Newsletter Archives - Mad Hedge Fund Trader

The Party is Just Getting Started With the Japanese Yen

I?m sorry, but I just don?t believe that we will see a weak dollar potentially going into the first interest rate rise in nine years.

If my friend, Janet, pulls the trigger, then the greenback will become the only currency in the world that is raising rates. Currencies just don?t decline in those circumstances.

In that case, we want to go out and sell short the weakest link in the currency milieu, and that is the Japanese yen.

Even if Janet doesn?t move in September, the prospect will hang over then yen like a Damocles sword.

In addition, the yen is bumping up key chart resistance around ?125. A decisive breakout would clear the way towards ?130, my yearend target for the beleaguered Japanese currency.

A short in the yen is a safe, low risk trade right here in a world gone crazy.

?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 280% of GDP, or 140% 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 0.36%, 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 ?130 then ?150, then ?180. That works out to a price of $200 for the (YCS), which last traded at $94.93. 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 ?125 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.

It?s All Over For the Yen

August 13, 2015

Diary, Newsletter, Summary

Global Market Comments
August 13, 2015
Fiat Lux

Featured Trade:
(CHINA?S FIRECRACKER SURPRISE),
($SSEC), (FXI), (CYB), (EWH),
(ALL I WANT TO DO IS RETIRE),
(THE TWELVE DAY YEAR)

Shanghai Stock Exchange Compostite Index ($SSEC)
iShares Trust - iShares China Large-Cap ETF (FXI)
WisdomTree Trust - WisdomTree Chinese Yuan Strategy Fund (CYB)
iShares, Inc. - iShares MSCI Hong Kong ETF (EWH)

China?s Firecracker Surprise

Diary, Newsletter, Research

Don?t waste your time trying to analyze financial markets right now.

There is only one ticker symbol you need to know about, that for the Shanghai Stock Exchange Composite Index, the ($SSEC).

When Shanghai goes up, the rest of the world?s risk assets happily join the party. When it drops, ?RISK OFF? fever goes pandemic.

China upped the ante this week when it allowed its currency, the Yuan, or the renminbi as it is known locally (the people?s currency), to float freely for the first time in 25 years. That produced a two-day devaluation of 3.6%.

In the very long history of currency debasements, this one was barely a whimper.

Ancient Sumerians used to shave the edges off of gold and silver coins 5,000 years ago.

When President Nixon took the US off of the gold standard in 1973, the dollar eventually fell 75% against the European currencies.

More recently, the Euro has given up 37% against the greenback, moving from a position of grotesque over valuation to dealing with the Greek credit crisis.

So Beijing?s move this week barely tips the needle in the official history of devaluations.

What it does do is create a giant psychological effect, and therein lies the problem.

Since June, the Mandarins in China have been pulling out all the stops to halt a free fall in the country?s share prices.

It has cut interest rates and relaxed reserve requirements. It banned high frequency trading, blaming the collapse on foreign short sellers (sound familiar?). It has even made stock selling illegal in roughly 94% of the country?s free float.

Still, the bears remain emboldened by their recent success.

By cutting the value of the Yuan, the government is providing a modest boost to the economy. A cheaper currency means less expensive exports and more of them, thus, making local businesses more profitable and creating jobs.

But not by much.

There are not a lot of products that live or die on a 3.6% margin. America has not just lost a chunk of its own exports from the additional competition, contrary to the claims of the TV networks and bogus newsletters with which I compete.

But by taking the first such move to undercut the Yuan in 25 years, it is showing the world how serious a problem is the stock crash.

Will the stock collapse feed into the main economy? Is 10% of the world?s GDP going into a Great Recession? Yikes!

SELL, SELL!

There are a few other problems with the Chinese firecracker.

It violates a secret agreement with the US government, made a decade ago, to allow a steady 3-4% a year appreciation of the Yuan against the dollar.

This was designed to slowly eliminate the artificial under valuation of the Yuan that gave the Middle Kingdom an unfair export advantage. The arrangement was responsible for the 20% rise of the Yuan since 2009.

(Sorry Donald, but you?re holding the chart upside down. Yes, I know, stock charts can be pesky things).

Reneging on the deal is ruffling feathers at the US Treasury in Washington. But it won?t amount to more than that, as long as it is temporary.

Which it will be.

China still has a massive trade surplus with the United States. In 2014, it totaled a staggering $343 billion. It maintained that heady pace, totaling $171 billion during the first half of 2015.

There are an awful lot of Chinese clothes, electronics, and toys sitting on the shelves of American retailers.

Its imports are falling, thanks to the collapse of the price of oil and other bulk commodities.

The natural state of the currency of any country running such huge surpluses is for it to rise in value. That will continue in China?s case for the foreseeable future.

Once the waters settle in the stock market, you can count on the Yuan to regain its upward path.

However, this isn?t going to happen in a day. It could be weeks or months until order returns to Chinese equity markets. Until then, expect some scary days there and here as well.

Compound these problems with the uncertainty over the Federal Reserve?s decision on interest rates in September and slower than expected US growth.

It certainly leaves traders and investors alike, with a full plate of issues to consider.

As if we didn?t have enough to worry about.

For some background on my 45 year coverage of the Middle Kingdom, please click here for my 2011 SPECIAL CHINA ISSUE.

Surprise!

August 12, 2015

Diary, Newsletter, Summary

Global Market Comments
August 12, 2015
Fiat Lux

Featured Trade:
(A NOTE ON NEXT WEEK?S OPTIONS EXPIRATIONS)
(TESTIMONIAL)

A Note on Next Week?s Options Expirations

Diary, Newsletter

We have an options positions that is deep in the money, and I just want to explain to the newbies how to best maximize their profits.

This comprises:

S&P 500 (SPY) August $214-$217 in-the-money vertical bear put spread with a cost of $2.50.

As long as the (SPY) closes at $214.00 or above on Friday, August 21, the position will expire worth $3.00 and you will achieve the maximum possible profit.

This will worth out to a 20% gain, something you have been able to achieve in only 17 trading days. Better than a poke in the eye with a sharp stick, as they say.

In this case, the expiration 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 the following Monday, and the margin freed up.

Of course, I am watching these positions like a hawk, as always. If an unforeseen geopolitical even causes the (SPY) to take off to the upside once again, such as Janet Yellen announces that there will never be another interest rate hike again.

You should get the Trade Alert in seconds.

If the (SPY) expires slightly out-of-the-money, like at $214.10, then the situation may be a little more complicated, and can become a headache.

On the close, your short put position expires worthless, but your long put position is converted into a large, leveraged outright naked short position in the (SPY) with a cost of $217.50.

This position 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.

This is not what moneymaking is all about.

Professionals caught in this circumstance then buy a number of shares of (SPY) on expiration day equal to the short position they inherit with the expiring $217 put to hedge out their risk.

Then the long (SPY) position is cancelled out by the short (SPY) 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 $214-$217 put spread outright in the market if it looks like this situation may develop and the (SPY) is going to close very close to the $214 strike.

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.

Well Done and On to the Next Trade

?

Testimonial

Diary, Newsletter, Testimonials

Thank You John,

While I was away at a car show today, my sell order was filled for my iShares Barclays 20+ Year Treasury Bond Fund (TLT) August, 2015 $125-$128 in-the-money vertical bear put spread at $2.90.

I bought it at $2.62 after your Trade Alert. My profit was $2.89 - 2.62 = 0.27 x 3800 = $1,026.

Mort
New Jersey

August 11, 2015

Diary, Newsletter, Summary

Global Market Comments
August 11, 2015
Fiat Lux

Featured Trade:
(AUGUST 12 GLOBAL STRATEGY WEBINAR),
(MIXING WITH THE 1% AT THE PEBBLE BEACH CONCOURSE D? ELEGANCE)

August 10, 2015

Diary, Newsletter, Summary

Global Market Comments
August 10, 2015
Fiat Lux

Featured Trade:
(THE JULY NONFARM PAYROLL YAWN),
(SPY), (TLT)
(WHY I DON?T CARE ABOUT OIL),
(USO), (UNG)

SPDR S&P 500 ETF (SPY)
iShares 20+ Year Treasury Bond (TLT)
United States Oil (USO)
United States Natural Gas (UNG)

The July Nonfarm Payroll Yawn

Diary, Newsletter, Research

I?m back.

No more croissants for breakfast. Goodbye to the fabulous selection of cold cuts and cheeses. No more great coffee. It?s back to a sugar infused, calorie packed concoction at Starbucks.

In other words, it?s back to the salt mines for me.

I have just come off a grueling 12 ? hour flight from Zurich, Switzerland to San Francisco.

My cell phone no longer worked in the US, so I couldn?t call Uber. That meant taking a regular taxi, complete with smelly seats, fleas, and a rude driver, at double the price.

When I got home, I discovered that the refrigerator had broken down, the contents spoiled, the ice melted, flooding the kitchen floor, and causing the floorboards to buckle.

The network connection for the TIVO failed. The batteries in the remotes died. Some insects of indeterminate origin appear to have moved in.

It turns out that jet lag is worse the older you get. Life is a bitch, and then you die.

Can I go back? What! Not until next year? I better get hustling!

At least I got the July nonfarm payroll right. My prediction of 215,000 new jobs proved dead on. The prolific gains in technology were offset by the hemorrhaging losses in energy and commodities.

The new economy appears to be growing at the expense of the old.

No surprise means no market movement. The post number price action was the most muted I can remember. The volatility Index (VIX) only made it to an intraday high of $14.50.

That was fine with me, since my core position of a (SPY) deep in-the-money bear put spread is also effectively a short volatility position. I?m taking some heat in my offsetting hedge, a short in US Treasury bonds (TLT). But that expires in ten trading days, and I?m still in the money.

I think I nailed the coming market action in my Milan, Italy Global Strategy Webinar. After the big dip, and then the big rally, we get a big nothing. That is how I expect August to play out.

Today?s nonfarm was the last chance for any market volatility until the Federal Reserve meeting during September 17-18. Then the Fed decides whether to raise rates by 0.25%, or not, for the first time in nine years.

It?s 50/50 whether they move then, or wait until next year. The Federal Reserve has its own wall of worry to climb.

It makes no difference which action the Fed takes. The mere fact that the decision is out of the way is the big issue. Then we?ll get a head fake of a dip, to be followed by a major rally that could continue until 2016, and take us to new all time highs.

Worse case, we are looking at ? point rise this year, and another one in the spring. After that, the burden will be only the shoulders of inflation, which is absolutely nowhere to be seen, and shouldn?t make a reappearance until the 2020?s.

Since America is the leader of the free world, there is the rest of the planet to consider as well.

Europe is just starting to see some green shoots. China is in disarray. Japan looks OK. Emerging markets, nearly half the world?s GDP, are in dire straights. Even the IMF and the World Bank have pleaded with the Fed not to be too quick off the mark in raising interest rates.

The payroll figures delivered the strength that we have become accustomed to. The headline unemployment rate remained unchanged at 5.3% a decade low, while the broader U-6 ?discouraged worker? jobless rate hovered at 10.4%. There were 14,000 in upward revisions for May and June.

Retail led the pack, with +36,000 job gains, followed by food services (+29,000), health care (+28,000), and professional and technical services (+27,000). Mining and logging lost -4,000 jobs. No surprise there.

I?ll leave you with a nice little piece of anecdotal evidence.

For the last four years, I have bought my kids back to school clothes at the big Desigual shop at the Milan train station.

In 2011, prices were at a 90% discount. They were literally trying to throw inventory out the window. I had to buy an extra suitcase to take my booty home.

The next year, I got a 70% discount, still great. After that, prices were only half off. This year? A 30% break. Not so great, but better than paying full retail. And my kids get next year?s styles early.

Hey, in San Francisco, for sixth grade girls, it?s all about fashion.

My conclusion? When the ?RISK ON? environment returns, buy Europe first. Throw some Japan in there too. And buy the US dollar with both hands.

I?m Baaaack!

Why I Don?t Care About Oil

Diary, Newsletter, Research

With the price of oil closing at a low on Friday of $43.77, you?d think I might be concerned.

In actual fact, I could care less, am indifferent, unconcerned, and even could give a rat?s ass.

There?s nothing like seeing your long term forecasts vindicated.

When I warned the oil majors in the late 1990?s that fracking technology was about to change their world beyond all recognition, they told me I was out of my tree, in the politest way possible, of course.

Their argument was that the technology was untested, unproven, and a huge liability risk. If they accidently polluted underground fresh water supplies, the ambulance chasers would make a beeline towards the deepest pockets around, and that was theirs.

They were telling me this after I supplied them my data showing 17 consecutive successful wells drilled in the depleted oilfields of the Barnet Shale, in West Texas (in the old Comanche country).

Today, I received the chart below from my friends at Business Insider. And guess what? Some 15 years later, and the energy industry has been changed beyond all recognition. The majors finally jumped in after building legal walls against the liability that so concerned them, and started fracking like there was no tomorrow.

The message is pretty clear. In the last five years, US oil production has skyrocketed from 8 million to 11.3 million barrels a day. America is now the world?s largest oil producer, eclipsing Saudi Arabia at 11 million b/d, and Russia at 10.5 b/d and falling.

Oil imports have collapsed from 10.3 to 7 million barrels a day. The share coming from the volatile Middle East has shrunk to a miniscule 2 million barrels a day. Some 80% of Persian Gulf oil exports now go to China. OPEC surplus oil production capacity is soaring (see table below). It couldn?t happen to a nicer bunch of people.

The chart also predicts that the US will achieve energy independence within four years, or at least parity in its imports and exports or energy and distillates. The administration is doing what it can to help along this trend, permitting the first exports of distillates in half a century, to South Korea, it turns out.

Is it any wonder that President Obama is turning a blind eye to recent horrific developments in the Middle East? This explains why I really don?t care about oil prices anymore.

There is another upshot to all of this. About the time that America gets its energy independence, it should also get a balanced budget. That is coming primarily from the big cuts in defense spending. The twin deficits, energy and the budget, are intimately linked. It is no surprise, then, they will disappear together.

By the way, did I mention that this is all great news for the long term future for stock prices? The stock market certainly thinks so, with its stubborn refusal to fall substantially.

Just thought you?d like to know.