to go, potentially taking the Dow as high as 16,000. Warning: David has a long history of being right, with his own long-term average annualized return nearly matching my own at 38%.

One could easily imagine a course of events that gets us there. The Republicans and Democrats kiss and make up and produce a budget acceptable to both sides that cuts our deficit over the long haul. The sequester ends. China stops double dipping. Europe gets its act together, with ECB president, Mario Draghi, finally cutting euro interest rates. Oil prices collapse.

There is another big factor that could keep driving share prices higher. Ben Bernanke could keep the pedal to the metal and maintain the present rate of monetary easing. March is turning into one of the most fascinating months in the history of the bond markets. For the first time ever, The Fed is buying more bonds that the Treasury is issuing, with the excess demand getting soaked up in the marketplace.

Without a doubt, the most underestimated, misunderstood development of the year was when the esteemed Fed chairman told us that they may never sell their $3 billion plus stash of Treasury bond holdings, but hold them until maturity instead.

This is huge. It means that the Armageddon predicted by everyone when the Fed unwound its massive bond position is never going to happen. Instead, we will see a slow grind higher in yields and lower in prices. I have been expecting this all along, warning readers in my own forecasts that we may never get the bond market crash they had been hoping for, and that they should avoid high cost of carry short bond plays, like the (TBT).

As a mathematician, I have to assume that Chaos Theory is going to kick in here pretty soon and force the indexes to revert back to the mean. This is another way of saying the longer the market moves in a single direction, the greater the probability that it will reverse.

Not to do so will really tempt fate. That is why I picked up a modest short position in stocks today, selling some short dated, deep out-of-the-money, calls on the S&P 500 (SPY). I am also deliberately dragging my feet in adding any new longs to the Trade Alert Service model-trading portfolio.

Even if Tepper is right and we blow through the top end of the most wildly bullish forecasts for 2013, we need to have a pullback first. Yes, it has been a long wait. But nothing goes up forever, trees don?t grow to the sky, yada, yada, yada.

When the hiatus begins, there should be room to make some money through the type of short position which I tacked on today. David did not say he expects the market to rise to 16,000 by the end of this quarter, which is already on track to deliver the best stock market performance in history.

If the Dow closes up again for a 10th day in a row, it will be the longest string of wins since 1996. What was the number one hit that year? The ?Macarena?? Can you hum a few bars for me?

SPX 3-12-13

SPXa 3-12-13

SPXb 3-12-13

Elton John

Shall We Go For 10?

Rampant Wage Inflation Strikes China

I rely on hundreds of 'moles' around the world whose job it is to watch a single, but important indicator for the world economy. One of them checks for me the want ads in the manufacturing mega city of Shenzhen, China, and what he told me last week was alarming.

Wage demands by Chinese workers have been skyrocketing this year. The biggest increases have been at the low end of the spectrum, where migrant workers from the provinces are earning up to 40% more than a year ago. Wage settlements of 20% or more for trained workers are common. One factory that gave staff only a 10% increase saw many of them fail to return after the recent Chinese lunar New Year.

Of course China's blistering 8% GDP growth is to cause, which has pushed inflation well beyond the government's 4% target. So the cost of living in the Middle Kingdom is rising dramatically. The problem has been particularly severe with imported commodities, such as in food. Hence, the increased demands.

This is important for the rest of us because low wages have been the cornerstone of the Chinese economic miracle. In just the last decade, average monthly Chinese wages have climbed from the bottom rung to the middle tier. That seriously erodes the country's cost advantage, which has gained such enormous shares in foreign markets, like the US. Take away the country's price advantages, and demand will wither, slowing growth globally.

What will they be demanding next? Collective bargaining rights? In the meantime, keep checking those Craig's List entries for Shanghai.

Average Monthly Salary

$3,099 Yokohama, Japan
$1,220 Seoul, South Korea
$888 Taipei, Taiwan
$235 Shenzhen, China
$148 Jakarta, Indonesia
$100 Ho Chi Minh City, Vietnam
$47 Dhaka, Bangla Desh

FXI 3-12-13

Chinese Men

$1.25 an Hour? You Must Be Joking!

March 13, 2013

Global Market Comments
March 13, 2013
Fiat Lux

Featured Trade:

S&P 500 Large Cap Index (SPX)

April 12 San Francisco Strategy Luncheon

Come join me for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in San Francisco on Friday, April 12, 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. And to keep you in suspense, I?ll be throwing a few surprises out there too. Tickets are available for $189.

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 lunch will be held at a private club in downtown San Francisco near Union Square that will be emailed with your purchase confirmation.

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.

San Francisco

Black Swans Are Circling

Basking in the glow of my 31% gain so far this year, I have to start wondering what could go wrong. Call me a pessimist, a paranoid, and worrywart, but whenever things got this good in the past, they were about to turn very bad. It is not my intention to ruin your day. But I may well do that if you read the rest of this piece.

Traders are piling on new longs with reckless abandon, gushing about the sweet spot for equities, Goldilocks, and how different it is this time. Retail flows into equity mutual funds have turned positive for the first time in years.

However, I am hearing a rising tide of negativity from the jungle telegraph. Don?t forget to sit down when the music stops playing. This is just a trade, not a new golden age. There are ?black swans? circling out there everywhere, and the risk is that they alight upon us in great unexpected flocks, like a scene out of Alfred Hitchcock?s classic film, The Birds.

Let me give you a list of things that can still go wrong this year:

*The ten year Treasury bond spikes to 4% and money finally gets expensive. About one third of present day corporate earnings are coming from assorted forms of financial engineering, like share buy backs and refinancing?s, that disappear when money becomes dear. This is why you are getting profit growth against no top line growth.

*The sequester looks like a big nothing now, but could develop into something much more serious in six months when the federal funds in the pipeline dry up. Don?t forget the reverse multiplier effect.

*Falling disposable incomes created by this year?s tax hikes on earners over $450,000 haven?t yet translated into falling consumer spending. But it will, as it always does.

*A Middle East flare up causes crude to soar to $120 a barrel and gasoline rises to $5 a gallon, putting the brakes on an already low economic growth rate.

*Europe blows up again, sending the dollar through the roof. Better keep taking those Italian lessons to get a head start on the next ?tape bomb.?

*Seeing stock prices soar and the jobless rate fall, Ben Bernanke ends QE3 early, paring it down to maybe QE 1 ?.

*China?s weakening data flow persists, and the country falls into a double dip recession. Weak commodity and precious metals prices tell us this has already started.

*High frequency traders and quants, starved for a big mean reversion, smell blood in the water and trigger another ?flash crash.? Volatility goes through the roof. The short vol crowd in Chicago gets wiped out.

*Retail investors conclude they were right to stay away and bail on what they have remaining.

*A giant asteroid hits the earth and destroys all life as we know it, except for cockroaches and Twinkies.

And here is the scariest thing of all. All of these black swans could hit at the same time and reinforce each other, possibly around May or June. Could this be the fifth consecutive ?sell in May and go away? year?

This conjures up the vision of a ?ground hog year?, where 2013 is a carbon copy of 2012.? A strong first quarter is followed by two dead quarters, and then a strong year-end finish. This is what ?lost decades? look like. Look at the 30 year chart of the (SPX) below and tell me this isn?t happening.

Of course, this is just one of many possible scenarios that could play out this year. As for me, I?m booking my chalet in Zermatt in the Swiss Alps now to beat out the rest of you.

SPX 3-12-13

The Birds, Crows

I Said Black Swans, Not Crows


See You Later

A Cow Based Economics Lesson

You have 2 cows.
You give one to your neighbor.

You have 2 cows.
The State takes both and gives you some milk.

You have 2 cows.
The State takes both and sells you some milk.

You have 2 cows.
The State takes both and shoots you.

You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the
milk away.

You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.

You have two cows.
You sell three of them to your publicly listed company, using letters of
credit opened by your brother-in-law at the bank, then execute a
debt/equity swap with an associated general offer so that you get all
four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more.
You sell one cow to buy a new president of the United States , leaving you with nine cows.
No balance sheet provided with the release.
The public then buys your bull.

You have two giraffes.
The government requires you to take harmonica lessons.

You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.

You have two cows.
You go on strike, organize a riot, and block the roads, because you
want three cows.

You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk.
You then create a clever cow cartoon image called a Cowkimona and market it worldwide.

You have two cows, but you don't know where they are.
You decide to have lunch.

You have 5000 cows. None of them belong to you.
You charge the owners for storing them.

You have two cows.
You have 300 people milking them.
You claim that you have full employment, and high bovine productivity.
You arrest the newsman who reported the real situation.

You have two cows.
You worship them.

You have two cows.
Both are mad.

Everyone thinks you have lots of cows.
You tell them that you have none.
No-one believes you, so they bomb the ** out of you and invade your
You still have no cows, but at least you are now a Democracy.

You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.

You have two cows.
The one on the left looks very attractive.


March 12, 2013

Global Market Comments
March 12, 2013
Fiat Lux

Featured Trade:
(SPY), (IWM), (F), (AIG), (FCX), (FXY), (YCS),
?(FXB), (FXE), (EUO), (VIX)

SPDR S&P 500 (SPY)
iShares Russell 2000 Index (IWM)
Ford Motor Co. (F)
American International Group, Inc. (AIG)
Freeport-McMoRan Copper & Gold Inc. (FCX)
CurrencyShares Japanese Yen Trust (FXY)
ProShares UltraShort Yen (YCS)
CurrencyShares British Pound Sterling Tr (FXB)
CurrencyShares Euro Trust (FXE)
ProShares UltraShort Euro (EUO)
WisdomTree Chinese Yuan (CYB)

Trade Alert Service Rockets 30.6% in 2013

The Trade Alert Service of the Mad Hedge Fund Trader has posted a 30.64% profit year to date, taking it to another new all time high. The 27-month total return has punched through to an awesome 86%, compared to a miserable 10% return for the Dow average during the same period. That raises the average annualized return for the service to 38%, elevating it to the pinnacle of hedge fund ranks.

My bet that the stock markets would continue to grind up to new all time highs in the face of complete disbelief has paid off big time, as I continued to run sizeable long positions in the S&P 500 and the Russell 2000 (IWM). A hefty weighting in Ford Motors (F) has driven me to impressive profitability.

My substantial short volatility positions are contributing to profits daily, with the closely watched (VIX) Index plummeting to a new five year low at 11.5%. I booked nice profits from holdings in American International Group (AIG) and copper producer, Freeport McMoRan (FCX). I also prudently doubled up my short positions in the Japanese yen for the third time this year.

It has truly been a month where everything is working. Even my short positions in deep out-of-the-money calls on the (SPY) contributed to my P&L. While the (SPY) has been going up like clockwork, it has not appreciated fast enough to hurt the position.

Trade Alerts that I wrote up, but never sent, worked. That's because I have been 100% invested for the entire year in long stock/short positions. However, followers of my biweekly strategy webinars caught my drift and benefited from the thinking, and many did these trades on their own. These included shorts in the Treasury bond market, (TLT), the Euro (FXE), (EUO), and the British pound (FXB).

Sometimes the best trades are the ones you don't do. I have been able to dodge the bullets that have been killing off other hedge funds, including those in gold (GLD), oil (USO), and commodities (CORN), (CU).

All told, the last 20 consecutive recommendations of the Trade Alert Service have been profitable. I have six trades to go to beat this record. Watch this space.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011 and 14.87% in 2012. The service includes my Trade Alert Service, daily newsletter, real-time trading portfolio, an enormous trading idea database, and live biweekly strategy webinars. To subscribe, please go to my website at, find the "Global Trading Dispatch" box on the right, and click on the lime green "SUBSCRIBE NOW" button.

TA 2013 Performance

TA Performance Inception

SPX 3-11-13

Nice Long!


FXY 3-11-13

Nice Short!