Diary Archives - Mad Hedge Fund Trader

Trade Alert Service Blasts to New All Time High

Global Trading Dispatch?s Trade Alert Service posted a new all-time high yesterday, clocking a 48% return since inception. That takes the average annualized return up to 30.3%, ranking it among the top five performing hedge funds in the world. Those happy subscribers who bought my service in early May reaped an instant 35% profit following my advice.

I really nailed the top of the market on April 2, piling on hefty short positions in the S&P 500 (SPY) and the Russell 2000 (IWM) within a week. Predicting that the conflagration in Europe would get worse, my heavy short in the Euro (FXE), (EUO) was a total home run. I took in opportunistic profits trading the Japanese yen (FXY), (YCS) and the Treasury bond market (TLT) from the short side. I was then able to lock in these profits by covering all of my shorts with 60 seconds of the May 28 market bottom.

In June I caught almost the entire move up with a portfolio packed with ?RISK ON? trades. I picked up Apple (AAPL) at $530 for a rapid $50 gain. I seized the once in a lifetime opportunity to buy JP Morgan (JPM) at a 40% discount to book value, picking up shares at $31, correctly analyzing that the ?London Whale? problem was confined and solvable. My long position in Walt Disney (DIS) performed like the park?s ?Trip to the Moon? ride. While Hewlett Packard (HPQ) fell a disappointing 5% on me, I was able to add 140 basis points to my performance through time decay on an options position.

My satisfaction in all of this comes from the knowledge that thousands of followers are making money in the markets that never would otherwise. I am protecting them from getting ripped off by the sharks on Wall Street with their conflicted and indifferent research. I am expanding their understanding of not just financial markets, but the world at large. And I am doing this during some of the most difficult trading conditions in history.

Global Trading Dispatch, my highly innovative and successful trade mentoring program, earned a net return for readers of 40.17% in 2011. 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 www.madhedgefundtrader.com , find the ?Global Trading Dispatch? box on the right, and click on the lime green ?SUBSCRIBE NOW? button.

A Day in the Life of the Mad Hedge Fund Trader

Diary

Diary Entry for Monday, June 18, 2012

Dear Diary,

4:30 PM Sunday- Looks like my Monday is going to start early this week.

One of my Athens readers e-mailed me that New Democracy was a slam dunk to win the election and would form a right of center, pro bailout, pro Euro (FXE) coalition government. Looks like it is going to mean a ?RISK ON? week. US Treasuries nosedive in the overnight market. Looks like we are going to get a shot at selling short the Euro (EUO) one more time.

6:30 PM Sunday-Take kids to see the new DreamWorks animated blockbuster, ?Madagascar 3?, with voiceovers by Ben Stiller, Chris Rock, Jada Pinkett Smith and David Schwimmer. Notice how the kid movies are better than the adult movies these days. There are ample double entendres and innuendos to keep the grownups laughing all the way. I loved the penguins, fowl after my own heart.

9:00 PM-Call from a friend at the People?s Bank of China in Beijing. He wants to know if they have missed the top of the Treasury bond market, and if they should start unloading their $1 trillion worth of holdings. I said don?t worry. I expect the ?RISK OFF? trade to take the ten year yield up to 1.25% on a spike at some point, and then levitate, possibly for years. The world is suffering from a savings glut and a bond shortage. Plus, you will get a double kicker with a strong dollar. But please don?t try and sell ahead of a three day weekend, like you did last time. And thanks for the Peking Duck dinner in Shenzhen last year.

9:30 PM- Hit the rack and try and catch some shuteye before the next call.

2:00 AM-One of my former staff members at Morgan Stanley calls me from a Private Bank in Geneva to tell me that the Spanish bond market was in free fall, with yields piecing 7%. Is it time to buy? I said not yet, not until the fat lady sings, and slammed the phone back on the hook to go to sleep.

Spanish 10 Year Bond Yields

3:00 AM- Call from one of the top New York trading houses. There are rumors that the Oracle (ORCL) would announce blowout earnings in a few hours. Did I want to buy anymore stock? I said no thanks, that I already had 50% of my portfolio in high tech names like Apple (AAPL) and Hewlett Packard (HPQ). Can he please come up with any new top performing industries? People are getting tired of hearing the Apple story for the umpteenth time.

5:00 AM-Woken up by an earthquake that sounds like a truck just hit the house. I turn on the TV and learn that I am directly above the epicenter. It?s the third one since Wednesday. Ah, the joys of living in California next door to the San Andreas Fault.

6:00 AM-My website administrator calls me in a panic. The store is down. A hacker attack prompted PayPal to suspend my account. Since I am one of their largest customers, I call my account rep and get it reopened.

6:15 AM-An old friend from the Swiss National Bank called asking my read on the Fed meeting this week. I said that things weren?t dire enough for a QE3, but he could count on a ?twist? extension to include home mortgage securities. The board was most frustrated my its inability to revive the real estate market with the lowest interest rates in history, and such a move could take 30 years fixed rates loans from 3.75% to 2.75% in weeks. I said I owed him a fondue diner with a bottle of Schnapps for giving me the heads up on the Swiss franc devaluation last year where my followers earned a 400% profit on the puts (FXF). But to collect, he had to take the cog railway up to Zermatt and attend my strategy seminar on July 27.

6:45 AM-I get flooded with 30 emails from Trade Alert Service followers asking if they should take profits on their long Apple calls spreads. I ignore them. Don?t bother me with the small change. I can?t hold everyone?s hand.

7:00 AM- Another call from my website administrator. The website is down. The Greek election brought a traffic spike that is causing the servers to melt. I am burning up the Internet.

7:30 AM- Conference call with support team. We agree to build in new infrastructure to accommodate a tenfold increase in new business. Couldn?t I be wrong a little more often to bring the growth down to a more manageable level? Pass.

8:00 AM- I get a call from a leading hedge fund in London?s Mayfair district. Europe is closing. Should we run the Euro short overnight? You betcha! And go have a pint of bitter for me at the Pig & Whistle next door, will you.

9:00 AM-Call from a large family office in Chicago. Should we use today?s weakness in gold to unwind out more hedges against core longs? Absolutely. Grab the brass ring. The barbaric relic is going to $2,300 before the fat lady sings, and will go higher if the ECB launches another LTRO, which is just a matter of time.

10:00 AM-Better get to work on today?s letter. I?m already behind the eight ball. I?ve gotta lead the gold story, which is starting to emerge from its long hibernation and exhibit some virile stirrings. Platinum (PPLT) looks even better.

12:00 PM-Break for lunch. Isn?t it great the way enchiladas always taste better after they have been reheated for a third day?

1:00PM- Market close with a small loss. Looks like another day of ?RISK OFF? for Tuesday.

1:15 PM-My friend, JR, a senior exec at an oil major, calls from Houston. What the hell was going on with the price of oil (USO)? Three months ago, it was at $109, then he blinked, and it was $80. I told him that the oil companies lost control of the price of Texas tea last year and the high frequency traders were now in the saddle. Better get used to the new frontier. He said thanks, and next time I was in town he would buy me a 24-ounce chicken fried steak at Billy Bob?s that spilled over both sides of the plate. I can?t wait. I?ll let my doctor have the heart attack.

1:20 PM- It?s official. Oracle earns $3.45 billion, or 69 cents a share, for the three months ended in May, compared with $3.2 billion, or 62 cents, a year earlier. The stock pops 5% in the aftermarket. Damn! I bought Hewlett Packard instead.

2:00 PM-Still haven?t started on the letter yet. I have been answering 200 email requests for information about the Trade Alert Service. This always happens whenever I have a hot trade on. The watchers want to become players. A 20.5% May and an 11% June month to date brings them in the droves.

2:30 PM- I unplug the phones and close the curtains to do a one our live show on the recent market volatility as a guest on a local radio station.

4:45 PM- Well, I got the letter done, but I?m too late. The web editor has gone to the DMV to register her new Prius, and the backup has gone to the yoga studio. Ouch! 10% sales tax for new cars in Washington state! They must be as broke as California.

4:30 PM-The traffic stats for the site have gone down. I called the webmaster, but she has gone off to a line dancing lesson in Dallas.

5:00 PM-Ooops. Forgot to take the trash out.? My garbage man, an Afghan immigrant, must wonder what goes on here. Every week, I recycle a giant bin of newspapers, magazines, and assorted broker research, but only throw out a tiny bag of actual trash. Am I green, or what? He notices that my T-shirt reads in Pashto script ?Defense Language Institute. We learn, so you don?t have to.? He says his son was stationed at Fort Hood in Texas and that he hasn?t heard from him in two months. I make a quick call Washington and find out that he has been transferred to Afghanistan as a translator. I tell him not to worry. It?s the other guys who usually die, not ours.

5:30 PM-I put on a 60-pound pack and my heavy climbing boots and head out the back door on a three hour hike to climb Grizzly Peak as I do every evening. Gotta stay boot camp ready. You never know when Uncle San is going to call again. Who cares if I?m 60? During Desert Storm, my flight commander was drafted at 65, and I heard of another guy they took who was 85. Turns out there was no one left in the Navy who knew how to run a coal fired steamship.

9:00 PM-Back to my screens. The Euro has broken $1.27. The Greek stock market is up 25% in days. Where was I last week? Asleep? If you turned off your TV, the centrist win was a no brainer.

10:00 PM-Time to call it a night and break out a bottle of Duckhorn merlot. How many wine clubs do I belong to now? 12? As of now I am committed to buy more wine this year than I can possibly drink or give away. That?s the price of living next door to Napa Valley. I?m shipping a case to my suite on the Queen Mary II so I can give away to fellow diners en route from New York to Southampton in a few weeks. The captain always likes a bottle too.

12:00 AM- Time to do some early Christmas shopping. Bonham?s in London is holding their fine jewelry auction today, and lot no. 62 is a 5 carat diamond solitaire that is a real beat.

12:10 AM-Damn! Outbid by the Chinese again, who are running up the price of luxury goods absolutely everywhere to insane levels. Time to get some sleep. Maybe next time. I?m obviously not working hard enough. I unplug my phones, as it?s the only way I can sleep. It looks like tomorrow is going to be another busy day. Does anybody want my job?

Note to Greece: Please Quit Waking Me Up!

The New Deflation Definition

Diary

It seems that all you hear about these days is deflation. That is certainly what the bond market is telling us, with my screen blaring at me a miserable 1.58% yield for the ten year Treasury bond.

But there is a new definition for this economic malady that applies to we hapless consumers. In the new deflation, the value of our income falls, while the prices of things we need to buy are going through the roof. It is a particularly pernicious form of deflation, as it is burning our candles at both ends at the same time.

Take a look at the chart below, showing the cost of college tuition versus the consumer price index and home prices. This hits home particularly hard, as I have just put three kids through college, and am reduced to riffling through the sofa cushions looking for spare change or washing windshields at street corners on weekends in order to meet the bills. When I graduated from the University of California in the seventies the tuition was $3,000 a year. Today it is $16,000, and climbing at a 20% annual rate.

The saddest part of the story is that rampant wage deflation means that recent graduates have a grim choice between taking a poorly paid job, or no job at all. That leaves them woefully unable to repay the student loans they ran up to obtain their rapidly devaluing diplomas. The $1 trillion in outstanding student loans is begging to become the next subprime crisis.

And if you were planning on becoming a teacher, forget it, unless you want to move to Saudi Arabia, Russia, or South Korea. After watching tens of millions of jobs get shipped to China over the last decade, did you expect anything less? Just add this problem to the ever lengthening list of ways we are getting screwed.

Deflation Can Be a Bitch!

Revisiting the First Silver Bubble

Diary

With smoke still rising from the ruins of the recent silver crash, I thought I?d touch base with a wizened and grizzled old veteran who still remembered the last time a bubble popped for the white metal. That would be Mike Robertson, who runs Robertson Wealth Management, one of the largest and most successful registered investment advisors in the country (click here for his site at www.robertsonwealthmanagement.com).

Mike is the last surviving silver broker to the Hunt Brothers, who in 1979-80 were major players in the run up in the ?poor man?s gold? from $11 to a staggering $50 an ounce in a very short time. At the peak, their aggregate position was thought to exceed 100 million ounces.

Nelson Bunker Hunt and William Herbert Hunt were the sons of the legendary HL Hunt, one of the original East Texas wildcatters, and heirs to one of the largest Texas fortunes of the day. Shortly after president Richard Nixon took the US off the gold standard in 1971, the two brothers became deeply concerned about financial viability of the United States government. To protect their assets they began accumulating silver through coins, bars, the silver refiner, Asarco, and even tea sets, and when it opened, silver contracts on the futures markets.

The brother?s interest in silver was well known for years, and prices gradually rose. But when inflation soared into double digits, a giant spotlight was thrown upon them, and the race was on. Mike was then a junior broker at the Houston office of Bache & Co., in which the Hunts held a minority stake, and handled a large part of their business. The turnover in silver contracts exploded. Mike confessed to waking up some mornings, turning on the radio to hear silver limit up, and then not bothering to go to work because knew there would be no trades.

The price of silver ran up so high that it became a political problem. Several officials at the CFTC were rumored to be getting killed on their silver shorts. Eastman Kodak (EK), whose black and white film made them one of the largest silver consumers in the country, was thought to be borrowing silver from the Treasury to stay in business.

The Carter administration took a dim view of the Hunt Brothers? activities, especially considering their funding of the ultra-conservative John Birch Society. The Feds viewed it as an attempt to undermine the US government. The proverbial sushi hit the fan.

The CFTC raised margin rates to 100%. The Hunts were accused of market manipulation and ordered to unwind their position. They were subpoenaed by Congress to testify about their motives. After a decade of litigation, Bunker received a lifetime ban from the commodities markets, a $10 million fine, and was forced into a Chapter 11 bankruptcy.

Mike saw commissions worth $14 million in today?s money go unpaid. In the end he was only left with a Rolex watch, his broker?s license, and a silver Mercedes. He still ardently believes today that the Hunts got a raw deal, and that their only crime was to be right about the long term attractiveness of silver as an inflation hedge.

Nelson made one of the great asset allocation calls of all time and was punished severely for it. There never was any intention to manipulate markets. As far as he knew, the Hunts never paid more than the $20 handle for silver, and that all of the buying that took it up to $50 was nothing more than retail froth.

Through the lens of 20/20 hindsight, Mike views the entire experience as a morality tale, a warning of what happens when you step on the toes of the wrong people.

Silver is Still a Great Inflation Hedge

How to Avoid Ponzi Schemes

Diary

I spent a sad and depressing, but highly instructional evening with Dr. Stephen Greenspan, who lost most of his personal fortune with Bernie Madoff. The University of Connecticut psychology professor poured the bulk of his savings into Sandra Mansky?s Tremont feeder fund; receiving convincing trade confirms and rock solid custody statements from the Bank of New York.

This is a particularly bitter pill for Dr. Greenspan to take, because he is an internationally known authority on Ponzi schemes, and published a book entitled Annals of Gullibility-Why We Get Duped and How to Avoid It. It is a veritable history of scams, starting with Eve?s subterfuge to get Adam to eat the apple, to the Trojan horse and the Pied Piper, up to more modern day cons in religion, politics, science, medicine, and yes, personal investments.

Madoff?s genius was that the returns he fabricated were small, averaging only 11% a year, making them more believable. In the 1920?s, the original Ponzi promised his Boston area Italian immigrant customers a 50% return every 45 days. My suspicious grandmother wisely passed on an invitation to join the plan.

Madoff also feigned exclusivity, often turning potential investors down, leading them to become even more desirous of joining his club. For a deeper look into Greenspan?s fascinating, but expensively learned observations and analysis, go to his website at www.stephen-greenspan.com .

Shenanigans in Switzerland

Diary

Since I am an avid collector of investment scam stories, I?ve got to update you on what?s been coming out of Switzerland. Two Japanese nationals were caught smuggling $134 billion in US Treasury bonds from Switzerland to Italy in a false bottom suitcase. No, that is not a typo, that is ?b? for billion. The two were mysteriously let go the next day.

The blogosphere is exploding with conspiracy theories about the paper, which is almost certainly fake. Are there now so many T bonds out there that $139 billion of bogus ones can easily disappear into the mix? Personally, I see North Korea?s and the Japanese yakuza?s fingerprints all over this. Fake bonds can?t be traded, but I can think of any number of banks in Switzerland that would unwittingly accept them as collateral. But collateral for what?

Why do I expect George Clooney and Brad Pitt to pop up on this one. (Ed note: please see gratuitous attempt to include George Clooney?s photo in a financial newsletter for the female readers).

An Evening With Bill Gates, Sr

Diary

I had a chat with Bill Gates, Sr. last night, co-chairman of the Bill and Melinda Gates Foundation, the world?s largest private philanthropic organization. There, a staff of 800 help him manage $30 billion.

The foundation will give away $3.1 billion this year, a 10% increase over last year. Some $1.5 billion will go to emerging nation health care, and another $750 million to enhance American education. The foundation?s spending in Africa has been so massive, that it is starting to have a major impact on conditions, and is part of the bull case for investing there (please click here).

The fund happens to be one of the best managed institutions out there, having sold the bulk of its Microsoft (MSFT) stock just before the dotcom bust and moving the money into Treasuries. Mr. Gates? pet peeve is the precarious state of the US K-12 public education system, where teaching is not as good as it could be, expectations are low, and financial incentives and national standards are needed.

When asked about retirement, he says ?having a son with a billion dollars puts a whole new spin on things.?? Now a razor sharp 87, his favorite treat is the free Net Jet miles he gets from his son Bill every year. In his memoir Showing up for Life, he says a major influence was his Scoutmaster of 70 years ago. Being an Eagle Scout myself, I quickly drilled him on some complex knots, and he whipped right through all of them. The world needs more Bill Gates Srs.

The One Bright Spot in Real Estate

Diary

After my regular dump on residential real estate, I feel obliged to reveal one corner of this beleaguered market that might actually make sense.

By 2050 the population of California will soar from 37 million to 50 million, and that of the US from 300 million to 400 million, according to data released by the US Census Bureau and the CIA fact Book (check out the population pyramid below).

That means enormous demand for the low end of the housing market?apartments in multi-family dwellings. Many of our new citizens will be cash short immigrants. They will be joined by generational demand for limited rental housing by 65 million Gen Xer?s and 85 million Millennials enduring a lower standard of living than their parents and grandparents. These people aren?t going to be living in cardboard boxes under freeway overpasses. Or maybe they will.

The trend towards apartments also fits neatly with the downsizing needs of 80 million retiring Baby Boomers. As they age, boomers are moving from an average home size of 2,500 sq. ft. down to 1,000 sq. ft. condos and eventually 100 sq. ft. rooms in assisted living facilities. The cumulative shrinkage in demand for housing amounts to about 4 billion sq. ft. a year, the equivalent of a city the size of San Francisco.

Fannie and Freddie financing is still abundantly available at the lowest interest rates on record. Institutions combing the landscape for low volatility cash flows and limited risk are starting to pour money in.

Got Anything With 3 Beds & 2 Baths and a Hot Tub?

The Ultra Bull Argument for Gold

Diary

I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value, and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD). They claim the move in the yellow metal we saw in recent years is only the beginning of a 30 fold rise in prices similar to what occurred from 1972 to 1979, when it leapt from $32 to $950.

So when the chart below popped up in my in-box showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using. To match the 1936 monetary value peak, when the base was collapsing, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by eight times, or to $9,600 an ounce.

I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. It makes my own three year $2,300 prediction positively wimp-like by comparison. The seven year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg, South Africa to unload my own krugerands in 1979, was triggered by a number of one off events that will never be repeated.

Some 40 years of pent up demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold. South Africa, the world?s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence my more subdued forecast. But then again, I could be wrong.

You may have noticed that I have not been doing much trading in gold or the other precious metals lately. That is because they are still working off an extremely overbought condition. Given some time, and a nice little dip in prices, and I?ll be back there in a heartbeat. You?ll be the first to know when that happens.

Ben Bernanke Will Say Nothing on Thursday

Diary

All eyes will be focused on Federal Reserve Chairman, Ben Bernanke, on Thursday looking for any hints that further quantitative easing is on the way. Don?t get your hopes up. I don?t expect the esteemed former Princeton professor to conveniently tip his hand. At the most he might make a reference to ?keeping all options open,? and that is it.

The Fed?s Beige Book was released today and doesn?t by any means justify bolder action. This is the report that Ben will have in hand when he treks up to Capitol Hill for his congressional testimony.

According to the report, the economy is expanding at a moderate pace. Manufacturing, loan demand, capital spending, consumer spending are all up modestly. New York rents are rising. Auto sales are strong. Construction is up in both the residential and commercial sectors. Price inflation and wage pressures remain modest. It is all consistent with the lukewarm, flaccid 2% GDP growth that I have been arguing for all year. There isn?t a QE3 anywhere in this.

You can therefore expect market to be disappointed once again. Whether the selloff resumes mid-way through Ben?s statement, when it is over, or sometime next week, is anyone?s guess. Keep in mind that everyone and his brother is looking to sell this rally. So you will need the fastest mouse finger in the West to unload at the top. It is wiser still to start scaling in at this level here, with the S&P 500 at 1,318.

If Europe can just shut up for a few more days and quit acting like a chicken with its head cut off, then we might make it up to the 1,336 high that we saw last week. That would be an opportunity to double up your short and sell out of the money calls. If the Greek election on June 20 goes the right way, then we could make it all the way up to 1,350. That would be a textbook retracement of half of the move down that started on April 2. However, I doubt we?ll make it that high.

Take a look at the chart below and you?ll see that in recent years corrections have been a two-legged affair. First you see a dramatic selloff, then a dead cat bounce worth 50% of the move down, then a new marginal low. This logic also points to a final bottom at 1,250 or 1,200.

I am able to add shorts here because I covered the ones I had within one point of the 1,268 bottom on Monday. This enabled me to clock a three day, 45% gain in my short position on the S&P 500 (SPY). It gives me the dry powder I need to reload up here. That is provided I have the fastest mouse finger in the West, which my close friends assure me I do.

Global Trading Dispatch, my highly innovative and successful trade mentoring program, earned a net return for readers of 40.17% in 2011, putting it among the top hedge fund managers. The average annualized return since inception is 26%. 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 www.madhedgefundtrader.com , find the Global Trading Dispatch box on the right, and click on the lime green ?SUBSCRIBE NOW? button.

Fastest in the West?