Featured Trades: (THE STOCK MELT UP THAT WAS), (SPX)
2) The Stock Melt Up That Was. The first half of 2011 went out with a bang last week. The S&P 500 delivered an awesome 72 point run, its best performance in two years. After threatening the 200 day moving average three times, the index predictably bounced hard. What really left traders with jaws dropped was the way the (SPX) blew through the 25 day moving average at 1,317 after only an hour of indecision.
It was a brutal week for hedge funds. I caught several managers on the phone after the close, on their way to the Hamptons in their limos or to Florida on Netjets, and managed to get some color. As the street was positioned for Armageddon with the demise of QE2, everyone was caught short, so at least 50% of the move was short covering. Another 25% came from month end, quarter end, and half end window dressing. The final 25% came from underweight mutual funds looking to modestly top up holdings. Everyone rushed to buy their favorites, which is why technology was the big winner.
The vote by the Greek Parliament provided the starting gun and delivered the weak dollar that added the fat to the fire. Modestly improving minor data releases that are usually ignored, like the Chicago purchasing managers index and the ISM, provided the justification to gun the market further. What was truly amazing was to see the love fest spill over into July 1 when new quarter profit taking was expected. Nothing substantial on the economic front came into play. Call it a 'faith based' rally.
Notice that the buying was entirely professional, on low volume with the retail investor completely absent. This reflects the sad state of affairs that the American stock markets have fallen into. After the proprietary desks, hedge funds, and high frequency traders have had their fill, there is nothing left for anyone else. Although the (SPX) is nominally up 7% during the first six months of 2011, the entire index performance came only during the last three days of the half. After you take out management fees, operating and marketing expenses, and other assorted rip offs, I would bet that the vast majority of mutual funds are either up low single digits, or are losing money this year.
What in effect has happened is that in a market that is going nowhere, we have flipped from the bid to the offered side. The spread works out to be about 100 S&P 500 points. You would be mad to chase the long side here. I think the next stock trade that is setting up will be from the short side, sometime after the best of the Q2 earnings reports are out in mid-July.
-
-
This Was the 'BUY' Signal
Featured Trades: (PLATINUM), (PPLT), (GOLD)
3) Time for Platinum to Play Catch Up. For those of you who have been romancing gold, you should check out platinum (PPLT), her younger, racier, and better looking sister who wears the low riders. The white metal usually outperforms gold in bull markets for precious metals, but this year has fallen 3.4%, compared to a 4.7% gain for the barbaric relic. No doubt the 'double dip' threat to the economy is having an impact.
While gold is just shy of its all-time high, Platinum has to rise a further 30% from here just to match its 2008 high of $2,200 an ounce, suggesting that some catch up play is in order. I have always been puzzled by the fact that platinum is 30 times more rare than gold, but at $1,720 an ounce, trades at a mere 15% premium to the yellow metal. And unlike gold, platinum has a wide array of actual industrial uses.
You have to refine a staggering 10 tons of ore to come up with a single ounce of platinum. The bulk of the world's 210 tons in annual production comes from only four large mines, 80% of it in South Africa, and another 10% in the old Soviet Union. All of these mines peaked in the seventies and eighties, and have been on a downward slide since then.
That overdependence could lead to sudden and dramatic price spikes if any of these are taken out by unexpected floods, strikes, nationalizations, or political unrest. While no gold is consumed, 50% of platinum production is soaked up by industrial demand, mostly by the auto industry for catalytic converters.
The Japanese earthquake and tsunami knocked out a good portion of the world's car production, hence the unexpected weakness this year. But Japanese recent industrial production data show that we are now witnessing the second leg of the 'V', the up one, and that should lead to a sudden lurch upward in platinum demand. That could take US car production alone from 13 million units a year to 16 million by 2015. That's a lot of catalytic converters. That assumes that 14.5 million American cars a year are scrapped, requiring almost no new net demand. Surprises will be to the upside.
Jewelry demand for platinum, 95% of which comes from Japan, is also strong, as the global pandemic of gold fever spreads to other precious metals. You can trade Platinum futures on the New York Mercantile Exchange, where one contract gets you exposure to 50 ounces of platinum worth $86,000.
For those who like to get physical, the US mint issued Platinum eagles from 1997-2008 in nominal denominations of $100 (one ounce), $50 (? ounce), $25 (1/4 ounce) and $10 (1/10th ounce) denominations. Stock traders should look at picking up the ETF (PPLT) on the next substantial dip.
-
-
Check Out Gold's Racier Sister
'Money goes where money is treated best,' said hedge fund legend Leon Cooperman of Omega advisors.
Featured Trades: (THE GREAT GRAIN MASSACRE), (CORN), (WHEAT), (JJG), (DBA)
2) The Great Grain Market Massacre. Grain prices were slaughtered today in the wake of a bombshell of a report from the US Department of Agricultural showing that plantings were much larger than expected. Corn and wheat were limit down, and the associated fertilizer and equipment stocks were a shambles.
Corn took the biggest hit, with the government seeing acreage rising from an expected 90.76 million acres to a stunning 92.28 million acres. Of the open interest of 500,000 contracts in December corn futures contracts, 200,000 were for sale at market down 10%. Synthetic instruments were trading at levels indicating at least a further 5% decline tomorrow.
The ags have been regular earners for me over the years. I caught a double a year ago in wheat, just as the Russian fires were getting started. Except for a few long plays in January, I have been largely absent from the space this year.
However, the long term fundamentals in favor of a bull market are still in force. The world is making people faster than the food to feed them, with the global population expected to rise by 2 billion to 9 billion by 2050. That works out to 175,000 new consumers of food a day.
While today's crash certainly makes the grains more attractive, we are not there yet. Wait for the dust to settle from this current move before contemplating a buy.
Do I hear a Bid?
Featured Trades: (EQUITIES-WATCH OUT FOR THE CHOP), (SPX), (VIX)
3) Equities-Watch Out for the Chop. One day back from vacation and I am faced with the mother of all window dressing efforts. Not only is it month end, but quarter end and half end as well. That was enough to cause a 58 point melt up, recovering half the loss since the 'RISK OFF' trade started at the end of April. In an instant, the glass has gone from half empty to half full, with the operational word being 'half'.
Suddenly, the Glass Has Gone from Half Empty to Half Full
-
Never mind that the volume is low. With retail investors scared out of the market long ago, only hedge funds and high frequency traders remain. Do you feel like taking them on? I think not.
In fact, we got a textbook correction in a longer term secular bull market. Look at the chart of the S&P 500 below, and after we pierced the 50 day moving average, we tickled to 200 day moving average three times and then bounced hard. The biggest drawdown amounted to just 8.3% from the top. Also helping is that the Q2 earning period starts on June 11 and is expected to deliver decent results, although not as good as in quarters past.
With QE2 ending today, sucking some $5 billion a day of Federal Reserve bond buying a day out of the market, many were expecting worse. But the massive liquidity creating by QE 1 & 2 is still sloshing around the system. Interest rates are at zero. The multiple for the S&P 500 is 13, compared to an historic average of 15 X, and 17X the last time interest rates were this low.
A big 2008 style collapse was never in the cards. This is what the volatility index has been screaming at you trading in the lowly teens, and peaking out at only $24.
I don't think that we have entered a great new bull market. The confidence is just not there. Nor has there been any improvement in the economic data. Only this morning, weekly jobless claims dropped a mere 1,000 to 428,000, its eighth week in a rising trend.
What has happened is that we have defined the summer trading range for the market of 1,250-1,350. Expect continued minimal volume, instant reversals, and no clear trends. This will continue until the economic data says otherwise. It will be enough to make you tear your hair out. Think of it as a summer of chop. Trade this market, but only if you dare.
-
-
-
Watch Out for the Chop
Featured Trades: (ITS OFF TO THE RACERS FOR NATURAL GAS)
1) It's Off to the Races for Natural Gas. Name one of the best performing assets since the 'RISK OFF' trade started and it would have to be natural gas. You may recall my waxing bullish on this simple molecule in my piece seven weeks ago (click here for 'Something is Bubbling in Natural Gas'). Since then, natural gas has rocketed by 30%.
My call then was to wait for the cold summer that the weather models were then predicting to crater this clean burning fuel and load up on the cheap. It seems that the weather models are never right. Instead, The US East Coast is suffering a broiling summer, and it has been off to the races for natural gas.
There have been other structural developments that have helped boost prices for CH4. With oil prices over $100 a barrel, the integrated majors are diverting rigs to new onshore oil development where the huge profits are, instead of using them to extract more underpriced gas. So gas rig counts are down, and industry insiders don't expect an upturn until gas gets up to $7-$8/BTU, up from the current $4.85. This is limiting new supplies coming on stream from shale gas unlocked by the new 'fracking' technologies.
On top of that, an increasing number of utilities are taking advantage of low gas prices to switch over from coal. Others are making the change purely for environmental reasons, as natural gas produces only half the CO2 emissions and none of the NO2 or SO3 when compared to oil fired plants. The last coal fired plant in California was recently closed, where utilities like PG&E (PGE) are racing to obtain 30% of their power from alternatives by 2020. This is why the International Energy Agency expects American natural gas demand to increase by 50% over the next five years.
What's more, traders no longer have to fear weather spikes from gas prices, like the hurricanes of the past, as so much of the new gas supplies are coming from onshore. Very little new gas now comes from the Gulf of Mexico when compared to past years.
Longer term, the 800 pound gorilla for this market is the prospect of exports to Asia, especially energy hungry China. They haven't started yet as the infrastructure is not in place, but it is under construction. When that happens you can expect the crude/natural gas price gap to disappear. Gas currently sells for 20% of the price of crude on a BTU basis.
How to play it? Don't touch the ETF (UNG) which has one of the worst tracking errors in the industry. Instead, invest in individual producers, equipment suppliers, and pipeline companies, like Chesapeake Energy (CHK), Devon Energy (DVN), Cheniere Energy (LNG), and Southwestern Energy (SWN).
-
-
-
-
Featured Trades: (WHY THE BANKS ARE TRADING LIKE GRIM DEATH), (BAC), (WFC), (XLF)
2) Why the Banks Are Trading Like Grim Death. You may recall that I went on national television on April 22, proclaiming that Bank of America stock was a screaming short, then trading at $12.50 (click here for the link to the Fox Business News piece ). My logic was that another leg down in the residential real estate market would eat up a further dollop of bank capital, triggering a secondary banking crisis. Making that call spitting distance from the bank's California headquarters generated much local controversy.
What a difference seven weeks makes. Today, (BAC) hit a new two year low, plunging 16% since my April call, and 40% since the beleaguered bank's February peak. The action today is being driven by capitulation selling by hedge funds who drank the Kool-Aid, believing that real estate had bottomed, paving the way for a sustainable American economic recovery.
I believed in that scenario for about a month myself. My buy of (BAC) call options in December and my sale in January was one of my most profitable trades of the year. Since then, fat has been poured on the fire, with continued revelations about foreclosuregate and never ending controversy on mortgage resets, which the bank is loath to facilitate. Falling US interest rates have shrunk the positive carry that banks were using to recapitalize themselves. Now we have a generalized global equity sell off, dragging the stock down more.
Take a look at the chart below to see how the banks have been the worst performing sector of the market this year. Its peaking in February, along with similar negative action in technology, prompted me to turn bearish on all stocks and risk assets in general. It also prompted me to make my watershed call the 'RISK OFF' trade was about to ensure in my April 22 letter.
I sense that once bond prices peak, yields bottom, and the stock indexes firm up, there will be another chance to make a killing in bank stocks from the long side. But I would not be rushing into this one. Better to take a long vacation first, such as in London, Venice, Milan, Zermatt, and Geneva, as I plan to do.
-
-
-
Once More Around the Block Please.
It's Not Time to Buy Bank Stocks Yet
Featured Trades: (GENEVA STRATEGY LUNCHEON SOLD OUT)
2) The June 22 Geneva Strategy Luncheon is Sold Out. Due to the rush of last minute orders to participate in my June 22 Geneva, Switzerland strategy luncheon, the event has become sold out. Plead as I may with the hotel for a larger conference room to accommodate the overflow, it has nothing more available. Apparently, the hedge fund business is booming in Geneva these days, with the presentations to investors are coming hot and heavy, and the medieval city's infrastructure is unable to cope with demand.
For those unable to live without the latest, in person update on the markets from The Mad Hedge Fund Trader, I still have seats available at my Milan, Italy luncheon on June 20. That's probably because Italians don't like to work very much in the summer, as there are so many delightful distractions. If you can wait, I will probably schedule a lunch at other Swiss venues in the future, such as in Zurich, Zermatt, or St. Moritz. Until then, you'll just have to subsist on the newsletter alone.
Those Italian Distractions
Featured Trades: (MY TAKE ON THE 2012 ELECTION)
3) My Take on the 2012 Election. This is going to be an interesting election. A Pew Research/Washington Post poll asked Republican voters to choose a word that best described their party's current field of presidential candidates. Here is a ranking of the words they chose:
unimpressive
disappointing
weak
good
incompetent
pathetic
unqualified
not interesting
idiots
Some 40% chose negative terms, while only 20% picked positive ones, with 40% undecided.
On the other hand, President Obama is going to have to run with plunging employment, residential housing in free fall, consumer confidence falling off a cliff, food and energy prices skyrocketing, and a dysfunctional government that is slowly sliding into bankruptcy. Can he become the first US president in history to win reelection with an unemployment rate over 7.2%.
If he does, it will only be with the assistance of Sarah Palin. The chief accomplishment of the Tea Party so far has been to hand the Senate in the last election to the Democrats in the 2010 election. This did this by fielding candidates who were weak, inexperienced, and incompetent in states like Nevada and Delaware where the Republicans should have otherwise won.
That pattern repeated itself two weeks ago in an upstate New York congressional by election where the Tea Party candidate took 9% of the vote, ensuring a Democratic win. Is Sarah Palin Alaskanese for Ross Perot, the last independent candidate who delivered a three way voter split that swept Bill Clinton into the top job?
Keep in mind that the election is still 17 months off, and in the world of politics that might as well be 17 centuries. After all, who outside of Illinois had ever heard of Barrack Obama 17 months before the last election? Then it was Hillary's to lose, and that is exactly what she did.
Is Sarah Palin Throwing the Election to the Democrats Again?
Featured Trades: (THE NONFARM PAYROLL BOMBSHELL)
1) The Nonfarm Payroll Bombshell. Any doubts about what the '?new normal' is all about were dispelled yesterday with the bombshell March Nonfarm Payroll Report showing a gain of only 54,000, the smallest in seven months, and a huge shortfall from the 190,000 consensus.
The headline unemployment rate bumped back up from 9.0% to 9.1%, taking the total number of unemployed to 13.9 million. The real U-6 unemployment rate including the long term jobless leapt to 15.8% totaling 24.1 million, and is closer to 20% in states like California.
Private sector employment rose by 83,000, with the biggest gains in business serves (44,000) and health care (17,000). Falls were seen in leisure and hospitality (-6,000) and manufacturing (-5,000). March and April reports were revised down 39,000.
The big hit was in government employment, which plunged by 29,000, all but 1,000 occurring at the local level. This trend is likely to accelerate in the summer, when many teachers already given pink slips are not rehired, as they were in years past. This is a trend that is likely to continue for another decade.
Let me give you a simple English lesson here. Spending cuts means job losses. Reducing the deficit means job losses. Balancing the budget means job losses. Austerity means job losses. And lots of job losses means slower economic growth. This reports shows that for every two workers hired by the private sector, one is fired by the government, leaving us with net job growth that is meager at best. Since the jobs recover started 18 months ago, the private sector has added an impressive 2.2 million, while the government has been shoveling jobs away half as fast.
This is a major ingredient of my long term forecast that American GDP growth has permanently downshifted from the 3.9% we saw from 2000-2009 to 2% for this decade. That is the harsh reality behind the chart below showing job gains during this recovery compared to those in years past.
As an investor and trader, you must know that the financial markets don't believe or understand this yet. Stay cautious and stay nimble, and for the time being, stay short.
-
-
