SPECIAL ELECTION ISSUE
Featured Trades: (WHAT THE ELECTION MEANS FOR THE MARKETS),
(SPY), (TBT), (YCS)
S&P 500 SPDR ETF
ProShares Ultra Short Lehman 20+ Year Treasury ETF
ProShares Ultra Short Yen ETF
3) What the Election Means for the Markets. Who really won this election? I did! It is setting up trends in the global financial markets that will be easy to identify and cash in on. If you want to jump on my bandwagon and get a peak at some market timing, then keep reading this letter.
While voters may be enthralled with empty promises, platitudes, spin, and sound bites, markets clearly aren't. Like a huge, dumb animal, they respect only the remorseless mathematics of supply and demand. QEII is still the principal driver, the first $600 million of which we got today. This promises to lift all boats, especially the yachts, to year end, and possible through Q1, 2011 (click here for 'Contemplations on Risk'). When it ends, the full impact of this election will bite. This will be the outcome:
1) There will be a major sell off next year, not just in stocks, but in all asset classes. The election results increase the certainty and the severity of this event. Volatility (VIX) will rise across the board.
2) The deficit will rise faster. The debt markets' breaking point will be reached sooner. This means we will get a collapse in bond prices, no matter how much liquidity floods the system. Whether this happens with the national debt at $15 trillion, $18 trillion, or $20 trillion is anyone's guess. We are headed towards all of those numbers trapped in a runaway Toyota with the accelerator stuck on the floor.
With the administration and congress gridlocked, the Federal Reserve is the sole functioning branch of government, and creating inflation is virtually the only thing they know how to do well. This nicely sets up my (TBT) trade, one of my core shorts for the coming decade.
3) A flight to safety will trigger an extended period of dollar strength. This is bad for stocks, commodities, emerging markets. Flip the 'RISK OFF' button. This sets up the crash in the yen, my other core short of the decade, and bodes well for the (YCS).
4) Since many conservatives believe that global warming is a leftist hoax, you can expect more favorable policies and tax treatment for oil, natural gas, and coal. Expect dependence on foreign energy sources to rise and crude prices to rocket. The congressman who apologized to BP for it harsh treatment is now the chairman of the House energy committee. The Bush administration took oil from $20/barrel to $150. Expect something similar going forward. The giant target on our backs in the Middle East stays there. Buy your electric car now.
Sorry, guys, but read it and weep. As with a World Series umpire, I call them as I see them. This is the letter where hard data and facts trump uninformed opinion every day of the week. There are thousands of letters out there whose primary goal is to make you feel better. This isn't one of them.
Featured Trades: (HOW BIG IS QEII?)
1) How Big is QEII? Speculation is rife in the Treasury markets on if quantitative easing has already started, and if it has, how big it is, or whether it will happen at all? Goldman Sachs has opened more than a few eyes when they put their $2 trillion forecast out there. The low-end estimate is $100 million between Fed meetings every six weeks.
Let me tell you how big that is. This month the Fed will buy $30 billion as part of its regular refunding efforts. The mean of these two predictions is $117 billion a month, or $1.4 trillion a year. That means that the Fed will buy the entire amount of debt created by the 2010 budget! This is why all asset classes are going up, even the wheezing, arthritic ones, like US stocks.
There are two great unknowns here. When does the Fed take the punch bowl away, and what will the markets do when it senses this is happening. My guess is that QEII will end sooner than later, because private investors have already done so much front running.
When it does end, the markets will sell off much more than in the past. The new, post crash risk control regime has a much finer hair trigger than before. Investors will no longer sit back and willingly take a 50% hit to their net worth. Buy and hold is dead, and the markets know it.
Alan Greenspan used to spike his punch with a surreptitious flask of Ron Rico rum. Ben Bernanke uses crystal meth, ecstasy, and steroids, and the hangover will be monumental. What will lead the downturn??? Wheezing, arthritic assets, like US stocks.
What's Really In There?
Featured Trades: (PALLADIUM), (PALL)
ETFS Physical Palladium Shares ETF
2) Palladium Hits a Seven Year High. Palladium has soared by 60% since my recommendation in January, hitting a seven year high yesterday, making it one of my better calls of the year (click here for the piece).? Double dippers beware! Moves like this by industrial commodities do not occur in the face of a collapsing economy.
It's looking like the car manufacturers, which consume huge amounts of the white metal to make catalytic converters, could turn out as many as 12.5 million cars this year. This could rise to 15 million by 2015. The 2008 nadir was a paltry 8.5 million vehicles. You can forget seeing the drug induced haze of 20 million annual units free money brought us, returning in our lifetime. Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by another 1.5 million units a year.
Some 80% of the world's palladium production comes from Russia and South Africa, dubious sources on the best of days. This means that a long position in this white metal gives you a free call on political instability in these two less than perfectly run countries.
Also known as the 'poor man's platinum,' demand for palladium for jewelry in China has been soaring with the growth of the middle class. On top of this, you can add huge new investment demand from the palladium ETF (PALL) this year. The fund is thought to be bumping up against its position limit of 1.29 million ounces, which amounts to a breathtaking 18% of global production in 2009.
If you are looking for something to stash in your gun safe, bury in the backyard, or give to the grandkids on their college graduation, get physical. You can buy 100-ounce bars at $50 over spot, or Royal Canadian Mint one ounce .9995% fine palladium Maple Leaf coins at $50 over spot. And yes, you can even buy them on Amazon by clicking here.
Featured Trades: (JUNK BONDS), (JNK)
SPDR Lehman High Yield Bond ETF
3) From Junk to Gold. Investors who bought beat up jalopies at the going out of business sale 18 months ago, ended up getting delivered a Rolls Royce. I piled readers into the junk bond ETF (JNK) 18 months ago because the market was discounting a future default rate of 17%, which I thought was extremely unlikely (click here for the call). What have we actually realized? A minimal 0.3%.
As a result, yield seeking, risk averse buyers have been piling into the fund, taking yields down from 18% to 6%. We could have a little more upside to go. As absolute returns have plunged, spreads over Treasuries have also been shrinking, but have yet to reach historical minimums. I am not a buyer here, but would not be surprised to see others chase this market further.
Investors in past years would have been laughed at as neophytes or suckers for taking on extra junk risk with such little potential upside. In this low return world, they are now considered all-seeing sages. It is a perfect example of how zero interest rates are skewing investment decisions everywhere.
4) SPECIAL SUBSCRIPTION OFFER FROM THE MAD HEDGE FUND TRADER. Any Texas residents who take out a two year subscription to The Diary of a Mad Hedge Fund Trader this week will get a free 'San Francisco Giants World Series Champions' knit hat. For proof of residence, please send me a stuffed armadillo. Cheap Chinese imports not accepted. There is a rumor on the Internet today that the conservative Texas Rangers deliberately threw the World Series last night so liberal San Franciscans would be too hung over to vote today. It's working. Five minutes after the winning 7th inning home run, Yahoo's main server for the Bay Area crashed. My best trade of the year? Buying two tickets for $1,300 for one of the only two games played at home.
'A lie can travel half way around the world before the truth gets its boots on,' said the 19th century humorist, Mark Twain.
Featured Trades: (CHARLES NENNER)
1) Catching Up With Charles Nenner. I managed to catch up with my friend, technical analyst to the stars, Charles Nenner, and quiz him about his recent relative silence. It has been many months since he predicted that the yen was going to soar from ?95 to ?80, that you should dump your longs before a plunge in the S&P 500 from 1240 to 1,000, or that the Australian dollar would rocket from 78 to 100 cents.
The wily Dutchman explained that he was been sitting on the fence because there is really nothing to do here, echoing sentiments from my own piece on market turning points last week (click here for 'Contemplations in Risk'). His longs in NASDAQ, the ags, and emerging markets were working fine, but he was not inclined to initiate new longs here, and there was no point in stepping in front of the train on the short side.
Charles' daily, weekly, and monthly cycles were drawing sharply diverging conclusions. Take a look at the stock indexes, where the weekly cycles show the Dow and S&P 500 possibly peaking this week, the NASDAQ not until January, and the emerging markets not for the foreseeable future. The best thing is to wait for these conflicts to resolve over time before making any big calls. After all, no one stood over Beethoven and demanded he finish his symphony by Friday.
Charles thinks we are about to enter a period of major dollar strength, but not yet. One area that is starting to look interesting was the volatility index (VIX), which seems to be bottoming out in the high teens, presaging times that the Chinese describe as 'interesting.' One could easily envision a scenario where the dollar is strong, and everything else goes to hell in a hand basket. I plan to get together with Charles in early January to review his 2011 calls across all markets. Premium subscribers can look forward to getting e-mailed a strategic advanced peak.
Featured Trades: (THE TREASURY BOND DILEMMA), (TBT), (IEF)
2) The Treasury Bond Dilemma. There is a very interesting divergence going on in the Treasury bond market which readers should be aware of. The leveraged short ETF for long dated paper, the (TBT), looks like it bottomed in the end of August, indicating that the collapse I have been predicting has already been started, just five days before my seminal post on the topic (click here for 'The Great Bond Market Crash of 2010'). The ETF for seven to ten year paper (IEF), motored on to a new high six weeks later, and has been grinding sideways since, the ten year since levitating at an amazing 2.60% yield.
This is happening because many bond traders believe that Ben Bernanke is going to focus his QEII on durations less than ten years, and will leave long dated paper, like the 30 year, out in the cold. Which is another way of saying that without temporary, artificial government support, all bond markets would be in free fall by now. This gives us all a wonderful insight into how bonds will behave, once QEII is finished, is thought to be halfway done, or gets canceled (click here for 'Ha, Ha, I fooled you' in 'Contemplations on Risk'). I think what these two charts are telling you is that if the great bull market in the (TBT) hasn't started yet, it is not far off.
Featured Trades: (Q3 GDP)
3) There is Less Than Meets the Eye in Q3 GDP. There was much celebration that the US economy managed a 2.0% growth rate in Q3, sending double dippers to the dust bin of history, where they rightfully belong. Of course, you already knew this was going to happen last January, because this is exactly the number I predicted then in my 2010 Asset Allocation Review' (please click here for the call) . I made this prediction because I thought that American companies doing business with the white hot emerging markets would generate just enough growth to offset the huge drag created by moribund industries, like housing, real estate and every shrinking state and local government portions of the economy. This is precisely what unfolded.
A closer examination of the breakdown show that even this modest, lackluster figure may be overstating the true level of business activity. By the time you strip out the 2.2% GDP deflator and the inventory build of 1.4%, real GDP growth was actually negative. The GDP deflator is no doubt being overstated by the huge expansion of the Fed balance sheet. Much of the inventory build was a one time only affair which has since ceased and can't be counted to repeat in the future.
What all this says about the US stock markets is that further rises are going to be driven mostly by a QEII that will lift all boats, especially the yachts. They will be supported less by actually profit making activities of US companies. That is sort of a long winded way of saying that we are in the middle of a mini stock bubble. Party away, but stay close to the exit at all times.
Featured Trades: (RARE EARTHS), (REMX), (MCP), (LYSCF), (AVARF)
2) Is the Rare Earth ETF Calling a Market Top? It looks like the Van Eck mutual fund group reads the Diary of the Mad Hedge Fund Trader, because last week they launched the first ETF (REMX) dedicated to rare earth and strategic metals. The move comes on the heels of incredibly bullish developments in this space over the last six months. These include a ban by China, source of 97% of the world's rare earth supplies, to Japan, a temporary export ban to the US, and a 30% reduction in global export quotas next year.
The new issue immediately gave a boost to the shares of the several names in this sector you have all come to know and love in the pages of this letter, including Molycorp. (MCP), Lynas Corp. (LYNCF), and Avalon Rare Metals (AVARF) (click here for 'Rare Earths Are About to Become a Lot More Rare'). That's becasue the launch of a new ETF in a thinly traded corner of the commodities markets is well known to suck in a ton of new money, as it did with Platinum (PPLT) and Palladium early this year (click here for the call).? MCP alone has moved up a stunning 240% since the end of August, partly on anticipation of the new ETF.
It even includes some outliers in the strategic metal area, like Titanium Metals Corp (TIE), which I mentioned earlier in the year (click here for 'Playing Catch Up With Titanium'). As if the issue needed any help, Secretary of State Hillary Clinton (see above) warned that the world needs to start developing alternative sources for rare earths. I have included the ETF's top ten holdings below.
I have been flooded with emails from readers this week asking if they should pile into the issue. Right here, I wouldn't touch with a ten foot pole. The deal comes on top of underlying equities that have rocketed by 400% and metals prices that have roared tenfold in six months. Great idea, but a little late.
When the CEO of Molycorp says his company's primary product is caught up in a bubble, you have to take notice. I think it's safe to say that if you are not in now, you have missed the move in this cycle. The train has left the station. Better to wait for the inevitable sell off that will come sometime next year, or find a completely different field which offers more immediate upside.
Lynas Corp Ltd (LYSCF.PK)
Iluka Resources Ltd (ILKAF.PK)
Titanium Metals Corp (TIE)
Thompson Creek Metals Co Inc (TC)
OSAKA Titanium Technologies Co
RTI International Metals Inc (RTI)
Toho Titanium Co Ltd
China Molybdenum Co Ltd
Kenmare Resources PLC
Molycorp Inc (MCP)
