Diary Archives

September 1, 2011 - Why I'm Flipping to the Short Side

Featured Trades: (WHY I'M FLIPPING TO THE SHORT SIDE), (BAC)

1) Why I'm Flipping to the Short Side. We have had a nice run here on (BAC), posting a profit of 20% in just one week. The stock market is now at the top end of a one month range, so I am going to cut back some risk. The big gainers are always the first to go on the chopping block.

We have had a great 130 point rally off of the August 8 capitulation low. The market is getting artificially ramped up to overbought levels by month end window dressing, as portfolio seek to hide the damage caused by the worst month in the equity market in ten years.

Once we get through month end, I don't see any positive drivers for the market until Q3 corporate earnings releases begin at the end of September, or the FOMC meeting takes place on September 20-21, when some form of QE3 may be announced. An outlier would be a surprisingly good August nonfarm payroll report, to be released on Friday, September 2. This is an outlier that is way out there.

In a perfect world, we'll catch the next downdraft, take profits on our shorts, double up on our longs, and laugh all the way to the bank. Ah, yes, that perfect world. Something tells me that it will be harder than that.

The Justice Department's effort to block the AT&T and T-Mobile merger is definitely throwing a wet blanket on the market. The 3 cent pop in the Swiss franc this morning is also telling us that another round of 'RISK OFF' may be just around the corner.

Finally, I received a blizzard of emails from my Houston readers in the oil patch telling me 'great trade' on my recommendation to go short oil yesterday. They should know.

And for good measure, we are one headline away from another tape bomb, the next chapter in the unfolding disaster in Europe.

Add all this up, and it tells me to strap on more downside exposure. Hasta la vista Bank of America. Catch you again on the downswing. Well done Macro Millionaires! You have just added 100 basis points to your 2011 total performance!

In a perfect world, we'll catch the next downdraft in the markets, take profits on our shorts, double up on our longs, and laugh all the way to the bank. Ah, yes, that perfect world. Something tells me that it will be harder than that.

For these who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put 'Macro Millionaire' in the subject line, as we are getting buried in emails.

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Flipping to the Short Side for a Trade

September 1, 2011 - Consumers are Telling Porky Pies

Diary

Featured Trades: (CONSUMERS ARE TELLING 'PORKY PIES')

2) Consumers are Telling Porky Pies. When I was working on the trading desk at the London office of Morgan Stanley I became familiar with the particular argot they speak in the East End, otherwise known as 'cockney'. A form a slang originally developed to keep bobbies guessing their true intentions, cockney can be as puzzling to outsiders a Greek hieroglyphics. Just in case you did not grow up in Spitalfields, Whitechapel, or heaven forbid, Bethnal Green, I'll give you a hint about the true meaning of 'porky pies,' that it rhymes with 'lies.'

The porky pies I am talking about are the ones consumers have been telling pollster's about their sentiment towards the economy. They have been informing both private and government opinion collectors that they are worried about the future, they are defensive in their investments, at that their spending plans are modest at best. It seems that all they want to buy are bonds.

Yet, almost every economic data point we have received over the past month has shown a modestly improving economy growing at a rate of around 2%. Only just this morning, July factory orders came in at a healthy 2.4%, against only 0.4% in June. Apparently consumers are telling anyone who asks that they hate their future, and then run out and buy a new car, a refrigerator, or a big screen TV.

I spoke to several local car dealers yesterday. To a man they told me that sales were good, now that the 2012 models are out. Only the hybrid Chevy Volt has been a complete disaster. After 40 years in the business, I have learned that when facts conflict with opinion, go with the facts every time.

This is not the first time that the public has told fibs to opinion gatherers. You often see it in politics, where individuals express their deep concern over the budget deficit and the national debt, but won't reveal a single spending program they are willing to cut them.

What this means is that the economy is better shape than the markets are currently discounting. They have discounted a recession that isn't going to happen, and that the surprise move in risk assets this fall will be to the upside. The double dip is nothing more than a great way to eat ice cream.

I think that the carnage we witnessed in August was a onetime only panic induced by the Tea Party's engineered near default on Treasury bonds. As that event passes into the rear view mirror, and investors look at how far prices have fallen, we might see a flood of money that pours into risk assets everywhere.

Nothing More Than a Fantasy?

August 31, 2011 - The Greek Assist on My Swiss Franc Short

Diary

Featured Trades: (THE GREEK ASSIST ON MY SWISS FRANC SHORT), (FXF)

1) The Greek Assist on My Swiss Franc Short. Greece's Eurobank and Alpha Bank have agreed to merge to create the country's largest financial institution. The new entity will have assets of over $217 billion with 2,000 branches. Eurobank had been one of the Greek banks that failed the European stress tests earlier this year.

Private investors from Qatar were major participants in the transaction, helping to recapitalize the new institution. This is just the opening shot in what promises to be a massive consolidation of the European banking system.

The merger triggered an eye popping 14% gain in the Greek stock market, and shined some sunlight on the Euro, which rose a penny against the dollar. It set the cat among the pigeons with the 'RISK OFF' crowd, sending gold and Treasury bonds down substantially.

It also pared another two cents off the Swiss franc. Since I strapped on my puts on the Swiss currency Friday morning, they have rocketed by 67%. Wait for another round of 'RISK ON' in in September to take these puts higher.

For these who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put 'Macro Millionaire' in the subject line, as we are getting buried in emails.

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Thanks for the Assist, Zorba!

August 31, 2011 - Sell Oil for a Stock Hedge

Diary

Featured Trades: (SELL OIL FOR A STOCK HEDGE), (USO)

2) Sell Oil for a Stock Hedge. Over the last month, asset classes everywhere have downshifted to new, lower trading ranges, reflecting the very rapid chopping of GDP growth forecasts for 2011 from 4% to 2%. Oil is no exception.

I think the new range for Texas tea rises from the $75 low we put in on the August 8th melt down day to a high of $90. So I am going to use today's $3 rally in crude triggered by hurricane Irene to get some downside exposure through buying puts in the oil ETF (USO). There is no sign of any disruption of oil supplies or refining capacity whatsoever.

Keep in mind that oil is one of the most volatile financial instruments out there right now. It is also a great lead contract for all asset classes. In one week this month we saw two $12 moves up and down. This is largely due to high frequency, or algorithmic capital pouring into the area which has been driving traditional pit traders to despair.

Oil has its own particular problems. The end of the Libyan civil war is likely to bring 1.8 million barrels a day on to the market within 18 months. I happen to know that the western oil majors were not especially happy with the terms the Khadafy regime extracted from them. They were marginally profitable at best, and as we now know, were high risk.

A grateful new regime is likely to have different ideas. Not only will contract terms be more generous, production could be quickly ramped up to 3 million barrels a day, which the country has always been capable of producing. The offshore area in the Gulf of Sidra has huge potential, but has never been tapped. Capital demands for reconstruction, infrastructure, and deferred maintenance are enormous, so the need for new revenues is great. For the rest of us, this could all lead to lower prices.

Oil puts would be a nice hedge for the rest of your long positions as well. I may be early here by a few bucks. But when 'RISK OFF' hits again, oil will turn so fast that it will cost you $3 to get in. It could hit $80 in a heartbeat, leading to a potential double in the puts.

The only way you could lose money here is for the 'RISK ON' trade to continue, and for equities to move up in a straight line every day for the foreseeable future. That is something that I am happy to bet against. The markets are anything but finished with inflicting new tortures upon us, and September promises to be another volatile month.

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The Market is Anything But Finished with Us

August 31, 2011 - Rare Earths Are Heating Up Again

Diary

Featured Trades: (RARE EARTHS ARE HEATING UP AGAIN)

3) Rare Earths Are Heating Up Again. Long time readers remember fondly my 2010 play in the rare earth sector, where stocks like Molycorp (MCP), Avalon (AVARF), and Lynas Corp (LYSCF) clocked gains of over 400%, and the call options went ballistic (click here for 'Rare Earths Are About to Become a Lot More Rare'). After a somewhat dead 2011, this sector could be in for another shot of adrenalin.

Chinese authorities are enforcing one of the most aggressive clamp downs in history in an effort to close down illegal rare earth mines in China's southern Jiangxi province, it is said, for environmental reasons. ??The Middle Kingdom now accounts for 97% of the world's rare earth supplies, much of it produced by unlicensed rural farmers and organized crime.

The environmental damage caused by these small operators is enormous, with small leaching pits dotting the countryside in rare earth rich areas, seriously polluting local drinking supplies.

China's goal is to consolidate all production into three state owned giants, Baogang, Chinalco, and Minmetals, which, it is hoped, will act more responsibly. Authorities have been burning refineries, arresting offenders, and offering out rewards for others.

So named because they were hard to get in the 18th and 19th century, these once obscure elements have suddenly become the focus of several converging trends in the global economy. They are the key ingredient of magnets. There are 17 in all, divided into light (cerium, Ce, lanthanum, La, and neodymium, Nd) and heavy (dysprosium, Dy, terbium, Tb, and europium, Eu).

It turns out that you can't build a hybrid or electric car, a wind turbine, thin film solar, LED's, high performance batteries, or a cell phone without these elements. One Prius uses 25 kilograms of the stuff. You also can't fight a modern war without rare earths, being essential for radar, missile guidance systems, navigation, and night vision goggles. That's where things get interesting.

Rare earths were never really rare. What is scarce is the cheap labor and scant regulation that enabled them to be produced cheaply. This, China had in abundance. By the early 1990's , most western producers of rare earths had been undercut by low Chinese prices and driven out of business.

Last year, the increasing application of rare earths in modern electronics combined with tightening Chinese export prices drove the prices of some of the more valuable, heavier rare earths up tenfold. Since 2009, China's export quota for rare earths has been pared back from 50,145 tonnes to 30,184 tonnes this year.

This has prompted a scramble to develop new mines, notably in the US and Australia. But these mines take years to bring into operation, and certainly not in time to head off any short squeeze in supplies triggered by the Chinese clean up.?? Molycorp was brought back online after a 20 year hiatus with its IPO last year, but has yet to produce a single ounce. Therein lays the play.

Going back into California's Molycorp at this level is probably not a bad idea. You can also look at the new ETF, Market Vector's Rare Earth/Strategic Metals (REMX), the product of the last bubble in this sector, which fell 36% from its April peak. It we get a return of the global 'RISK ON' trade in September, as I expect, this could be a great place to focus.

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August 29, 2011 - The Great Snore of 2011

Diary

Featured Trades: (THE GREAT SNORE OF 2011)

1) The Great Snore of 2011. As I expected, Ben Bernanke's long awaited Jackson Hole speech turned out to be a huge nonevent. He effectively put off any serious action to repair the sagging economy until the next Federal Open Market Committee (FOMC) meeting on September 20-21. He will look at the world then and decide if the global financial system needs any further assistance to avoid a collapse.

His reasoning? The economy is already humming along well enough to postpone any further stimulative action. In fact, he stated that he expects GDP to be stronger in the second half than in the first. This is in sharp contrast to the market's opinion that things are going to hell in a hand basket, and that Armageddon is near.

Who is right? Mr. Bernanke, or Mr. Market? Could 'surprise at the failure of the economy to accelerate' become the most commonly used phrase in future Fed releases?

The Dow immediately tanked 200 points on news that Ben wasn't pouring another pint of 200 proof ethanol into the punch bowel. It then rallied 400 points. Gold soared by $70 in anticipation of a big 'RISK OFF' trade next week. At the end of the day, stocks and gold were rising at the same time, which never happens. I think that traders were just throwing up their hands in despair and going flat so they could board up their windows ahead of the approaching hurricane.

With Ben now out of the picture, I think we are in for a period of continued tearing your hair out type market volatility that could extend all the way into the next FOMC meeting in 3 ? weeks. Look for the S&P 500 (SPX) to continuing putting in a narrowing triangle off the 1,100 bottom that could pave the way for a more robust move to the upside in the fall. If 1,100 fails, the market will try again to find a floor just above 1,000.

I believe that there is a 50% chance that we already saw the bottom of this move at 1,100, and a 50% probability that it is at the 1,000 handle. Let me toss this silver dollar and I'll tell you where it is for sure. And the answer is'?.

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OK, Who Forgot the Ripple?

August 29, 2011 - Time to Dump the Swiss Franc

Diary

Featured Trades: (TIME TO GO SHORT THE MATTERHORN), (FXF)

2) Time to Dump the Swiss Franc. This will be my first post Bernanke speech trade. The Swiss franc (FXF) has been driven up to absurd levels by a safe haven bid. It is about to suffer a fate similar to its safe haven cousin in the metals market, gold, which plunged an incredible 11% in two days. This is the next 'short gold' trade. If the barbarous relic can fall that far, that fast, so can the Swiss franc.

The Swiss National Bank has undertaken massive efforts to weaken its hopelessly overvalued currency before it completely wrecks the country's economy. For a more detailed report on the travails of the Swiss economy, please click here for 'My Big Miss of the Year'. I love Swiss chocolate, especially Toblerone, but it's not that good. $20 for a cup of coffee? Puleese!

The Swiss National Bank is flooding the domestic money markets with liquidity at an unprecedented rate and intervening in the foreign exchange markets. Harsher measures are rumored to come shortly. This is all fresh red meat for hedge fund traders.

Adding the fat to the fire, on Friday, a rumor swept the foreign exchange market that UBS, the largest bank in Switzerland, would start charging negative interest rates of short term Swiss franc deposits. A similar move during the late seventies heralded the peak of speculation in the Swiss currency. The Swiss franc immediately crashed 3.5 cents. Many stop loss liquidation orders were triggered along the way, causing one of the sharpest declines in the history of the Swiss franc market.

My experience is that, while these measures initially fail and are 'poo pooed' by the market, at the end of the day, they succeed. After all, central banks can print all the money they want. It is far easier to weaken a currency than to strengthen them. We are about to see that with the Swiss currency.

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Time to Go Short the Matterhorn

August 26, 2011 - My Home Run on Bank of America (BAC)

Diary

Featured Trades: (MY HOME RUN ON BANK OF AMERICA)

2) My Home Run on Bank of America (BAC). Yesterday, I recommended that followers of my Macro Millionaire program put 5% of their capital into Bank of America (BAC) shares at $6.85. My three month target was $9-$10. Not was that call a total home run, it was one with the bases loaded at the bottom of the ninth inning! (apologies to foreign readers).

Apparently, great minds think alike. Long time reader, Oracle of Omaha, Warren Buffet, announced this morning that he was investing $5 billion into (BAC). The stock immediately soared by 25%, and the rest of the financial sector rocketed as well.

Warren claims that he got the idea Wednesday morning while taking a bath. He is buying 50,000 shares of preferred stock at $100,000 a share with a 6% dividend. Warren also gets in the money warrants which he intends to exercise into the common, making him one of the largest investors in the company.

The move is similar to ones that I have seen Buffet make in the past. I am thinking about his purchase of 10% Solomon Brothers convertible bonds in the early nineties. He was also made chairman of the company in that deal. Warren also swooped in and bought a big piece of Goldman Sachs (GS) at the bottom of the 2008 financial crisis. He made a fortune on both these deals. These were also trades that only Warren could pull off, and that you and I couldn't touch with a ten foot pole.

Warren's investment will no doubt put in the final bottom in the financials in the four month long 'RISK OFF' move. It could also herald the low for the market as a whole, and shines a giant spotlight on my call for a fall, 'RISK ON' rally.

When I put out a recommendation, I don't expect the stock to hit my three month target in a day, so don't expect lightening to strike twice in the same place. If you want to learn more about Macro Millionaire, my highly successful online trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com. Just put 'Macro Millionaire' in your subject line, as I have received over 1,000 emails so far today.

Don't bother calling this weekend to say 'thank you'. I'll be having a cheeseburger and a chocolate malt for dinner in Omaha, Nebraska.

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August 26, 2011 - Time to Buy Some Fire Insurance

Diary

Featured Trades: (TIME TO BUY SOME FIRE INSURANCE)

3) Time to Buy Some Fire Insurance. I am looking at oil take a swan dive here, bonds pop a point, and even gold performing a rallyette off its $1,700 low. It all looks like 'RISK OFF' to me. So I'm thinking gee, maybe I should hedge some of my downside risk here.

It's not like the positions are so small that I can skip hedging, as they have been for the last couple of months. Then a large move by financial markets could cause only a small impact on my performance. But I have been bulking up my book lately, adding positions in the (TBT), (BAC), and running longs in (CAT). I have also had an incredible hot streak, and it is time to protect some profits.

Going into this morning, the market had been up two days in a row, which is almost unprecedented in the month of August. This will amount to a big screaming 'SELL' to the day traders.

So it seems prudent here to hedge the rest of my portfolio through putting some (SPY) puts. The pop in the market at the open delivered by (BAC) was the gift that allowed me to get a great fill. That cuts my delta going into Bernanke's Jackson Hole speech. I picked the $112 strike, as this is just above the floor of the recent action.

If the Bernanke puts everyone to sleep with his speech and markets rally, I will cover with a small lost. After all, you don't complain when you buy fire insurance and your house doesn't burn down. If he disappoints and we revisit $112, I have downside protection. That's unless we get the entire down move today in anticipation, in which case, I might cover at the close.

Now That We're Bulking Up the Portfolio,

It's Time to Put on Some Downside Risk

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At Least Somebody Has a Sense of Humor!

August 25, 2011 - Macro Millionaires Post One Day Gain of 120% on Gold Shorts

Diary

Featured Trades: (THE BUBBLE HAS BURST IN GOLD), (GLD)

2) Macro Millionaires Post One Day Gain of 120% on Gold Shorts. It's d??j?? vu all over again. I spoke to a friend in Tokyo two nights ago who told me that local gold scrapage companies were seeing lines extending out the door. This is exactly what I saw in Johannesburg in 1979, when gold then made a similar hyperbolic move to peak at $900, beginning a 22 year bear market. Throw that in with the margin increase for gold contracts announced in Shanghai, and I had the last piece of information that I needed to start piling on aggressive shorts in the barbarous relic at $1,886 an ounce.

I happen to know some gold bug friends who are seeing the same thing in the US. Traditionally, 60% of the world's supply of gold comes from the mines, while 40% is generated by scrapage. But recently the scrapage rates have been sharply rising. This has prompted some gold bugs to sell positions that are so old they have hair on them. These were accumulated back in the nineties, when the barbarous relic was universally despised for not paying any interest or dividend, and therefore, of no intrinsic value.

I still think that the yellow metal can hit my target of the old inflation adjusted high of $2,300 in coming years. But looking at the charts below showing a move up of $310, or 20% to $1,910 in less than a month, I had to conclude that enough is enough. It all had the smell of a blow off top to me.

Since gold has no book value, price/earnings multiple, valuation is immune to analysis and independent of the thought process. So I took a shot in the dark and piled followers of Macro Millionaire into the short side of the yellow metal. Bottom line: we caught $136 of a one day, $161 collapse in gold that enabled our puts to soar by 120%.

The trade allowed me to boost the year to trade performance of Macro Millionaires to an impressive 24.5%, versus a loss of 1.5% for the S&P 500 index during the same time period. If you have further interest in this innovative trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com .

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The Bubble Has Burst