Diary Archives - Mad Hedge Fund Trader

Global Trading Dispatch Scores Two Day 75% Gain

Finally, all that driving down dusty, bumpy, washboard dirt roads in the Barnet Shale in Texas paid off. The thing about a great trade is that when it works, new reasons to justify it that you never thought of suddenly come out of the woodwork. That is exactly what happened with my decision to sell short natural gas two days ago.

That unloved molecule, CH4, cratered this morning, the ETF (UNG) trading all the way down to $5.07. The value of my April puts soared, jumping 75% in a mere two days. Being a trader all the way down to my DNA, I took the money and run. The gain took the value of my Global Trading Dispatch model trading portfolio up to 1.41% year to date.

I got up at 4:00 AM this morning to call my friends in Texas before they headed off the fields. I wanted to get the lowdown on what caused the catastrophic decline in natural gas yesterday, the sharpest one day sell off in 18 months. What I got was a complete earful, which I will summarize below:

1) Chesapeake Energy?s (CHK) announcement that they would cut natural gas production was complete BS. If you cap a well prematurely you damage the field. You might as well blow it up. What they probably will do is cut back new drilling by 50% going forward. But that does nothing to address the glut of gas that is spewing out of the wells now.

2) The fear is that so much gas will be produced that we will completely run out of storage by summer, leading to a further collapse in prices. While new storage is being built, it will be woefully inadequate.

3) The winter never showed. This has been the warmest winter in a decade, and traditional heating demand for gas has vaporized.

4) Efforts to build an LNG export industry to ship product to China are being slowed by law suits from pesky environmentalists and zoning officials in local neighborhoods nervous about the construction of new liquifaction facilities that might blow up.

5) In the meantime, other companies are in a race to out produce each other to offset lower prices with volume, causing further price cuts.

6) President Obama can promise all he wants about natural gas corridors, but is unlikely to get anything he wants through a gridlocked congress. See a national map of the proposed corridors below.

The pros in the pits assure me that we are not anywhere close to a bottom in natural gas. If we break the ten year low at $2/MBTU, then we could see trapdoor stop loss selling that takes is all the way down from the current $2.36 to $1.75, down 25%. That would take the ETF (UNG) down to $3.75 and the April, 2012 $6 puts up to $2.20, up 340% from my cost. But hey, nobody ever got fired for taking a profit.

To subscribe to the Mad Hedge Fund Trader?s Trade Alert Service, 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 at the bottom. I look forward to working with you. And thank you for supporting my research.

February 2, 2012 - Quote of the Day

Diary

?The only way out for Europe is to devalue the Euro to help the peripheral countries,? said Scott Minerd, chief investment officer at Guggenheim Partners.

Trade Alert - (UNG) Update - February 1, 2012

Diary, Trade Alert

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. Read more

Farewell to the Wealth Insider Alliance

Diary

All good things must come to an end, and it is time for me to bid adieu to the Wealth Insider Alliance. There is no doubt that this innovative and aggressive online marketing firm played a major role in placing the Mad Hedge Fund Trader on the map in the virtual world. They acted as the able midwives to the birth of my Macro Millionaire Trade Alert Service. One of the most successful online launches in Internet history brought thousands of new followers to my site. I give my heartfelt thanks to the hard working and imaginative WIA staff for a job well done.

Mad Hedge Fund Trader has since grown into a major international business, with subscribers in over 130 counties (including two in the Maldives). Apparently, I am still weak in Mali and North Korea, perhaps because of the absence of electricity. So I am plowing the profits back into the business to improve the service at every level.

Existing paid up subscribers will be transferred to my new database this week and sent new user ID?s and passwords necessary to access the premium content. To prevent your daily letters and trade alerts from getting caught up in spam filters, please add the addresses, alert@madhedgefundtrader.com and newsletter@madhedgefundtrader.com to your address book.

A link will be emailed to you directly that will give you live access and enable you to participate in my biweekly strategy webinars. If anyone has trouble with any of this, please email my dedicated live customer support at support@madhedgefundtrader.com .

Time to Short Natural Gas Again

Diary

Long term readers are well aware of my antipathy towards natural gas, which has been in your worst nightmare of a bear market for the past three years.

Well, the simple molecule finally got some good news last week. First, major producer, Chesapeake Energy (CHK) announced that it was cutting its natural gas production by 50%, taking some immediate pressure off the market. Sure, (CHK) is just one company, but others may follow suit.

Second, at the urging of my friend, Boone Pickens, Present Obama announced funding of some natural gas corridors in his State of the Union address. These are chains of natural gas stations placed every 100 miles stretching from east to west and north to south that would allow heavy trucks on transcontinental routes to refuel. This would provide the extra incentive for these 18 wheelers to convert from diesel fuel to CH4 at a nominal cost and put a major dent in our oil imports.

The news was enough to trigger a massive short covering rally in this most unloved of molecules. The spot market soared 25%, from $2.25 to $2.82 per MBTU?s, while the ETF (UNG) leapt from $5 to $6.

I am going to call the bluff of the market here and buy the United States Natural Gas Fund April, 2012 $6 puts at $0.65 or best. That way I can take advantage of the huge contango that exists between the spot and forward markets for natural gas futures contracts. To avoid actually drilling its own wells, the (UNG) buys forward contracts at huge premiums and holds them until they expire at spot. They then roll the cash forward into new contracts and repeat the process. It is one of the best wealth destruction machines I have ever seen and explains why (UNG) has, by far, outperformed natural gas on the downside. It is a great thing to be short.

To see how extreme this contango is, please visit the CME website. June futures natural gas futures are trading at a 10% premium to March, which is more than 40% annualized. All of that premium goes to money heaven for the (UNG).

If (UNG) double bottoms at $5, the put options should double in value. If a continuing glut of gas breaks us down to new lows, you could make much more. With the industry expected to run out of new storage capacity by the summer, I am betting on the latter, hence the heavy position. One other thing worth knowing here is that once drilled with the fracking process, you cannot turn off or cap a natural gas well without damaging the output. There is no ?OFF? switch.

For a much more detailed explanation on why natural gas is in dire straits, please click here. Subscribers to my Global Trading Dispatch received this research piece as a trade alert on Monday. To subscribe to the Mad Hedge Fund Trader?s Trade Alert Service, 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 at the bottom.

Where Did You Say the ?OFF? Switch is?

Trade Alert - (UNG) - January 31, 2012 Update

Diary, Trade Alert

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. Read more

Will Facebook Mark the Market Top?

Diary

The street is chattering today over the prospect of an enormous payday with the imminent IPO for the social media company, Facebook. Price talk is valuing the company as high as $100 billion, making it the largest such floatation in history. Could the mega deal spell the end of the current bull market?

Look at it this way. Assuming that Facebook sells only 5% of itself to the public, that sucks $5 billion out of the stock market. It is $5 billion that gets diverted away from existing equity allocations. Many investors will need to sell existing positions in other companies to pay for their new Facebook shares, especially in the technology sector.

Can the market afford to lose $5 billion in buying power in its current fragile condition? I think not. Take a look at the chart below which has the (SPY) making a near parabolic move since the beginning of the year. At the very least, we need to pull back to just above $126, which takes us down to 1,256 on the S&P 500, smack dab on the 200 day moving average. If you don?t believe me, then take a look at the chart for the financials sector ETF (XLF), which has led the market this year and is clearly rolling over.

I?ll tell you who the big winner in a Facebook IPOP will be. The San Francisco Bay area. $100 billion is a ton of money to pour into a single urban area. The issue is expected to create several billionaires and as many as 3,000 new millionaires in my neighborhood.

The last time that happened was when Google (GOOG) went public, creating a wealth effect that never went away, taking the waiting list for a new Ferrari or Tesla out two years. Better buy real estate near Facebook?s Menlo Park headquarters, such as in Atherton, Palo Alto, and Mountain View. The bidding wars are about to begin!

If you have any doubts about this analysis, you can take it up with any of my 1,209 Facebook friends by clicking here.

Is Mark a Market Killer?

Is This the Chink in Japan?s Armor?

Diary

?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, but so far every time I have dipped my toe in the water, it has been chopped off by a samurai sword.

I was heartened once again this week when Japan?s Ministry of Finance released data showing that the country suffered its first annual trade deficit since 1980. Specifically, the value of imports exceeded exports by $39 billion. Japan still ran healthy surpluses with the US and Europe. But it ran a gigantic deficit with the Middle East, its primary supplier of energy.

You can blame the March tsunami and the Fukushima nuclear meltdown that followed for much of this. Japan depended on nuclear power for 25% of its electric power generation, and since then the number of operating plants has been cut from 54 to just 5. Conventional plants powered by oil and LNG have had to make up the difference, causing a surge in imports. Crude?s leap from $75/barrel in the fall to $100 made matters worse.

It also hasn?t helped that Japan has offshored much of its low end manufacturing to China over the last 30 years, as America has done. Exacerbating the problem were the Thai floods, which caused immense supply chain problems, further eroding exports.

To remind you why you hate all investments Japanese, I?ll refresh your memory with this short list of the other problems bedeviling the country:
* With the world?s weakest major economy, Japan is certain to be the last country to raise interest 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 Japanese any more.

* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt exceeding 200% of GDP, or 100% when you net out inter-agency crossholdings, Japan is at the top of the hit list.

* The Japanese long bond market, with a yield of 0.98%, 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 ?100, then ?120, then ?150. That could take the price of the leveraged short yen ETF (YCS), which last traded at $41.43, to over $100.? But it might take a few years to get there. The fact that the Japanese government has come on my side with this trade is not any great comfort. Many intervention attempts have so FAR been able to weaken the Japanese currency only for a few nanoseconds.

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 ?78 I see on my screen today is unbelievable.

Noted hedge fund manager Kyle Bass says he is already in this trade in size. All he needs for it to work is for Japan to run out of domestic savers essential to buy the government?s domestic yen bond issues, who have pitifully had sub 1% yields forced upon them for the past 17 years. Then the yen, the bond market, and the stock market all collapse like a house of cards. Kyle says that could happen as early as the spring.

It?s All Over For the Yen

Fed Says Market Rally is BS

Diary

Well, they didn?t really say that, but they could have, and perhaps should have, and the bond market wholeheartedly agrees with them. That is my takeaway from the Fed minutes released yesterday indicating that the Federal Reserve intends to extend its hyper accommodative policies for at least another 6-9 months to ?late 2012.? It also lowered its long term economic growth forecast from 2.5%-2.9% down to 2.2%-2.7%, a major downshift from the 3% plus it was predicting a year ago. That also brings them nicely to my own estimate of 2%, which I nailed on the mast over a year ago.

The reasons offered were many. Business fixed investment is slow, inflation is stable, unemployment is declining only slowly, and international risks are substantial. It was enough to create one of those odd trading days where everything went up. The Dow flipped a 100 point loss to a near 100 point gain. Bonds rocketed, with ten year Treasuries dropping 10 basis points in yield, and five year paper utterly collapsing from 0.89% to 0.77%.

The risk markets rallied like this was a new quantitative easing, which it isn?t. Bernanke is just ?thinking? about QE3, which is nothing new. If the economy worsens again, he?ll pull the trigger. If it continues to poke along as it has done, he?ll do nothing.

I have said this countless times before, but I?ll say it again. When the stock and bond markets deliver a contradictory message, you always believe the bond market. It is right 90% of the time. Right now, the stock market is saying that the economy is growing a 4%, while bonds say it is expanding by 2% or less. I?ll go with the later and wait for a great entry point to short more stocks.

Looking forward, I see a coming drought in upside surprises. Tomorrow, we see Q4 US GDP, which should be over a healthy 3%. Next week promises another sizzling nonfarm payroll on Friday. After that, there is nothing on the horizon until we get the final word on Greece, or the next Fed meetings in March and April.

All of this encourages me to hang on to my tiny short positions in the (SPY) and the Euro, even though we are trading close to my stops. Bernanke?s easing yesterday could be the ?buy the rumor, sell the news? event that the market has been rallying on for the last three weeks. If it is, then the downside could be just around the corner.

The Market?s Message Yesterday Was Clear

Report From Beverly Hills

Diary

I am writing this letter at a table in the alcove of the Polo Lounge at the legendary Beverly Hills Hotel. They did not disappoint on the movie star front, with more than an ample supply. At the table on my right, John Hamm, who plays the predatory ad man Don Draper in AMC?s Mad Men, is having a friendly chat with Lorne Michaels, the producer of Saturday Night Live. Jamie Lee Curtis is on my left, apparently lecturing a young family member about some indiscretion. A Desperate Housewife of Beverly Hills is across the room signing autographs. Who says that I don?t like to name drop? Hedda Hopper, eat your heart out.

To get here, I had to negotiate the notorious Los Angeles freeway system, where traffic frequently backs up because of drivers found dead the wheel, the victims of daily road rage incidents. You never use your turn signal here. It only encourages people to speed up to take your space. But cut anyone off, and you risk your life.

The freeways here are more a state of mind that a transportation system, and it brings out the full range of human emotion. ?Drive the Pasadena Freeway and you are experiencing the full force of an action video game set in the 1930's. Make the turn from the 101 to the 110 and you are plunged into a hopeless maze where only the most aggressive rat escapes alive. But turn off from the 10 over the magnificent elliptical overpass to the 405 and you are soaring with the eagles.

The global strategy seminar at Nicks Martini Lounge broke all records for attendance, with many last minute sign ups insuring a packed room. There was much discussion about the longer term outlook for the financial markets, which I viewed with caution for the rest of the year. A recession in Europe and substantial slowdowns in China and India appear to be more than our own feeble and structurally impaired economy can cope with. Whereas last year?s ?sell in May? worked out great, this year January might be a better idea.

The banks will become the major victims of the next melt down, as they have yet to amortize the losses of the last crash, and house prices are still falling. The only distinction is that there will be no TARP, no bail outs, and no stimulus package. A gridlocked congress offers no safety net. Then, the chips really will fall where they may. Residential real estate may fall another 25% and then bump along the bottom for another decade.

This is enough to cause the stock market to plunge 30% from current levels. But it won?t crash to the 2009 low of 666 in the S&P 500 or lower. That means you want to use the next sell off to load the boat once again. For me, a 2% GDP growth rate assures that we will remain trapped in a narrow range for many more years, which you should play for fun and profit.

It looks like Obama can win another election, especially if the large numbers of minorities and young people return to the polls after going missing in action in 2010. Campaigning for his own job will make a huge difference. He should have a win in Libya in his back pocket, and his successful hit against Osama bin Laden has certainly reinforced his anti-terrorism credentials. At the moment, the republican candidates are doing everything they can to assure that the others are unelectable, and Obama is literally singing from the sidelines. However, a democratic win could be offset by the republicans taking both houses of congress, assuring another four years of gridlock and histrionics.

The spanner in the works will be unemployment. With every level of government cutting staff to staunch deficits, and with large companies keeping a death grip on their cash hoards, I don't expect any improvement here. The structural headwinds are so severe, that I doubt we can make it to the 7% handle for the jobless rate. The 25 million jobs we shipped to China are never coming back. Booming companies are doing well because they don?t hire anyone, offshoring new work or replacing workers with technology instead. There is nothing Obama or anyone else can do about this, no matter what they say.

I am planning a rather ambitious lunch schedule for the rest of the year, which you can find on my website. I look forward to seeing the rest of you then. In the meantime, I see that Victoria Secret model, Giselle B?ndchen, who has recently become available, has just appeared at the door. I?ll see you later. Let?s see if she needs some investment advice.