I am back at my mountain top aerie near the city of San Francisco.
Drifting smoke from the enormous forest fires up north have turned the skies a pale rust brown, taking visibility down to a few hundred yards. Some 100 square miles have burned up near here in the past month, the inevitable result of our four-year drought.
El Nino! Where are you?
I tried going on a hike last night, but found myself coughing and wheezing within an hour. It was like trying to breathe in the smog choked Los Angeles of the 1950?s.
To top it all, as I was writing my Trade Alert to sell short the Euro (FXE) on Monday, I was thrown out of my chair by a 4.1 magnitude earthquake. I was a half-mile from the epicenter, and it sounded like a truck hit a parked car outside at 80 miles per hour.
I knew my Trade Alerts were earth shaking, but not literally so.
Fortunately for followers of the Mad Hedge Fund Trader?s Trade Alert service, a blaze of a different kind has been taking place with their trading and investment performance.
Since returning from my African and European sojourn, every single Trade Alert I issued has been profitable.
I sensed in April that a long rolling top would ensue in the stock markets that would take as long as six months to resolve. Since then that view has been paying off in spades.
I have been using every short-term rally to strap on short positions in the S&P 500 (SPY) through risk limiting vertical bear put option spreads. Those who couldn?t trade options bought the ProShares Ultra Short S&P 500 (SDS) instead.
I have completed five round trips using this approach so far, and just opened a sixth. I am going to continue until we hit a traditional period of equity strength that starts in the fall, after Chairman Janet makes her call.
The really exciting thing about the rest of 2015 is that we have a new batch of leaders to milk. Those include housing (LEN), (HD), (LOW), the banks (JPM), (BA), (C), and consumer discretionary (DIS).
That?s not all I have been doing.
I have scored wins on the long side in Apple (AAPL), Goldman Sachs (GS), and the Volatility Index (UVXY). I came out ahead with short positions in the Japanese yen (FXY), (YCS), and the Euro (FXE), (EUO).
In July, I grew even bolder, selling short the Treasury bond market (TBT), (TLT). I?m sorry, but I just don?t see a humongous bond rally going into the first Federal Reserve interest rate rise in nine years.
The fruit of these labors was to take the Mad Hedge Fund Trader?s performance for 2015 up to a new all time high at 38.37%. August so far has been as hot at the Sahara Desert that I recently escaped, up 5.24%.
This brings my performance since inception four years and eight months ago to 191.18%. That annualizes out to 40.96% per year, not bad in this upside down world.
It seems like only a Madman can prosper in these hopeless trading conditions.
Some 21 of the last 22 consecutive Trade Alerts I issued since April 29 have been profitable. Followers have found themselves in the green during every month of 2015, and quite substantially so.
It has been a near perfect year.
I started out 2015 with the goal of earning 25% for my readers during the first half, and another 25% in the second half. This latest batch of trades puts me right on track for reaching my yearend goal.
Given the weird dynamic of this market, the shares of best quality names have had the biggest falls. That means the pickings will be especially ripe when I return to single name picks at the next market bottom.
I should take these extended research trips more often! My back office tells me that subscriptions have been falling off in North Korea, Mali has been weak of late, and that a strategy luncheon in Bhutan would be welcome any time.
Under promise and over deliver; it has always been a winning business strategy for me.
This is against a backdrop of major market indexes that are nearly unchanged so far this year, despite sudden bursts of volatility and long, Sahara like stretches of boredom.
The complete collapse of oil, commodities, and precious metals has made the markets even more challenging.
The key to winning this year have been to put the pedal to the mettle during those brief, but hair raising selloffs, and then take quick profits. They don?t call me ?Mad? for nothing.
When the market is dead, you sit on your hands.
After all, you are trying to pay for your own yacht, not your broker?s.
When the market pays you to stay away, you stay away in droves.
Those who have made the effort to wake up early every morning and read my witty and incisive prose have an impressive row of notches on their bedpost to show for their effort.
My groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud.
Some 50% of my clients are over 50 and managing their own retirement funds fleeing the shoddy but expensive services provided by Wall Street. The balance is institutional investors, hedge funds, and professional financial advisors.
The Mad Hedge Fund Trader seeks to level the playing field for the average Joe. Looking at the testimonials that come in every day, I?d say we?ve accomplished that goal.
It has all been a vindication of the trading and investment strategy that I have been preaching to followers for the past eight years.
Quite a few followers were able to move fast enough to cash in on my trading recommendations. To read the plaudits yourself, please go to my testimonials page by.
Our business is booming, so I am plowing profits back in to enhance our added value for you.
Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, 67.45% in 2013, and 30.3% in 2014.
Our flagship product, Mad Hedge Fund Trader Pro, costs $4,500 a year. It includes Global Trading Dispatch (my trade alert service and daily newsletter).
You get a real-time trading portfolio, an enormous research database, and live biweekly strategy webinars. You also get Bill Davis?s Mad Day Trader service, which provides great intra day market color.
To subscribe, please go to my website at?www.madhedgefundtrader.com, click on the ?Memberships? located on the second row of tabs.
And now for the rest of the year.
I can?t wait!
Global Market Comments
August 18, 2015
Fiat Lux
Featured Trade:
(WHY THE CHINESE YUAN IS DONE FALLING),
(CYB), (FXI), (EWH), (FXE), (EUO),
(PLEASE CHOOSE THE OCTOBER INCLINE VILLAGE, NEVADA? STRATEGY LUNCHEON DATE),
(THE PASSING OF A GREAT MAN)
WisdomTree Chinese Yuan Strategy ETF (CYB)
iShares China Large-Cap (FXI)
iShares MSCI Hong Kong (EWH)
CurrencyShares Euro ETF (FXE)
ProShares UltraShort Euro (EUO)
There is absolutely no doubt in my mind that the surprise five point spike up in the bond market last week is entirely due to the shocking devaluation of the Chinese Yuan.
Prior to that, fixed income markets were discounting the inevitable rise in US interest rates and fall in the bond market. It is really irrelevant whether Janet makes her move in September, December, or sometime in 2016. The writing is on the wall.
Bonds should start feeling the heat about now.
Yesterday, the Beijing government reduced support for the Yuan for a third time, and then swore on a stack of Chairman Mao?s Little Red Books that this was the last one.
I take them at their word, even though my Mandarin is sparse, to say the least, and I am not inclined to believe anyone.
To continue devaluating would risk importing substantial inflation into the Middle Kingdom. They can get away with this now because the price of their largest import, oil, is in free fall.
It would risk a real currency war with the United States, which is unhappy about seeing all of the past year?s Yuan appreciation undone in a heartbeat.
If China pushes any further, they may see the trading sanctions and anti dumping duties rain down upon them, like a summer typhoon. If you thought the kerfuffle over solar panels, tires, and chicken feet were bad, wait until you see the next batch.
They would also see what little credibility they still have in international markets fall into tatters. No one ever said building a domestic financial system was going to be easy.
In any case, the Yuan drop we have seen so far is still small bear compared to the much more dramatic declines of other major currencies over the past year, most notably again the Euro (-18%) and the yen (-21%) (see chart below).
Better to keep it that way.
Keeping all this in mind, I am more than happy to take on a new short position in the Treasury bond market through buying the iShares Barclays 20+ Year Treasury Bond Fund (TLT) September, 2015 $128-$131 in-the-money vertical bear put spread.
You can pay up to $2.70 for the spread and still make a decent profit. If you can?t do options, then buy the ProShares Ultra Short 20+ Year Treasury 2X ETF (TBT) outright.
We can take four more points of upside heat if we have to, which would take ten year Treasury yields below 2.00%. I?m happy to bet that is not going to happen.
If the Yuan is truly bottoming out here, it also makes sense to renew my short position in the Euro.
That?s what I did on Monday, buying the Currency Shares Euro Trust (FXE) September, 2015 $112-$115 in-the-money vertical bear put spread at $2.55 or best. You should have gotten the text alert at the opening.
For more depth on the Chinese currency crisis, please click here for ?China?s Firecracker Surprise?.
Chairman Janet is Coming for You
A dozen or so of you expressed interest in attending my upcoming October Global Strategy luncheon in Incline Village Nevada.
This is when followers have a chance to meet with me personally, hook up with other readers, exchange trading and investment ideas, and tell a few jokes. Think of it as a ?Good old boys (and girls) club?.
It is an opportunity to grill me on matters that are too sensitive for me to go into depth in the daily newsletter. I?m assuming you are all patriots and know how to handle classified information.
I am always looking for new ways to improve my service, and the lunches have proven fertile ground for new ideas in the past.
I usually hold these on a Friday to give guests a chance to skip a day of work, and then return home that night.
However, I have noticed at recent lunches that not many of you need to work for a living anymore. Either you are already retired, or have made so much money from my Trade Alert service that you can afford not to.
So this time I am going to put the matter up for a vote. Send me an email at madhedgefundtrader@yahoo.com indicating whether you want to attend the lunch of Friday, October 23 or Saturday, October 24. Majority rules.
As for me, either day is fine. I basically work seven days a week, so it is neither here nor there which day you choose.
No rest for the wicked.
Can You Keep a Secret?
Global Market Comments
August 17, 2015
Fiat Lux
Featured Trade:
(MY YEAREND STOCK MARKET VIEW),
(SPY), (QQQ), (PANW), (GILD), (IBB),
?(AAPL), (KBE), (GS), (LEN), (USO), (DIS),
(SAN FRANCISCO?S LONG SUFFERING RENTERS
?TAKE ANOTHER HIT)
SPDR S&P 500 ETF Trust (SPY)
PowerShares QQQ Trust, Series 1 (QQQ)
Palo Alto Networks, Inc. (PANW)
Gilead Sciences Inc. (GILD)
iShares Trust - iShares Nasdaq Biotechnology ETF (IBB)
Apple Inc. (AAPL)
SPDR Series Trust - SPDR S&P Bank ETF (KBE)
The Goldman Sachs Group, Inc. (GS)
Lennar Corporation (LEN)
United States Oil Fund LP (USO)
The Walt Disney Company (DIS)
I hate to be the bearer of sad tidings guys.
But I think the choppy, volatile, trendless, trading conditions we are all suffering right now will continue for a few more weeks, and possibly all the way out to the September 17-18 Federal Reserve interest rate decision.
Man! I wish I were still back in the Sahara Desert. There, I only had to worry about scorpions, poisonous snakes, heat stroke, and raiding Berber tribesmen.
I can afford to be flippant. I have just enjoyed my best trading summer ever, adding 10% to the value of my trading book since I took off for Europe in June.
This, I did with rickety Internet access, only occasional access to market information, and a six-hour time difference.
My secret? I kept my book small, my cash levels high, and didn?t check prices every 15 minutes.
Above all, I stayed patient, holding back from buying stocks that suddenly became cheap. Apple (AAPL) at $120? Disney (DIS) at $110? Tesla (TSLA) at $250?
Most importantly, whenever I thought about buying energy or commodity plays, I lay down and took a long nap instead. When I woke up, the temptation went away.
That said, we are clearly in a capitulation mode for the entire oil space (USO), and could reach a bottom in weeks, given the current rate of decay (an old nuclear physics term). The $30 handle seems to be begging for attention.
In fact, a bottom in energy could signal a bottom for the entire market, and trigger one of the great generational buys of all time. China, the marginal big buyer of all things energy, hasn?t died; it is just resting.
So back to the stock market.
Since April, I have seen a long sideways triangle unfolding for the S&P 500 (SPY). I think we will reach an apex in September, right around a confluence of several news events (Fed decision, energy bottom).
The initial direction will be down, probably through the 200 day moving average. But that will be a head fake, and the real move will start right after that.
Around then, the calendar will flip from hostile to friendly, as we enter the half year period which sees the greatest amount of stock buying (at least it has for the past 60 years). Also about now, the daily data releases will show a dramatic improvement in the economy.
That presents us with a rally into 2016 and a new all time high.
Sectors? You want to know about sectors? Jeez, you?re a tough crowd to please.
I think we can go back to our old reliables of technology (QQQ), health care (GILD), consumer discretionaries (DIS), cyber security (PANW), and biotech (IBB).
This coming cycle will see some new additions. They include interest sensitives, like banks (GS) and regional banks (KBE), homebuilders (LEN), energy (XOM), (OXY), (COP) and solar (SCTY), (FSLR), if oil doesn?t go to zero.
As for Apple, expect the slumber to continue until the next new product cycle for the iPhone 7 launches next year. In between cycles is never a great time to buy Apple, although we may get a pop going into the Christmas selling season.
For those who have been prudently sitting on their hands all year waiting for a chance to put more long term, non-trading money to work, this is it. Your entry point will open up over the next few weeks.
Let me tell you that I have an unfair advantage in making market calls like this that are bold, confident, and possibly bordering on hubris.
I have the good fortune to live in the San Francisco Bay area. It is like living 10-20 years in the future.
The GDP here is definitely not growing at a feeble 2% annual rate, as it may be for much of the rest of the country (like North Dakota, Oklahoma, and Texas). It is really growing at a 5% rate, and possibly much more.
The technology boom in the City by the Bay is reaching a 1990?s fever pitch. You can?t get restaurant reservations or lease office space. Companies have launched serial poaching of staff with only the most limited experience at eye-popping salaries. Contractors everywhere have turned into prima donnas.
Housing is a joke. A friend of mine managed to score a tiny, rent controlled pre-war studio apartment for $2,000 a month after winning a lottery against 50 other entrants. He had to pay a $100 ?application fee? just to enter the lottery.
Oh, and since this is one of the few dog friendly buildings in the city, the whole place smells like crap and dog hair, as every resident owns a pet. Open the door, and you get a slap in the face.
Yes, I know that the United States is not San Francisco. However, the tools and services they are creating here, at a breakneck pace, can be used by the rest of the world to dramatically improve productivity and profitability. That boosts growth and share valuations everywhere.
By the way, if any of you has a twenty something kid looking for a job and a purpose in life, send them to San Francisco immediately. With any luck, they will be able to gain a foothold and pick up some skills before the next crash occurs.
As for me, I am going to try and maintain discipline and not chase every little gyration of the market.
You can?t take advantage of the coming best buying opportunity in a year if you blew all your money trying to catch the small fry.
I Much Prefer Being Here Than in the Market
Global Market Comments
August 14, 2015
Fiat Lux
Featured Trade:
(WHY THE ?UNDERGROUND? ECONOMY IS GROWING),
(THE PARTY IS JUST GETTING STARTED WITH THE JAPANESE YEN),
(FXY), (YCS), (DXJ)
CurrencyShares Japanese Yen Trust (FXY)
ProShares UltraShort Yen (YCS)
WisdomTree Trust - WisdomTree Japan Hedged Equity Fund (DXJ)
I?m sorry, but I just don?t believe that we will see a weak dollar potentially going into the first interest rate rise in nine years.
If my friend, Janet, pulls the trigger, then the greenback will become the only currency in the world that is raising rates. Currencies just don?t decline in those circumstances.
In that case, we want to go out and sell short the weakest link in the currency milieu, and that is the Japanese yen.
Even if Janet doesn?t move in September, the prospect will hang over then yen like a Damocles sword.
In addition, the yen is bumping up key chart resistance around ?125. A decisive breakout would clear the way towards ?130, my yearend target for the beleaguered Japanese currency.
A short in the yen is a safe, low risk trade right here in a world gone crazy.
?Oh, how I despise the yen, let me count the ways.?
I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.
To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:
* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 280% of GDP, or 140% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of only 0.36%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.
When the big turn inevitably comes, we?re going to ?130 then ?150, then ?180. That works out to a price of $200 for the (YCS), which last traded at $94.93. But it might take a few years to get there.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360.
To me the ?125 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.
It?s All Over For the Yen
Global Market Comments
August 13, 2015
Fiat Lux
Featured Trade:
(CHINA?S FIRECRACKER SURPRISE),
($SSEC), (FXI), (CYB), (EWH),
(ALL I WANT TO DO IS RETIRE),
(THE TWELVE DAY YEAR)
Shanghai Stock Exchange Compostite Index ($SSEC)
iShares Trust - iShares China Large-Cap ETF (FXI)
WisdomTree Trust - WisdomTree Chinese Yuan Strategy Fund (CYB)
iShares, Inc. - iShares MSCI Hong Kong ETF (EWH)
Don?t waste your time trying to analyze financial markets right now.
There is only one ticker symbol you need to know about, that for the Shanghai Stock Exchange Composite Index, the ($SSEC).
When Shanghai goes up, the rest of the world?s risk assets happily join the party. When it drops, ?RISK OFF? fever goes pandemic.
China upped the ante this week when it allowed its currency, the Yuan, or the renminbi as it is known locally (the people?s currency), to float freely for the first time in 25 years. That produced a two-day devaluation of 3.6%.
In the very long history of currency debasements, this one was barely a whimper.
Ancient Sumerians used to shave the edges off of gold and silver coins 5,000 years ago.
When President Nixon took the US off of the gold standard in 1973, the dollar eventually fell 75% against the European currencies.
More recently, the Euro has given up 37% against the greenback, moving from a position of grotesque over valuation to dealing with the Greek credit crisis.
So Beijing?s move this week barely tips the needle in the official history of devaluations.
What it does do is create a giant psychological effect, and therein lies the problem.
Since June, the Mandarins in China have been pulling out all the stops to halt a free fall in the country?s share prices.
It has cut interest rates and relaxed reserve requirements. It banned high frequency trading, blaming the collapse on foreign short sellers (sound familiar?). It has even made stock selling illegal in roughly 94% of the country?s free float.
Still, the bears remain emboldened by their recent success.
By cutting the value of the Yuan, the government is providing a modest boost to the economy. A cheaper currency means less expensive exports and more of them, thus, making local businesses more profitable and creating jobs.
But not by much.
There are not a lot of products that live or die on a 3.6% margin. America has not just lost a chunk of its own exports from the additional competition, contrary to the claims of the TV networks and bogus newsletters with which I compete.
But by taking the first such move to undercut the Yuan in 25 years, it is showing the world how serious a problem is the stock crash.
Will the stock collapse feed into the main economy? Is 10% of the world?s GDP going into a Great Recession? Yikes!
SELL, SELL!
There are a few other problems with the Chinese firecracker.
It violates a secret agreement with the US government, made a decade ago, to allow a steady 3-4% a year appreciation of the Yuan against the dollar.
This was designed to slowly eliminate the artificial under valuation of the Yuan that gave the Middle Kingdom an unfair export advantage. The arrangement was responsible for the 20% rise of the Yuan since 2009.
(Sorry Donald, but you?re holding the chart upside down. Yes, I know, stock charts can be pesky things).
Reneging on the deal is ruffling feathers at the US Treasury in Washington. But it won?t amount to more than that, as long as it is temporary.
Which it will be.
China still has a massive trade surplus with the United States. In 2014, it totaled a staggering $343 billion. It maintained that heady pace, totaling $171 billion during the first half of 2015.
There are an awful lot of Chinese clothes, electronics, and toys sitting on the shelves of American retailers.
Its imports are falling, thanks to the collapse of the price of oil and other bulk commodities.
The natural state of the currency of any country running such huge surpluses is for it to rise in value. That will continue in China?s case for the foreseeable future.
Once the waters settle in the stock market, you can count on the Yuan to regain its upward path.
However, this isn?t going to happen in a day. It could be weeks or months until order returns to Chinese equity markets. Until then, expect some scary days there and here as well.
Compound these problems with the uncertainty over the Federal Reserve?s decision on interest rates in September and slower than expected US growth.
It certainly leaves traders and investors alike, with a full plate of issues to consider.
As if we didn?t have enough to worry about.
For some background on my 45 year coverage of the Middle Kingdom, please click here for my 2011 SPECIAL CHINA ISSUE.
