There is a method to my madness here.
With the volatility Index (VIX) popping above $16 yesterday morning, a window briefly opened that lets us earn some extra money buying a S&P 500 SPDR?s (SPY) May, 2016 $209-$214 in-the-money vertical bear put spread.
This is because we can earn excess premium on the short $209 leg of the trade.
To lose money on this position the (SPY) has to make a run at new all time highs in the coming 9 trading days.
With the US dollar (UUP) now on a definite strengthening trend I think this is impossible.
A strong dollar diminishes the foreign earnings of the big American multinationals, major components of the S&P 500.
I think it is much more likely that stocks grind down in coming weeks to first retest the unchanged on 2016 level at $2,043, and then the 200-day moving average at $2,012.
Share prices are anything but inspirational here.
Price earnings multiples are at all time highs at 19X. The calendar is hugely negative (?Sell in May?). Soggy and heavily financially engineered Q1 earnings reports came and went with a yawn.
Huge hedge fund shorts have been covered with large losses, and no one is in a rush to jump back into the short side.
Oh, and the (SPY) is bumping up against granite like two year resistance at $210 that will take months to break through in the best case.
Did I mention that US equity mutual funds have been net sellers of stock since 2014?
This position is also a hedge against what I call ?The Dreaded Flat Line of Death? scenario. This is where the market doesn?t move AT ALL over a prolonged period of time and no one makes any money, except us.
If I am right on all of this, May will come in as the most profitable month for the Mad Hedge Fund Trader Trade Alert Service in more than a year. For new subscribers, your timing is perfect!
By the way, I noticed a surge of new subscriptions right after Nyquist won the Kentucky Derby on Saturday evening.
No doubt the new readers were spending their winnings. It looks like your assessment of investment newsletters is as good as your selection of horseflesh.
And Nyquist carried the lucky number 13. Talk about an out of consensus trade!
If you can?t do the options, buy the ProShares Short S&P 500 Short Fund ETF (SH) (click here for the prospectus at http://www.proshares.com/funds/sh.html), or the ProShares Ultra Short S&P 500 Short Fund 2X ETF (SDS) (click here for the prospectus at http://www.proshares.com/funds/sds.html).
Don?t get me wrong here. I still believe the bull market is stocks still has another 2-3 years to run. But the signs of short-term exhaustion are everywhere.
It is my job to show you how to take advantage of that fact and how to profit from nimbleness.
Time for Some Downside Protection
Go Nyquist!
First, thanks for all that you do.? To have a job that you love, and one that does so much good for so many families is a great blessing to all of us.? I am a new retiree, and a recent subscriber. I followed your posts for at least two years before pulling the trigger. Knowing that you and your group were there gave me the courage to retire?a little earlier than I would have - maybe by four or five years.
So, how do you thank someone who has given you an extra couple of years of life? Thanks for those extra years, and for the possibility of growing what we have, and might receive in the future, into something that might help our grandchildren get a good start on their educations and their lives in a few years.
Thanks,
Dave
Delta, Utah
Global Market Comments
May 9, 2016
Fiat Lux
SPECIAL RESIDENTIAL REAL ESTATE ISSUE
Featured Trade:
(HERE IS YOUR TOP PERFORMING INVESTMENT FOR THE NEXT FIVE YEARS),
(ITB), (PHM), (KBH), (DHI), (AVB), (PPS), (CPS),
(ONSHORING TAKES ANOTHER GREAT LEAP FORWARD),
(TSLA), (UMX), (EWW)
iShares US Home Construction (ITB)
PulteGroup, Inc. (PHM)
KB Home (KBH)
DR Horton Inc. (DHI)
Avalonbay Communities Inc. (AVB)
Post Properties Inc. (PPS)
Cooper-Standard Holdings Inc. (CPS)
Tesla Motors, Inc. (TSLA)
ProShares Ultra MSCI Mexico Capped IMI (UMX)
iShares MSCI Mexico Capped (EWW)
Have you tried to hire a sewing machine operator lately?
I haven?t, but I have friends running major apparel companies who have (guess where I get all those tight fitting jeans?).
Guess what? There aren?t any to be had.
Since, 1990, some 77% of the American textiles workforce has been lost, when China joined the world economy in force, and the offshoring trend took flight.
Now that manufacturing is at last coming home, the race is on to find the workers to man it. Welcome to onshoring 2.0.
The development has been prompted by several seemingly unrelated events. There is an ongoing backlash to several disasters at garment makers in Bangladesh, the current low cost producer, which have killed thousands.
Today?s young consumers want to look cool, but have a clean conscience as well. That doesn?t happen when your threads are sewn together by child slave laborers working for $1 a day.
Several firms are now tapping into the high-end market where the well off are willingly paying top dollar for a well-made ?Made in America? label.
Look no further than?7 For All Mankind, which is offering just such a product at a discount to all recent buyers of the Tesla Model S-1 (TSLA), that other great all American manufacturer (click here for their website).
As a result, wages for cut and sew jobs are now among the fastest growing in the country, up 13.2% in real terms since 2007, versus a paltry 1.4% for industry as a whole.
Apparel industry recruiters are plastering high schools and church communities with flyers in their desperate quest for new workers. They advertise in languages with high proportions of blue-collar workers, like Spanish, Somali, and Hmong.
New immigrants are particularly being targeted. And yes, they are resorting to the technology that originally hollowed out their industry, creating websites to suck in new applicants.
Chinese workers now earn $3 an hour versus $9 plus benefits at the lowest paying US factories. But the extra cost is more than made up for by savings in transportation and logistics, and the rapid time to market.
That is a crucial advantage in today?s fast paced, high turnover fashion world. Some companies are even returning to the hiring practices of the past, offering free training programs and paid internships.
By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls.
The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades. It has also been blamed for losses of US jobs, with some estimates reaching as high as 25 million.
When offshoring first started 50 years ago, it was a total no brainer.? Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years.
So American electronics makers began flying overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines. After the US normalized relations with China in 1978, the action moved there and found that labor was even cheaper.
Then, a funny thing happened. After 30 years of falling real American wages and soaring Chinese wages, offshoring isn?t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977.
Today, it is $6,000 and $24,000 for trained technicians, with total compensation rising 20% a year. At this rate, US and Chinese wages will reach parity in about 10 years.
But wages won?t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks. Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here.
Natural disasters like earthquakes, fires and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a finely tuned, incredibly complex watch.
There are also far larger political risks keeping a chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the US fleet and the Chinese military playing an endless game of chicken off the coast, we are one mid air collision away from a major diplomatic incident.
Protectionism constantly threatens to boil over in the US, whether it is over the dumping of chicken feet, tires, or the latest, solar cells.
This is what the visit to the Foxcon factory by Apple?s CEO, Tim Cook, was all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what?
Work will come back to the US all the faster. The Chinese press was ripe with speculation that Apple induced reforms might spread to the rest of the country like wildfire.
Former General Motors (GM) CEO, Dan Akerson, told me his company was reconsidering its global production strategy in the wake of the Thai floods.
Which car company was most impacted by the Japanese tsunami? General Motors, which obtained a large portion of its transmissions there.
The impact of a real onshoring move on the US economy would be huge. Some economists estimate that as many as 10%-30% of the jobs lost to offshoring could return. At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least.
It would add $20-60 billion in GDP per year, or up to 0.4% in economic growth per year. It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us by failing to have any meaningful correction for the past 2 ? years?
Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico (UMX) (EWW), which took the biggest hit when China started soaking up all the low waged jobs in the world.
After that, the industrial Midwest has to figure pretty large, especially gutted Michigan. With real estate prices there under their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.
So How Does This Thing Work?
?Kamikaze missions are rarely successful, least of all for the pilots,? said Robert Gibbs, former White House Press Secretary.
Global Market Comments
May 6, 2016
Fiat Lux
Featured Trade:
(MAY 11 GLOBAL STRATEGY WEBINAR),
(WHY THE STRONG DOLLAR WILL DRIVE YOUR MAY TRADES),
(FXY), (YCS), (FXE), (EUO), (FXA), (UUP), (SPY),
(TESTIMONIAL)
CurrencyShares Japanese Yen ETF (FXY)
ProShares UltraShort Yen (YCS)
CurrencyShares Euro ETF (FXE)
ProShares UltraShort Euro (EUO)
CurrencyShares Australian Dollar ETF (FXA)
PowerShares DB US Dollar Bullish ETF (UUP)
SPDR S&P 500 ETF (SPY)
It?s all about the dollar. In fact, it?s been all about the dollar all year.
When the buck is strong, as it was in early January, stocks, commodities, and energy crater. When the greenback is weak, everything rallies as they have done since mid January.
The good news for those short stocks, commodities, and oil is that the buck seems to have reached a major turning point on Tuesday night and gotten strong again.
I ascribe this to the large numbers of international trade transactions that settle this month, which generate a lot of dollar buying and foreign currency selling.
This is no accident. It turns out the last seven consecutive months of May have seen the dollar appreciate, quite substantially so, by an average of 3%.
Let me explain the mental gymnastics I had to undergo that enabled me to reach these conclusions.
Now that the market has thrown out any chance of a Fed rate hike in June, the capacity for the dollar to disappoint has burned out. Futures markets are only pricing in a 15% probability of such a move.
All we need now is for the Department of Labor to deliver a half way decent April nonfarm payroll report of around 200,000, the average print it has been reporting monthly for the past two years.
That means the economy is speeding up, not slowing down, and that interest rate hikes will happen sooner,not later. The Q1 mini recession is now behind us. The dollar should rise and the currencies should fall.
This is against a backdrop of foreign governments looking to weaken their own currencies at every opportunity.
Look for someone in Japan to say something very negative next week when they return from the Golden Week vacations. For them, the yen at 107.00 is nothing short of the apocalypse for their economy.
Since politicians everywhere are not inclined to commit suicide, keep your ears open.
If you want to see how this works look no further that the Australian Dollar (FXA), which cratered 5% this week in the wake of a surprise 25 basis point interest rate cut by the Reserve Bank of Australia.
It turns out that the economies of commodity dependent countries are still reeling from the after effects of the 2015 commodity crash.
This is why I doubled up my long dollar positions, adding a short Euro position (FXE), (EUO) yesterday in addition to my existing short yen position (FXY), (YCS).
It is also why I doubled up my short position in the S&P 500 (SPY).
Yes, I was three days early on the yen. Part of the problem that comes with seeing major trends and reversals before anyone else is that I sometimes execute the trades a little too soon.
It is a good problem to have.
Foreign currencies are definitely trading against their terrible long-term fundamentals right now. The details of those fundamentals are detailed in all their glory in my previous newsletters.
Suffice it to say that I have beaten the subject like a red headed stepchild, ad infinitum, and until the cows come home.
There! I?m done mixing my metaphors for the day.
And apologies in advance to all red headed readers.
See the Similarity?
?Revenues stink in the banking area. This decade will be the worst for revenue growth since the Great Depression,? said Mike Mayo, the controversial banking analyst at the Asian brokerage and research house, CLSA.
Global Market Comments
May 5, 2016
Fiat Lux
SPECIAL SALT ISSUE
Featured Trade:
(REPORT ON THE SKYBRIDGE ALTERNATIVES (SALT) CONFERENCE)
Once again, I am writing to you from poolside cabana B-2 at the posh Bellagio Hotel in Las Vegas. It is a baking hot 100 degrees in the shade and the air is bone-dry, so I?m draining my third strawberry daiquiri for the day.
The days when I risked getting dragged out to the parking lot by some heavies to get my hands broken with a hammer for card counting at blackjack have long since passed. So I am able to relax.
As with PIMCO?s former bond maven, Bill Gross, that?s how I worked my way through college, the hard way. How many face cards are still in that deck?
May Bugsy Siegel Rest in Peace.
I was sad to hear they closed the famed Riviera Hotel, the must go to Las Vegas destination of the late 1950?s. My parents fled there for a romantic weekend whenever they could find a babysitter for seven children, which I think was exactly once.
Today, there are just not enough budget package tours from China, Russia and Japan to keep the crumbling edifice going. Drunken cowboys throwing up into the pool wasn?t much of a draw.
The tattoos seem to be getting bigger and more colorful every year. I am told by the people who know about these things that when a girl dumps her boyfriend, she has to get a bigger tattoo to completely cover up the name of the outgoing one.
Frequent fliers eventually end up covered head to toe, much like the tattooed lady at the circus.. I am so old that I remember when only Marine gunny sergeants had tattoos.
How times have changed.
As for me, I am a blank canvas, but only because I never got drunk enough when I was in the Corps.
I have to tell you that the SkyBridge Alternatives Conference (SALT) is the best investment event I have ever attended, bar none, and I eagerly await the annual May event.
Never have I seen such a concentration of great minds so willing to share with the general trading community market-bending views on all assets classes, long and short.
Some of the best-known speakers were humbled, and almost at a loss for words, addressing the impressive firepower assembled before them, 1,800 of the smartest people in the world.
Former Federal Reserve Chairman, Ben Bernanke, shared his innermost thoughts, at long last free to say whatever he wanted without sparking extreme market volatility.
Omega?s Leon Cooperman peppered us with his favorite stocks, which always have the habit of doing extremely well. The audience certainly perked up and took note. Last year?s tip gained 65%.
Mohamed El-Erian, advisor to the German financial conglomerate Allianz, warned the audience of the coming liquidity crisis in the bond market.
Former Greek prime minister, George Papandreou, (whose father and grandfather both held the high office), gave a unique insider?s view of his country?s debt crisis.
Gene Sperling, recently the president?s economic advisor, gave us insights into the early years of the Obama administration.
Unquestionably, the most moving part of the week came when the actor, Michael J. Fox, shared his challenges in dealing with Parkinson?s Disease.
The head of his foundation, Debra W. Brooks, gave us a fascinating look at ?high impact philanthropy,? and how the efficient allocation of resources is leading to great advances on a wide range of maladies.
Gyrating all over his seat, the man was clearly dying, and a pall cast over the room. Questions were invited, but there was utter silence.
So I strode up to the microphone, and thanked him for his courage. I then asked him, ?In your 1985 movie ?Back to the Future? Marty McFly traveled 30 years into the future in his DeLorean time machine, to October 21, 2015. That date is now only five months off. What do you think of the future we got, where did we fall short, and where did we exceed your expectations??
Michael was taken aback by my question, and the entire room burst into laughter. He confided that the flying cars have yet to arrive, but that computer processing capacity has exceeded his wildest imagination.
The cost for the four day assembly was a bargain at the price, given that you will probably make all of this back, and much more, on your next trade. This is an education that can make, or break, your year, and even a career.
It spoke volumes that the stock market saw the lowest turnover of the year this week. The running joke is that the markets were dead because the hot money was all in Vegas.
SALT was hosted by my friend, Anthony Scaramucci, the managing partner of SkyBridge Capital, LLC, a world-class networker and high profile operator in the hedge fund industry.
Scaramucci is the author of two books, The Little Book of Hedge Funds: What You Need to Know About Hedge Funds but the Managers Won?t Tell You, and Goodbye Gordon Gekko: How to Find Your Fortune Without Losing Your Soul.
Meeting the ?Mooch?
SkyBridge Capital is a research driven alternative investment firm with over $13 billion in?total assets under advisement or management. It recently opened an office in South Korea.
The firm offers?hedge fund investing solutions?that address?a wide range of market participants from individual retail investors to large institutions.
Their businesses?include?comingled funds of hedge fund products, customized separate account?portfolios,?and hedge fund advisory services. To learn more about their services, please visit their coolest of all websites at http://www.skybridgecapital.com.
Andrew, or ?The Mooch? to his friends, seems to get better at this game every year. One minute, he is frenetically putting out fires, and the next, coolly introducing the next high profile name in a relaxed and suave manner. Every time I saw him, he was on the way to somewhere in a high speed hustle.
Unfortunately, there was a total press blackout for all of the marquee names. So most of the high-grade intelligence was for ears only, with ?OFF THE RECORD? projected on the gigantic high definition screens in big bold red letters.
You can?t blame these guys for being gun shy. All have been grievously misquoted by the press in the past.
This can be a dicey problem when their comments are market moving and they already own big positions. With the former world leaders, there is always the chance of an offhand comment creating an international incident.
Given the choice between restrained, politically correct views approved by compliance heads, public relations departments, or intelli
gence agencies, and the real, but unquotable, skinny, I?ll definitely take the latter.
You?ll learn the market impact of what was said in my coming Trade Alerts.
I?ll give you a quicky hint right now: Use the next dip to double up your cyber security position.
Non-stop panel discussions kept us all up to date on the many urgent issues facing hedge funds and their investors. Fee discounts for size, once unheard of, are now becoming common. As the industry is rapidly becoming commoditized, prices are dropping.
There is a rise in the customization of accounts for specific clients. Risk control and transparency have improved dramatically since the 2008 crash. Concerns about the popping of the bond market bubble were almost universal.
Peripheral to the large conference halls were two vast meeting rooms, one with 100 tables, another with 50 white upholstered sofas. There, an army of young, fresh faced marketing reps sold a panoply of hedge fund products to a flotilla of hardened, craggy faced, and wizened end investors.
Reading the body language was fascinating. Dozens of small, start up hedge fund managers earnestly articulated their own strategies to potential partners. Every 20 minutes, the buyers of services rotated tables.
You could almost feel the supercharged energy of the deals getting done and commerce coursing through the air. The participants referred to this whimsically as ?speed dating.?
God bless America!
My New Stock Selection System
There are now 23 hedge fund strategy categories, some with another half dozen subdivisions. You need a PhD in Higher Mathematics from MIT to understand some of the more abstruse ones.
Managers can now outsource any service to third party providers, be it compliance, tech support, investor relations, or support staff. The business has been sliced and diced so many ways it is dizzying.
The elevators hummed with the language of finance; duration, convexivity, alphas, betas, deltas, thetas, and price earnings ratios. Baffled vacationers from the Midwest might have thought they took a wrong turn and landed in ancient Greece by accident.
At night, the guests were treated to a blowout party around the Bellagio?s ornate swimming pool complex. A rock band boomed out the music, and the torsos of dancers gyrated wildly in true bacchanalian fashion.
A fire breather roamed about singeing the guests, as did elaborately dressed women on stilts wearing fantastic feathered costumes. Tarot card and palm readers were available if you wanted to learn your performance numbers in advance.
Comely waitresses served all the iced tequila shots you could drink, which had ?headache? written all over them. The hotel wisely stationed lifeguards around the pools in case a drunken reveler fell, or was thrown in.
I asked one shapely attendant if she would save me if I inadvertently took a plunge, and she cautiously answered ?yes?.
It was all a scene worthy of The Great Gatsby.
Because I recently started posting my pictures on the site, I was mobbed by fans, dispensing some 200 business cards that evening.
Why do I feel like the protagonist, Nick Carraway? Or am I the doomed Wall Street titan Jay Gatsby himself?
I managed to pin down short selling legend, Jim Chanos, telling him he is wrong about China for the umpteenth time. Still, he has already made a fortune there on the downside in recent years, and admitted he did carry some longs there against his shorts.
No, Jim, You?re Wrong!
?When I first jumped into the industry 30 years ago, there were only two dozen hedge funds managing a miniscule amount of money, and we all knew each other. We all used to meet for lunch once a month to trade ideas.
Most of Wall Street thought we were all crooks. Making money in a falling market? That has to be illegal!
Now you have 10,000 funds managing $2.7 trillion, accounting for 50%-70% of all trading volume. Pension funds have made the industry respectable, and huge.
The highlight of the event was a private concert by the boy band, OneRepublic. A production company from Los Angeles hauled out ten truckloads of sound equipment to make it happen with industrial strength. ?Watch out, it?s going to be LOUD,? warned the producer, as he handed me a pair of earplugs.
I saw one of the richest men in the world casually walk up to the stage to get his ears blasted out, dressed in designer blue jeans, Gucci loafers, and a blue checked shirt with the tails hanging out.
Girls walked up to shake his hand, and wouldn?t let go. Half the women were wearing six-inch stilettos with red soles, meaning they ran a grand a pair.
The next day, some of the younger kids from marketing were clearly wrecked, and could have walked out of the morning after scene from The Hangover, which was shot at the Bellagio.
I?m sure they spent the morning shuffling the stacks of business cards they collected, wondering who some of these people were. Ah, the price of youth!
And who the hell is John Thomas?
After drinking my meals for four days, I managed to cover all the bases. I even spent time with the hairy chest and silver chain crowd in the lukewarm pool, who leased office space to hedge funds. Business was booming.
You Meet the Most Interesting People in Las Vegas
?As much as I love the Bellagio, living there for a week gets a bit tiring. Every time I left my room I was assaulted by ringing bells and distant screaming by someone who had just won a fortune on the slots.
Catching my flight home, I saw a falling down drunk woman wearing only a bikini try to board a flight and punch out a TSA officer when she was turned away.
Big mistake.
You meet the nicest people in Las Vegas.
Oh, did I tell you how hard it is to get your clothes off when they are soaking wet?
My dry cleaner is going to hate me.
