Global Market Comments
January 28, 2013
Fiat Lux
Featured Trade:
(THE RACE TO THE BOTTOM FOR CURRENCIES MEANS A RACE TO THE TOP FOR STOCKS),
(SPX), (SPY), (EWG), (DWJ), (FXY), (YCS), (FXE),
(RUBBING SHOULDERS WITH ?THE 1%? AT INCLINE VILLAGE)
Even the Old Hands, like myself, are somewhat amazed by the strength of the global equity markets this month. The S&P 500 has risen 11 out of the last 12 trading days, and is up almost every day this month. It has been the best January in 18 years.
The first week saw the biggest inflows to equity mutual funds in 10 years. Yet, the market went up so fast, most of the largest investors were left at the starting gate, with the bulk of their new money yet to go into the market. If you weren?t as fast on the trigger as I was, you were left to read about it in the Wall Street Journal, and on your way to the Tombstone career cemetery. Hint to market strategists: that money is still out there trying to get in.
It appears that the race to the bottom for currencies is the race to the top for equities. The reality is that in such a competition, everyone wins. Since the mid November low, the (SPX) has risen by 12%. But Germany (EWG), which has had to carry the dead weight of an appreciating Euro, is up 29%. Japan, where the yen has plunged 16%, has seen the currency hedged equity ETF (DWJ) soar by 31%. My own Trade Alert Service tacked on 21%. For investors, this is a ?heads I win, tails you lose? market.
Certainly, the data flow has been there in abundance to justify such ebullience. Everywhere I look, I see improving PMI?s, increasing orders, rising real estate prices. Some 70% of American companies have, so far, beat earnings expectations.
In the US, business is running on all 12 cylinders (or all 80 kw of lithium ion battery power in my world), with the housing, energy, and auto industries all kicking in at once. Yesterday, weekly jobless claims hit a five year low at 335,000, and this morning the HKSB private Chinese PMI rose to a healthy 51.9.
The new Japanese stimulus efforts are so Godzilla like in proportions that the country?s GDP growth could flip from -3.5% to +3% in a mere two quarters. Do I hear the words ?global synchronized expansion?, anyone? Yikes. It makes the (SPX) at 1,500, and the (IWM) at $89 look positively cheap. Even the Federal Reserve?s own dividend discount valuation model says that the (SPX) should be worth 1,750 here.
Hedge funds are getting creamed, as usual, because their shorts are rising much faster than their longs. Look no further than Netflix (NFLX), which had a jaw dropping open short interest of 45%, but soared by a staggering 71% in two days after their earnings announcement. The pain trade is on. That?s why I have been going commando, without any shorts at all, save in the Japanese yen. Thank goodness I?m not in that business anymore. It is sooo last year?s game.
It is, in fact, a one stock market. But this time, there is only a single stock going down, Apple (AAPL), while everything else rises. A close friend whose market timing I respect told me on Tuesday, when the stock traded at $514, that it would hit a final bottom at $438 in three months. Three days later, and here we are at $437.
When the company announced an increase in cash on the balance sheet of $23 billion, the market took $100 billion off its market capitalization, depriving it of its vaunted ?largest company in the world? status. Go figure. This is truly a classic falling knife scenario, which is better observed from afar.
If you had asked me in September, when Apple was trading at $700, where would the (SPX) be if it fell to $437, I would have answered 1,000. Yet, here we are at 1,500. Here?s an intriguing thought, what if my friend is at least partly right, and Apple goes up from here? My own target of the (SPX) at 1,600 becomes a chip shot, possibly by March. Hey, if Ben Bernanke wants me to pile into risk assets, who am I to argue? I?ve always been a team player.
I think I?ll buy more stocks (SPY), (IWM), sell more yen (FXY), (YCS), and drive the Tesla around the mountain one more time. Maybe I can get the clock up to 500 miles.
In this Market, You are Either Very Fast, or Very Dead.
If you really want to get a read on how ?the 1%? are faring these days, take a ski vacation to the tony hamlet of Incline Village on the pristine shores of Nevada?s Lake Tahoe.
Each morning, I trekked to Starbucks, one of the few local sources for the Wall Street Journal and the New York Times. There, trophy wives line up to buy their chai tea lattes, all tall, thin, and blonde, wearing designer sunglasses and snow boots, as if produced from a Gucci cookie cutter. The parking lot is jammed with Range Rovers and Cadillac Escalades.
Keeping up with the Jones?s here on fabled Lakeshore Drive can be quite a task, especially when they are populated by such names as Oracle?s Larry Ellison, casino mogul, Steve Wynn, and Saudi arms dealer, Adnan Kashoggi. Ellison alone is thought to have poured $200 million into his mountain retreat. Some of these compounds offer private beach lodgings for bodyguards and dog groomers. Junk bond king, Michael Milken, springs for the cost of the town?s annual Fourth of July fireworks display as it coincides with his birthday.
In the ultimate feat of hubris one upsmanship, one billionaire is converting the profits from his check cashing business to build a $150 million, 36,000 square foot residence that looks like a convention center. He has ruffled the feathers of locals by chopping down every ancient pine and cedar tree on the property to max out the square footage, violating multiple town ordinances. Who knew that cashing checks was so profitable?
In fact, lakefront Incline boasts one of the few neighborhoods in the US that has held up reasonably well during the real estate crash, with six properties changing hands at $1,000 a square foot in the last year. I guess they?re just not making beachfront property any more. Current listings include a 3 bedroom, 2 bath bungalow for $49.9 million and a 8,694 square foot palace for $43 million. If you are looking for a real bargain, check out the five bedroom French castle at www.inclinecastle.com for $22.85 million. As with the large diamond shortage I have written about previously, this is further evidence that the rich are getting richer at an accelerating rate.
The land here was originally owned by one of the Comstock silver barons of the 1860?s. You may recall it as the location of the TV series ?Bonanza? and I?m sure that every female reader will remember ?Little Joe?. A development company subdivided the land during the 1950?s with the intention of creating a Palm Springs in the mountains, spurred on by the completion of Interstate 80 as part of the infrastructure demanded by the 1960 winter Olympics at nearby Squaw Valley.
Devoid by edict of the down market fast food chains that afflict most of America, Incline boasts two municipal golf courses, where at 6,300 feet, the air is so thin that your drive travels an extra 50 yards. If you want a Big Mac, you have to travel down the road to California-- if the road isn't blocked by snow.
Incline is also a Mecca for libertarian millionaires drawn by the absence of a state income tax. Unfortunately, they also possessed the financial sophistication to buy gorgeous mountainside homes, extract cash-out refi's all the way up, invest the proceeds in the stock market, and lose it all in the subsequent crash.
The result has been a meltdown of Biblical proportions in the housing market. Of the 8,000 homes in the village, 400 are for sale at distressed prices and another 400 or more discouraged sellers hang over the market. Brokers report a brisk business in bank owned short sales, foreclosures, and sales on the Washoe County Court House steps for homes worth less than $800,000 at prices down 60%-70% from the 2006 peak.
Jumbo financing is now an extinct species, unless you're happy to pay a 200 basis point premium over conventional loans. So the middle market, where homes are priced from $1 million to $4 million, has ceased to exist. Only cold, hard cash talks here. But high net worth individuals hate tying up capital in an illiquid asset when more attractive options abound. Precious metal coins are especially popular in the Silver State.
I am sad to report that antidepressant addiction among realtors in Incline Village is at epidemic proportions, since they don?t have anything to sell to the 1%. Some of their properties have been on the market so long that snow drifts have collapsed balconies, the local wildlife have moved in, and prospective buyers are scared away by offensive odors. Break-ins by black bears have become a serious problem, leaving basketball sized poops on the living room floor.
Abandoned homes see their pipes freeze and burst, causing irreparable damage. In Las Vegas, foreclosed homes can be easily spotted from the air by their dead lawns and green swimming pools. In Incline the 'tells' are the ten foot high mountains of frozen snow dumped there by snow plows, blocking entry. I guess all real estate markets really are local.
Owners used to be able to cover half their annual carrying costs by renting out their properties during Christmas and New Year's, and for a few weeks in the summer. Unfortunately, that market has collapsed also. There are not a lot of high rollers willing to fork out $10,000 a week for a vacation rental in a recession.
If you are one of the 99%, I?d think again before buying a vacation home any time soon. The only consolation is that conditions are much worse in Las Vegas. The optimists concede that prices could stay down for another decade. The pessimists can already be found at the bottom of the lake with the Godfather's Fredo Corleone, another former resident of Incline Village.
Global Market Comments
January 24, 2013
Fiat Lux
Featured Trade:
(SPX 1,600, HERE WE COME!),
(SPX), (SPY), ($INDU), (TLT), (VIX), (USO)
(WHY THE YEN WILL NEVER RECOVER), (FXY), (YCS)
Take a look at the chart below for the S&P 500, and it is clear that we are gunning for an all time high between 1,550 and 1,600. With the debt ceiling crisis now cancelled, you really have to look hard to find any near term reasons to sell stocks, so we could hit those lofty numbers as early as March.
A perusal of the short-term charts certainly demands one to conclude that we are overbought. The Relative Strength Indicator has just hit 70%, normally a signal that we are reaching an interim top. However, the RSI can stay elevated for an extended period of time and trade as high as 80 before the downside risks show their ugly face. That could be months off.
In the meantime, we could see some sort of correction. But it is more likely to be a time correction, not a price one. That has the market moving sideways in an agonizing, tortuous, narrowing range on declining volume for a while before launching on another leg up.
This year?s rally occurred so quickly that a lot of money was left on the sidelines, especially with the largest managers. That is why we have seen no meaningful corrections so far. This condition could remain all the way out until April.
It is likely that traders are going to keep ramping up this market until the January month end book closing. That sets up a quiet February. The deep-in-the-money options that I have been recommending to readers are ideally suited for this falling volatility environment. They reach their maximum point of profitability, whether the market goes up, sideways, or down small.
You see confirmation of this analysis everywhere you look. Treasury bonds (TLT) can?t catch a bid, and are clearly threatening to break out above the 1.90% yield band that has prevailed for the past year. The Volatility Index (VIX) hit another new five year low today at $12.40. Oil (USO) just hit a multi month high. It all points to stock prices that will remain on an upward path for the foreseeable future.
I think I?ll buy more stocks and then go drive my new Tesla around the mountain.
A Tesla S-1 Performance
If anyone is expecting the Japanese yen to take back the losses it has suffered over the last two months, you can forget about it happening anytime soon, eventually, or in your lifetime.
Naysayers have been pointing to this week?s policy meeting at the Bank of Japan as proof that the yen has stumbled in the international race to the bottom, and that it is running up the white flag of surrender in the currency wars. They point to the rise in the beleaguered currency from a ?90.16 to the dollar Friday low, back to ?88.4 in the cash market, and a gain in the (FXY) from $108.20 to $110.70. The inverse ETF (YCS) has backed off from $55 to $52.60.
There were several reasons for the pause. BOJ governor, Masaaki Shirakawa, said he would delay any substantial monetary easing until 2014. Hold the presses! Prime Minister Shinzo Abe indicated that if the yen fall became too severe, it might have to be slowed. The US government started carping that the weak yen was giving Japan?s car exports an unfair advantage.
That all-electric Nissan Leaf that cost $38,000 in November can now be sold for $31,000, once the recent currency depreciation is factored in. That is a big difference, and was a cause of frequent trade wars in decades past. How do you think we ended up with a Corolla factory in Fremont, California?
There is something much more fundamental afoot. Japan has been far and away the world?s largest international direct investor for the last 20 years. Trillions of dollars have poured out of the country, snapping up energy resources, commodities, manufacturing facilities, commercial real estate, and yes, lots of golf courses.
When the interest and dividends thrown off by these holdings were brought back to Japan, dollars were sold and yen bought, some $100 billion worth a year. On top of this, you can add $40 billion in interest payments earned on $800 billion in US Treasury bonds held by the Japanese government. Total it all up, and it is not only enough to support the yen, but to send it to new highs continuously for the past two decades, no matter how dire the worsening fundamentals of the domestic Japanese economy.
So what happens next? Think of the Nissan Leaf trade in reverse. That American factory that cost $1 billion in 2012 will now set a Japanese investor back $1.2 billion. Ditto for the government?s purchase of US Treasuries. The Japanese won?t stop their foreign investment completely, but they are now being priced out of the market in many transactions, and it will slow appreciably. So does that repatriated interest and dividends. This will feed into a weaker yen over the long term.
Given more time, Japan?s other awful fundamentals will start to kick in as well. Those include a deplorable demographic outlook, a debt/GDP ratio of 240%, the hollowing out of Japanese industry as it decamped for China, and the new cold war with the Middle Kingdom.
I?ll tell you how recent developments will end. Prime Minister Abe will fire the BOJ governor Shirakawa or he will wait a couple of months for him to retire. That will be consistent with his pedal to the metal strategy for reviving the Japanese economy. Then, the aggressive monetary easing he campaigned and won the election on, will get moved from 2014 back up to 2013--early 2013. Like, tomorrow. Then it will be back to free-fall for the yen.
Use this temporary and long overdue weakness to add short positions in the Japanese yen. You can also pick up more of the short yen ETF here, the (YCS).
Take Away the Meatball and What Are You Left With?
Global Market Comments
January 23, 2013
Fiat Lux
Featured Trade:
(TRADE ALERT SERVICE BLASTS TO NEW ALL TIME HIGH),
(SPY), (IWM), (FCX), (AIG), (FXY), (YCS), (TLT)
(CATCHING UP WITH DOWNTON ABBEY)
The Trade Alert Service of the Mad Hedge Fund Trader posted a new all time high today, pushing its two-year return up to 66%. The Dow average booked a miniscule 12% gain during the same time period. The industry beating record was achieved on the back of a spectacular January, which so far had earned readers a mind blowing 10.92% profit.
Right after the January 2 opening, I shot out Trade Alerts urging readers to take maximum long positions in the S&P 500 (SPY) and the Russell 2000 small cap index (IWM). Later, I piled on longs in copper producer Freeport McMoRan (FCX) and American Insurance Group (AIG). I balanced these out with aggressive short positions in the Treasury bond market (TLT), and the Japanese yen (FXY), (YCS). Only my position in Apple (AAPL) has cost me money this year.
After grinding around just short of the previous top for four tedious and painful months, the breakout was certainly welcome news for many. Once I wracked up an unprecedented 25 consecutive profitable trades over the summer, things went wobbly. The Fed unleashed an early, surprise, pre election QE3. Then inventors stopped drinking the Apple (AAPL) Kool Aide en masse. The extent of the tax loss selling after the Obama win was also a bit of a shocker. Maybe I should take longer vacations.
Then the ?aha? moment came. I concluded at the end of November that the multiple political crises facing us were nothing more than hot air. This meant the risk markets were poised to launch multi month bull runs to new all time highs, and I positioned myself, and my followers, accordingly. In the end, that is exactly what we got.
Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011 and 14.87% in 2012. The service includes my Trade Alert Service, daily newsletter, real-time trading portfolio, an enormous trading idea database, and live biweekly strategy webinars. To subscribe, please go to my website at www.madhedgefundtrader.com, find the ?Global Trading Dispatch? box on the right, and click on the lime green ?SUBSCRIBE NOW? button.
I decided to flee the madness in London for a day and visit some old friends in the countryside, the 8th Earl and Countess of Carnarvon. The late 7th Earl was an early investor in my first hedge fund and I have kept in touch with the family ever since.
His grandfather, the 5th Earl gained fame and fortune from his co-discovery of King Tut?s tomb in Egypt?s Valley of the Kings in 1922. His early death, shortly thereafter, was the origin of ?The Mummy?s Curse? of depression era horror film fame. Many of his discoveries today make up the bulk of the Egyptian collection in New York?s Metropolitan Museum of Art, which the family sold to pay estate taxes.
Recently, the family has been renting out their 350 year old home, a 15-minute taxi ride south of Newbury, the spectacular Highclere Castle, for use as a film set. The period drama series that resulted, ?Downtown Abbey,? unexpectedly became a blockbuster in the US where viewers stupefied by endless low budget reality shows were starved for quality, thoughtful content and adult writing.
It also sent 100,000 visitors a year their way, as well as $25 million in ticket fees. This windfall enables them to maintain the house and the magnificent gardens in immaculate condition. The cash flow also allows them to ramp up the other family business, breeding racehorses for the queen. Portraits of past winners adorned almost every room.
After tea with my hosts and a personal tour of the estate, I picked up some tea towels for friends at home who are into this kind of thing. I also saw a display of some spectacular early Egyptian relics, which the family found bricked up behind a wall 60 years after the Met sale.
The series? third season has just begun and I can tell you now how I think it will play out. The politically incorrect and ultra liberal American mother-in-law, played by Shirley MacLain, has made an unannounced visit, and was about as welcome as a bull in a china shop. Matthew Crawley has bought a new car, so we can expect him to flirt with death in a crash in the near future. The current earl, Robert Crawley, appears to be better at hosting dinners than managing the estate, we we can count on another financial crisis.
There seems to be some sort of gay lovers triangle developing among the footmen. The former head footman, John Bates, now in prison for murder, will be exonerated, but killed in a jailhouse riot just before his release. Lady Edith Crawly is left standing at the altar, so she goes into politics to champion the suffragette movement, much to the horror of her family. The Irish son-in-law and former driver dies in the 1922 Irish rebellion.
Given the huge reception by the viewing public, we can count on this drama to extend to at least five seasons, when it will then be syndicated for the rest of our lives. That works fine for the real life Carnarvons, who can now reinvest in even more thoroughbreds. Who needs hedge funds?
Global Market Comments
January 22, 2013
Fiat Lux
Featured Trades:
(THE DEBT CEILING CRISIS IS CANCELLED),
(SPY), (IWM), (FCX), (AIG), (FXY), (YCS),(AAPL), (VIX)
(JANUARY 23 GLOBAL STRATEGY WEBINAR)