Global Market Comments
September 21, 2015
Fiat Lux
Featured Trade:
(THE DEATH OF GOLD),
(GLD), (ABX), (GDX),
(DON?T BUY ALIBABA, YET)
SPDR Gold Shares (GLD)
Barrick Gold Corporation (ABX)
Market Vectors Gold Miners ETF (GDX)
One of the most impressive moves in the wake of the Fed?s Thursday move to maintain ultra low interest rates was to be found in gold.
In the run up to the flash headline on the Fed non-announcement, the yellow metal rocketed $40. The action was even more impressive in silver (SLV), which tacked on 90 cents, or 6.6%.
Now, here is the really bad new.
The fundamentals for the barbarous relic are about to turn from bad to worse. The prospect is sending perma bulls rushing to update their life insurance policies.
This is the dilemma. To sell, or not to sell?
Gold does well when interest rates are low or falling. That reduces the opportunity cost of owning the barbarous relic, which doesn?t pay any interest or dividends. It just sits there, shines, and collects dust.
It also runs up storage and insurance fees, effectively hampering it with a real negative yield.
So what happens when the fundamentals flip from good to bad?
WARNING: if you have been carefully salting away one ounce American gold eagle coins in your safe deposit box for the past several years, you are not going to want to read this.
If I am right, and we have put in a generational high in bond prices and a low in yields, interest rates are going to rise. Initially, for the first couple of years, they may not do it a lot. But eventually they will.
That is terrible news for gold owners.
The market clearly thinks this is happening. Take a look at the charts below. Gold is making its third run at support at $1,100 over the past 18 months. Break this and cascading, stop loss selling will ensue, taking gold down to $1,000.
That, by the way, is my jeweler?s downside.
Caution: My jeweler is always right. There he plans to load the boat with bullion, which his business consumes in creating baubles for clients, like me.
It wasn?t supposed to be like this, as the arguments in favor of buying the yellow metal were so clear five years ago.
The exploding national debt was about to force the US government to default on its debt. It almost did, thanks to congressional gamesmanship.
Massive trade deficits with China and the Middle East were supposed to collapse the value of the US dollar.
The election of Barack Obama was predicted to lead to the creation of a socialist paradise. We were all going to need gold coins to bribe the border guards in order to get out of the country with only what we could carry.
The problem is that none of this happened.
The US budget deficit is falling at the fastest rate in history, from a $1.5 trillion peak to as low as $400 billion this year. Foreign capital pouring into the US has pushed the greenback to multiyear highs, and loftier altitudes beckon.
Since the 2009 inauguration, the S&P 500 has tripled off its intraday low. This has enriched the 1% more than any other group, who have seen their wealth increase at the fastest pace on record.
The trade deficit with China is now balancing out with America?s own burgeoning surpluses in services and education. As for the Middle East, we make our own oil now, thanks to fracking, so why bother.
To see such dismal price action in the barbarous relic now is particularly disturbing. Traditionally, the Indian ?Diwali? gift giving season heralded the beginning of a multi month bull run in gold. It ain?t happening.
In fact the dumping of speculative long positions by long-term traders used to this is accelerating the melt down. That?s because gold, silver, or any other inflation hedges have no place in a deflationary, reach for yield world.
Mind you, I don?t think gold is going down forever.
Eventually, emerging central banks will bid it back up, as they have to buy an enormous amount just to bring their reserve ownership up to western levels. Inflation is likely to return in the 2020?s, as my ?Golden Age? scenario picks up speed.
In the meantime, you might want to give those gold eagles to your grand kids. By the time they go to college, they might be worth something.
?
Better to Look than to Buy
Long time readers of this letter have known for years that the Alibaba IPO was coming, that it had massive implications for the market, and could well signal an interim market top.
I?m sticking to my guns.
You have to hand it to the underwriters of the company?s initial public offering, the largest in history.
Some $25 billion in capital was raised.? At the all time high of $118, Alibaba had a market capitalization of $300 billion, making it the 8th largest in the US, right after Wal-Mart (WMT).
At that price, the lucky few insiders who received allocations had a paper profit of 74% from the $68 IPO price.
To get this deal off successfully, the managers had to orchestrate one of the greatest onslaughts of hype, hyperbole, and euphoria of all time.
Of course, you want to buy a company that represents Amazon (AMZN), PayPal, and Ebay (EBAY) combined, in the fastest growing major country in the world!
As my old boss at Morgan Stanley used to hammer into me, ?stocks are not bought, they?re sold.?
What artificially boosted the price of the shares in the aftermarket was the unusual allocation of the shares.
CEO Jack Ma personally hand picked the top 25 institutions that received 50% of the shares. His goal was to place them with the largest, longest-term holders, basically, people who never sell.
Hedge funds were banned from participation, as were most individuals.
That shut out thousands of investors who were forced to chase stock in the after market. This is how you get such a dramatic initial gains. They?re always engineered.
The final insult was the ?green shoe?, which increased the deal size by 15% at the last minute at the underwriters? discretion. When these guys finally get in, look out below.
Look carefully at what you get as an Alibaba shareholder, and you might have second thoughts.
This is not your father?s joint stock company. It is a share in a profit stream into a Cayman Islands holding company, the amount of which is at the discretion of Jack Ma. It is more like a hedge fund limited partnership than a publicly listed company.
In some court cases in China, the structure has already been ruled illegal. One could only imagine what would happen in a liquidation. There are no assets, just a post office box on a remote Caribbean island.
Not exactly widows and orphans stuff.
If you had any doubt about (BABA)?s next move, better take a look at the shares of its two largest shareholder?s, Softbank (SFTBY) (-46%) and Yahoo (YHOO) (-47%). They have both done an outstanding rendition of a swan dive.
Some of this is no doubt the result of new Alibaba holders hedging their position by selling short (SFTBY) and (YHOO). But it could also mean that (BABA) is grotesquely over valued and has to fall to come in line with reality.
Keep in mind, also, that non-dividend yielding stocks tend to have greater volatility than those that do pay out.
I am inclined to hold back until (BABA) hits the low $40 handles. That is still a big discount to the IPO price. Some brokers have already issued reports suggesting that the shares will get there shortly.
By the way, my old friend, Softbank?s Masayoshi Son?s $20 million initial investment in Alibaba, made in 2004, is now worth $100 billion at the peak. That has to be one of the greatest trades of all time.
Good for you, Mas, and the next dinner is one you!
?
The $25 Billion Dollar Man
I?m Sticking to My Guns on Alibaba
Global Market Comments
September 18, 2015
Fiat Lux
Featured Trade:
(SEPTEMBER 23 GLOBAL STRATEGY WEBINAR)
(THANK YOU JANET YELLEN!),
(SPY), (TLT),
(WHY I?M CHASING THE EURO),
(FXE), (EUO)
SPDR S&P 500 ETF (SPY)
iShares 20+ Year Treasury Bond (TLT)
CurrencyShares Euro ETF (FXE)
ProShares UltraShort Euro (EUO)
Email sent to Federal Reserve Governor Janet Yellen, 9-17-2015 2:30 PM EST:
Dear Janet,
A great big thank you to you!
All is forgiven!
I apologize for those snarky questions I used to ask at your San Francisco Fed press conferences years ago.
And I don?t regret for a second all those times I walked you to your car after your night economics class at UC Berkeley because you were afraid you would get mugged.
The insights I gained to your thinking have been worth their weight in gold.
A few minutes before your interest rate decision, I placed bets with some hedge fund friends of mine.
I went for NO INCREASE, citing your insistence to me on many occasions that you needed to ?see the whites of inflation?s eyes? before you?d make a move.
I am also averse to betting against nine year long trends.
So, I won! BIG TIME!
It?s clear that you have subscribed to Verizon?s new international dialing plan. It?s such a great deal, as I found myself traveling last summer in Europe.
That would explain your newly heightened sensitivity to economic conditions abroad, with a weak Europe and a China slowdown.
A strong dollar was also clearly in your thinking, as it is a big drag on the earnings of large US multinationals.
And the massive collapses in oil and commodity prices obviously indicate that inflation is nowhere to be seen.
So being the central banker to the 50 United States is not enough? You want to take on the world?
If anything, deflation is accelerating. So why rush to head off non-existent inflation?
I suspected as much.
That?s why I went into your meeting with no positions whatsoever. That is very rare for a person like me who has to be making money all the time. The risk/reward was just lousy.
What you have done is set up one of the greatest ?BUY THE RUMOR AND SELL THE NEWS? markets in recent memory.
In a few days, once the smoke clears, we should go back down and retest the recent lows, even if we don?t get very close.
That will give me the entry point for me and my many new followers to buy stocks once again.
If you really do need to see inflation before you raise interest rates, you might not raise them for three more years!
What we now have to look forward to is three more months of uncertainty, speculation, and prognostication about a December rate rise. I can?t imagine a more ideal trading environment.
But you have to go into this with dry powder, which I, with a 100% cash position, have plenty of.
While I have your attention, let me tell you about this neat little trade I discovered in the Velocity Shares Daily Inverse VIX Short Term ETN (XIV), which is a bet that S&P 500 volatility will fall.
I made two round trips on this baby in the past two weeks, getting followers in as low as $23.20. It hit $32.40 after the announcement, an unbelievable two week gain of 39.66%.
A few more trades like this, Janet, and you will more than make up for the pitiful pension that the government pays former Federal Reserve governors.
You won?t have to do any TV gigs at all!
Just let me know and I?ll get you set up. You see, I know this broker?
So once again, thank you Janet. The box of See?s candy is in the mail.
Dear Janet?
I?m not a person inclined to chase winning positions. Making money on one trade is certainly no guarantee that you will repeat the win on the next. Lightening doesn?t strikes twice in the same place.
Well, actually it does sometimes, especially when it comes to selling short the Currency Shares Euro Trust (FXE). Selling short the Euro (EUO) has been one of my most consistently winning trades for all of 2015.
It?s like suddenly being adopted by a generous rich uncle, a continental one that drinks espresso, eats croissants, and smokes Galois cigarettes.
Given the European Central Bank?s dramatic action weeks ago to implement an aggressive program of quantitative easing, the entire world has been trying to sell short the beleaguered continental currency.
This means running the Euro printing presses non-stop, much like the Federal Reserve started doing five years ago.You saw the results here.
Overnight Euro interest rates have already been chopped to negative numbers. Even my cleaning lady, Cecelia, knows she should be unloading her Euros.
The trouble is that the currency has already plunged 37 cents, or almost 27% since its mid 2014 top. In the currency world, this is a big move, and puts China's piddling 4.4% move in the Yuan to shame.
However, we needed an event, or an uncertainty removed, before we could go back in on the short side.
We got that yesterday with Janet's move on interest rates.
You have to go to the weekly charts to find the next support levels, but its clear that $1.00, and then $0.90 eventually beckons one.
We live in a world of chase now. All asset classes, from stocks to bonds, currencies, precious metals, oil, and even food, are at the extended end of very large one-way moves. So pickings on the trading front are becoming increasingly thin.
Think of it as buying the US stock market in 2009. I?d rather sell the (FXE) at the beginning of a five year move, than buy in the middle of a 10 year appreciation, which is what we are seeing in US stocks now.
This is also a play on the US bond market. Any fall in Treasury bond prices and rise in yields, a pretty safe bet over the medium term. This will be happening while Euro interest rates are falling, giving a huge yield advantage to the greenback.
As regular readers of this letter know, INTEREST RATES DIFFERENTIALS ARE THE LARGEST DRIVER OF CHANGES IN FOREIGN EXCHANGE RATES.
It's as simple as that.
If you need a third argument for this position, it is a bet on the continued virility of the US fracking industry.
Every additional barrel we produce in America means one less imported from the Middle East, and (as of today) $47 less sold in the foreign exchange markets.
Frackers have already cut our import bill from $400 billion to $200 billion in the past five years, prompting a staggering decline in our dollar outflows.
They are also eliminating our country?s need to maintain expensive ground forces there to protect oil supplies. Every fracking job created in the windswept planes of North Dakota means one less soldier stationed abroad.
This savings will eventually eliminate the government?s present $400 billion budget deficit.
Our newest war in the bleak sands of Syria and Iraq, fought with F-16?s, drones, and Special Forces for targeting, will cost pennies on the dollar when compared to previous conflicts.
I may not be selling short the Euro this second, today, or this week. But I will continue to smack substantial rallies. I might also pick up some Wisdom Tree Europe Hedged Equity ETF (HEDJ), which benefits mightily from a weak continental currency.
Call me old fashioned, but I like to sell high and buy low.
Run Those Printing Presses, Mario!
Global Market Comments
September 17, 2015
Fiat Lux
Featured Trade:
(FRIDAY, OCTOBER 30 SAN FRANCISCO STRATEGY LUNCHEON)
(THE RECEPTION THAT THE STARS FELL UPON)
Global Market Comments
September 16, 2015
Fiat Lux
Featured Trade:
(FRIDAY, OCTOBER 23 INCLINE VILLAGE, NEVADA STRATEGY LUNCHEON)
(THE BULL MARKET IS ALIVE AND WELL), or
(HOW TO SPOT A MARKET TOP),
(SPY), (NFLX), (TSLA), (FB), (LEN), (TLT), (BAC)
SPDR S&P 500 ETF (SPY)
Netflix, Inc. (NFLX)
Tesla Motors, Inc. (TSLA)
Facebook, Inc. (FB)
Lennar Corporation (LEN)
iShares 20+ Year Treasury Bond (TLT)
Bank of America Corporation (BAC)
It?s fall again, when my most loyal readers are to be found taking transcontinental railroad journeys, crossing the Atlantic in an a first class suite on the Queen Mary 2, or getting the early jump on the Caribbean beaches.
What better time to spend your trading profits than after all the kids have gone back to school, and the summer vacation destination crush has subsided.
It?s an empty nester?s paradise.
Trading in the stock market is reflecting as much, with increasingly narrowing its range since the August 24 flash crash, and trading volumes are subsiding.
Is it really September already?
It?s as if through some weird, Rod Serling type time flip, August became September, and September morphed into August. That?s why we got a rip roaring August followed by a sleepy, boring September.
Welcome to the misplaced summer market.
I say all this, because the longer the market moves sideways, the more investors get nervous and start bailing on their best performing stocks.
The perma bears are always out there in force (it sells more newsletters), and with the memories of the 2008 crash still fresh and painful, the fears of a sudden market meltdown are constant and ever present.
In fact, nothing could be further from the truth.
What we are seeing unfold here is not the PRICE correction that people are used to, but a TIME correction, where the averages move sideways for a while, in this case, some five months.
Eventually, the the moving averages catch up, and it is off to the races once again.
The reality is that there is a far greater risk of an impending market melt up than a melt down. But to understand why, we must delve further into history, and then the fundamentals.
For a start, most investors have not believed in this bull market for a nanosecond from the very beginning. They have been pouring their new cash into the bond market instead.
Now that bonds have given up a third of 2015?s gains in just a few weeks, the fear of God is in them, and dreams of reallocation are dancing in their minds.
Some 95% of active managers are underperforming their benchmark indexes this year, the lowest level since 1997, compared to only 76% in a normal year.
Therefore, this stock market has ?CHASE? written all over it.
Too many managers have only three months left to make their years, lest they spend 2016 driving a taxi for Uber and handing out free bottles of water. The rest of 2015 will be one giant ?beta? (outperformance) chase.
You can?t blame these guys for being scared. My late mentor, Morgan Stanley?s Barton Biggs, taught me that bull markets climb a never-ending wall of worry. And what a wall it has been.
Worry has certainly been in abundance this year, what with China collapsing, ISIL on the loose, Syria exploding, Iraq falling to pieces, the contentious presidential elections looming, oil in free fall, , the worst summer drought in decades, flaccid economic growth, and even a rampaging Donald Trump.
We also have to be concerned that my friend, Fed governor Janet Yellen, is going to unsheathe a giant sword and start hacking away at bond prices, as she has already done with quantitative easing (I?ve been watching Game of Thrones too much).
This will raise interest rates sooner, and by more.
Let me give you a little personal insight here into the thinking of Janet Yellen. It?s all about the jobs. Any hints about rate rises have been head fakes, especially when they come from a small, anti QE Fed minority.
When in doubt, Janet is all about easy money, until proven otherwise. Until then, think lower rates for longer, especially on the heels of a disappointing 173,000 August nonfarm payroll.
So I think we have a nice set up here going into Q4. It could be a Q4 2013 lite--a gain of 5%-10% in a cloud of dust.
The sector leaders will be the usual suspects, big technology names, health care, biotech (IBB), and energy (COP), (OXY). Banks (BAC), (JPM), (KBE) will get a steroid shot from rising interest rates, no matter how gradual.
To add some spice to your portfolio (perhaps at the cost of some sleepless nights), you can dally in some big momentum names, like Tesla (TSLA), Netflix (NFLX), Lennar Husing (LEN), and Facebook (FB).
You Mean it?s September Already?
What has to happen for even me to believe that the market is topping?
I have a laundry list:
1) Retail buyers enter the stock market on a large scale. So far they are missing in action.
2) S&P 500 profits historically peak at 50% above the old high. In the last cycle they got to $100 a share. So we still have room to soar to $150/share, some 20% above today?s probable $120/share.
3) The yield curve is always inverted at a market top (short term interest rates are higher than long term ones.) Now, the reverse is true.
4) Stocks are always more expensive than bonds on a relative basis at bubble tops. Currently, stocks are two standard deviations cheaper than bonds, largely through the grotesque over valuation of bonds.
5) Even if the Fed does raise interest rates tomorrow, historically markets were higher in nine out of the last ten first hikes.
How soon will our sideways correction end? Possibly as soon as Thursday afternoon at 2:00 PM, when Yellen shows her dovish hand (wing?).
