'A year from now the dominoes will be falling in Europe. The world is going to be a more destabilized place'?.The risk free rate isn't risk free any more. We're not growing as we should be because there is a diminishing rate of return for each additional dollar of debt. In a year, we're going to be in recession again,' said Kyle Bass, of the Dallas, Texas based hedge fund, Hayman Capital.
Featured Trades: (TRADERS ARE 'LOST' WITH THE ECONOMIC DATA)
1) Traders Are 'Lost' With the Economic Data. Traders can be forgiven for believing that they are reliving an episode of the cult mystery TV show, 'Lost.' The economic data was truly a mixed bag last week, with lagging reports showing us that the economy is fine, while the most important leading indicators threatening a serious deterioration. They give more credence to the view that the Tea Party inspired near debt default and Standard and Poor's Treasury bond downgrade generated a real dip in the economy last summer.
The July trade deficit showed a stunning decline, from $51.6 billion to $44.8 billion. Due, no doubt to the advantages American exporters are reaping from the weak dollar, the report normally would have been cause for celebration by investors, politicians, and business leaders alike. But they are understandably nervous, gun shy, and punch drunk, and will await further confirmation to sound the 'all clear' signal.
It didn't help that the most crucial of leading indicators, the weekly jobless claims, worsened, rising 11,000 from to 428,000. The four week moving average rose 4,000 to 419,500. Capacity utilization remains in the basement at 77.4%.? This is a stunning figure, as our unused capacity would rank as the fourth largest country in the world, if it were carved out as a separate country. And August inflation rose at double the expected rate, popping 0.4% to a 3.8%., raising the ugly specter of stagflation.
The choppiness of this data suggests that the double dip risk is still on the table, and that market volatility will continue. This is great news for nimble and agile traders like myself, but terrible for long term investors. Watch for those trader alerts!
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Sell the Rallies, Buy the Dips, or Both?
Featured Trades: (BILL ACKMAN'S HONG KONG DOLLAR PLAY), (EWH)
2) Bill Ackman's Hong Kong Dollar Play. You are all well aware of my love affair with the Chinese Yuan (CYB), which I expect to appreciate substantially in coming years off the back of China's continuing economic miracle. Bick Ackman, of Pershing Square Capital Management fame, has come up with his own variation, that of piling on a leveraged long in the Hong Kong dollar.
I often tell investors that Hong Kong is the way to play China if you want to sleep at night. As a holdover from its days as a British Crown Colony, which ended in 1998, it still employs largely western style accounting and corporate governance standards. Blowups of the variety that we are seeing in mainland companies, like Sino Forest, are much less common.
The Hong Kong economy is growing at a 6% annual rate, with 5% inflation, and a 3% unemployment rate. These are numbers that any developed country finance minister or politician would kill for. But because of an accident of history, the Hong Kong dollar has always been pegged to a foreign currency, first the British pound, and for the last 27 years, the US dollar. So while it's economic policy is, in effect, made in Beijing, monetary policy is determined in Washington. This can't last.
Since the peg was established in 1983, Hong Kong has risen from an up and coming frontier market with almost laughable volatility to a triple 'A' credit. (A close friend of mine received an Order of the British Empire from Queen Elizabeth for engineering the scheme). Despite this stellar performance, the peg has made the Hong Kong dollar one of the weakest currencies in Asia. It really should be trading on par with the Singapore dollar, which has been moving from strength to strength for similar reasons. Let it float, and you could see a very rapid 30% appreciation from its current 12.84 cents.
Ackman has taken his position in the form of highly leveraged over the counter, out of the money call options that do not trade on any exchange, and were most likely custom written by a major investment banks. There is no Hong Kong dollar ETF, and the Hong Kong iShares ETF (EWH) gives you exposure to both the currency and local blue chip equities.
Big hedge funds can do as Bill did and buy some custom options, although this is an expensive way to do it. Those with large credit lines can put on this trade through the interbank market where you can get 10:1 leverage. Individuals are limited to buying outright cash in Hong Kong dollars, or invest in the ETF and take the equity risk as well, where the long term prospects are excellent.
The Hong Kong currency could be dragged up by any move by China to float the Yuan, which is just a matter of time. But recent leaks from senior officials at the People's Bank of China suggest that this is at least five years off.
Bick Ackman is not that patient. He expects the Hong Kong dollar to go ballistic within the next 12-18 months, which is the maturity of his options position. Longer than that, and he will simply roll forward the position when it expires. When is the next potential trigger? Next April, when local elections may tempt bold moves on the monetary front.
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A Peg Worth an OBE
'Average is over. If you just show up now for your job in an average way, that's not going to cut it anymore. James Reston, a famous columnist in the sixties and seventies, used to have my office, and he would come into work each day wondering what his seven competitors were going to write about. I come into work wondering about what my 70 million competitors are going to do,' said Tom Friedman, a columnist for the New York Times.
4) Testimonial.? I am a 25 year veteran of the financial industry and run one of the largest wealth management teams at one of the largest banks in the country.? This is my second time subscribing, I'm always looking for good ideas.? My man, you are a freak. If this were a few hundred years ago we would burn you at the stake as a Warlock. I have never, ever, written a congratulatory email??But day after day, you are the most accurate trader I have ever seen. I'm truly flabbergasted. My wife even heard me say "holy ****".
Barry
Atlanta, Georgia
'There's no retail inflows. The hedge fund community has derisked. So the algorithm based, high frequency traders have taken up the slack, and are now responsible for 70% of the total trading activity in the market every day. It's a very difficult environment to create alpha, or excess returns in. Are your clients frustrated?
Featured Trades: (BUY THE DIP IN CORN), (CORN), (DBA), (JJG)
1) Buy the Dip in Corn. The US Department of Agriculture released its monthly crop report on Monday, underlining the tremendously bullish conditions for corn, which I have been harping away about in this letter for months. What did the markets do? They sold off, delivering a classic 'buy the rumor, sell the move' type of reaction.
As I expected, corn yields were chopped from 153.0 bushels per acre to 148.1. The total US crop was downsized from 12.914 billion bushels to 12.497 billion. Global demand conditions were reduced, which I find incredible, given the distressed conditions found around the world. Since the department collected its data, conditions have worsened appreciably, thanks to the incredibly hot weather that has been searing the South and the Midwest. Look no further than the unprecedented Texas fires.
This is not a market that has given you a lot of windows to get into. I will try to hang on for a pull back to the 50 day moving average for the ETF (CORN) at $46.90, down 8% from its recent high. Every dip over the last 2 1/2 months has been a 'buy' for corn, and I expect that this time will be no different.
You can also take a look at the grain ETF (JJG) and the PowerShares DB Multisector Commodity Trust Agriculture Fund (DBA). And if I'm wrong, you can always take delivery and eat your position.
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Is This a Buy Signal?
Featured Trades: (SELLING OIL AGAIN FOR A HEDGE), (USO)
2) Selling Oil Again for a Hedge. With oil having bounced $5.50 over the last couple of days, I am going to flip back to the short side for several reasons, not all of which have to do with Texas tea.
The trigger was oil's failure to rally in the wake of a surprisingly large draw down in inventories this week, some 6.7 million barrels. This comes off the back of a large build in gasoline inventories of 2 million barrels, which has been a great leading indicator for crude.
For a start, I have run out of 'RISK OFF' positions, having covered them all during the last big dip in risk assets, quite profitably I might add. We have seen a nice rallyette in the (TBT), and I want to hedge these gains by going short oil. The 'RISK OFF' (USO) puts can also be used to hedge any additional 'RISK ON' positions I may want to add in the near future.
Finally, this is just an outright punt. Looking at the charts, we are clearly at the upper end of a rising channel. There should be a chance to capture a $3-$4 break in oil, even if we continue in the uptrend. This could be worth a quickie 50% gain in the puts. This is a flyer I can afford to take, as my book is now small, and I am up 37% year to date. If it doesn't work, I can always stop out when oil hits $93. Notice, also, that I am rolling out to the November expiration on this trade to duck the accelerated time decay.
It gives us some downside participation if the financial markets choose to have one more puke-out before the fall rally begins. It is also a great put on the next bombshell coming out of Europe, which could occur as early as this weekend.
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Is There One More Puke Out Left in the Markets?
Featured Trades: (TRADING SHIFTS TO THE FOREIGN EXCHANGE MARKET)
2) Trading Shifts to the Forex Market. Those of us who have been in the business for four decades have been overwhelmed by the growth of the foreign exchange business. Since the late sixties, it has grown from a handful of low level clerks speaking on transatlantic lines doing a few hundred million dollars' worth of deals a day, to a breathtaking $4 trillion a day. The move has accelerated since 2008, as traders, attracted by the tight spreads and bottomless liquidity, flee other asset classes into the foreign exchange markets.
Along these lines, a friend of mine, Jason Stapleton, CEO of Triple Threat Trading, is launching a new foreign exchange trading service for individual investors. It neatly compliments my own Macro Millionaire trade mentoring program. It is called the 2011 Protrader Bootcamp, and Jason has kindly agreed to give the readers of this newsletter a free two week trial to the program that includes ten training sessions.
You can't beat the dollar for value. The sessions will feature Live Trading, Guest Speakers, and hours of high quality Forex trading education covering strategies and techniques to keep your portfolio in the black.
Featured Trades: (WHAT'S ON THE MENU?) (FXE), (EURO), (UUP), (GLD)
4) What's On the Menu? I am posting these charts below from a variety of sources outlining some trades that I may execute in the near future. Call it my 'short watch list'.
Look at the two longer term charts for gold, which seems to be putting in a more convincing top by the day. The first one shows that gold is clearly stalling at the top of a three year up channel. The second shows the price action for this year, and could be interpreted as a ragged 'head and shoulders' top. Message: use price spikes to the upside to buy out of the money puts two months out.
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The next chart for the PowerShares DB US dollar index (UUP) is showing that we have seen a major sea change in the US dollar, breaking the recent downtrend and reversing a multiyear decline. You can witness further confirmation of this in the subsequent chart for the Euro, which has 'breakdown' written all over it. If you have any doubts, look at the third chart, which convincingly shows that we have been in a three year channel pointing south all along. Message: use rallies in the Euro to buy out of the money puts starting at the 50% retracement level for the recent move at $1.38, or buy the leveraged bearish Euro ETF (EUO).
Just thought you'd like to know what I was thinking.
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