Diary Archives - Mad Hedge Fund Trader

Throwing in the Towel on the (TBT)

I am throwing in the towel on the (TBT) ETF, my 200% leveraged bet that Treasury bonds will fall. I am doing this partly to clear out the dogs from my portfolio so I can start the New Year with a 100% cash position. But I am also bailing because the short term fundamentals point to continued weakness in the economy, a flight to safety, deflation, and falling interest rates for long term Treasury bonds.

The dagger through the heart of this trade was the Federal Reserve?s ?twist? policy implemented in September, whereby, it bought hundreds of billions of dollars of long term bonds and sold short dated ones. I have been trying to get out ever since. But the (TBT) managed a feeble rally from $18 up to only $23, despite a huge ?RISK ON? trade that took the S&P 500 up a whopping 200 points.

This morning, the 30 year Treasury bond auction saw overwhelming demand, the bid to cover ratio hitting a stunning 11 year high. With the outlook for financial markets next year so uncertain, the demand for ?risk free? paper knows no bounds. Investors are happy to take a negative real yield for 30 years if they believe that other alternatives offer bigger potential loses.

Besides, people want to run with what?s working, both individuals and institutions.
Sure, this is insane, but after 40 years in the business, you learn that people can be insane for a really long time.

If we go into a recession next year, or even just threaten one, a 1.50% yield on the ten year Treasury is a chip shot, and it could even go as low as 1%. With that prospect looming, I don?t want to hang on to the (TBT) in the hope of cutting my losses by few points at the risk of losing many more. I really should have stopped out of this position over the summer when it broke my 10% stop loss limit. Whenever I break my own rules, it always costs me money. But for those of us who have been at this game a long time, seeing the ten year with a 1% handle is truly unbelievable.

Getting out at this level has cost my model $100,000 virtual portfolio $7,080, or 7.08%. I made far more back by hedging my (TBT) losses with gains in short positions in the Euro (FXE), the Swiss franc (FXF), the S&P 500 (SPY), and the Russell 2000 (IWM); so on a net basis, I am still way ahead of the game. That?s why they call this a ?hedge? fund. That reduces my year to date return down to 40.18%, something I?ll just have to live with. It?s better than a poke in the eye with a sharp stick.

Throwing in the Towel on the (TBT)

Where?s the Money?

Diary

That is the question that was asked repeatedly by members of congress to the former senior management of the late MF Global. The response was a few feeble shrugs and I don?t knows. CNBC has been running ridiculous contests like ?Where is John Corzine??, and ?What does John Corzine want for Christmas??

The reporting on this by the media has been exaggerated and wildly inaccurate, most likely because he is a democratic billionaire, and therefore a traitor to his class. Enron?s Ken Lay and Jeffrey Skilling received kinder treatment. This is where all of the speculation of an imminent arrest is summing from. Since General Electric (GE) sold CNBC to Comcast, I noticed that the cable network has been making up more of its own news, and this is a classic example.

I know John Corzine because he tried to hire me for Goldman Sachs 25 years ago, without success. Billionaires at the end of immensely successful careers don?t break the law and tell lies just to make another billion, especially in a heavily regulated and closely watched business such as the securities industry. Those are the actions of a junior ?wanabee? rogue trader. So I?ll give you my take on the situation.

When he says he has no idea where the money is, I?m sure Corzine is telling the truth. If he did, he would be the first CEO in history to be knowledgeable about the firm?s day to day margin position. That is usually the responsibility of a mid-level bean counter who is in constant contact with the exchanges. I also don?t believe that the money was lost in a bad bet in the Eurobond market.

A company like MF Global has thousands of relationships with customers, prime brokers, and banks all over the world. Unfortunately, it fired all the people who maintained these relationships the day after the bankruptcy filing because they knew they couldn?t make the payroll. The people who knew where the money was were all sacked.

To trace the money, the bankruptcy administrators are going to have to use a third party accounting firm to trace the money with a forensic examination that will take months. My understanding is that 40,000 MF customers were divvied up among seven different futures brokers, like RJ Obrien. When cash turns up, it will be returned to the customers.

There was an immediate payout of 60% of customer funds the week of the bankruptcy. Another 12% was paid out this week after $800 million was ?found? at another bank. If you have heard nothing about your account so far, you may simply have to check a few boxes on a five page form to recover 72% of your funds.

Even if it turns out that the money was lost in the market, I still think the customers will be made whole. They are at the absolute top of the seniority chain for claims on nearly $70 billion in assets. Many more creditors are going to have to take 100% haircuts before the customers lose a penny, including stock and bond holders and commercial creditors.

If there is a shortfall, I think the CME will want to maintain its pristine record of a customer never losing money from a counterparty failure. So I think they will come up with a payoff of their own, possibly from a new insurance fund capitalized by a transaction tax.

The bottom line is that MF customers will get their money back, and most of it soon. But it could be years before they get their last penny, and they should be prepared to receive a lot of papers in the mail.

I Haven?t Got It

December 15, 2011 - Quote of the Day

Diary

?You ever wonder why fund managers can?t beat the S&P 500? It?s because they?re sheep,? said Gordon Gecko in the classic film, Wall Street.

Trade Alert Update- (TBT) December 14, 2011

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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.
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Angela Merkel Torpedoes the Euro

Diary

The Euro hit my yearend target today after a two cent plunge sent it down to the $1.29 handle. You can thank German Chancellor, Angela Merkel, who in the strongest possible terms, said there was no way she would consent to an increase in the size of the European bailout package.

It didn?t help that in the Federal Reserve comments today they basically ran up the white flag and admitted that there is nothing left for them to do but keep interest rates at ?exceptionally low levels? for the foreseeable future. They see moderate growth last pegged at 3%, which means they are about 1% higher than reality.? We are left to wait until January 25 for the all-powerful government agency to take longer term measures to help the economy, such are targeting unemployment rates.

I have been happily trading in an out of the Euro from the short side since April, catching almost all of the move down from $1.50, except for the last three cents. There was clearly a lot of new shorts initiated today as the euro broke multi month support levels. To say this is a crowded trade would be a vast understatement, as these new positions are being added to existing ones that are at all-time highs. A recent survey revealed that 67% of all hedge funds are currently running short positions in the Euro.

This is a crummy place to get involved, as the beleaguered European currency is now severely oversold on a short term basis. I want to wait for a four cent rally against Uncle Buck to jump back in the game again. I would be surprised if we plumbed new lows from here, but then this has been a surprising year. Wait until Q1, 2012 before we see a $1.25 print.

It would be easy to sit back and be complacent, believing that this is not our problem. But it is. A recession that Europe?s new austerity is certain to bring, will likely chip 0.5% to 1.0% off of US GDP growth in 2012. Since we are likely growing at a modest 2% rate now, we don?t have a lot to give away. Looking at an American economy that is facing death by a thousand cuts, this is one giant slash.

Auf Wiedersehen Euro!

Cross Market Correlations Are Breaking Down

Diary

Today was a real head scratcher for long time market observers, including myself. Cross market correlations that have served me so well this year are breaking down, and their predictive power has suddenly gone blind. I blame this on the liquidity drought that has plagued the market since the beginning of the month that has confined markets to frustratingly narrow ranges.

There are many reasons for the sudden opacity. The usual seasonal flight to the sidelines seems more pronounced than in years past, as many managers attempt to put a dreadful year behind them. There is still $500 million in trading capital missing from traders who used MF Global as a prime broker. This is especially felt in the energy and metals markets where MF had such a large presence.

High frequency traders have also decamped for more fertile climes in the oil and foreign exchange markets. And we all know that the big hedge funds are getting redemptions, cutting them off at the knees until January.

I?ll give you a few examples. Falling stock markets almost always produce a rising volatility index. But today it fell as low as 23%, a five month low, and closed at only 25.4% even with the Dow off 66 points. The correlation between stocks and gold has been almost perfect since the summer. But the barbarous relic has been in free fall since yesterday with the S&P 500 essentially unchanged. Ditto with the Euro, which managed a two cent plunge today.

The larger question for traders is whether this is a onetime only breakdown in cross market linkages that will end in January, or is it the beginning of a more permanent continental drift. We will find out next month when the ?A? Team managers return to the market and volume recovers.

Let me toss an alternative theory out there. It appears that the year to date returns for all asset classes are rapidly converging on zero. That?s why assets like gold and silver with the great 12 month returns are having the biggest falls this week. The S&P 500 is now down 2.2% on the year, and the Euro is up a miniscule 1.1%. Gold is still hanging on to a 17% gain, while silver is up only 12%, both rapidly headed towards single digits

Is this the inevitable result of a ?no return? world? Sounds like I better stay out of the market in this performance sapping environment, lest my own profits go up in a puff of smoke.

The ?A? Team Traders Are Gone Until January

December 14, 2011 - Quote of the Day

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?We should thank Meredith Whitney for creating a buying opportunity in municipal bonds,? said Aaron Gurwitz, CIO and chief strategist at Barclays? Wealth Management.

Silver Turns to Lead

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I have to tell you that I am not feeling the love from my silver position. I hung on faithfully for a month while the (SLV) churned around the 50 day moving average, building a base for a possible upside breakout. It was not to be. With another ?RISK OFF? day on our plate this morning it is clearly time to pull the ripcord on this unloved metal.

Let me tell you what I missed. Silver is still one of the few profitable positions owned by hedge funds, as it is up around 10% year to date. As we plow into the yearend book closing, hedgies have been booking profits in the white metal to offset their abundant losses in other holdings, such as in financials and their short positions in Treasury bonds.

This was offset by panic buying of precious metals in Europe until last week. Progress on a solution of the sovereign debt crisis has cooled demand from this source, taking the knees out from under the entire precious metals space.

Gold (GLD) has already broken its two month support with its $50 plunge today. I won?t wait for silver (SLV) to do the same. The damage is also evident with the other precious metals, including platinum (PPLT) and palladium (PALL).

On top of this, we only have one month of life left in the January options, and from here on, accelerated time decay kicks in. I?m sure silver will see $37, $42, and even $50 or higher someday, just not in the next five weeks.

Whenever I take a loss like this I tell people that this is proof that the track record is real. The fake ones never lose money. It just illustrates the value of using an options strategy during these volatile, unpredictable, and tumultuous times. I never risked more than 5% of my capital. I never lost sleep over the position. I took a 4.27% hit, even though silver fell 12%. I never doubled up on the downside, which the silver permabulls begged me to. Being able to walk away from a position if it turns bad is a great luxury, but it still costs money.

I live to fight another day.

Pulling the Ripcord on Silver

California?s War Against Millionaires

Diary

With the onset of the 2012 elections in a few weeks, the class warfare against the millionaires is about to start in earnest. In California, the issue has already been decided, and the millionaires have definitely lost.

On the November ballot will be no less than five measures to raise taxes on high income earners, primarily to fund the state?s increasingly impoverished education system. Deficits have forced public schools to lay off teachers and replace them with inexperienced temps without benefits, shrink the school year, cancel electives, increase class sizes, and end sports and music programs. Many teaches are now paying for class supplies out of their own pockets

Why should you care, comfortably resident in one of the other 49 states? Because the Golden State often initiates social and economic measures which are then adopted by the rest of the country and the world. Take a careful look at your catalytic converters, seat belts in cars, ceilings on car emissions, caps on real estate taxes, smoking bans in bars and airplanes, recycling program, and environmental controls.? They all carry a ?Made in California? stamp on them.

The revenue raising efforts are aimed at heading off a state budget shortfall that is expected to top $13 billion in 2012. The current top California income tax rate is already a hefty 9.3%.

To give you a preview of what is headed your way, below is a listed of the proposed levies:

*Governor Jerry Brown is proposing a 1% surtax on those making more than $250,000, and a 2% tax over $500,000. Everyone else gets hit with a half cent rise in state sales taxes.

*Billionaire investor Nicolas Berggruen has teamed up with Google?s Eric Schmidt and retired real estate magnate, Eli Broad, to back a 1% surtax on income of over $1 million, to be partially offset by a reduction in corporate income taxes from 8.84% to 7%. There will be a new sales tax on services of 5% which are currently tax free. These would raise $10 billion a year.

* Berkshire Hathaway trust fund kid Molly Munger is trying to push through a $27,266 wealth tax on couples earning more than $1.5 million that would raise $10 billion.

*San Francisco hedge fund manager Tom Steyer would tax corporations nationally on their California based income, potentially raising $1 billion.

*The California Federation of Teachers wants to raise taxes on incomes over $1 million by 3%, raising $6 billion.

Tax opponents and libertarians are hoping that by having such a profusion of measures on the ballot, they will split the vote with then end result that none pass. And while many of the state?s ideas are later adopted elsewhere, sometimes they don?t work out so well. California?s 1920?s eugenics policies and racial laws were later used by Adolph Hitler as the legal foundation for Germany?s holocaust.

Be careful what you wish for, and expect a rising tide of tax refugees looking for new homes in your state.

Trade Alert - (SLV) December 12, 2011

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Trade Alerts are a premium subscription service, you must login to read the details. 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.
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