Free Research Archives

So What?s Next for the Markets?

I am writing to you from the bar of the El-Minzah Hotel in Tangiers, Morocco, a one-time favorite of literary greats, F. Scott Fitzgerald, Earnest Hemingway, and Paul Bowls.

A warm, languid breeze coming off the Atlantic Ocean is causing the date palms around the pool to sway in rhythmic fashion.

The city has long been a hotbed of espionage, international intrigue, and illicit trade. It was once home of the Barbary Pirates.

I first came here in 1968 and slept on the roof of a run down medina inn for 50 cents a night and thought it was the deal of the century.

How times change.

If you recognize the place from the pictures below, there?s a good reason. It is the location on which Rick?s Caf? Americain was based in the 1942 Humphrey Bogart film classic, Casablanca, complete with a grand piano.

Damn, and I already sent my white dinner jacket home!

Whenever I check into a hotel with decent broadband or WiFi, I undertake the same ritual drill. It is a practice born of a half century of analyzing markets.

I go to the ever-trustworthy www.stockcharts.com and rapidly run through 100 charts among all asset classes. This immediately gives me an instant snapshot of the global economy, and where to find the action in financial markets.

And what I?m finding today is nothing less than astounding.

On the one hand, a very impressive collapse of all energy, commodity, and precious metal prices suggests that we have already fallen into the morass of a severe recession.

On the other, some 77% of US companies beat forecasts for Q2 earnings and are painting a rosy picture of the future, confirming that the moderate economic recovery still has legs.

Which asset class has it right, and which one is missing the target?

I?ll go with the expansion scenario. I think that the stock market crash in the former Red China is sending us all schools of red herrings on the prediction front.

Middle Kingdom margin calls are triggering capitulation sell offs across the commodities board, leading to fears that the woes of newbie stock speculators will feed into the main economy. This, in turn, will prompt a global recession.

I don?t think this will happen. Rampant stock speculation was engaged in by only 4% of the population, with most of the gains confined to a couple of months.

Most of this was mere paper gains that went as quickly as they came. Thankfully, this was not a decade long build up, like the one we saw in NASDAQ during the 1990?s, which would have been far more damaging.

Furthermore, the government in Beijing is doing everything they can to prevent the collapse from going systemic. I think they will succeed. Only 3% of listed Chinese shares are now freely tradable.

The creation of financial markets from scratch for a major economy, which the Chinese are now attempting to engineer, was never going to be easy. I know, because I went through this with Japan 40 years ago.

Everything else that could have gone wrong this year, Iran, Greece, the Supreme Court decision on Obamacare, the Ukraine crisis, Iraq, has now passed us by, all resolving for the positive, as far as stock markets are concerned.

We have run out of things that could go wrong. A possible ?% Fed interest rate rise in September is so insignificant that it doesn?t even show up on the radar.

So it?s simple. Wait for the Chinese stock bubble to unwind, and then load the boat with global equities.

Except that it?s not that simple.

The US equity markets have been so boring this year that it is creating a situation that is unprecedented in the history of technical analysis. Volatility is now at a staggering 100 year low.

According to the Wall Street Journal, only six stocks, Amazon (AMZN), Google (GOOG), Apple (AAPL), Facebook (FB), Gilead Sciences (GILD), and Walt Disney (DIS) have accounted for more than the entire $199 billion in gains in the S&P 500 this year.

The other 494 stocks in the big cap index have, for the most part, been unchanged, or are losers.

I am proud to say that four of these six, (GOOG), (AAPL), (GILD), and (DIS) have been the subject of successful Trade Alerts or bullish research reports in this newsletter.

That?s not a bad home run record. Just go to www.madhedgefundtrader.com a search for the reports.

The situation is nearly as dire with the NASDAQ (QQQ), where the same stocks account for half of the $664 billion in gains there.

To long in the tooth traders, such as myself, a technical set up like this against falling volume this isn?t just a red warning light. It is an entire Christmas tree?s worth of warning lights.

You can see this in all its eloquence in the chart below of a declining advance/decline ratio, which broke its 200-day moving average on Friday.

This is why I shot out a Trade Alert last week to bail on my ?RISK ON? short position in the Japanese yen (FXY) and to sell short the (SPY).

Now here is the really scary part. All of this is setting up going into the two highest risk months of the year, September and October, from which the legendary stock crashes of old spring.

In other words, the calendar couldn?t be worse for traders.

So here is the bottom line. Positive fundamentals have been checkmated by negative technicals. So we may go nowhere for a while, until corporate earnings catch up with share prices and make them look cheap once again.

S&P 500 earnings traded at 17 times earnings on Friday. Get them back to 16 times earnings in a zero interest rate world, and new money will come pouring in.

That means we may have to suffer the umpteenth 5% correction of this bull market in the weeks ahead (see chart below), or 10% in a really extreme case.

Just thought you?d like to know.

At Rick?s Caf? Americain

July 27, 2015/by Mad Hedge Fund Trader

The Case Against Treasury Bonds

Diary, Free Research, Newsletter

My friend, Texan money manager Mike Robertson, asked me the other day if there was one asset class that I truly despised.

I didn?t hesitate: bonds.

In fact, fixed income investments are about to regain the nickname they earned during the 1980?s: ?certificates of wealth confiscation.?

That leaves me within a hair?s breadth of pulling the trigger on some new short positions in fixed income instruments. My hedge fund buddies are lining up varies short plays here, like clay ducks in a shooting match.

With the ten year Treasury bond yield at a microscopic 2.30%, and 3.06% for the 30 year, you have a classic ?heads I win, tales, you lose? trade. Best case, you break even over the next decade. Worst case, you lose half or more of your capital.

The US has no history of excessive debt, except during WWII, when it briefly exceeded 100% of GDP. That abruptly changed in 2001, when George W. Bush took office.

In short order, the new president implemented massive tax cuts, provided expanded Medicare benefits for seniors, and launched two wars, causing budgets deficits to explode at the fastest rate in history.

To accomplish this, strict 'pay as you go' rules enforced by the previous Clinton administration, were scrapped. The net net was to double the national debt to $10.5 trillion in a mere eight years.

Another $5 trillion in Keynesian reflationary deficit spending by President Obama since then has taken matters from bad to worse.

This year, the national debt just nudged past our GDP at $17 trillion. The Congressional Budget Office is now forecasting that, with the current spending trajectory, total debt will reach $23 trillion by 2020, or some 160% of today's GDP, 1.6 times the WWII peak.

By then, the Treasury will have to pay a staggering $5 trillion a year just to roll over maturing debt. What's more, these figures greatly understate the severity of the problem.

They do not include another $9 trillion in debts guaranteed by the federal government, such as bonds issued by home mortgage providers, Fannie Mae and Freddie Mac. State and local governments owe another $3 trillion. Double interest rates, which they inevitably will, and our debt service burden doubles as well.

It is unlikely that the warring parties in Congress will kiss and make up anytime soon. It is therefore likely that the capital markets will emerge as the sole source of any fiscal discipline, with the return of the bond vigilantes.

They have already made their predatory presence known in the profligate nations of Europe, and they are expected to arrive here eventually.

Such forces have not been at play in Washington since the early 1980's, when bond yields reached 13%, and homeowners (including me) paid 18% for mortgages.

Since foreign investors hold 50% of our debt, policy responses will not be dictated by the US, but by the Mandarins in Beijing and Tokyo. They could enforce a cut back in defense spending from the current annual $700 billion.

Personally, I think the US will never recover from the debt explosions engineered by Bush and by 'deficits don't count' Vice President Chaney. The outcome has permanently lowered standards of living for middle class Americans and reduced influence on the global stage.

But I'm not going to get mad, I'm going to get even. I am going to make a killing profiting from the coming collapse of the US Treasury market through buying the leveraged short Treasury bond ETF, the (TBT).

I am sticking to my short term forecast for this fund to rise from the current $58 to $100, then $150. And that is despite a hefty and rising cost of carry of nearly 0.5% a month.

Where?s My Social Security?

July 23, 2015/by Mad Hedge Fund Trader

July 8, 2015 - SPECIAL EDITION - Special Update on the Oil Collapse

Diary, Free Research, Newsletter

Global Market Comments
July 8, 2015
Fiat Lux

EMERGENCY OIL ISSUE

Featured Trade:
(SPECIAL UPDATE ON THE OIL COLLAPSE),
(USO), (XOM), (OXY), (COP), (LINE)

United States Oil Fund LP (USO)
Exxon Mobil Corporation (XOM)
Occidental Petroleum Corporation (OXY)
ConocoPhillips (COP)
Linn Energy, LLC (LINE)

?

The Middle East is a miserable place to be during Ramadan, a month where the faithful reevaluate their lives and recommit to the teachings of Islam. This year it runs from June 17 to July 17.

During this period, the Muslims are not permitted to eat or drink from sunrise to sunset, or criticize others, or engage in a long list of other hurtful activities.

Although infidels, such as myself, are exempt from these rules, living amidst a population subject to these eighth century laws can be wearing. Everyone is starving, exhausted, and in a foul mood. Restaurants don?t open until sunset. Then people party all night, keeping you awake.

In the more fundamentalist conservative countries, like Saudi Arabia, Oman, and Kuwait, the Religious Police beat offenders with sticks and clubs that they come across in public.

That includes those eating, drinking, or women wearing immodest dress, like short pants and tank tops. Did I mention it reached 120 degrees yesterday in those countries?

As a result, anyone who can afford to do so flees to more liberal regimes during the fasting period, like Turkey, Egypt, and Morocco.

As a result, I am bumping into quite a few interesting people in the five star hotels here who have quite a lot to say about the price of oil.

A rash of hurried negotiations has suddenly broken out between American and European oil majors and the government of Iran. The word is out. Iran is going to imminently cave on US demands of inspections of nuclear facilities, especially the military ones.

The fact that this is all happening now is no coincidence. According to the Koran, Ramadan is a time to ?make peace with those who have wronged us.?

The hard numbers being assigned to these contracts is having the effect of increasing the size of the carrot for both the West and Iran to wind up the talks. The impact will be to permit Iran to rejoin the global economy for the first time in 36 years.

This paves the way for Iran to double its oil exports from 1.2 to 2.4 million barrels a day immediately, and then double them again once desperately needed energy infrastructure investments are made.

It won?t take long for this impending tsunami of oil to hit the markets. The Reuters news agency is reporting that 38 million barrels of Iranian oil are sitting in 15 VLCC tankers slow cruising the Persian Gulf and Indian Ocean.

The second the ink is dry on any US/Iran agreements, these ships are sailing for western and Asian ports to make delivery.

This is why you have seen a cataclysmic plunge in the price of Texas tea over the past few weeks, from $62 to $51, some 18%.

Saudi Arabia has responded to the decline by aggressively cutting prices for their largest customer, and ramping up production even more, in a determined effort to boost market share.

Therefore, the March low of $43 now seems within range, and maybe then some. You have already seen this in the contango for far month futures markets, which have widened fantastically. The world has returned to paying huge premiums for storage.

In case you missed the generational low at these prices four months ago, you now have another shot.

The share prices of my favorite oil plays, Exxon Mobile (XOM), Occidental Petroleum (OXY), Conoco Phillips (COP), and Linn Energy (LINE) all saw this route coming months ago and are already there.

In fact, the weak energy sector, which accounts for 10% of the S&P 500, was a major reason why the index failed to break out to new highs a few weeks ago.

I think that energy could be one of your seminal investment plays for the rest of 2015. Crude should make it back up to the $90 handle within the next three years, riding on the back of the global synchronized economic recovery.

After that, the question arises of whether the next move is to $10, as carbon based energy forms are replaced by alternatives on a large scale. Allow for a Moore?s Law type exponential growth of efficiencies, and we?ll soon be there.

That is Saudi Arabia?s current $5 per barrel cost of production, plus a 20% profit margin and $4 for shipping. Remember, it was only $8 as recently as 1998.

Just thought you?d like to know.

And now, back to my loyal rental camel, whose price, it turns out, is determined by, you guessed it, the price of oil.

Sometimes, You Have to Go to the Source

July 8, 2015/by Mad Hedge Fund Trader

A Note on the Friday Options Expiration

Diary, Free Research, Newsletter

We have several options positions that expire on Friday, and I just want to explain to the newbies how to best maximize their profits.

These include:

The Currency Shares Japanese Yen Trust (FXY) February $84-$87 vertical bear put spread

The Gilead Sciences (GILD) February $87.50-$92.50 vertical bull call spread

The S&P 500 (SPY) February $199-$202 vertical bull call spread

My bets that (GILD) and the (SPY) would rise, and that the (FXY) would fall during January and February proved dead on accurate. We got a further kicker with the two stock positions in that we captured a dramatic plunge in volatility (VIX).

Provided that some 9/11 type event doesn?t occur today, all three positions should expire at their maximum profit point. In that case, your profits on these positions will amount to 13% for the (FXY), 19% for (GILD) and 20% for the (SPY).

This will bring us a fabulous 5.58% profit so far for February, and a market beating 6.11% for year-to-date 2015.

Many of you have already emailed me asking what to do with these winning positions. The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck and pat yourself on the back for a job well done. You don?t have to do anything.

Your broker (are they still called that?) will automatically use your long put position to cover the short put position, cancelling out the total holding. Ditto for the call spreads. The profit will be credited to your account on Monday morning, and he margin freed up.

If you don?t see the cash show up in you account on Monday, get on the blower immediately. Although the expiration process is now supposed to be fully automated, occasionally mistakes do occur. Better to sort out any confusion before losses ensue.

I don?t usually run positions into expiration like this, preferring to take profits two weeks ahead of time, as the risk reward is no longer that favorable.

But we have a ton of cash right now, and I don?t see any other great entry points for the moment. Better to keep the cash working and duck the double commissions. This time being a pig paid off handsomely.

If you want to wimp out and close the position before the expiration, it may be expensive to do so. Keep in mind that the liquidity in the options market disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration. This is known in the trade as the ?expiration risk.?

One way or the other, I?m sure you?ll do OK, as long as I am looking over your shoulder, as I will be.

This expiration will leave me with a very rare 100% cash position. I am going to hang back and wait for good entry points before jumping back in. It?s all about getting that ?buy low, sell high? thing going again.

There are already interesting trades setting up in bonds (TLT), the (SPY), the Russell 2000 (IWM), NASDAQ (QQQ), solar stocks (SCTY), oil (USO), and gold (GLD).

The currencies seem to have gone dead for the time being, so I?ll stay away.

Well done, and on to the next trade.

Pat Yourself on the Back

February 20, 2015/by Mad Hedge Fund Trader

Going Back Into Gilead Sciences

Diary, Free Research, Newsletter

This is a stock that could double by the end of 2015. Buy a great performing stock in the top performing sector on a 10% dip.

The stock has over reacted to an earnings report that was fantastic; but carried conservative forward guidance, based on expected future pricing pressure on its blockbuster Hepatitis C drugs, Sovaldi and Harvini.

I am giving a nod to the current high risk, high volatility environment and being very cautious here buy going with strike prices for the options that are well below the 200-day moving average. A very short, 11 trading day expiration gives us some extra protection.

This position should be able to weather some pretty fierce storms.

If you want to be more aggressive and take a longer view, buy the (GILD) April, 2015 $110 calls at $2.20 or better. If we break to a new all time high by the April 17 expiration, as I expect, you could score a 3-5 bagger for these options.

If you don?t do options, just buy the shares and sit on them for the rest of the year.

I spoke to a friend of mine who works for a health care venture capital firm, and I thought I?d pass through a few tidbits.

Gilead Sciences (GILD) is basking in the glow of the most profitable drug launch in history. Its treatment for hepatitis C, launched in 2013, inhibits the RNA polymerase that the hepatitis C virus (HCV) uses to replicate its RNA. It traders? parlance, it kills the bug.

(GILD) has taken in $5.7 billion in sales of this drug during the first half of 2014, and could sell as much as $10-$12 billion for the full year.

The drug is so revolutionary, that it on the scale of medical miracles of decades past, such as Salk vaccine immunizations for polio and penicillin treatments for bacterial infections. So far, Gilead has cured a breathtaking 90% of patients.

Now the company is using various drug combinations that produce even higher success rates with fewer side effects, and may be expended to treat other life threatening diseases. These could take Hepatitis C drug sales as high as $15-$18 billion in 2015.

A big controversy has been its immense cost, which works out to $84,000-$135,000 per patient. This has become a bigger issue with the advent of Obamacare, now that the government is picking up much of the tab.

But, that?s a bargain compared to full treatment of the disease, which can run as high as $350,000 per patient. That is, unless you don?t care if you die.

Partly in response to these complaints, the company is making the drug available at deep discounts in 91 emerging nations that account for 50% of all Hepatitis C cases globally. What it loses on margins there it will make back in volume.

With any luck, we may see hepatitis C wiped out in my lifetime, as I have already seen with smallpox (I saw some of the last few live cases in kids in Nepal in 1976).

All of this makes the stock appear a bargain at its current $99.01 price. At a multiple of a subterranean 11X earnings, the stock should hit $140 next year.

You all know that health care is one of my three core industries to bet on for the long term (there others are energy and technology).

The short-term driver of the share price for (GILD) is obviously whether the health care sector is in, or out of vogue. But for the long term Gilead looks like a good bet to me.

And I don?t even have hepatitis, or Ebola.

Time for Another Dose of Gilead Sciences

February 5, 2015/by Mad Hedge Fund Trader

Qualcomm Guidance Crushes Stock

Diary, Free Research, Newsletter

It seems that the harder I work, the luckier I get.

Last week I made a bet that companies with a high share of international business would be punished severely during earnings season.

Specifically, I picked QUALCOMM (QCOM), the San Diego based maker of processors for cell phones, tablets, and laptops, because it had the highest percentage of foreign earnings among the S&P 500.

Three days later, after years of dawdling, the European Central Bank announced a particularly aggressive form of quantitative easing that sent the Euro crashing. You might as well have sent a torpedo directly into QUALCOMM?s bottom line.

The company?s Q4 earnings report, announced after the Tuesday close, confirmed my worst fears. While the earnings held up surprisingly well, the second half guidance was downright apocalyptic.

The stock immediately gapped down to $65 in the aftermarket, off some 8%, in a heartbeat.

Foreign earnings are a great place to hide when the greenback is soggy. It is a terrible place to be when the buck is moving from strength to strength, as it has for the past eight months.

It turns out that there is much more that is wrong under the hood at QUALCOMM than the recent collapse of the Euro and the Yen.

Much of the meteoric growth of Apple?s (AAPL) iPhone 6 sales in recent months has been at the expense of Samsung and other competitors. I hate to say ?I told you so? but I have been predicting this all along.

While QUALCOMM sells to both companies, particularly its Snapdragon 800 quadcore processor, it gets a lesser share of the profits on its sales to Apple. QUALCOMM is therefore, effectively, an indirect short position in Apple.

Oops!

I think you can take QUALCOMM?s woeful stock performance today as a warning that there is more suffering to come on the foreign earnings front by other companies yet to report.

For more depth on this, please read yesterday?s piece on ?The Unintended Consequences of the Euro Crash? by clicking here.

As for the happy holders of my recommended QUALCOMM (QCOM) February, 2015 $75-$80 in-the-money bear put spread, good for you! You have just made a nearly instant 2.25% profit on your total portfolio in a mere seven trading days. That works out to a gain of 22% on this single position.

There is no point in running this position the remaining three weeks into the February 20 expiration, as you have already reaped 95% of the potential profit. Better to free up the cash to roll into a new position, while simultaneously reducing your risk.

Or, you could simply take a long vacation from the miserable, unforgiving market.

There Goes QUALCOMM?s Earnings

January 29, 2015/by Mad Hedge Fund Trader

The Unintended Consequences of the Euro Crash

Diary, Free Research, Newsletter

For those of you who heeded my expert advice to buy the ProShares Ultra Short Euro ETF (EUO) last July, well done!

You are up a massive 48%! This is on a move in the underlying European currency of only 18.5%.

My browsing of the Galleria in Milan, the strolls through Spanish shopping malls, and my dickering with an assortment of dubious Greek merchants, all paid off big time. It turns out that everything I predicted for this beleaguered currency came true.

The European economy did collapse. Cantankerous governments made the problem worse by squabbling, delaying and obfuscating, as usual.

The European Central Bank finally threw in the towel and did everything they could to collapse the value of the Euro and reinvigorate their comatose economies. This they did by imitating America?s wildly successful quantitative easing, which they announced with local variations last Thursday.

And now for the good news: The best is yet to come!

Europe is now six days into a strategy of aggressive monetary easing which may take as long as five years until it delivers tangible, sustainable results. That?s how long it took for the Federal Reserve?s QE to restore satisfactory levels of confidence in the US economy.

The net net is that we have almost certainly only seen the first act of a weakening of the Euro which may last for years. A short Euro could be the trade that keeps on giving.

The ECB?s own target now is obviously parity against the greenback, which you will find predicted in my own 2015 Annual Asset Class Review released at the beginning of January (click here).

Once they hit that target, 87 cents to the Euro will become the new goal, and that could be achieved sooner than later.

However, you will not find me short the Euro up the wazoo this minute. I think we have just stumbled into a classic ?Buy the Rumor, Sell the News? situation with the Euro.

The next act will involve the ECB sitting on its hands for a year, realizing that their first pass at QE was inadequate, superficial, and flaccid, and that it is time to pull the bazooka out of their pockets once again.

This is a problem when the entire investment world is short the Euro. That paves the way for countless, rip your face off short covering rallies in the months ahead. Any smidgeon or blip of positive European economic data could spark one of these.

Trading the Euro for the past eight months has been like falling off a log. It is about to get dull, mean and brutish. So for the moment, my currency play has morphed into selling short the Japanese yen, which has its own unique set of problems.

As for the unintended consequences of the Euro crash, the Q4 earnings reports announced so far by corporate America tells the whole story.

Companies with a heavy dependence on foreign (read Euro and yen) denominated earnings are almost universally coming up short. On this list you can include Caterpillar (CAT), Procter and Gamble (PG), and Microsoft (MSFT).

Who are the winners in the strong dollar, weak Euro contest? US companies that see a high proportion of their costs denominated in flagging foreign currencies, but see their incomes arrive totally in the form of robust, virile dollars.

You may not realize it, but you are playing the global currency arbitrage game every time you go shopping. The standout names here are US retailers, which manufacture abroad virtually all of the junk they sell you here, especially in low waged China.

The stars here are Macy?s (M), Family Dollar Stores (FDO), Costco (COST), Target (TGT), and Wal-Mart (WMT).

You can see this divergence crystal clear in examining the behavior of the major stock indexes. The chart for the Guggenheim S&P 500 Equal Weight ETF (RSP), which has the greatest share of currency sensitive multinationals, looks positively dire, and may be about to put in a fatal ?Head and Shoulders? top (see the following story).

The chart for the NASDAQ (QQQ), where constituent companies have less, but still a substantial foreign currency exposure, appears to be putting in a sideways pennant formation before eventually breaking out to new highs once again.

The small cap Russell 2000, which is composed of almost entirely domestic, dollar based, ?Made in America? type companies, is by far the strongest index of the trio, and looks like it is just biding time before it blasts through to new highs.

If you are a follower of my Trade Alert Service, then you already know that I have a long position in the (IWM), which has already chipped in 2.12% to my 2015 performance.

You see, there is a method to my Madness.

Never Underestimate the Value of Research

January 28, 2015/by Mad Hedge Fund Trader

Will the Oil Bust Kill the Railroads?

Diary, Free Research, Newsletter, Research

No, not really.

I was fascinated by the recent comments made by Union Pacific (UNP) CEO, Jack Koraleski, about the current robust health of his company.

Fourth quarter profits rocketed by an amazing 22% and those stellar numbers look set to continue.

I love railroads, not because they used to belch smoke and steam and have these incredibly loud, romantic, wailing whistles. In fact, my first career goal in life (when I was 5) was to become a train engineer.

It turns out that the railroads are also a great proxy for the health of the entire US economy. They are, in effect, our canary in the coalmine.

Jack sees moderate economic growth in the US continuing. Demand for the heavy products the company shifts is booming. Construction products like stone, gravel, cement and lumber, are up 10%.

The dramatic plunge in oil prices brings positives and negatives. The boom in oil shipments from North Dakota has been a windfall for the railroads that may now ebb.

But if prices stay low enough for long enough, it will boost demand for everything else that the Union Pacific ships, including houses, furniture, cars and every other sweet spot for their franchise. (UNP), in effect, has a great internal hedge for its many businesses. When one product line weakens, another strengthens. This has been going on forever.

The company is watching carefully the construction of a second Panama Canal across Nicaragua (the subject of a future article, when I get some time).

If completed by its Chinese promoters within the next decade, it could bring a tiny incremental shift of traffic from the US west coast to the Gulf ports. Even this is a mixed bag, as this will move some business away from strike plagued ports that are currently causing so much trouble.

When I rode Amtrak?s California Zephyr service from Chicago to San Francisco last year, I passed countless trains heading west, hauling hoppers full of coal for shipment to China.

This year I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here?. It turns out I was right.

Take a look at the charts below, and you will see that the shares of virtually the entire railroad industry are breaking out to the upside.

In two short years, the big railroads have completely changed their spots, magically morphing from coal plays to natural gas ones. You?ve heard of ?fast fashion?? This is ?fast railroading?.

Today the big business is coming from the fracking boom, shipping oil from North Dakota?s Bakken field to destinations south. In fact, the first trainload of Texas tea arrived here in the San Francisco Bay area only a year ago, displacing crude that formerly came from Alaska.

Look at the share prices of the major listed railroads, and it is clear they have been chugging right along to produce one of the best performances of 2013. These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), and Canadian Pacific (CP). In the meantime, competing coal shares, like Arch Coal (ACI) have been one of the worst performing this year.

Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service.

A friend of mine taking a passenger train from New Mexico to Los Angeles found his car abandoned on a siding for 24 hours, where he froze and starved until discovered.

New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy. The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government owned Amtrak passenger service was created out of the ashes. I know all of this because my late uncle was the treasurer of Penn Central.

Fast forward nearly half a century and what you find is not your father?s railroad. While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and roads were reorganized and consolidated.

The government provided a major assist with a sweeping deregulation. It became tremendously concentrated, with just four roads dominating the country, down from hundreds a century ago, giving you a great oligopoly play. The quality of management improved dramatically.

Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from west coast ports.

A huge trade also developed moving western coal out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.

All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment. The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.

Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa. Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double-stacked sea containers.

Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic. Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.

I have some firsthand knowledge of this expansion. Every October 1, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in.

There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.

During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad. I can guide my guests through that tunnel today with flashlights because (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.

While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing and another energy renaissance) and Canada (natural resources) promise to boost rail traffic with the US.

The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, all great cargo for railroads.

And who knew? Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four times more energy efficient than competing trucks.

In fact, many companies are now looking to railroads to reduce their overall carbon footprints. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad two years ago has probably
doubled in value since then.

You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities. My past letters have chronicled adventures riding the Orient Express from London to Venice, and Amtrak from New York to San Francisco.

I even once considered buying my own steam railroad; the fabled ?Skunk? train in Mendocino, California, until I figured out that it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.

It gets worse. Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.

The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.

When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, please click here and hit the ?PLAY? arrow in the lower left hand corner. Please excuse the shaky picture.

I shot this with one hand, while using my other hand to restrain my over excited kids from running on to the tracks to touch the laboring beast.

January 26, 2015/by Mad Hedge Fund Trader

2014 Trade Alert Review

Diary, Free Research, Newsletter

When is the Mad Hedge Fund Trader a genius, and when is he a complete moron?

That is the question readers have to ask themselves whenever their smart phones ping, and a new Trade Alert appears on their screens.

I have to confess that I wonder myself sometimes.

So I thought I would run my 2014 numbers to find out when I was a hero, and when I was a goat.

The good news is that I was a hero most of the time, and a goat only occasionally. Here is the cumulative profit and loss for the 75 Trade Alerts that I closed during calendar 2014, listed by asset class.

Profit by Asset Class

Foreign Exchange 15.12%
Equities 12.52%
Fixed Income 7.28%
Energy 1.4%
Volatility -1.68%

Total 37.64%

Foreign exchange trading was my big winner for 2014, accounting for nearly half of my profits. My most successful trade of the year was in my short position in the Euro (FXE), (EUO).

I piled on a double position at the end of July, just as it became apparent that the beleaguered European currency was about to break out of a multi month sideway move into a pronounced new downtrend.

I then kept rolling the strikes down every month. Those who bought the short Euro 2X ETF (EUO) made even more.

The fundamentals for the Euro were bad and steadily worsening. It helped that I was there for two months during the summer and could clearly see how grotesquely overvalued the currency was. $20 for a cappuccino? Mama mia!

Nothing beats on the ground, first hand research.

Stocks generated another third of my profits last year and also accounted for my largest number of Trade Alerts.

I correctly identified technology and biotech as the lead sectors for the year, weaving in and out of Apple (AAPL) and Gilead Sciences (GILD) on many occasions. I also nailed the recovery of the US auto industry (GM), (F).

I safely stayed away from the energy sector until the very end of the year, when oil hit the $50 handle. I also prudently avoided commodities like the plague.

Unfortunately, I was wrong on the bond market for the entire year. That didn?t stop me from making money on the short side on price spikes, with fixed income chipping a healthy 7.28% into the kitty.

It was only at the end of the year, when the prices accelerated their northward trend that they started to cost me money. My saving grace was that I kept positions small throughout, doubling up on a single occasion and then coming right back out.

My one trade in the energy sector for the year was on the short side, in natural gas (UNG), selling the simple molecule at the $5.50 level. With gas now plumbing the depths at $2.90, I should have followed up with more Trade Alerts. But hey, a 1.4% gain is better than a poke in the eye with a sharp stick.

In which asset class was I wrong every single time? Both of the volatility (VIX) trades I did in 2014 lost money, for a total of -1.68%. I got caught in one of many downdrafts that saw volatility hugging the floor for most of the year, giving it to me in the shorts with the (VXX).

All in all, it was a pretty good year.

What was my best trade of 2014? I made 2.75% with a short position in the S&P 500 in July, during one of the market?s periodic 5% corrections.

And my worst trade of 2014? I got hit with a 6.63% speeding ticket with a long position in the same index. But I lived to fight another day.

After a rocky start, 2015 promises to be another great year. That is, provided you ignore my advice on volatility.

Here is a complete list of every trade I closed last year, sorted by asset class, from best to worse.

Date	Position	Asset Class	Long/short	?	?	?	?	?	?
7/25/14	(SPY) 8/$202.50 - $202.50 put spread	equities	long	?	?	?	?	?	2.75%
10/16/14	(GILD) 11/$80-$85 call spread	equities	long	?	?	?	?	?	2.57%
5/19/14	(TLT) 7/$116-$119 put spread	fixed income	long	?	?	?	?	?	2.48%
4/4/14	(IWM) 8/$113 puts	equities	long	?	?	?	?	?	2.38%
7/10/14	(AAPL) 8/$85-$90 call spread	equities	long	?	?	?	?	?	2.30%
2/3/14	(TLT) 6/$106 puts	equities	long	?	?	?	?	?	2.27%
9/19/14	(IWM) 11/$117-$120 put spread	equities	long	?	?	?	?	?	2.26%
10/7/14	(FXE) 11/$127-$129 put spread	foreign exchange	long	?	?	?	?	?	2.22%
9/26/14	(IWM) 11/$116-$119 put spread	equities	long	?	?	?	?	?	2.21%
4/17/14	(TLT) 5/$114-$117 put spread	fixed income	long	?	?	?	?	?	2.10%
8/7/14	(FXE) 9/$133-$135 put spread	foreign exchange	long	?	?	?	?	?	2.07%
10/2/14	(BAC) 11/$15-$16 call spread	equities	long	?	?	?	?	?	2.04%
4/9/14	(SPY) 5/$191-$194 put spread	equities	long	?	?	?	?	?	2.02%
10/15/14	(DAL) 11/$25-$27 call spread	equities	long	?	?	?	?	?	1.89%
9/25/14	(FXE) 11/$128-$130 put spread	foreign exchange	long	?	?	?	?	?	1.86%
6/6/14	(JPM) 7/$52.50-$55.00 call spread	equities	long	?	?	?	?	?	1.81%
4/4/14	(SPY) 5/$193-$196 put spread	equities	long	?	?	?	?	?	1.81%
3/14/14	(TLT) 4/$111-$114 put spread	fixed income	long	?	?	?	?	?	1.68%
10/17/14	(AAPL) 11/$87.50-$92.50 call spread	equities	long	?	?	?	?	?	1.56%
10/15/14	(SPY) 11/$168-$173 call spread	equities	long	?	?	?	?	?	1.51%
7/3/14	(FXE) 8/$138 put spread	foreign exchange	long	?	?	?	?	?	1.51%
10/9/14	(FXE) 11/$128-$130 put spread	foreign exchange	long	?	?	?	?	?	1.48%
9/19/14	(FXE) 10/$128-$130 put spread	foreign exchange	long	?	?	?	?	?	1.45%
10/22/14	(SPY) 11/$179-$183 call spread	equities	long	?	?	?	?	?	1.44%
5/29/14	(TLT) 7/$118-$121 put spread	fixed income	long	?	?	?	?	?	1.44%
2/24/14	(UNG) 7/$26 puts	energy	long	?	?	?	?	?	1.40%
2/24/14	(BAC) 3/$15-$16 call spread	equities	long	?	?	?	?	?	1.39%
6/23/14	(SPY) 7/$202 put spread	equities	long	?	?	?	?	?	1.37%
9/29/14	(SPY) 10/$202-$205 Put spread	equities	long	?	?	?	?	?	1.29%
5/20/14	(AAPL) 7/$540 $570 call spread	equities	long	?	?	?	?	?	1.22%
9/26/14	(SPY) 10/$202-$205 Put spread	equities	long	?	?	?	?	?	1.22%
5/22/14	(GOOGL) 7/$480-$520 call spread	equities	long	?	?	?	?	?	1.16%
5/19/14	(FXY) 7/$98-$101 put spread	foreign exchange	long	?	?	?	?	?	1.14%
1/15/14	(T) 2/$35-$37 put spread	equities	long	?	?	?	?	?	1.08%
3/3/14	(TLT) 3/$111-$114 put spread	fixed income	long	?	?	?	?	?	1.07%
1/28/14	(AAPL) 2/$460-$490 call spread	equities	long	?	?	?	?	?	1.06%
4/24/14	(SPY) 5/$192-$195 put spread	equities	long	?	?	?	?	?	1.05%
6/6/14	(CAT) 7/$97.50-$100 call spread	equities	long	?	?	?	?	?	1.04%
7/23/14	(FXE) 8/$134-$136 put spread	foreign exchange	long	?	?	?	?	?	0.99%
8/18/14	(FXE) 9/$133-$135 put spread	foreign exchange	long	?	?	?	?	?	0.94%
11/4/14	(BAC) 12/$15-$16 call spread	equities	long	?	?	?	?	?	0.88%
4/9/14	(SPY) 6/$193-$196 put spread	equities	long	?	?	?	?	?	0.88%
7/25/14	(SPY) 8/$202.50 -205 put spread	equities	long	?	?	?	?	?	0.88%
6/6/14	(MSFT) 7/$38-$40 call spread	equities	long	?	?	?	?	?	0.87%
10/23/14	(FXY) 11/$92-$95 puts spread	foreign exchange	long	?	?	?	?	?	0.86%
7/23/14	(TLT) 8/$117-$120 put spread	fixed income	long	?	?	?	?	?	0.81%
3/5/14	(DAL) 4/$30-$32 Call spread	equities	long	?	?	?	?	?	0.76%
4/10/14	(VXX) long volatility ETN	equities	long	?	?	?	?	?	0.76%
1/30/14	(UNG) 7/$23 puts	equities	long	?	?	?	?	?	0.66%
4/1/14	(FXY) 5/$96-$99 put spread	foreign currency	long	?	?	?	?	?	0.60%
1/15/14	(TLT) 2/$108-$111 put spread	equities	long	?	?	?	?	?	0.47%
3/6/14	(EBAY) 4/$52.50- $55 call spread	equities	long	?	?	?	?	?	0.24%
10/14/14	(TBT) short Treasury Bond ETF	fixed income	long	?	?	?	?	?	0.22%
3/28/14	(VXX) long volatility ETN	equities	long	?	?	?	?	?	0.20%
7/17/14	(TBT) short Treasury Bond ETF	fixed income	long	?	?	?	?	?	0.08%
3/26/14	(VXX) long volatility ETN	equities	long	?	?	?	?	?	0.06%
7/8/14	(TLT) 8/$115-$118 put spread	fixed income	long	?	?	?	?	?	-0.18%
4/28/14	(SPY) 5/$189-$192 put spread	equities	long	?	?	?	?	?	-0.45%
3/5/14	(GE) 4/$24-$25 call spread	equities	long	?	?	?	?	?	-0.73%
4/28/14	(VXX) long volatility ETN	volatility	long	?	?	?	?	?	-0.81%
4/24/14	(TLT) 5/$113-$116 put spread	fixed income	long	?	?	?	?	?	-0.87%
4/28/14	(VXX) long volatility ETN	volatility	long	?	?	?	?	?	-0.87%
6/6/14	(IBM) 7/$180-$185 call spread	equities	long	?	?	?	?	?	-1.27%
9/30/14	(SPY) 11/$185-$190 call spread	equities	long	?	?	?	?	?	-1.51%
10/9/14	(TLT) 11/$122-$125 put spread	fixed income	long	?	?	?	?	?	-1.55%
9/24/14	(TSLA) 11/$200 call spread	equities	long	?	?	?	?	?	-1.62%
2/27/14	(SPY) 3/$189-$192 put spread	equities	long	?	?	?	?	?	-1.67%
3/6/14	(BAC) 4/$16 calls	equities	long	?	?	?	?	?	-2.01%
10/14/14	(SPY) 10/$180-$184 call spread	equities	short	?	?	?	?	?	-2.13%
11/14/14	(BABA) 12/$100-$105 call spread	equities	short	?	?	?	?	?	-2.38%
10/20/14	(SPY) 11/$197-$202 call spread	equities	short	?	?	?	?	?	-2.72%
7/3/14	(GM) 8/$33-$35 call spread	equities	long	?	?	?	?	?	-2.91%
3/7/14	(GM) 4/$34-$36 call spread	equities	long	?	?	?	?	?	-2.96%
11/25/14	(SCTY) 12/47.50-$52.50 call spread	equities	long	?	?	?	?	?	-3.63%
10/20/14	(SPY) 11/$197-$202 call spread	equities	short	?	?	?	?	?	-4.22%
4/14/14	(SPY) 5/$188-$191 put spread	equities	long	?	?	?	?	?	-6.63%

What a Year!

January 15, 2015/by Mad Hedge Fund Trader

Throwing in the Towel on the Bond Market

Diary, Free Research, Newsletter

Here are the long-winded, feeble bunch of excuses I promised you.

I have broken every rule in my trading book hanging on to my position in the (TBT) for the past four months. I ignored my own stop losses. I listened to the morons on TV saying interest rates were about to spike up. I took the pile of charts that were telling me there was no bottom in sight, and deliberately lost them behind the radiator.

I even listened to the Fed signaling me with an emergency flare gun that they would raise rates in June.

As a result, I have been punished. Not too severely though, for I did follow one cardinal rule: I kept the position small. I did not double, triple and quadruple up, as many in the hedge fund industry have done.

As a result, I am merely suffering a thrashing in the woodshed, the kind my grandfather used to give me when he caught me shooting out the lights with my .22 rifle on our ranch in Indio, California. This is not a beheading, nor even a water boarding, and not a scintilla of an existential threat.

Still, a $14, 25% loss on a single position is no laughing matter. It?s about as welcome as a slap in the face with a wet mackerel. This is all proof that after 45 years in this business, I can still make the mistakes of a first year intern that was only hired for her good looks, shapely figure and loose morals.

If you told me that US GDP growth was 5%, unemployment was at a ten year low at 5.6%, and energy prices had just halved, I would have pegged the ten-year Treasury bond yield at 6.0%. The US economy created 2.9 million jobs in 2014, the most since 1999. Full employment is now almost a gimme.

Yet here we are at 2.00%.

You might as well take your traditional economic books and throw them in the trash. Apologies to John Maynard Keynes, John Kenneth Galbraith, and Paul Samuelson. It is yet another indication that this market has an insatiable need to teach an old dog new tricks.

After turning a blind eye to the writing on the wall, it?s time for me to read it out to you loud and clear.

The collapse of the German bond market is the big deal here. With the European economy in free fall, and doubts remaining about the ability of quantitative easing to work there under any circumstances, investors are assuming the future demand for money on the beleaguered continent will be zero.

German 10 year bond yields at 0.45% and still falling make 10 year US Treasuries at 2.00% appear the bargain of the century. Governments and hedge funds alike can buy US paper, sell short European paper against it, hedge out the currency risk, and lock in a risk free 1.55% a year for ten years. Sounds like a deal to me.

Multiply this by trillions of dollars and you can see what the problem is.

The other big deal here is the price of oil. I will reiterate my belief that if Texas tea stays down at the $40 handle, it is worth not just a 10% gain in stocks, but a double. The flipside is that interest rates stay far lower for longer than anyone expects, even including the Fed.

People just don?t understand how far reaching the impact of oil prices is. This heralds an entire new leg in the deflation story, one that could continue for years. It completely rules out any chance of a hike in interest rates this year. It is also fantastic news for the US bond market, and terrible for the (TBT).

If you want to add a third strike against continuing with a short bond position, look no further than the string US dollar. Investors around the world are pouring money into the greenback for a host of reasons. What do they do with the dollars when they get here? Buy bonds.

For more depth on why I totally missed the boat on bonds, please click here for ?10 Reasons Why I Am Wrong on Bonds?.

There are also opportunistic issues to consider here.

With implied volatilities on options sky high here, I can slap on almost any other options position and make back my 2.5% loss on the (TBT) in a couple of weeks. So there is no point in tying up 10% of my portfolio in a position that is dying a death of a thousand cuts.

Also, If you have been short the Euro (FXE), (EUO) and the Japanese yen (FXY), (YCS) after the past seven months, as I begged you to do, you have already more than made back the money.