Last month, I shot out a Trade Alert to buy theCurrency Shares Australian Dollar Trust (FXA) December, 2013 $89-$91 bull call spread that turned immediately profitable. A mere four trading days later I sold out, after the (FXA) rallied an impressive $1.2, adding 0.84% to the value of my model trading portfolio.
That turned out to be the absolute top of the move. This is not unusual, as I am legendary throughout the market for picking the perfect tops and bottoms of market moves, and then leveraging up the other way. This is why pros stampeded into my Trade Alerts. Maybe it?s my math and engineering background that enables me to do this with such precision, a world where accuracy is measured to the Angstrom (0.0000000001 meters).
When the market marked my position at its maximum theoretical value of $2.00, that?s all I needed to know. The Trade Alert to get out flew your way the next morning.
After that, the Aussie was deluged with bad news. Reserve Bank of Australia governor, Glenn Stevens, said he was considering intervening in the foreign exchange market to head off its appreciation. Then, the government blocked a $2.7 billion takeover bid by US agribusiness giant Archer Daniels Midland (ADM) for the Australian grain handler, GrainCorp. A ban of foreign takeovers means less capital coming into the Land Down Under. Then, Goldman Sachs followed up with a forecast that the Aussie was heading for $85. After that, it was all over but the crying.
So here we are three weeks later, and I am getting plaintive emails from followers asking me what to do about their Australian dollar positions. The excuses as to why they are still long Aussie are legion, and range from ?I was traveling? to ?my dog ate my homework.? In the meantime, the (FXA) has plunged from $93.80 to $90, spilling much blood among those who still held the position.
Let me tell you how many trading rules these people violated:
1) When positions go deep in the money, you always place a stop loss at your cost, below the market. That way, you are effectively playing with the ?house?s money.? Your worst case scenario is that you break even.
2) You can?t travel and trade. I structure these trades so they can breathe and you don?t have to watch your screen 24/7. But you can?t disappear off the face of the map counting on notes in bottles washing ashore to keep you up to date.
3) Understand your own risk tolerance. Before you enter every trade, calculate how much money you are willing to lose if it goes against you. Then, if it hits that point, get out in the most automatic, emotionless, automaton way possible and go on to the next trade. There are plenty of fish in the sea, over 100 this year alone. You don?t need my permission to take a loss.
4) Don?t look at any position in isolation, look at the entire portfolio. I design these things so that some will be going up in value at any given point in time, and others down, in all market conditions. That way, one will hedge the other, limiting losses. In the case of the (FXA), your hedge was in being short the Treasury bond market (TLT), (TBT), which was profitable, and mitigated your losses if you didn?t get out of the (FXA).
5) You?ve got to watch the news. Bloomberg, Reuters, and the Wall Street Journal can get you a headline faster than I can send out a Trade Alert. When the Australian central bank governor started flapping his gums about possible intervention to push his currency lower, that?s all you needed to know. Hasta la vista, baby.
6) I am not always right. In fact, this year?s trading statistics show that I am wrong 15% of the time. That is less than almost anyone else. But wrong is wrong. Don?t let that 15% cost you all your profits for fear because you lack discipline.
I don?t think the Australian dollar is going down forever. In fact, there is still a reasonable chance that the Currency Shares Australian Dollar Trust (FXA) December, 2013 $89-$91 bull call spread will close at its maximum theoretical value of $2.00 by the December 20 expiration.
Central bank intervention can only dictate the direction of a currency for only short periods. After that, fundamentals take over. In the face of a 2014 global synchronized economic recovery, that means UP for the Aussie.
International interest rate differentials are the primary factoring in determining direction over the long term. With overnight Aussie rates at an all time low of 2.5%, further cuts are unlikely, lest the real estate bubble there inflates further. That means the next directional change in Australian interest rates is up, and that will be great news for the Aussie.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/12/Kangaroo-Car.jpg307409Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-12-09 01:05:022013-12-09 01:05:02Lessons from the Australian dollar
Featured Trade: (THE BOND CRASH HAS ONLY JUST STARTED), ($TNX), (TLT), (TBT), (INDIA VS CHINA), (FXI), (PIN), (INP), (TTM)
10-Year Treasury Note ($TNX)
iShares Barclays 20+ Year Treas Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
iShares China Large-Cap (FXI)
PowerShares India (PIN)
iPath MSCI India Index ETN (INP)
Tata Motors Limited (TTM)
When I first visited Calcutta in 1976, more than 800,000 people were sleeping on the sidewalks, I was hauled everywhere by a very lean, barefoot rickshaw driver, and drinking the water out of a tap was tantamount to committing suicide. Some 36 years later, and the subcontinent is poised to overtake China's white hot growth rate.
My friends at the International Monetary Fund just put out a report predicting that India will grow by 8.5% this year. While the country's total GDP is only a quarter of China's $5 trillion, its growth could exceed that in the Middle Kingdom as early as 2014.
Many hedge funds believe that India will be the top growing major emerging market for the next 25 years, and are positioning themselves accordingly. Investors are now taking a harder look at the country ETF?s, including India (INP) and China (FXI), which have recently suffered gut churning selloffs.
India certainly has a lot of catching up to do. According to the World Bank, its per capita income is $3,275, compared to $6,800 in China and $46,400 in the US. This is with the two populations close in size, at 1.3 billion for China and 1.2 billion for India.
But India has a number of advantages that China lacks. To paraphrase hockey great, Wayne Gretzky, you want to aim not where the puck is, but where it's going to be. The massive infrastructure projects that have powered much of Chinese growth for the past three decades, such as the Three Gorges Dam, are missing in India. But financing and construction for huge transportation, power generation, water, and pollution control projects are underway.
A large network of private schools is boosting education levels, enabling the country to capitalize on its English language advantage. When planning the expansion of my own business, I was presented with the choice of hiring a website designer here for $60,000 a year, or in India for $5,000. That's why booking a ticket on United Airlines or calling technical support at Dell Computer gets you someone in Bangalore.
India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. China's 30 year old 'one child' policy is going to drive it into a wall in ten years, when the number of retirees starts to outnumber their children.
There is one more issue out there that few are talking about. The reform of the Chinese electoral process at the next People's Congress in 2013 could lead to posturing and political instability which the markets could find unsettling. India is the world's largest democracy, and much of its current prosperity can be traced to wide ranging deregulation and modernization than took place 20 years ago.
I have been a big fan of India for a long time, and not just because they constantly help me fix my computers. In the past, I recommended Tata Motors (TTM), which has since doubled, making it one of my best, all-time single stock picks (click here for ?Take Tata Motors Out for a Spin?). On the next decent dip take a look at the Indian ETF?s (INP), (PIN), and (EPI).
https://www.madhedgefundtrader.com/wp-content/uploads/2013/08/Rickshaw.jpg338454Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-12-06 01:03:242013-12-06 01:03:24India is Catching Up With China
Featured Trade: (THE POPULATION BOOM), (WHY WATER WILL SOON BE WORTH MORE THAN OIL), (CGW), (PHO), (FIW), (VE), (TTEK), (PNR), (WHO EXPENSIVE OIL HURTS THE MOST), (USO), (TESTIMONIAL)
Guggenheim S&P Global Water Index (CGW)
PowerShares Water Resources (PHO)
First Trust ISE Water Idx (FIW)
Veolia Environnement S.A. (VE)
Tetra Tech Inc. (TTEK)
Pentair Ltd. (PNR)
United States Oil (USO)
In their century long coverage of exotic places, cultures, and practices, National GeographicMagazine inadvertently sheds light on broad global trends that deeply affect the rest of us. Plus, the pictures are great. A recent issue celebrated the approach of the world's population to 7 billion, and the implications therein.
Long time readers of this letter know that demographic issues will be one of the most important drivers of all asset prices for the rest of our lives. The magazine expects that our planet?s population will reach 9 billion by 2045, the earliest date that I have seen so far. Can it take the strain? Early religious leaders often cast Armageddon and Revelations in terms of an exploding population exhausting all resources, leaving the living to envy the dead. They may not be far wrong.
A number of developments have postponed the final day of reckoning, including the development of antibiotics, the green revolution, DDT, and birth control pills. Since 1952, life expectancy in India has expanded from 38 years to 64. In China, it has ratcheted up from 41 years to 73. These miracles of modern science explain how our population has soared from 3 billion in a mere 40 years.
The education of the masses may be our only salvation. Leave a married woman at home, and she has eight kids, as our great grandparents did, half of which died. Educate her, and she goes out and gets a job to raise her family's standard of living, limiting her child bearing to one or two. This is known as the ?demographic transition.?
While it occurred over four generations in the developed world, it is happening today in a single generation in much of Asia and Latin America. As a result, fertility around the world is crashing. The US is hovering at just below the replacement rate of 2.1 children per family, thanks to immigration. But China has plummeted to 1.5, Europe is at 1.4, and South Korea has plunged as low as 1.15.
Population pressures are expected to lead to increasing civil strife and resource wars. Some attribute the genocide in Rwanda in 1999, which killed 800,000, as the bloody result of overpopulation.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/Traffic.jpg266397Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-12-05 08:39:452013-12-05 08:39:45The Population Boom
If you think that an energy shortage is bad, it will pale in comparison to the next water crisis. So investment in fresh water infrastructure is going to be a great recurring long-term investment theme. One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.
Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world's population, up to 90% of the fresh water is already polluted, some irretrievably so. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.
Aquifers in the US, which took nature a millennia to create, are approaching exhaustion. While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don't have any, and will easily double the end cost of water to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. Beef exports are really a way of shipping water abroad in concentrated form.
The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the 2008 US stimulus package was similarly spent. It says a lot that when I went to the University of California at Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds!
At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 14% since the October low. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world's greatest per capita water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/Water-Fall.jpg249365Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-12-05 08:37:502013-12-05 08:37:50Why Water Will Soon Become More Valuable Than Oil
Every time the price of oil spikes, we learn vast amounts of information about the global reach of this indispensable commodity. It's like taking a non-core elective in geology at college. So I was fascinated when I found the chart of relative sector winners and losers below.
No surprise that energy does best from sky-high crude prices. It is followed by telecommunications and health care. You would also expect consumer discretionary stocks to take it on the nose, as high energy prices almost always lead to a cyclical downturn in the economy.
Who is the worst performer of all? Europe, which makes the recent weakness even more understandable.
Europe Will be the Biggest Loser from High Oil Prices
https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/Before-After.jpg226344Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-12-05 08:35:372013-12-05 08:35:37Who Expensive Oil Hurts the Most
Yes, I know that the presidential election of 2016 is three years off. But if you already know the outcome of that contest you can use it to your advantage trading the markets today.
You don?t want to get caught out like many conservatives did in 2012, who were forced to dump stock in a hurry to beat a surprise jump in capital gains taxes after an unexpected Obama win, triggering a 10% market correction.
If you have any doubt that Hillary Clinton will be the slam-dunk winner in 2016, take a look at the table below. According to a poll just conducted by Quinnpiac University in New Haven, Connecticut, the former Secretary of State beats every Republican front-runner in the key battleground states of Florida and Ohio, often by huge margins.
Notice that the more conservative the candidate, the bigger the losing margin. I have always believed that the United States is a fundamentally moderate, middle of the road country. Whenever either party leans towards extremes, they are sent to the woodshed, where they are punished severely by the voters. At the end of the day, most Americans just wish that the government would go away.
In another poll I saw Clinton is leading by 60%-40% with Republican women. Democrats are counting on many to cross party lines to vote for the first woman president, as they did for the first black one in 2008. Most other leading polls are reaching the same conclusion.
You can forget about Senator Ted Cruz from Texas because he was born in Canada, with a Canadian father. After carping about Obama being from Kenya for eight years, the last thing the Republicans will do is run a Canadian for president.
So what will President Hillary mean for the market? There?s no point in asking her. Officially, she is not even running yet. But I have been in touch with some of her recent and past staff people, and the answer seems to be not much.
With our Middle Eastern wars done, Al Qaida a distant memory, the economy going great guns, unemployment down, and the US energy independent, Clinton should inherit a country that is in pretty good shape.
With the economy reaccelerating back to a 3%-4% growth rate, and no new wars, the budget should be close to balancing. The dollar will be endemically strong.
We should be at the threshold of a Pax Americana. In these goldilocks conditions stocks should rise by 10% a year, and 13% with dividends, and inflation will stay under control. Bonds will slowly grind down, and interest rates up. That works for me.
So, social issues will be the top legislative priority. You can expect to hear a lot about gun control. Assault rifles, especially military ones like the AR-15, and high capacity magazines will become history. You can also count on federal restrictions on the resale of firearms and closer tracking of convicted criminals.
Immigration will be another hot button item. Expect measures to permit the 10 million illegals currently in the country to gain access to citizenship, subject to strict conditions.
Clinton will also make an effort to roll back restrictions on voter?s rights now rampant in red states. Ten-hour lines to vote in black neighborhoods in Miami should become a thing of the past. The same will hold true for state restrictions on abortion, such as mandatory ultrasounds.
President Obama did the heavy lifting with financial regulation through Dodd-Frank, and health care with the Affordable Care Act. It will be up to Hillary to implement and enforce existing law, a far easier task.
The same will be true with tax reform. We took the big hit when the federal income tax rate jumped from 35% to 39.50%. Clinton will probably only nibble at the edges. It will be hands off for the middle class. Target number one: the ?carried interest? treatment that assures that most hedge fund managers, like me, pay no more than a 15% annual rate. Capital gains could also see another 5% move.
Big earnings to see their favorite deductions whittled back as well. Home mortgage interest deductibility will get capped at mortgage values of? $250,000-$500,000. Limits will be placed on tax-free charitable donations. Company provided health insurance will become fully taxable as regular income.
The really big impact President Clinton will have on the future of the country will be with her Supreme Court appointments. It is likely that at least one conservative justice will retire or die before the end of her second term in 2024.
That will enable her to shift the 5-4 convective majority to a liberal one for the first time in 40 years. That assures a liberal bent for the country until 2064. After that, I will be long dead, or 112, so I don?t care what happens.
A rapid succession of legal challenges will follow that will eventually bring to an end of gerrymandering of congressional elections and anonymous corporate campaign donations. That will turn Texas, Arizona, and several other states into blue ones. Gay rights will reach full equality, if it hasn?t already happened by then.
Who will Hillary bring into her cabinet? I suggest former presidential candidate, Mitt Romney, as the next Secretary of Health and Social Services. He is the only person who has ever gotten government provided health care to work in the US, with his highly successful Massachusetts program. I think it will take ten years to fully implement Obamacare and for it to become actuarially sound. That makes it just the job for an experienced private equity guy.
So who will be Hillary?s first appointment to the Supreme Court? President Obama will be only 55 when his second term ends, and is a constitutional law professor with a proven track record. The kids are already placed in local schools. The only thing he will need is a new residence. What else is an ex president supposed to do?
The bigger question will be what to do about Bill.
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