1) How Big is QEII? Speculation is rife in the Treasury markets on if quantitative easing has already started, and if it has, how big it is, or whether it will happen at all? Goldman Sachs has opened more than a few eyes when they put their $2 trillion forecast out there. The low-end estimate is $100 million between Fed meetings every six weeks.
Let me tell you how big that is. This month the Fed will buy $30 billion as part of its regular refunding efforts. The mean of these two predictions is $117 billion a month, or $1.4 trillion a year. That means that the Fed will buy the entire amount of debt created by the 2010 budget! This is why all asset classes are going up, even the wheezing, arthritic ones, like US stocks.
There are two great unknowns here. When does the Fed take the punch bowl away, and what will the markets do when it senses this is happening. My guess is that QEII will end sooner than later, because private investors have already done so much front running.
When it does end, the markets will sell off much more than in the past. The new, post crash risk control regime has a much finer hair trigger than before. Investors will no longer sit back and willingly take a 50% hit to their net worth. Buy and hold is dead, and the markets know it.
Alan Greenspan used to spike his punch with a surreptitious flask of Ron Rico rum. Ben Bernanke uses crystal meth, ecstasy, and steroids, and the hangover will be monumental. What will lead the downturn??? Wheezing, arthritic assets, like US stocks.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-03 02:00:402010-11-03 02:00:40November 3, 2010 - How Big is QEII?
Featured Trades: (PALLADIUM), (PALL)
ETFS Physical Palladium Shares ETF
2) Palladium Hits a Seven Year High. Palladium has soared by 60% since my recommendation in January, hitting a seven year high yesterday, making it one of my better calls of the year (click here for the piece).? Double dippers beware! Moves like this by industrial commodities do not occur in the face of a collapsing economy.
It's looking like the car manufacturers, which consume huge amounts of the white metal to make catalytic converters, could turn out as many as 12.5 million cars this year. This could rise to 15 million by 2015. The 2008 nadir was a paltry 8.5 million vehicles. You can forget seeing the drug induced haze of 20 million annual units free money brought us, returning in our lifetime. Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by another 1.5 million units a year.
Some 80% of the world's palladium production comes from Russia and South Africa, dubious sources on the best of days. This means that a long position in this white metal gives you a free call on political instability in these two less than perfectly run countries.
Also known as the 'poor man's platinum,' demand for palladium for jewelry in China has been soaring with the growth of the middle class. On top of this, you can add huge new investment demand from the palladium ETF (PALL) this year. The fund is thought to be bumping up against its position limit of 1.29 million ounces, which amounts to a breathtaking 18% of global production in 2009.
If you are looking for something to stash in your gun safe, bury in the backyard, or give to the grandkids on their college graduation, get physical. You can buy 100-ounce bars at $50 over spot, or Royal Canadian Mint one ounce .9995% fine palladium Maple Leaf coins at $50 over spot. And yes, you can even buy them on Amazon by clicking here.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-03 01:50:472010-11-03 01:50:47November 3, 2010 - Palladium Hits a Seven Year High
Featured Trades: (JUNK BONDS), (JNK)
SPDR Lehman High Yield Bond ETF
3) From Junk to Gold. Investors who bought beat up jalopies at the going out of business sale 18 months ago, ended up getting delivered a Rolls Royce. I piled readers into the junk bond ETF (JNK) 18 months ago because the market was discounting a future default rate of 17%, which I thought was extremely unlikely (click here for the call). What have we actually realized? A minimal 0.3%.
As a result, yield seeking, risk averse buyers have been piling into the fund, taking yields down from 18% to 6%. We could have a little more upside to go. As absolute returns have plunged, spreads over Treasuries have also been shrinking, but have yet to reach historical minimums. I am not a buyer here, but would not be surprised to see others chase this market further.
Investors in past years would have been laughed at as neophytes or suckers for taking on extra junk risk with such little potential upside. In this low return world, they are now considered all-seeing sages. It is a perfect example of how zero interest rates are skewing investment decisions everywhere.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-03 01:40:252010-11-03 01:40:25November 3, 2010 - From Junk to Gold
4) SPECIAL SUBSCRIPTION OFFER FROM THE MAD HEDGE FUND TRADER. Any Texas residents who take out a two year subscription to The Diary of a Mad Hedge Fund Trader this week will get a free 'San Francisco Giants World Series Champions' knit hat. For proof of residence, please send me a stuffed armadillo. Cheap Chinese imports not accepted. There is a rumor on the Internet today that the conservative Texas Rangers deliberately threw the World Series last night so liberal San Franciscans would be too hung over to vote today. It's working. Five minutes after the winning 7th inning home run, Yahoo's main server for the Bay Area crashed. My best trade of the year? Buying two tickets for $1,300 for one of the only two games played at home.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-03 01:30:162010-11-03 01:30:16November 3, 2010 - Special Subscription Offer From The Mad Hedge Fund Trader
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-03 01:00:002010-11-03 01:00:00November 3, 2010 - Quote of the Day
1) Catching Up With Charles Nenner. I managed to catch up with my friend, technical analyst to the stars, Charles Nenner, and quiz him about his recent relative silence. It has been many months since he predicted that the yen was going to soar from ?95 to ?80, that you should dump your longs before a plunge in the S&P 500 from 1240 to 1,000, or that the Australian dollar would rocket from 78 to 100 cents.
The wily Dutchman explained that he was been sitting on the fence because there is really nothing to do here, echoing sentiments from my own piece on market turning points last week (click here for 'Contemplations in Risk'). His longs in NASDAQ, the ags, and emerging markets were working fine, but he was not inclined to initiate new longs here, and there was no point in stepping in front of the train on the short side.
Charles' daily, weekly, and monthly cycles were drawing sharply diverging conclusions. Take a look at the stock indexes, where the weekly cycles show the Dow and S&P 500 possibly peaking this week, the NASDAQ not until January, and the emerging markets not for the foreseeable future. The best thing is to wait for these conflicts to resolve over time before making any big calls. After all, no one stood over Beethoven and demanded he finish his symphony by Friday.
Charles thinks we are about to enter a period of major dollar strength, but not yet. One area that is starting to look interesting was the volatility index (VIX), which seems to be bottoming out in the high teens, presaging times that the Chinese describe as 'interesting.' One could easily envision a scenario where the dollar is strong, and everything else goes to hell in a hand basket. I plan to get together with Charles in early January to review his 2011 calls across all markets. Premium subscribers can look forward to getting e-mailed a strategic advanced peak.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-02 02:00:122010-11-02 02:00:12November 2, 2010 - Catching Up With Charles Nenner
Featured Trades: (THE TREASURY BOND DILEMMA), (TBT), (IEF)
2) The Treasury Bond Dilemma. There is a very interesting divergence going on in the Treasury bond market which readers should be aware of. The leveraged short ETF for long dated paper, the (TBT), looks like it bottomed in the end of August, indicating that the collapse I have been predicting has already been started, just five days before my seminal post on the topic (click here for 'The Great Bond Market Crash of 2010'). The ETF for seven to ten year paper (IEF), motored on to a new high six weeks later, and has been grinding sideways since, the ten year since levitating at an amazing 2.60% yield.
This is happening because many bond traders believe that Ben Bernanke is going to focus his QEII on durations less than ten years, and will leave long dated paper, like the 30 year, out in the cold. Which is another way of saying that without temporary, artificial government support, all bond markets would be in free fall by now. This gives us all a wonderful insight into how bonds will behave, once QEII is finished, is thought to be halfway done, or gets canceled (click here for 'Ha, Ha, I fooled you' in 'Contemplations on Risk'). I think what these two charts are telling you is that if the great bull market in the (TBT) hasn't started yet, it is not far off.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-02 01:50:532010-11-02 01:50:53November 2, 2010 - The Treasury Bond Dilemma
3) There is Less Than Meets the Eye in Q3 GDP. There was much celebration that the US economy managed a 2.0% growth rate in Q3, sending double dippers to the dust bin of history, where they rightfully belong. Of course, you already knew this was going to happen last January, because this is exactly the number I predicted then in my 2010 Asset Allocation Review' (please click here for the call) . I made this prediction because I thought that American companies doing business with the white hot emerging markets would generate just enough growth to offset the huge drag created by moribund industries, like housing, real estate and every shrinking state and local government portions of the economy. This is precisely what unfolded.
A closer examination of the breakdown show that even this modest, lackluster figure may be overstating the true level of business activity. By the time you strip out the 2.2% GDP deflator and the inventory build of 1.4%, real GDP growth was actually negative. The GDP deflator is no doubt being overstated by the huge expansion of the Fed balance sheet. Much of the inventory build was a one time only affair which has since ceased and can't be counted to repeat in the future.
What all this says about the US stock markets is that further rises are going to be driven mostly by a QEII that will lift all boats, especially the yachts. They will be supported less by actually profit making activities of US companies. That is sort of a long winded way of saying that we are in the middle of a mini stock bubble. Party away, but stay close to the exit at all times.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-02 01:40:572010-11-02 01:40:57November 2, 2010 - There is Less Than Meets the Eye in Q3 GDP
Featured Trades: (RARE EARTHS), (REMX), (MCP), (LYSCF), (AVARF)
2) Is the Rare Earth ETF Calling a Market Top? It looks like the Van Eck mutual fund group reads the Diary of the Mad Hedge Fund Trader, because last week they launched the first ETF (REMX) dedicated to rare earth and strategic metals. The move comes on the heels of incredibly bullish developments in this space over the last six months. These include a ban by China, source of 97% of the world's rare earth supplies, to Japan, a temporary export ban to the US, and a 30% reduction in global export quotas next year.
The new issue immediately gave a boost to the shares of the several names in this sector you have all come to know and love in the pages of this letter, including Molycorp. (MCP), Lynas Corp. (LYNCF), and Avalon Rare Metals (AVARF) (click here for 'Rare Earths Are About to Become a Lot More Rare'). That's becasue the launch of a new ETF in a thinly traded corner of the commodities markets is well known to suck in a ton of new money, as it did with Platinum (PPLT) and Palladium early this year (click here for the call).? MCP alone has moved up a stunning 240% since the end of August, partly on anticipation of the new ETF.
It even includes some outliers in the strategic metal area, like Titanium Metals Corp (TIE), which I mentioned earlier in the year (click here for 'Playing Catch Up With Titanium'). As if the issue needed any help, Secretary of State Hillary Clinton (see above) warned that the world needs to start developing alternative sources for rare earths. I have included the ETF's top ten holdings below.
I have been flooded with emails from readers this week asking if they should pile into the issue. Right here, I wouldn't touch with a ten foot pole. The deal comes on top of underlying equities that have rocketed by 400% and metals prices that have roared tenfold in six months. Great idea, but a little late.
When the CEO of Molycorp says his company's primary product is caught up in a bubble, you have to take notice. I think it's safe to say that if you are not in now, you have missed the move in this cycle. The train has left the station. Better to wait for the inevitable sell off that will come sometime next year, or find a completely different field which offers more immediate upside.
Lynas Corp Ltd (LYSCF.PK)
Iluka Resources Ltd (ILKAF.PK)
Titanium Metals Corp (TIE)
Thompson Creek Metals Co Inc (TC)
OSAKA Titanium Technologies Co
RTI International Metals Inc (RTI)
Toho Titanium Co Ltd
China Molybdenum Co Ltd
Kenmare Resources PLC
Molycorp Inc (MCP)
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-01 01:50:352010-11-01 01:50:35November 1, 2010 - Is the Rare Earth ETF Calling a Market Top?
3) Pricking the Bubble in the Yen. Analysts have been puzzled by the relentless appreciation of the Japanese yen, which went out at ?80.40 on Friday, and seems poised to break out to the ?70 handle and an all time high. Having written the authoritative tome on the Japanese banking system 30 years ago (it's in the Library of Congress), I can shed more than a little light on why.
Unknown to most in the trading community, foreign banks have engaged in a massive recapitalization of their Japanese subsidiaries since over the last six months. Since May, excess foreign bank reserves held in yen have soared from $246 billion to $562 billion, an increase of a staggering $316 billion, creating immense upward pressure. Some $136 billion of this poured into the yen in September alone. By comparison, there are only $7.3 billion worth of net longs held in futures markets by speculators.
Ask Japanese senior bankers why this is happening, and you get lame excuses, like anticipation of stiffer capital requirements from the Bank of Japan to head off any future financial crisis. The truth is that banks are using their balance sheets to speculate in the currency markets and boost profits. Adding fuel to the fire has been efforts by the People's Bank of China to diversify out of the dollar as a reserve asset by pouring new cash flows into the yen. This is showing up in a huge jump in overnight bill purchases by foreign investors.
In days of old, countries used to destroy their neighbors by sending in invading armies of screaming warriors swinging great long swords. Today, you simply buy their currency; drive it to ridiculous heights, making its industry hopelessly uncompetitive in the global market place, thus collapsing its economy. This is what China is doing to Japan today.
This explains why the central bank's intervention efforts to slow the yen's appreciation have been an abject failure. In September, total BOJ sales of yen amounted to only $61 billion, and has been spread among a range of lower tier assets, like 'BBB' rated corporate bonds, exchange traded funds (ETF's), and REIT's. The Japanese government is slumming with its own version of QEII. But the amounts so far are miniscule compared to the inflows. They might as well be pissing in the ocean.
There are two ways this kabuki play will go end. The obvious one is for the BOJ to boost its intervention to the $1 trillion that worked the last time it was in this pickle eight years ago. I sense that a Pearl Harbor type surprise attack of this sort is setting up. Suck the shorts in with a series of small, ineffective interventions that invite laughter and derision, and then all of a sudden, its tora, tora, tora and bombs away. The shorts get taken to the cleaners.
The second approach will be more subtle. Banks are currently earning 10 basis points on their excess reserves. Turn this number negative, as Germany and Switzerland did, and the banks will bail on their excess reserves in a heartbeat. It's not a matter of if, but when they do this. Then the 15 year double top chartists have been waiting for will be in place, and one of the great shorts of the decade, and the (FXY) and the (YCS) will be in play. This all may happen very fast, so keep you finger poised over that mouse.
Is the Bank of Japan Planning a Surprise Attack on the Yen Shorts?
Why the Bank of Bank of Japan's Intervention Efforts Aren't Working
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2010-11-01 01:40:192010-11-01 01:40:19November 1, 2010 - Pricking the Bubble in the Yen
Legal Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.
Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.
Essential Website Cookies
These cookies are strictly necessary to provide you with services available through our website and to use some of its features.
Because these cookies are strictly necessary to deliver the website, refuseing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.
We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.
We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.
Google Analytics Cookies
These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.
If you do not want that we track your visist to our site you can disable tracking in your browser here:
Other external services
We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.