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Mad Hedge Fund Trader

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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Mad Hedge Fund Trader

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!

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Mad Hedge Fund Trader

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

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Mad Hedge Fund Trader

August 25, 2011 - Time to Double Up on the (TBT)

Diary

Featured Trades: (THE BUBBLE HAS BURST IN BONDS TOO), (TBT), (TLT)


3) Time to Double Up on the (TBT). I have mentioned in recent days that the stock market is close to fully discounting a recession that isn't going to happen. The bond market is saying that recession is a certainty, that we are already well into it.

I think the bond market has got it wrong this time, or is at least early by a year. So I am going to double up my position in the ProShares Ultra Short Lehman 20+ Year Treasury ETF (TBT), the 200% leveraged fund that profits when Treasury bond prices fall and yields rise.

The price movements in the bond market have been so extreme that they have reached multigenerational highs. You have to go back to 1946 to find yields this low, or so historians tell me.

Take a look at the charts below. Even if I am dead wrong, there is still room for a five point rally in the TBT and still maintain its down trend. This is the five points that I am shooting for right now. If I am right, then we are seeing the beginning of a rally that will take yields back up to 4.10%, and the (TBT) back up to $43.

That gives us a potential gain of 80%. Worst case, yields plummet to 1.80%, knocking another 10% off the (TBT). This is the kind of risk reward that I am looking for, 8:1 in my favor.

There is another point to mention here. With the 30 year bond now yielding 3.5%, the cost of carry of the (TBT) has dropped to around 7.5%, the lowest it has ever been. This is down from the 11% carry we saw only six months ago. This ETF has never been such a bargain.

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Mad Hedge Fund Trader

August 25, 2011 - The Dead Hand of the Baby Boomer on the Market

Diary

Featured Trades: (THE DEAD HAND OF THE BABY BOOMER ON THE MARKET)

 

4) The Dead Hand of the Baby Boomer on the Market. From this year, the nation's 80 million baby boomers have started retiring in large numbers, creating a major depressive effect on stock prices, virtually assuring that we will endure a second lost decade for the leading stock indexes.

Assuming that you worked every year since you were 21 and earned the maximum amount of income, your monthly social security payment will amount to $2,366, or $28,392 a year. The average payment is $1,200 a month, or a paltry $14,400? a year. This is against an average cost of living for a family of four of $50,000 a year in the San Francisco area, and not much less in the rest of the country.

The average savings of a boomer is now only $75,000. However, some 25% of boomers have no savings at all. Many had pensions that were invested in their own firm's stock, which then went bankrupt. Others who planned on retiring on the equity in their homes have seen it vaporize in the housing collapse.

There are going to be further cash calls than just trying to meet the monthly rent. Many boomers lack health insurance, and will have to meet unforeseen medical bills from savings. The dreadful job market is forcing many into early retirement, forcing accelerated draws on IRA's and 401k's. This adds up to a soaring demand for social services, just when the cash available for these is about to get cut.

How are they going to get the money to make up the difference? Selling stocks appears to be at the top of the list, as this month's record selling of equity mutual funds indicates. When they run out of equities, you can bet they'll move on to bonds, forcing interest rates up. The net net for the rest of us will be higher taxes, fewer benefits, and slowing economic growth.

Which Way to the Welfare Office?

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Mad Hedge Fund Trader

August 24, 2011 - My View of the Stock Market for the Rest of 2011

Diary

SPECIAL MODEL PORTFOLIO ISSUE

 

1) My View of the Stock Market for the Rest of 2011. Down, then up, then down again. How about that? I believe that the global risk markets will bottom sooner than people think, and that the time has come to compile a shopping list of investments to pick up on distressed days in the market.

I think that at the most extreme, the S&P 500 will bottom at 1,000 at the lowest from yesterday's 1,123 close. More likely are important bottoms at the Fibonacci levels of 1,045 and 1,065. At 1,000, the index will be showing a 28% decline from the April 29 peak. The market multiple will have collapsed from 14 to 10 times earnings. That is against a 30 year range of 10-22. In other words, we will have discounted a full scale recession. Ten year Treasury bond yields are telling us the same with a 2.03% yield, against a 3.6% inflation rate.

The likelihood is that this recession is not going to happen. Virtually all the current economic data is consistent with the forecast I have maintained all year of 2%. Car sales show that the industry is recovering. Major exporters like Caterpillar and Freeport McMoran show the demand from emerging markets is booming. An enormous reconstruction package in Japan is just starting to kick in. Add all this together, there will be enough demand to assure 2% growth for the full year, which would represent a modest improvement from the first half.

Mind you, I am not proclaiming the birth of an entire new bull market. I believe that we put in the top for stock prices for this economic cycle on April 29 at 1,384, and it is unlikely that we see that print again. My best case scenario will be for a recovery of the 200 day moving average at 1,285. If we start this move off of a 1,000 bottom then there is room for a 28% move, certainly something worth taking a bite of.

What will be the drivers of such a move? In September, we will start releasing Q3 corporate earnings, which are likely to be buoyant. We will also start to see the traditional yearend liquidity push. Europe will hopefully go quite again, once the leadership returns from summer vacation. The icing on the cake would be any surprises from the Federal Reserve on the monetary front, as they did last year. All of this will pave the way a rise in risk assets everywhere that could last three to four months.

That gets us into 2012, when the real challenges reassert themselves. Very little about the presidential election is likely to be equity friendly. Arrest Ben Bernanke for treason? Really? Where's the rally in that? Gale force headwinds on the demographic front start to kick in and the first baby boomers reach the age of 66 and dramatically pare back spending. Corporate earnings will then hit diminishing returns.

Real estate promises to take another leg down, possibly as much as 25%. This will put the banks through the meat grinder once more, but this time there will be more TARP. You can forget about getting any help from congress on the economy either. It all sounds like a replay of 1937 to me, when the government ended stimulus too soon, triggering a secondary great depression. This could all add up to a real crash of the 2008 variety, with declines of 50% or more on the menu.

So what I am proposing here is not an investment, but a trade. It assumes a dead cat bounce in PE multiple from 10 to only 12.8. Preserving your capital will be the name of the game, while pulling in what incremental trading income that you can.

How could I be wrong? If failing stock prices deliver a self-fulfilling prophesy. If this summer's melt down in risk assets frighten consumers into paring back spending and corporations into backing off from capital investment, then my growth targets above will like high, and we are already in a recession. Call us 'dead men walking.' It is also possible that structurally low growth is forcing a permanent downshifting of the market's multiple range from 10-22 to 8-16. Then risk assets will begin plumbing far greater depths. This could also happen if any of the long list of structural negatives listed above accelerate. The only way to stay alive in these markets is to believe that all things are possible at all times.

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Mad Hedge Fund Trader

August 24, 2011 - What to Buy at the Bottom

Diary

SPECIAL MODEL PORTFOLIO ISSUE

FOR PAID SUBSCRIBERS ONLY

To obtain this issue in full with Model Portfolio,

please subscribe to The Diary of a Mad Hedge Fund Trader

 

2) What to Buy at the Bottom.

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Mad Hedge Fund Trader

August 24, 2011 - The Method to My Madness

Diary

SPECIAL MODEL PORTFOLIO ISSUE

 

3) The Method to My Madness. The portfolio that I have assembled here capitalizes of the major long term trends that will dominate the global economy for the next decade. Long term followers of this letter will know the names well, as these were the ones we rode up from the March, 2009 bottom, with spectacular results. Those trends include:

*The growth of the global population

*The rise of the emerging market middle class

*The scarcity of essential natural resources

*The shift from paper to hard assets

*Demographic investing

*The rise of technology

*Deflation and then inflation

Let me go through my picks on an industry by industry basis, and I will explain the logic behind them.

Energy-This is no longer a commodity, but a financial asset with a near perfect correlation with risk assets around the world. This is a 'peak oil' play that particularly targets the growth of demand in energy hungry China. Don't forget that they're not making the stuff anymore. For a speedy, leveraged position, buy the (DIG) ETF.

Autos-This industry is seeing demand climb from a low of 9 million units in 2008 to 15 million by 2013. This gets us back to just above the scrapage rate of 14 million. There is also a ton of deferred purchases still in the pipeline, holdovers from the 2008 recession. I picked Toyota because they have a triple comeback to price in from the economic cycle, the brake problems, and the tsunami.

Technology-This is what American does best, is our lead over the rest of the world, and is what everyone wants to buy or steal from us. These are our best of bread companies. If you want a quickie short cut to get in, then just buy the ETF (QQQ).

Rails- You need to transport the coal, iron ore, and food that we are shipping o China. When you weren't looking, this became one of the most efficient industries in the country. It takes one gallon of fuel to move a ton of freight 400 miles. This is a great emerging market demand play. Warren Buffet likes this industry so much that he bought his own railroad to play with, Burlington Northern.

Heavy Machinery-This is how you play the global commodities boom by staying at home. It also gets you into the shift out of paper assets into hard assets. And if you buy a bulldozer, they give you this cool, yellow baseball cap with a big black 'C' on it.

Banks-So you were looking for proof that I really am Mad? Bank of America has a book value of $10 a share. The problem is that no one believes them, so the stock is trading at a 40% discount. Move a patient out of a coma into intensive care, and the stock is good for a 50% dead cat bounce. 'RISK ON' will be the catalyst, along with a selloff in the bond market that widens their spreads.

Emerging Markets-So which do I choose, the country that is growing at a 6% rate, or the one that is plodding along at 2%. I'll let you figure this one out. The answer is a heavy weighting in emerging markets. I have listed the best four here.

Bonds-'RISK ON' means dump bonds. The (TBT) could nearly doubly from here if the ten year Treasury gets back to the 4% yield we saw six months ago.

Foreign Exchange-Dump the flight to safety currency, the Swiss franc, and buy the global growth currency, the Australian dollar. Don't touch the yen, which lives in a world of its own, and the operating manual is still written in Japanese.

Commodities-Recession fears have beaten copper like the red headed step child that it is. (FCX) is the leveraged play on the recovery of industrial metals.

Precious Metals-With gold at euphoric levels, it is ripe for a $200 pull back, even if the long term trend stays intact. Limit your risk through buying out of the money puts only.

Agriculture- We are making people faster than the food to feed them and this is a global problem. Also look at (JJG) and (DBA) for a more diversified play.

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Mad Hedge Fund Trader

August 23, 2011 - Those Damn Europeans!

Diary

Featured Trades: (THOSE DAMN EUROPEANS!), (AAPL)



1) Those Damn Europeans! I am tearing up my Eurail Pass, returning my espresso machine to Costco, and sending my gelato maker to the recycling center. Next year's summer vacation is going to be at Coney Island, not the Italian Rivera. Those damn Europeans are spoiling everything!

The US stock markets made a determined effort to put in a bottom last week, with the S&P 500 rallying 106 points off the bottom with blinding speed. But the Europeans had other ideas.

First, France and Germany met and agreed to do essentially nothing to solve the current debt crisis. There was no announcement of any bail outs, a Euro TARP, or even the issuance of pan continental Eurobonds. All we are left with are the hemorrhaging effects of austerity. It's as if the Tea Party had learned German and suddenly took over the Bundesbank. Then they tried to staunch market volatility with a short selling ban on all equities, a measure that has a proven history of failure.

Markets understandably gave this dreadful performance a raspberry, followed by a middle finger salute. European banks were particularly trashed, some down as much as 80% in three months. The market capitalization of the entire European banking sector is now less than that of Apple (AAPL), some $340 billion.

The Swiss were even worse. They boosted liquidity in the domestic money markets 400%, from SF30 billion to SF120 billion, in a futile attempt to weaken their own currency. There is talk of pegging the Swiss franc (SFS) to the Euro. Pretty soon, the mountain paradise's largest heavy machinery production is going to be in printing presses.

This comes on the heels of efforts by the Swiss National Bank to intervene in the foreign currency markets, which have so far cost it SF30 billion. I watched the Japanese try to end their bear market in equities via bureaucratic fiat with the end result that the Nikkei made successive new lows.

This is Europe's basic problem. They have a common currency, but borrowing is carried out by the 16 individual member states, creating a gigantic asset and liability mismatch. It's as if America had no Treasury Department, Treasury bonds didn't exist, and all of our national commitments were met through borrowing by the individual states. If that were the case, Illinois and California state bonds would be trading at 30 cents on the dollar, while North Dakota state bonds would be going for $3.

The problem is that the Europeans lack the political will to carry out the necessary reforms. No one is really interested in handing over control of monetary matters to Berlin, which would almost certainly administer them with an iron hand. The last time that happened, a certain washed up artist and rabble rouser from Austria was running the country, with unfortunate results.

The bottom line here is that the European debt crisis is going to be like one of those nasty flu's that keeps coming back, no matter how much medicine you take. Write periodic tape bombs from the continent into your trading calendar for the next several years.

By the way, since we're on the topic, hands up from anyone out there who knows who originated the term 'European Community'? Yes, you out there in the back row, wearing the toga. Julius Caesar? Not a chance. The gentleman in the black beret and stripped Breton T-shirt, smoking the Gitane. Napoleon? Nope, but you're getting warmer. You sir, the one wearing the lederhosen and knee socks. Yes, that's right, you got it: Adolph Hitler. Therein lies the problem.

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There Goes Another Load of European Bank Shares

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The Last Time Berlin Ran European Monetary Policy

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August 23, 2011 - How to Play Jackson Hole

Diary

Featured Trades: (HOW TO PLAY JACKSON HOLE),
(DBA), (FXE), (USO), (CU), (PALL), (UUP),
(GLD), (SFS), (FXJ)
, (FXA), (FXC)

 

2) How to Play Jackson Hole. I remember when the meeting of economists at Jackson Hole was one of those boring, under the radar, non-stories that only those with an interest in the arcana of macroeconomic affairs bothered to take notice. In other words, people like me.

Today that is anything but the case. All eyes will be focused this week on the remote gathering, particularly Ben Bernanke's keynote speech on Friday, August 26. Unless you have been living in a cave on a remote Pacific island without a broadband connection, you probably already know that Ben launched QE2 in his address at the same event last year.

Traders will be hanging on every word, sifting for any evidence of bold, new measures to rescue our sagging economy. If Ben delivers, the markets will riot. The 'RISK ON' trade will be on with a vengeance, and you will want to pile into stocks (SPY), commodities (DBA), the euro (FXE), the Australian (FXA) and Canadian (FXC) dollars, oil (USO), and the industrial metals (CU), (PALL).

If Ben disappoints, 'RISK OFF' lives for a few more weeks, and you want to chase gold (GLD), the Swiss franc (SFS), and the yen (FXY). A weakening economy the 'RISK OFF' trade implies means that a rapidly shrinking trade deficit and the repatriation of American capital from abroad will strengthen the dollar. Please pass the steroids to Uncle Buck (UUP). Equities will probably put in their low for the year.

I vote for the latter. The Federal Reserve has a long history of taking slow deliberate, measured steps. It really couldn't be any other way, given that it is managing a supertanker of an economy. They adopt a policy, and then sit back for six months to see if it works. The tendency to panic is pretty much nil. Since the last bombshell, pegging short rates at zero for two years, landed as recently as August 8, I think the likelihood of further reparative measures this soon is unlikely.

I expect that one thing Ben will mention is that his outlook for the economy is considerably more positive than either you are I might have. He might even say that he expects the second half of the year to be stronger than the first half. If that is the case, the markets will welcome Ben's comments about as much as a loud fart at a Sunday church service.

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Casting for the Right Economic Policy at Jackson Hole

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Please Pass the Steroids to Uncle Buck

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