I have an unusually sensitive nose. Maybe that is because it is so big. It is particularly attuned to detecting bullpucky in broker research reports. So when an analyst recently downgraded the mid-level broker, Jeffries & Co (JEF), on the back of its European debt exposure, the stench was overwhelming.
I went to the website at http://www.jefco.com/ and had a quick look at the balance sheet and income statement. The leverage was a conservative 12:1 and earnings were growing nicely. But when I looked at the chart, it had chapter 11 written all over it, the stock plunging 40% in days. Things were just not adding up.
So I called someone I knew in senior management. The European problems were being vastly exaggerated. Total positions amounted to 2% of assets, and these were all fully hedged, both by underlying security and duration. The firm was about to post its entire European portfolio on its website with every detail, down to the last CUSIP number, an unprecedented level of disclosure. There is no need for an emergency dilutive capital raise whatsoever. What?s more, he only knew of one client in his department who had pulled funds in the past week, and he would probably return, once the dust had settled.
It all had the makings of a classic bear raid to me. This is where some opportunistic traders spread false rumors about the health of a company in the hope of making some quick profits on the short side. With MF Global, once the world?s largest future broker, having gone bust on Monday, the market was particularly sensitive to this kind of news.
With any luck, a panic will ensue causing the decline to snowball and quickly take the share price to zero. If a few thousand people lose their jobs, and a few tens of thousands of shareholders get wiped out, that is tough luck. Such are the cruel and heartless ways of Wall Street in search of the eternal buck.
However, given JEF?s bold and decisive action, I didn?t think the bears would be successful this time. And, to me, that spells opportunity with a capital ?$O$?.
If the rest of the market reaches the same conclusions that I have, then the stock is poised to rocket. At the very least, it could rapidly return to the pre-rumor level of $15.50. That would cause the January, 2012 $11 calls to double from my current cost of $2.40. If Europe cools off a bit and the market and global risk assets take another leg up, you could get a lot more.
This is still a financial, a sector that I am not exactly enamored with. So I am going to limit this position in the calls to only a high risk allocation of 2.5% of my portfolio. There are still plenty of black swans out there looking for a place to land. For my notional ?virtual? $100,000 fund, this amounts to 10 contracts ($2,500/100/$2.40). With any luck, we?ll be out of this next week.
Newsletter subscribers should note that this is a trade alert that went out from my Macro Millionaire Service at opening last Friday, November 4, when the stock was trading at $11.30. Yes, this is the program with the model portfolio that is up 47% year to date. For those 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. Hurry up, because our software limits the number of subscribers, and we are running out of places.
You are Cleared for Landing
?The bond markets are telling the truth about the financial markets right now. It?s not being told by the equity markets,? said Constance Hunter, chief economist at Aladdin Capital Management of bond house.
When I first bought shares in the Chinese electric car manufacturer, BYD (BYDDF) (or Build Your Dreams) in 2009 on the heels of Warren Buffet?s 10% investment, it looked like a total home run. The stock soared from $1.50 to $11, given me a paper return of 730%.
Undercover, I Totally Blend
Last year, the stock started to roll over, retracing all the way back to my cost. I called the company?s Los Angeles office, but the line was disconnected. I tried the New York office, but my call was never returned. An email I sent their headquarters in Shenzhen, China went unanswered. I even had a friend in the Chinese government make some inquires, and he told me the company wasn?t seeing anyone.
That?s it! Off with the gloves. No more Mr. nice guy. I did what I usually do when a company I follow won?t talk to me. I fly to their headquarters and break into the facility.
It was easier than you think. I simply pulled up to the main gate in Northern Shenzhen and told security that I was a friend of Mr. Buffet and was there to see Mr. Li. They waved me through and went scurrying to find the appropriate Mr. Li. I knew full well that in a company of 100,000, at least 10,000 had to be named Mr. Li, and by the time they figured out that there was no Mr. Li, I would be long gone. It worked like a charm.
This Could Be Your Next Car
At this point, my editor is saying, ?You did what!?? Indeed, my staff worries about my antics from time to time, fearing the dole if I fail to return from one of my adventures. But the nine life limitation that cats face doesn?t seem to apply to me, so I just keep on going.
I then set off and roamed the factory floors freely, stopping workers wherever I could and asking about conditions. The great thing about this approach is that the man on the assembly line, in R&D, and the girl in accounting are totally unfamiliar with management?s sanitized view for public consumption, and haven?t been professionally trained to lie. As a result, I was able to get a first class read on the state of the company.
E-Taxis
When I met with the Shenzhen venture capital community in the days before, the rumors were rampant. When founder and CEO, Wang Chuanfu, launched his assault on the global car market three years ago, expectations were high. He promised investors, like Berkshire Hathaway?s Charlie Munger, that BYD would soon become the world?s largest car manufacturer. He ramped up production from 500,000 vehicles to 800,000 in 2010, anticipating a huge demand for the company?s conventional cars and hybrids.
But quality issues persisted, and the resale rate to past BYD car owners fell to zero. Sales peaked at just over 500,000, leaving the company with a huge inventory of unsold vehicles. Profits collapsed. Mercedes was brought in to provide technical assistance, but has so far been unable to improve sales. Was BYD going under? Was Warren Buffet pulling his investment? Speculation was rife.
One salesman told me that the information blackout was ordered not due to any financial problems, but because the company was releasing its new, all electric Model E6 the following week. This car is much larger than other electric cars, gets an amazing 186 miles per charge, and will be offered for sale for $39,000 after government incentives.
If true, this would be a revolutionary, highly disruptive advance. BYD plan to export the car to the US as soon as possible. It has already been test driving a fleet of ?E-Taxis? on the streets of Shenzhen for the past 18 months, with much success. If the company cans delivery on the vehicle, Wang Chuanfu might realize his ambitious goals after all.
China currently subsidizes energy prices, with gasoline available for about $3.50 a gallon, or 10% lower than US prices. That means a smaller cost advantages for alternative car producers. That disadvantage could disappear during the next oil price spike. Government subsidies will also eventually have to disappear because they are too costly.
Finally, after two hours of scouring the grounds, inspecting the physical remains of their crash tests, inspecting the assembly line, and peeking through windows, I was ready to go. There once was a day when I could have been put in front of a firing squad for doing something like this. But the People?s Republic has grown soft in its old age, and I figured that, worst case, I would just get kicked off the grounds. Not, so for my Chinese staff, however, who were sweating bullets and begging me to leave.
So what are investors to take away from this? For a start, you run out and buy tsunami afflicted, beaten down Nissan Motors (NSANY). If BYD can squeeze 186 miles out of its batteries, so can Nissan, and there is already talk that the second generation all-electric Leaf will reach that target. That will eliminate the ?range anxiety? afflicting current owners with their 80 mile limitation.
As for BYD itself, the story is a little more complicated. At this share price, you are essentially getting a world class multinational lithium ion battery company with the car company thrown in for free. If the car division continues to sputter along, you can expect modest appreciation in the shares. But if the E-6 becomes the next big car of the future, the stock could go ballistic and potentially make a new high, delivering investors a multi bagger.
Whoa, That Was Close
The English are feeling the pinch in relation to recent events in Libya, and have therefore raised their security level from "Miffed" to "Peeved." Soon, though, security levels may be raised yet again to "Irritated" or even "A Bit Cross." The English have not been "A Bit Cross" since the blitz in 1940, when tea supplies nearly ran out. Terrorists have been re-categorized from "Tiresome" to "A Bloody Nuisance." The last time the British issued a "Bloody Nuisance" warning level was in 1588, when threatened by the Spanish Armada.
The Scots have raised their threat level from "Pissed Off" to "Let's get the
Bastards." They don't have any other levels. This is the reason they have been
used on the front line of the British army for the last 300 years.
The French government announced yesterday that it has raised its terror alert
level from "Run" to "Hide." The only two higher levels in France are "Collaborate" and "Surrender." The rise was precipitated by a recent fire that destroyed France 's white flag factory, effectively paralyzing the country's military capability.
Italy has increased the alert level from "Shout Loudly and Excitedly" to
"Elaborate Military Posturing." Two more levels remain: "Ineffective Combat
Operations" and "Change Sides."
The Germans have increased their alert state from "Disdainful Arrogance" to
"Dress in Uniform and Sing Marching Songs." They also have two higher levels:
"Invade a Neighbor" and "Lose."
Belgians, on the other hand, are all on holiday as usual; the only threat they
are worried about is NATO pulling out of Brussels.
The Spanish are all excited to see their new submarines ready to deploy. These
beautifully designed subs have glass bottoms so the new Spanish navy can get a
really good look at the old Spanish navy.
Australia, meanwhile, has raised its security level from "No worries" to
"She'll be alright, Mate." Two more escalation levels remain: "Crikey! I think
we'll need to cancel the barbie this weekend!" and "The barbie is canceled." So
far no situation has ever warranted use of the final escalation level.
-- John Cleese - British writer, actor and tall person.
?I?m not a dove or a hawk on monetary policy, I?m an owl,? said Richard Fisher, president of the Federal Reserve Bank of Dallas.
The October nonfarm payroll came in at a pedestrian 80,000, compared to 158,000 in September, a rate that is somewhat less than what matches population growth. But it is the numbers behind the numbers that will deliver the big market impact. The headline unemployment rate came in at a nosebleed 9.0%.
August and September were revised up a whopping 102,000. This is final proof that the recession that the market was discounting over September and early October was never there, a point which I have been arguing about vociferously. The recession was only in the stock market.
What was particularly fascinating was the massive decline in the long term unemployed, by 366,000, the largest since records began in 1948. This took the expanded U-6 unemployment rate, which includes discouraged workers and those whose benefits have expired, from 16.5% down to 16.2 %. I have never seen anything like this, and have no idea what caused it. But the overall message about the economy has to be good.
October saw a pop of 104,000 in hiring by the private sector, partially offset by a loss of 24,000 government jobs, a continuation of what will be a decade long trend. Gains were seen by business and professional services (32,000), leisure and hospitality (22,000), and health care (12,000). Further losses of 20,000 were seen in construction. Since the beginning of 2010, an impressive 3 million jobs have been created by the private sector.
Another sobering statistic buried in the raft of figures was that, of the 80,000 hired, a shocking 42,000 were of people who were taking on second full time jobs! This is additional evidence that the only way that minimum wage workers can support families is by working 16 hours a day at two jobs. Even still, that only gets you earnings of $33,280 a year, pretax, and will certainly be more ammunition for the ?Occupy Wall Street? crowd.
Taken together with a sudden decline in weekly jobless claims to 397,000, and improvement in other employment data, an improving jobs market emerges out of the mist. They suggest an employment picture that has stopped deteriorating, is stabilizing, and beginning a modest upturn. These are economic conditions far better than the financial markets are currently discounting, and are consistent with the 2.0%-2.5% GDP growth rate that I have been sticking to all year.
At the beginning of the year I have been asserting that the economy was growing at a 2% rate, not 4%. Now I have to convince people that it is growing at 2%, not zero. This difference equates to about 300 points in the S&P 500.
Take this data, and throw it in with fading turmoil in Europe and a budget Supercommittee surprise, and you will have a springboard for the S&P 500 to break through upside resistance at the 200 day moving average.
?Economics is extremely useful as a form of employment for economists?, said noted Harvard economics professor, John Kenneth Galbraith.
I am taking my profit in the Euro (FXE) December $140 puts this morning, nailing the high of the day at $5.70, and clocking a stunning three day profit of 107%. This adds 5.63% to the year-to-date return for Macro Millionaire, taking us up to 46%. Non option players who bought the short Euro ETF (EUO) made 9.5%.
My net profit on the trade was $2.95. For the model $100,000 portfolio this works out to $5,310 ($2.95 X 100 X 18). And we made this return while keeping 76% of our money in cash, out of harm?s way.
This was a perfect trade in so many ways:
*For a start, I got a great entry point on top of a 10 cent rally in the Euro.
*The position was a great indirect ?RISK OFF? hedge for my sole remaining ?RISK ON? position in the (TBT). For every $1 I lost in the (TBT) since the Thursday high at $23.00, I made $2 on the Euro short.
*We got an assist in the bankruptcy of MF Global, which resulted in the liquidation of their entire $6.5 billion portfolio of Euro bonds, which put additional pressure on the European currency.
*We got a second assist from my friends at the Bank of Japan, who rushed to deflate the yen with a massive $130 billion round of intervention.
*I resisted the temptation to take a quickie 30% profit yesterday, believing that the trading community was caught badly off balance in their positioning, and that there was enough juice to take the Euro to my secondary target of $1.36.
*My friends at the People?s Bank of China told me they would take my advice and take down a big slug of any bond issue resulting from the European sovereign debt resolution. However, they said they would also take my advice and hedge out their Euro risk, making the trade currency neutral.
*I initially put on the trade expecting European Central Bank President, Mario Draghi, to cut interest rates tomorrow. With the Euro at $1.3630, I now don?t care if Mario has pasta al dente for lunch, a canole for desert, and sings O Solo Mio tomorrow. I can take my money and run at let the rest of the market run the overnight event risk. If Mario then fails to act tomorrow, I will simply resell the Euro higher up.
*We caught one of the sharpest moves in the history of the foreign exchange markets, some 5 cents in the Euro, in three trading days. You shouldn?t need to be told twice to cash in.
*No one ever got fired for taking a three day profit of 107%. Possession of the cash is 9/10ths of the law.
I know that some of you made more money on this trade than I did, because the $140 puts traded all the way down to $2.47 after the initial opening alert. No whining about not being able to get in this time. As they say down under ?Good on You!?
If you missed this trade for whatever reason, don?t chase it here. Another opportunity will come along. There are plenty of fish in the sea.
Yesterday, I wrote about the Nevadan wrinkle in the housing crisis where distressed homeowners are letting their horses go wild to make their mortgage payment. Now neighboring California is facing a Chihuahua glut, where evicted homeowners are handing over their pets to animal shelters. The diminutive Mexican canine enjoyed a boom in popularity in recent years, thanks to movies like Beverly Hills Chihuahua and Legally Blonde.? Celebrities, like Paris Hilton, have also helped promote the breed, flaunting one in front of the paparazzi. Animal shelters in the Land of Fruits and Nuts have been so overwhelmed they have had to ship the ultra-cute, but utterly useless animals to pounds as far away as Toronto. Will the unintended consequences of Greenspan?s low interest policy never end? Give the poor Chihuahua?s a break!
Thanks to the thousands of new subscribers that have poured into this service in recent months, I have been able to complete a major upgrade of my website at www.madhedgefundtrader.com . Now that the daily traffic is reaching astronomical proportions, it is time to join the big league of online financial services with an industrial strength website.
The new site offers vastly improved layout, design, and functionality. And according to my Dallas based designer, it is just plain purttier. Among the enhanced services are:
*There will be two levels of password access for paid subscribers.
*Current paid subscribers will have real time access to the online version of the entire newsletter for the first time. They will still be emailed the full daily letter to their personal addresses.
*Paid subscribers will also get access to a confidential page offering private news alerts.
*Subscriptions to my market beating Trade Alert Service will be available for the first time for $1,997 a year.
*The entire archives of Hedge Fund Radio are available for download.
*A new ?Luncheons? section offers tickets for sale with auto confirms.
*The subscription and renewal process has been fully automated.
*The public will still have free access to the less market sensitive research pieces.
My apologies to regular viewers, who have been faced with a website that has been going up and down like a yoyo during the past week. Paid subscribers should be receiving the new passwords by email in coming days.
I have put together this website with spit and bailing wire over the past four years, at it at long last time to bring in professional help. This involves migrating a dozen non-compatible databases to the new site, which I can tell you is a headache and a half. Thank you for your support and I hope you like the new site.
Your Loyal Servant,
John Thomas.
