The Party is Just Getting Started With the Japanese Yen

?Oh, how I despise the yen, let me count the ways.? I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.

To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:

* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 240% of GDP, or 120% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of only 1%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.

When the big turn inevitably comes, we?re going to ?110, then ?120, then ?150. That works out to a price of $200 for the (YCS), which last traded at $62. But it might take a few years to get there.

If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?83 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.

Japanese Lady-SadIt?s All Over For the Yen

Take a Look at Occidental Petroleum (OXY)

There are a lot of belles at the ball, but you can?t dance with all of them.

While a student at UCLA in the early seventies, I took a World Politics course, which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, crawling out of the desert half starved, lice ridden, and half dead.

I concluded that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10.? I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg? egg on his desk. He said he was impressed with my paper, and then spent two hours grilling me.

Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians? I told him everything I knew, including the two weeks in an Algiers jail for taking pictures in the wrong places. His parting advice was to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

Some 40 years later, while trolling the markets for great buying opportunities set up by the BP oil spill, I stumbled across (OXY) once more (click here for their site). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005. (OXY?s) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. The company has raised its dividend for the tenth year in a row, by 15% to 1.56%. Need I say more?

The clear message that came out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. I decided to add it to my model portfolio. Energy is one of a tiny handful of industries I am willing to put my money in these days (technology, industrials, and health care are the others).

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

Faberge Egg

A Faberge Egg

 

OXY 8-22-14

WTIC 8-22-14

Apple Breaks $100

Since I am in a major patting myself on the back mood, I thought I would rerun a piece I ran last October entitled ?Apple is Ready to Explode?. This is back when the shares were trading at a lowly $490 a share.

Since then I have been urging readers to get in on the long side at every opportunity. They are now up a mind boggling 43% from that timely recommendation. They are laughing all the way to the bank.

?You have to be impressed how Apple shares have been trading during the Washington shutdown and the debt ceiling crisis. While other highflying technology stocks have crashed and burned, Apple has held like the Rock of Gibraltar.

Is this presaging much better things to come?

After the bar was set extremely low in the run up to the iPhone 5s launch, there has been an onslaught of good news. The first weekend sales came in at a staggering 9 million units, nearly double analyst forecasts. That?s a lot of units to be wrong by.

This has led to a series of broker upgrades by Cantor Fitzgerald, Cowen & Co., Piper Jaffray, Sanford Bernstein, and most recently by Jeffries. Entrenched bears are slowly an inexorably turning into bulls. Targets range up to $780.

During the summer, when the shares were trading in the low $400?s, Apple emerged as the largest buyer of its own stock. Still, it only made a dent in the $60 billion the company has dedicated to the program.

Of course, corporate raider and green mailer Carl Icahn (he lived in my building in Manhattan and was always a bit of a jerk) wants Apple to buy $160 billion of its stock, about $36% of the total market capitalization. But with a position of only $2 billion, Carl doesn?t have enough skin in the game to get anything more than a free dinner from CEO Tim Cook.

Still, the more Icahn bangs the drum about the value of Apple, the more money he sucks in. His blustering has probably added about $50 to the stock price. That works for me.

Like the Origin of the Universe and the 105-year long losing streak suffered by the Chicago Cubs baseball team, the cheapness of Apple shares is one of those mysteries that baffles investors. Sure, you?d expect some natural profit taking after the meteoric 15 year run in the shares, from $4 to $707. But a 46% drawdown is a lot, and many would say too much.

The company has eye popping net profits of $3.5 million per business hour (click here for the most recently quarterly announcement). Some one third of it capitalization, or $150 billion, sits in cash in European bank accounts.

That works out to $165 of the current $490 share price. This brings the ex cash trailing price earnings multiple down to a subterranean 11.8 times, or a 25% discount to the 16X market multiple. The dividend yield of 2.5% still exceeds that of the ten year Treasury bond. This is absurdly cheap.

Anyone who makes their living looking at the numbers has been loading up on the stock for the past eight months. Even permabear and short seller, Jim Chanos, has been buying on the theory that both Apple, and competitor Samsumg, together have been demolishing the Wintel architecture.

I think there is something important going on here. Apple is bringing out the next generation iPad in two weeks. Product refreshes for the iMac, Macbook, and Airbook in coming months are already well known. Every time an announcement of an announcement is made, the stock spikes $10.

But the 800-pound gorilla in Apples earnings stream is the iPhone, which accounts for more than 70% of its profits. The wildly successful 5s and 5c launches will take total smart phone sales from around 36 million in Q3 to at least 56 million units in Q4. The analyst community is nowhere near these numbers, so they are substantially underestimated the profitability of the company.

Apple has already cracked the China market for cash buyers with the latest upgrade of its wireless operating system. The whale here is a deal with China Mobile (CHL) with its 740 million customers, which has been to subject to on again and off again negations for years. Still, Apple has already told its manufacturers to add china Mobile to its approved carrier list.

I think the stock is beginning to discount the launch of the iPhone 6, which is still a distant 11 months away. That will take the company another generation ahead, with an expansive six-inch screen and a blazing fast A8 processor, leaving competitors in the dust.

The business is so big that my favorite airline, Virgin America, has initiated nonstop service from San Francisco to Austin. I?m told the plane is always full. That?s where they make processors for the new phones.

All of this leads me to believe that Apple will be a major mover in 2014. The chip shot is $600, and we get a real head of steam into the iPhone 6 rollout, we could match the old high at $707.

You can buy the stock here with some comfort. If you are hyper aggressive, try playing the weekly call options on the next breakout. The more cautious can settle for the Technology Select Sector SPDR ETF (XLK), or the ProShares Ultra Technology 2X leveraged ETF (ROM). Apple has major weightings in both of these ETF?s.?

For the link to the original story, please click here.

AAPL 8-19-14

XLK 8-19-14

ROM 8-19-14

GibraltarSo Where is the Power Button on this Thing?

Austerity Hits Wall Street

This year, your bonus is that you get to keep your job. That is the bad news that will be dished out to many disappointed staff during annual reviews at the major Wall Street firms this year.

We all know that volumes have been trading at subterranean levels, which have created a real draught of commission incomes. New regulations imposed by Dodd-Frank and the Volker rule mean that banks have to become boring, no longer able to juice earnings with trading revenues.

For boring, read less profitable, leading to smaller budgets for compensation. This is the price of preventing banks from committing suicide with your money in hand.

Industry compensation experts are seeing bonus cuts of up to 40%. Bond trading divisions are seeing the greatest cuts, reflecting a generational peaking of bond prices and volumes. Next is anything related to home mortgage origination and precious metals?

Senior staff is being nudged toward early retirement to further reduce overhead. Only private wealth managers are seeing pay increases, thanks to their ability to charge rich fees for enhanced customer service and place high margin products, like local municipal bonds.

The scary thing is that shrinking payouts is a trend that could continue for years. When I first started working on Wall Street 40 years ago, one out of three taxi drivers were brokers recently rendered jobless by deregulated commissions. Rates of 25 cents a share supported a lot of fluff.

Be careful next time you cross the street. You might get hit with some free investment advice.

ny-taxi-cabsDid You Say ?Buy? or ?Sell??

Mad Hedge Fund Trader Sets New All Time High with 27% Gain in 2014

If you think this letter is being written by someone who is stoned, you?d be at least partially right this morning. For that is the after effect of my attending the Paul McCartney concert at Candlestick Park in San Francisco last night.

I was sitting in the infield in the most expensive $1,000 seats, well attended by Silicon Valley royalty. Excuse me Mr. Cook, can I please get by Mr. Ellison, hey, Sergei, love the service. I calculated that there was at least $1 trillion in market capitalization in my row, alone.

All that meant was that the second hand smoke in my section was more expensive, and more potent. And there was always the risk that the gyrating figure in the aisle on LSD might crash into you.

This was not a sit back in your seat and listen to the tunes concert. Some 70,000 people were on their feet for the duration, rocking out, dancing, and tapping their feet. McCartney, who appears immune to ageing, delivered in spades.

While he played, the fog rolled in from the bay, hit the high intensity lights, and vaporized, creating a surreal, magical effect.

Candlestick Park, which Paul pronounced in his drawn out Liverpudlian (scousian) accent, holds a special place in the hearts of Beatles fans. They first played there when the stadium was new in 1966. They last played together there in 1969. After tonight?s concert, it will be torn down.

Candlestick was originally built in 1959 to lure the Giants baseball team from Brooklyn. Structurally, it never recovered from the 1989 Loma Prieta earthquake, which occurred when a World Series was in play. The damp, freezing cold, the lack of mass transit connections, and the terrible parking have been perennial complaints about The Stick.

Last night, loyal fans could be seen digging up tufts of grass, or tearing down signs to take home. The San Francisco Giants moved downtown to play at AT&T Park more than a decade ago, and the 49ers relocated to a new stadium in San Jose this year.

To watch a video of McCartney?s blockbuster opening number, ?Eight Days a Week,? please click here.

This diversion aside, I am happy to report that I have been rocking out in my own way. The total return for my followers so far in 2014 has reached 27.1%, compared to a far more arthritic 2% for the Dow Average during the same period.

In August, followers have earned a welcome 3.2%, making it one of my best months of the year. Did I just hear someone shout at me to ?take more vacations??

The three and a half year return is now at an amazing 149.6%, compared to a far more modest increase for the Dow Average during the same period of only 36%.

That brings my averaged annualized return up to 41%. Not bad in this zero interest rate world. It appears better to reach for capital gains than the paltry yields out there.

This has been the profit since my groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud.

This has been a real trader?s market this year, with plenty of volatility in the past month, but little net movement in the overall indexes. I played the S&P 500 from both the long and short side, selling the peak within minutes and buying the bottom 5% lower.

I managed to eke out some small profits shorting the Treasury bond market (TLT), stopping out before the real carnage began.

A short position in the Euro (FXE), (EU) is the gift that keeps on giving. I am on my third roll-down in strikes over the past month. It also helps that I went into Russia?s latest incursions into the Ukraine with a tiny book, and 80% cash. Thus I have plenty of dry powder to act opportunistically going forward.

I am ready to use the next microdip to jump back in. It is just a matter of time before Apple breaks $100 a share and hits a new, split adjusted all time high.

In the meantime, the world is waiting to see whether the US can deliver a second half GDP growth rate of 4% per annum?or not. We might have to settle for 3%, given the new sanctions against Russia.

Quite a few followers were able to move fast enough to cash in on the move. To read the plaudits yourself, please go to my testimonials page by clicking here. They are all real, and new ones come in almost every day.

My esteemed colleague, Mad Day Trader Jim Parker, was no slouch either, dodging in an out of the raindrops to make money on an intra day basis.

What would you expect with a combined 85 years of market experience between the two of us? Followers are laughing all the way to the bank.

Don?t forget that Jim clocked an amazing 2013 with a staggering 374% trading profit. That was just for an eight-month year!

The Opening Bell with Jim Parker, a quickie but insightful webinar giving followers an instant snapshot of the market opening every day, has been an overwhelming success. Many customers have already reported dramatic improvements in their trading results.

Watch this space, because the crack team at Mad Hedge Fund Trader has more new products and services cooking in the oven. You?ll hear about them as soon as they are out of beta testing.

Our business is booming, so I am plowing profits back in to enhance our added value for you. The latest is the Mad Hedge Fund Trader Channel on YouTube that enables me to post videos from my frequent travels around the world.

The coming year promises to deliver a harvest of new trading opportunities. The big driver will be a global synchronized recovery that promises to drive markets into the stratosphere by the end of 2014.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, and 67.45% in 2013.

Our flagship product,?Mad Hedge Fund Trader Pro, costs $4,500 a year. It includesGlobal Trading Dispatch?(my trade alert service and daily newsletter). You get a real-time trading portfolio, an enormous research database and live biweekly strategy webinars. You also get Jim Parker?s?Mad Day Trader?service and?The Opening Bell with Jim Parker.

To subscribe, please go to my website at?www.madhedgefundtrader.com, find the??Mad hedge Fund Trader PRO??or??Global Trading Dispatch??box on the right, and click on the blue??SUBSCRIBE NOW??button.

TA Performance

Paul McCartney

John Thomas

Candlestick Park

Concert Goers

A Note on the Friday Options Expiration

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

These include:

iShares Barclay 20+ Year Treasury Bond Fund (TLT) August, 2014 $115-$118 in-the-money bear put spread with a cost of $2.70

iShares Barclay 20+ Year Treasury Bond Fund (TLT) August, 2014 $117-$120 in-the-money bear put spread with a cost of $2.61

As long as the iShares Barclay 20+ Year Treasury Bond Fund (TLT) closes at $115.00 or below on Friday, you will achieve the maximum profit in both these positions. Today, the (TLT) closed at $114.76, so, so far, so good.

Both positions expire with a value of $3.00, giving you a profit of 11.1% on the $115-$118 put spread and 13% on the $117-$120 put spread.

In this case, the process 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.

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

Of course, I am watching this position like a hawk. If an unforeseen geopolitical event causes the (TLT) to take off to the upside once again, such as if Russia invades the Ukraine in the next two days, I will quickly STOP OUT for a small loss. You should get the text alert in seconds.

Those who were able to put both spreads on will probably still make money overall, as the expiration breakeven point for the pair has been boosted to $115.69.

If the (TLT) expires slightly in the money, like at $115.05, or $115.10, then the situation may be a little more complicated, and can become a headache.

On the close, your short position expires worthless, but your long put position is converted into an outright naked short position in the (TLT) with a cost of $118.

This you do not want on pain of death, as the potential risk is huge and unlimited, and your broker probably would not allow it unless you put up a ton of new margin.

Professionals caught in this circumstance then buy a number of shares of (TLT) equal to the short position they inherit with the expiring $118 put. Then the short (TLT) position is cancelled out by the long (TLT) position, and on Monday both disappear from your statement. However, this can be dicey to execute going into the close.

So for individuals, I would recommend just selling the $115-$118 put spread in the market if it looks like this situation may develop and the (TLT) is going to close very close to $115.00.

Keep in mind, also, that the liquidity in the options market disappears, and the spreads 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.

Well done, and on to the next trade.

TLT 8-12-14

John ThomasWhat Do You Think? Will the (TLT) Close Over or under $115?

Unloading More Euros

The entire foreign exchange world has been on hold this week, waiting for ECB president Mario Draghi to announce a well-deserved cut in Euro (FXE), (EUO) interest rates.

The sanctions war with Russia is escalating by the day. Russia banned food imports from the US and Europe, a mere $1 billion trade hickey for us, but a $15 billion punch to the gut for the continentals. Some 350 McDonald franchises in Russia will be left with nothing to serve. Yikes!

Economists are paring expectations for European GDP growth for this year as fast as they can.

Italy announced a shocking dive in Q2 growth, and German data is deteriorating by the day, where some 300,000 jobs are dependent on trade with Russia.

The European bond market has certainly gotten the message. The yield on ten-year German bunds hit another all time low at a gob smacking 1.02%, while the return on two year paper fell below zero!

Throwing more fat on the Euro fire were the latest American weekly jobless claims, plunging by 14,000 to a new seven year low of 289,000. This augers for high US interest rates sooner, which is hugely dollar positive and Euro negative.

So given all this, Draghi?s announcement that there would be no interest rate cut whatsoever went over like a lead balloon. You would have expected the Euro to rocket a few cents on this news, thanks to the further yield support.

It didn?t, not even for a second.

Instead, another round of frustrated short sellers hit the market big time, who had been waiting for better prices at which to sell. I was one of those.

With the rapidly deteriorating fundamentals, selling short the Euro has become this year?s one way, ?free money? trade. It is a classic trading nostrum that if you throw good news on an asset and it fails to rally, you sell the hell out of it.

I will reiterate my long time targets for the beleaguered continental currency of $1.27, then $1.18, and possibly as low at $1.00. How quickly will we get to these low numbers?

Just ask Vladimir Putin.

FXE 8-7-14

EUO 8-7-14

Vladimir PutinMeet My New European Head Trader

An Update on the Tesla Fire

Once again, Tesla (TSLA) visionary, Elon Musk, surprised to the upside with his latest reports on earnings and production for his revolutionary vehicle.

Musk, who also founded groundbreaking Space X and Solar City (SCTY), expanded on his plans to manufacture in China and expand sales in Europe, where 220 volts is already standard.

The first ever left hand drive Model S-1 was just delivered in London to E.L. James, author of Fifty Shades of Grey, a fictional tome that is racy in its own right (worst book I ever read).

You can? keep a good stock down, which is now spitting distance from an all time high. That was the obvious message on Tesla (TLSA) shares in the wake of last year?s fire that consumed one of its $80,000 Model S-1?s on a Washington state road after it ran over the rear bumper of the truck it was following.

The video was quickly plastered all over YouTube (click here to view). Tesla quickly delivered a new car to the grateful owner within a week.

This was the first S-1 to catch fire since the production run started two years ago. There have been two others since. Compare that to the roughly 400 gasoline powered vehicles that catch fire on US roads nearly every day.

If you really want to see how volatile gasoline is, try lighting a campfire with it some day. Even tossing in matches in from a great distance, as I once did, you?ll be lucky to have your eyebrows left. I didn?t.

To make amends, Tesla is installing titanium armor plating on the bottom of every S-1 for free. They did mine this week, and gave me new a new Tesla as a loaner!

Tesla followed up quickly with an analysis and a letter with a complete explanation sent to all other S-1 drivers signed by none other than CEO Elon Musk. I have included the entire text below in italics. He doesn?t leave much to the imagination.

If only all car manufacturers behaved like this!
?Earlier this week, a Model?S traveling at highway speed struck a large metal object, causing significant damage to the vehicle. A curved section that fell off a semi-trailer was recovered from the roadway near where the accident occurred and, according to the road crew that was on the scene, appears to be the culprit. The geometry of the object caused a powerful lever action as it went under the car, punching upward and impaling the Model?S with a peak force on the order of 25 tons. Only a force of this magnitude would be strong enough to punch a 3 inch diameter hole through the quarter inch armor plate protecting the base of the vehicle.

The Model?S owner was nonetheless able to exit the highway as instructed by the onboard alert system, bring the car to a stop and depart the vehicle without injury. A fire caused by the impact began in the front battery module ? the battery pack has a total of 16 modules ? but was contained to the front section of the car by internal firewalls within the pack. Vents built into the battery pack directed the flames down towards the road and away from the vehicle.

When the fire department arrived, they observed standard procedure, which was to gain access to the source of the fire by puncturing holes in the top of the battery’s protective metal plate and applying water. For the Model?S lithium-ion battery, it was correct to apply water (vs. dry chemical extinguisher), but not to puncture the metal firewall, as the newly created holes allowed the flames to then vent upwards into the front trunk section of the Model?S. Nonetheless, a combination of water followed by dry chemical extinguisher quickly brought the fire to an end.

It is important to note that the fire in the battery was contained to a small section near the front by the internal firewalls built into the pack structure. At no point did fire enter the passenger compartment.

Had a conventional gasoline car encountered the same object on the highway, the result could have been far worse. A typical gasoline car only has a thin metal sheet protecting the underbody, leaving it vulnerable to destruction of the fuel supply lines or fuel tank, which causes a pool of gasoline to form and often burn the entire car to the ground. In contrast, the combustion energy of our battery pack is only about 10% of the energy contained in a gasoline tank and is divided into 16 modules with firewalls in between. As a consequence, the effective combustion potential is only about 1% that of the fuel in a comparable gasoline sedan.

The nationwide driving statistics make this very clear: there are 150,000 car fires per year according to the National Fire Protection Association, and Americans drive about 3 trillion miles per year according to the Department of Transportation. That equates to 1 vehicle fire for every 20 million miles driven, compared to 1 fire in over 100 million miles for Tesla. This means you are 5 times more likely to experience a fire in a conventional gasoline car than a Tesla!

For consumers concerned about fire risk, there should be absolutely zero doubt that it is safer to power a car with a battery than a large tank of highly flammable liquid.?

Elon Musk
CEO,
Tesla Motors

 

TSLA 8-6-14

SCTY 8-6-14

TeslaTesla Traffic Jam

 

Tesla - 2