Featured Trades: (IS THE SECOND SHOE ABOUT TO DROP ON THE EURO?),
(FXE), (FXF)
1) Is the Second Shoe About to Drop on the Euro? There were two pieces of news today that enabled the Euro (FXE) to benefit from a much needed relief rally. First, the German Supreme Court ruled in favor of the legality of the Greek bailout package. Then the Italian Senate approved a $70 billion austerity package that is a prerequisite for the rolling over of the country's existing debt.
With news this dramatic, you would expect the Euro to launch a major rally of three, four, or even five cents. But the best the damaged and suspect currency managed was a feeble one cent rally.
It is an old trader's nostrum that if you throw good news on a stock and it fails to go up, then you sell it. The European currency is starting to meet that qualification.
It's not like there is a shortage of reasons to dump the Euro. The sovereign debt crisis and the conjoined banking crisis have sent Europe's economy into a tailspin. GDP forecasts for the continent are rapidly crash landing down to zero.
It is only a matter of time before European Central Bank President Jean Claude Trichet admits that he committed a major policy error by raising interest rates for the Euro twice in the first half of the year. The inflationary fears that prompted him to stumble badly have proven to be a phantom. Oil alone has fallen by $25 since the last rate hike, and many other key commodities are now showing losses for the year.
The next move on interest rates has to be down, possibly as far as to zero. American interest rates are already at zero and can't go any lower. This is all hugely Euro negative and dollar positive.
Now that the Swiss franc (FXF) is out of the picture as a viable short, hedge fund traders are trolling for fresh meat to kill. Newly invigorated by the overnight fortune they made on the Swiss franc, the focus now has to be shifting to the Euro.
The break of the 50 moving average on the charts is signaling to technicians that we may be about to break out of the $1.40-$1.46 range that has prevailed all year to a new, lower $1.36-$1.40 range. Demolish that, and we could be eventually headed towards $1.17, and even parity against the buck.
What will be the headline that finally blows down the European house of cards? The inevitable default of Greece, which after looking at the charts below, could happen at any time, with or without a bailout.
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Brussels, We Have a Problem
'Go where the growth is, and where the debt isn't, and that is emerging markets,' said David Donabedian, the chief investment officer of Atlantic Trust Co., the private wealth management arm of Invesco.
'The Unites States government is in the business of securities manipulation,' said Jim Grant of the research boutique Interest Rate Observer.
Featured Trades: (AUGUST NONFARM PAYROLL TORPEDOES MARKET RALLY)
2) August Nonfarm Payroll Torpedoes Market Rally. Economist and market strategists alike were stunned by the August nonfarm payroll report showing zero job growth. The headline unemployment rate stayed unchanged at 9.1%.
The reports for June and July were revised down a gut punching 58,000. Employers obviously reacted to the damage the Tea Party was threatening to inflict on the global economy with a Treasury bond default by instituting an immediate hiring freeze.
The figures were further muddled by conflicting cross currents. The Verizon strike cut 45,000 from the reported total. At the same time, a return of state employees to work in Minnesota, which had been shut down over a budget impasse, boosted the figures by 22,000.
Health care lost 30,000 workers, government 17,000, and construction 5000. Professional and business services gained 28,000 jobs. What is really frightening here is that only 4,700 temps were hired, which normally lead the recovery stage in the economic cycle.
Risk assets everywhere fled in terror, while a monster rally launched in the bond markets. Yields for the ten year Treasury bond reached a new intraday low in the mid 1.90%'s, while the 30 year was seen well below $3.50%.
For me, the real stunner in the report was the revision to July government job losses up to an amazing 71,000. Clearly what is happening here is that as short term government stimulus programs run out, public workers are being let go in record numbers.
Congress deadlocked and the House is ideologically handcuffed, so there is no chance that any of these job creating programs will be renewed. This is going to get a lot worse before it gets better.
Will this cause me to lower my 2% GDP forecast for 2011? I don't think so. But it will force some permabulls, paid cheerleaders, and Kool-Aide drinkers to revise down their own overoptimistic targets from 4% and 3% down to my own more realistic and greatly subdued figure. Hint: This is not good for stock prices.
What organizations are currently advertising the greatest number of job openings? The US Air Force, at 134,000, followed by Taco Bell, the National Guard, and Staples. Looks like you better sharpen up your target practice or your Spanish if you want that paycheck bad enough.
Oops. There Goes the Economy
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I Think I Have a Job in My Sights
'Patience is not a word that is fixated on two year election cycles. China has a five year plan. We have a five minute plan,' said Steven Roach, former non-executive chairman of Morgan Stanley Asia.
Featured Trades: (ITCHING TO GET INTO CORN),
(CORN), (JJG), (DBA), (POT), (MOS), (AGU), (CAT), (DE)
2) Itching to Get Into Corn. Long term readers of this letter know that I have long been banging away on the fact that the world is making people faster than the food to feed them. According to the World Bank, the world's population is expected to jump 2 billion, from 7 billion to 9 billion in the next 40 years. Half of that increase will come in the arid, food deficient Islamic world.
This is happing when the rate of increase of the world's agricultural productive capacity is rapidly declining. Ancient aquifers everywhere are falling, thanks to 'water mining', especially in India, Saudi Arabia, and the American mid-west. Insects have become immune to modern pesticides. The dividends of the 1960's 'green revolution' have reached diminishing returns.
The soil in many farmlands, especially in emerging markets, have become depleted, thanks to the overuse of advanced fertilizers, often contaminating local water supplies. Much food is still lost to waste in countries like India, where a primitive distribution and storage system see up to one third of its annual crop eaten by rats or rotting in silos. Oh, and has anyone heard of global warming?
The American corn crop this year has been particular interest. Huge rains hit during the spring and delayed seeding. Then a draught struck in the summer, with some states, like Texas, receiving no rain at all. Yields have plummeted. Approximately 86 million acres are planted with corn this year, producing some 1.299 billion bushels. But in recent weeks, yield estimates have been shrunk from 152.8 bushels per acre down to 151 bushels, and some farmers tell me that the 140's are in the cards.
Trading corn has been a nightmare this year, thanks to the Department of Agriculture, which has published enormous swings in crop expectations. China has thrown the fat on the fire, stepping in out of nowhere with enormous purchases of this essential foodstuff to deal with draught conditions back home.
That has created a roller coaster price for corn, with both limit up and down moves seen since January. I was hoping that during the August financial crisis, we would get a nice 30% pullback and a great entry point. It was not to be. After only a 6% hickey, it was off to the races again. The great thing about the ags in general is that they will move independent of all other asset classes, making them a great diversification play. This year has been no different.
As I write this, we are backing off of new multiyear highs at $7.75 a bushel. At least $9 a bushel seems to be in our immediate future, and $10 could be achieved with a spike. Strong corn prices have been pulling up other food prices as well, such as wheat and soybeans, and next time you buy a cup of coffee, you better not look at the price.
This all paints a rosy picture for the entire agricultural space. The corn ETF (CORN) is an easy vehicle to play this, if we ever get another pullback. Wheat and soybeans can be bought through the Chicago futures. Another good trading vehicle is the iPath Dow Jones-AIG Grains Total Return Sub index ETF (JJG), a basket of several grains. The PS DB Multi sector Agriculture ETF (DBA) also works also works. The fertilizer and seed companies should be bought, like Potash (POT), Mosaic (MOS), and Agrium (AGU). Equipment makers Caterpillar (CAT) and John Deere (DE) also have plenty of potential.
And the nice thing about food trades is that if they go wrong, you can always take delivery and east your positions. Anyone for a refrigerated rail car of pork bellies?
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Can't Get Enough Corn
Featured Trades: (WHY I'M FLIPPING TO THE SHORT SIDE), (BAC)
1) Why I'm Flipping to the Short Side. We have had a nice run here on (BAC), posting a profit of 20% in just one week. The stock market is now at the top end of a one month range, so I am going to cut back some risk. The big gainers are always the first to go on the chopping block.
We have had a great 130 point rally off of the August 8 capitulation low. The market is getting artificially ramped up to overbought levels by month end window dressing, as portfolio seek to hide the damage caused by the worst month in the equity market in ten years.
Once we get through month end, I don't see any positive drivers for the market until Q3 corporate earnings releases begin at the end of September, or the FOMC meeting takes place on September 20-21, when some form of QE3 may be announced. An outlier would be a surprisingly good August nonfarm payroll report, to be released on Friday, September 2. This is an outlier that is way out there.
In a perfect world, we'll catch the next downdraft, take profits on our shorts, double up on our longs, and laugh all the way to the bank. Ah, yes, that perfect world. Something tells me that it will be harder than that.
The Justice Department's effort to block the AT&T and T-Mobile merger is definitely throwing a wet blanket on the market. The 3 cent pop in the Swiss franc this morning is also telling us that another round of 'RISK OFF' may be just around the corner.
Finally, I received a blizzard of emails from my Houston readers in the oil patch telling me 'great trade' on my recommendation to go short oil yesterday. They should know.
And for good measure, we are one headline away from another tape bomb, the next chapter in the unfolding disaster in Europe.
Add all this up, and it tells me to strap on more downside exposure. Hasta la vista Bank of America. Catch you again on the downswing. Well done Macro Millionaires! You have just added 100 basis points to your 2011 total performance!
In a perfect world, we'll catch the next downdraft in the markets, take profits on our shorts, double up on our longs, and laugh all the way to the bank. Ah, yes, that perfect world. Something tells me that it will be harder than that.
For these 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.
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Flipping to the Short Side for a Trade
Featured Trades: (CONSUMERS ARE TELLING 'PORKY PIES')
2) Consumers are Telling Porky Pies. When I was working on the trading desk at the London office of Morgan Stanley I became familiar with the particular argot they speak in the East End, otherwise known as 'cockney'. A form a slang originally developed to keep bobbies guessing their true intentions, cockney can be as puzzling to outsiders a Greek hieroglyphics. Just in case you did not grow up in Spitalfields, Whitechapel, or heaven forbid, Bethnal Green, I'll give you a hint about the true meaning of 'porky pies,' that it rhymes with 'lies.'
The porky pies I am talking about are the ones consumers have been telling pollster's about their sentiment towards the economy. They have been informing both private and government opinion collectors that they are worried about the future, they are defensive in their investments, at that their spending plans are modest at best. It seems that all they want to buy are bonds.
Yet, almost every economic data point we have received over the past month has shown a modestly improving economy growing at a rate of around 2%. Only just this morning, July factory orders came in at a healthy 2.4%, against only 0.4% in June. Apparently consumers are telling anyone who asks that they hate their future, and then run out and buy a new car, a refrigerator, or a big screen TV.
I spoke to several local car dealers yesterday. To a man they told me that sales were good, now that the 2012 models are out. Only the hybrid Chevy Volt has been a complete disaster. After 40 years in the business, I have learned that when facts conflict with opinion, go with the facts every time.
This is not the first time that the public has told fibs to opinion gatherers. You often see it in politics, where individuals express their deep concern over the budget deficit and the national debt, but won't reveal a single spending program they are willing to cut them.
What this means is that the economy is better shape than the markets are currently discounting. They have discounted a recession that isn't going to happen, and that the surprise move in risk assets this fall will be to the upside. The double dip is nothing more than a great way to eat ice cream.
I think that the carnage we witnessed in August was a onetime only panic induced by the Tea Party's engineered near default on Treasury bonds. As that event passes into the rear view mirror, and investors look at how far prices have fallen, we might see a flood of money that pours into risk assets everywhere.
Nothing More Than a Fantasy?
Featured Trades: (THE GREEK ASSIST ON MY SWISS FRANC SHORT), (FXF)
1) The Greek Assist on My Swiss Franc Short. Greece's Eurobank and Alpha Bank have agreed to merge to create the country's largest financial institution. The new entity will have assets of over $217 billion with 2,000 branches. Eurobank had been one of the Greek banks that failed the European stress tests earlier this year.
Private investors from Qatar were major participants in the transaction, helping to recapitalize the new institution. This is just the opening shot in what promises to be a massive consolidation of the European banking system.
The merger triggered an eye popping 14% gain in the Greek stock market, and shined some sunlight on the Euro, which rose a penny against the dollar. It set the cat among the pigeons with the 'RISK OFF' crowd, sending gold and Treasury bonds down substantially.
It also pared another two cents off the Swiss franc. Since I strapped on my puts on the Swiss currency Friday morning, they have rocketed by 67%. Wait for another round of 'RISK ON' in in September to take these puts higher.
For these 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.
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Thanks for the Assist, Zorba!
Featured Trades: (SELL OIL FOR A STOCK HEDGE), (USO)
2) Sell Oil for a Stock Hedge. Over the last month, asset classes everywhere have downshifted to new, lower trading ranges, reflecting the very rapid chopping of GDP growth forecasts for 2011 from 4% to 2%. Oil is no exception.
I think the new range for Texas tea rises from the $75 low we put in on the August 8th melt down day to a high of $90. So I am going to use today's $3 rally in crude triggered by hurricane Irene to get some downside exposure through buying puts in the oil ETF (USO). There is no sign of any disruption of oil supplies or refining capacity whatsoever.
Keep in mind that oil is one of the most volatile financial instruments out there right now. It is also a great lead contract for all asset classes. In one week this month we saw two $12 moves up and down. This is largely due to high frequency, or algorithmic capital pouring into the area which has been driving traditional pit traders to despair.
Oil has its own particular problems. The end of the Libyan civil war is likely to bring 1.8 million barrels a day on to the market within 18 months. I happen to know that the western oil majors were not especially happy with the terms the Khadafy regime extracted from them. They were marginally profitable at best, and as we now know, were high risk.
A grateful new regime is likely to have different ideas. Not only will contract terms be more generous, production could be quickly ramped up to 3 million barrels a day, which the country has always been capable of producing. The offshore area in the Gulf of Sidra has huge potential, but has never been tapped. Capital demands for reconstruction, infrastructure, and deferred maintenance are enormous, so the need for new revenues is great. For the rest of us, this could all lead to lower prices.
Oil puts would be a nice hedge for the rest of your long positions as well. I may be early here by a few bucks. But when 'RISK OFF' hits again, oil will turn so fast that it will cost you $3 to get in. It could hit $80 in a heartbeat, leading to a potential double in the puts.
The only way you could lose money here is for the 'RISK ON' trade to continue, and for equities to move up in a straight line every day for the foreseeable future. That is something that I am happy to bet against. The markets are anything but finished with inflicting new tortures upon us, and September promises to be another volatile month.
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The Market is Anything But Finished with Us