"When you run in debt, you give to another power over your liberty,? said Benjamin Franklin.
The abject failure of yesterday?s seven year Treasury bond auction and the crash that ensued has enabled the year-to-date return for my Macro Millionaire trade mentoring program to soar to a new all-time high of 43%. The 30 year bond plunged a staggering six points from the previous day?s high. Yields on ten year government paper have ratcheted up 50 basis points in just a few weeks, from 1.80% to 2.38%.
It?s a good thing that my only position going into the collapse was a major holding in the (TBT), an ETF that profits most from exactly this type of scenario, which rocketed some 10% today. Using the leverage embedded in this popular ETF, some 40% of our capital is devoted to short Treasury bond positions. This move comes on the heels of my October 8 call to cover all shorts in ?RISK ON? assets, including stocks, commodities, oil, and foreign currencies, with a major fall rallies imminent.
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 . Those who currently subscribe to just the newsletter and want to upgrade to Macro Millionaire to get my trade alerts can get full credit for the remainder of their subscription. 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.
The financial markets exploded to the upside overnight with news of Europe?s triple resolution of their sovereign debt crisis. As I predicted in my letter only yesterday, the move has caught traders by surprise, enabling markets to break out to the upside from the recent ranges, and give this fall rally longer legs than most expect.
As I write this piece, the (SPX) futures have popped to 1275, a new high for this move. Ten year Treasury yields have ratcheted back up to 2.26%, and the dollar is in full flight against a basket of currencies. Here are the details in summary:
*Capital for the European Financial Stability Fund will be increased to ?1 trillion.
*Greek debt will be written down 50%, halving the country?s debt to GDP ratio in one fell swoop.
*European bank capital ratios must be raised from 6% to 9% by June next year.
The package raises more questions than it answers. It delivers less than what the optimists were hoping for, but more than what the pessimists dreaded. You really have to wonder where banks are going to raise $120 billion in private capital in this environment. As a result, Asian sovereign debt funds will probably end up owning large stakes in European banks at fabulous discount prices.
While the cut in Greece?s debt load to only 120% of GDP is welcome, it offers no clear path on how the beleaguered country is going to cope with the heavy burden of the remaining balance. Of course, the deal is a total home run for the Chinese, who I have been advising to load up on as much Greek debt as possible at 30 cents on the dollar. This is only the first chapter in what is likely to become an epic restructuring of the European economy and financial system. Much work lies ahead, and many more gut churning headlines lie in our future.
The move has triggered a ?feel good? rally for the European currency, which has soared to the low $1.41?s. Herein lies the opportunity. Wait for this rally to exhaust itself, then sell the daylights out of the Euro. They next move on European interest rates has to be down. Now that the can has been kicked down the road on the debt problem the European Central Bank can now focus on the distressed economy.
With outgoing ECB president no longer around to justify his disastrous rate hikes in the first half of the year, the new president, the Italian Central banker Mario Draghi, has a free hand to initiate a rapid unwind. At the end of the day, interest rate differentials are the only thing that foreign exchange traders really care about, and such a move would pave the way for a dramatic weakening of the Euro against the dollar. Today?s bail out gives us a great entry point for such a trade.
For those who play in option land, the no brainer here is to buy the $1.40 puts on the (FXE) three months out. ETF investors should start nibbling on the (EUO), the double leveraged short play on the Euro. And to show how earthshaking this conclusion is, my house was at the epicenter of a 3.6 magnitude earthquake that just caused it to literally jump off its foundations with a giant roar.
Draghi: To Cut or Not to Cut, That is the Question
My friend, Charles Githler, organizer of the hugely successful Money Shows, graciously invited me to appear as a keynote speaker at the recent Las Vegas event. You will never find more talent, useful tools, and new points of view under one roof than any other confab of this kind. And best of all, they are free to attend.
After my speech, I made a series of instructional videos for new, prospective investors on how to make money in these incredibly difficult and contentious markets. I have listed three titles below along with their links. If long term followers and friends want to have a laugh and see how much this business has aged me, please take a look. They run about ten minutes each. For a calendar of the next Money Show nearest you, please click here.
Video 1: How to Trade Like a Hedge Fund Manager - Play Video
Video 2: 3 Global ETFs Worth Watching - Play Video
Video 3: The Most Common Investor Mistake - Play Video
If you have any questions about the videos, please don't hesitate to contact me.
Thanks again,
?A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain,? said the American poet laureate, Robert Frost.
I am writing TO you from my first class seat on Singapore Airlines, winging my way the 12 hours from Hong Kong to San Francisco. While most airlines jettisoned their first class sections years ago as a cost saving measure, Singapore carried on to maintain its reputation as the best airline in the world. The small section at the front of the bus is populated with a few Chinese billionaires, Taipans, and CEO?s flying at shareholder expense. They are transported in untold luxury with a fully flat bed almost the size of a regular single and a 24 inch high HDTV with a vast movie library. The plane carries double the number of stewardesses on American airliners.
They say a change is as good as a vacation, and this trip certainly fit the bill. I covered 23,000 miles in 17 days, which is really a trip around the world, touching down in New Zealand, Australia, Singapore, Hong Kong, and mainland China. The people I met were fascinating, and included a Maori chieftain, an Australian media mogul, gold miners from Queensland, sheep farmers in New South Wales, Chinese bankers, a Singaporean F-5 combat pilot, and senior officials from the People?s Republic of China. I even managed to track down a Chinese renegade rare earth miner on his day off, and the good news is that he didn?t shoot me, as long as I didn?t take pictures.
I heard some amazing stories and gained some first class intelligence, which I will translate into killer trading opportunities. I will be feeding these out as fast as these old, arthritic and scarred fingers can type them. Alas, I can only knock out about 1,500 words a day before it starts to turn to mush and my back gives out. I will be publishing a series of Pacific country reports over the next four Fridays.
The market? Ohhhh, you want me to talk about the market! Let me give you my quickie read here. My fall rally kicked in right on schedule, my call to cover all shorts coming within a point of the actual bottom in the (SPX). This is the closest I have ever come picking an absolute bottom. After that, it was off to the races with a ?RISK ON? trade with a vengeance. Corporate earnings are coming in much better than anticipated.
This has triggered a buying stampede for all risk assets as hedge fund traders rush to cover shorts and conventional managers frenetically readjust substantial underweight positions they only recently achieved. This has truly been the year from hell, and the word is that 40% of active managers are underperforming their benchmarks by 250 basis points or more.
Having discounted a double dip recession that was never going to happen, Mr. Market is now backing that possibility out again. The net result of all this was to take the S&P 500 from a 1,075 bottom up 17% to just short of my target at the 200 day moving average of 1,275. The entire script unfolded exactly as I expected. Followers of my Macro Millionaire trading service got the memo in my October 8 webinar, The Short Game is Over, and have been laughing all the way to the bank since then. Their year to trade performance now stands at a new high of 42.13%.
The easy money in this move has been made, and we are now bumping up against 200 day moving averages across all equity classes. Expect a prolonged battle to be fought here. So this is not a great place to initiate new positions. Bonds have died, but yields have not risen as much as I would have thought, given the ebullience of the price action.
The (TBT) is the sole position I currently have in my portfolio, and it has only picked up a measly 23% in this move. I would have expected more.
Expect the rally to fail several times at these levels before they make further progress. There is a lot of hot money to flush out here before they can mount a break out to the upside. Take a look at the chart for crude oil and the (USO), which is telling you that this risk on will have longer legs than most expect. What will be the trigger? Surprise progress on the European sovereign debt crisis, or even a deliberate kicking of the can down the road.
One additional note. You have noticed some modifications to the website. No, it has not had a sex change operation to get even with me for my absence. I am launching a major upgrade, redesign, and improvement in functionality, plowing in new capital that thousands of new subscribers have afforded me. The final version will be up and running in a couple of days. But like all great birthing events, this was has not without surprises, difficulties, and setbacks.
Rather than willingly give up its toys to the new kid on the block, our hosting service has chosen to break them instead. In addition, moving over two War and Peace?s on the Internet, the extent of the content I have written over the past four years, is no piece of cake. It took Tolstoy seven years just to write it once, but that was in long hand with a quill pen, so I?ll forgive the old man.
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.
Featured Trades: (SPY), (IWM), (RSX), (EEM), (CU), (GLD), (JNK), (TBT), (TLT), (GLD), (USO), (FXA), (FXE), (UUP), (VIX)
1) Market Carnage Revisited. I have never seen a single word cost me so much money. That word would be 'significant', the word that the Federal Reserve added to the language in its recent release about the current risks to the economy. To the market, this translates into down 1,000 points on the Dow. For copper it means shedding 50 cents per pound. And for the (TBT) it converts into down five points. Ouch, and double ouch!!
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The newsletter business is a great one to be in, except when it isn't. My workload is so staggering that when the slightest thing goes wrong, it all falls apart like a house of cards. Right when the Dow had plunged 500 points and NASDAQ was bleeding 100 points, the price action melted my computer. I quickly batted out a backup letter for Friday, which is why I was talking about the wonderful world of ETF's when we were facing Armageddon. I then spent the rest of the afternoon using my best Hindi trying to get Dell to fix my machines from Bangalore.
I called the market action going into the Fed release dead on, the S&P rallying all the way up to a healthy 1,220. Over the past six weeks, the 1200 handle has been as rare as a sighting of a blue footed boobie in the middle of the Sahara Desert. I was also accurate in forecasting a post statement rally. Only my timing was off. Instead of giving me a whole day with which I could pound all asset classes at the upper end of their recent rallies, especially stocks, oil, and the euro, the spurt lasted all of 27 seconds. That is how long it took the big hedge funds to mobilize billions of dollars with which to decimate the indexes.
It was a perfect 'RISK OFF' day. Shares suffered their worst week in three years. Crude splashed $9. The industrial metals were shoveled under the carpet. Junk went back to the dump. The Euro was slashed four cents; the Ausie dollar touched 96 cents, down a whopping 15 cents since July. All of a sudden Uncle Buck was everybody's favorite relative. Even Apple was down $20. My goodness!
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The carnage was global in nature. Commodity based countries and their currencies took the biggest hit, with Russia (RSX) down 11% in a single day. Emerging markets (EEM) outperformed developed ones in the downside, as investors suddenly grew homesick and took their money with them. It seems that an economy downshifting from 6% growth to zero generates a more dramatic trip south than one slowing from 2% to zero. This is the usual pattern. Looking at the charts, the emerging markets are already deep into bear market territory.
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Somebody has got this all completely wrong. I have never seen a greater disconnect between the financial markets and the real economy, which the data releases show is continuing to improve. Even on takedown Thursday, the leading economic indicators for August showed a surprisingly strong 0.3%.
This all means that October is shaping up to be a very interesting month, as one of two things has to happen. The data will catch up with reality and show a dramatic decline with the September releases, in which case the recent collapse of asset prices has been fully justified. Or the data continues their modest rate of improvement, meaning that traders have just laid a huge egg. That would trigger a huge short covering rally that could take us into year end, possibly tacking on up to 27% in the S&P 500.
I vote for the latter. Watch those weekly jobless claims, which come out every.? Thursday morning at 9:30 EST!
The good news is that I finally got my computer working. Now, if I can only get everything to shift 90 degrees to the right. Maybe I'm supposed to lie on my side? And, oh, I think that I'm engaged to someone in India. Abhishek in technical support seemed like such a wonderful person, I thought why not.
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Suddenly, Everyone Loves Uncle Buck
'If you're really long term, you should be really long term scared. At the end of the day, long term risk management is what you should be thinking about. '?Long term' meaning only being bullish is ridiculous. You should be managing risk aggressively,' said Keith McCullough of Hedgeye Risk Management.
Featured Trades: (DO THE RATINGS AGENCIES NEED NEW TYPISTS?),
(TLT), (BAC), (C)
3) Do the Ratings Agencies Need New Typists? If there were ever a deep lagging indicator, it is a downgrade by a ratings agency. While the housing market peaked in 2006, these despised institutions didn't get around to marking paper down from triple 'A' to junk until four years later.
Then in August, Standard and Poor's downgraded US Treasury bonds. Since then, they have gone up like a rocket, with the yield on the ten year bond plunging from 2.8% to an eye popping 1.86%. Could it be that this is a simple typo? Did an underpaid and errant typist confuse the word 'down' for 'up'?
Today, I hear that Moody's downgraded the major banks, including Bank of America (BAC) and Citigroup (C). I have since been flooded with emails from readers asking if they should be going short banks here. I respond that it's too late, that they're an hour late and a dollar short, and that they missed the boat. Shorting (BAC) is something you do at $12, as I recommended on national TV last spring, not here at $6. The risk reward ratio here is not good.
Part of the reason behind the Moody's move is that they have completely lost faith in the American political system. I totally sympathize with them. The Republicans now have a vested interest in crashing the economy so they can blame it on Obama and win the presidency.
So there is zero chance of a TARP 2 getting through the congress in the next financial crisis and saving the banks once again. Tough luck if you and I are unwilling passengers in this demolition derby. Can you blame investors for throwing up their hands in disgust and walking away from equities, as they appear to be doing in large numbers?
Here is another way to look at the banks. Much of the bank meltdown that has occurred since February is due to the enormous Treasury bond rally. The incredibly flat yield curve that has resulted, squeezes the free lunch that the banks have been relying on to recapitalize themselves. So shorting banks here is the risk equivalent of initiating new longs in bonds at these levels. Neither is a good idea.
Does Moody's Need a New Typist?
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No Matter What Happens, Blame It On Obama
'The next phase in the development of China is the empowerment of the consumer. That is happening as we speak. The Chinese consumer is in much better shape than the American consumer,' said Daniel J. Arbess of Xerion Capital Partners.
