Global Market Comments
November 12, 2013
Fiat Lux
Featured Trade:
(YOU JUST CAN?T KEEP AMERICA DOWN),
(TLT), (SPY), (GLD),
(A SPECIAL NOTE ON NOVEMBER EXERCISED OPTIONS)
iShares 20+ Year Treasury Bond ETF (TLT)
SPDR S&P 500 (SPY)
SPDR Gold Shares (GLD)
You just can?t keep America down. That is the overwhelming message from Friday?s blockbuster October nonfarm payroll showing that 204,000 jobs were added, double the industry forecasts. The headline unemployment rate ratcheted back up from 7.2% to 7.3%, the first gain in many months.
August and September were revised up by an eye popping 60,000 jobs. October private sector job growth came in at a stunning 212,000. Apparently, the prospect of an imminent default by the US government prompted many corporate managers to rush out and hire! Go figure.
Without the Washington shutdown we probably would have seen a 300,000 print. It appears that 223,000 federal workers were temporarily laid off, but later received back pay, so they weren?t counted as jobless.
Leisure and hospitality was up an unbelievable 53,000. Retail added 44,000. Professional and technical services tacked on 21,000. Health care increased by 12,000 jobs, anticipating an onslaught of 30 million new customers with government guaranteed payments, thanks to Obamacare.
It confirms what I have been arguing since the summer, that the US economy is far stronger than anyone suspects, and that we are accelerating with an upward trajectory. This is the recurring theme that I get from speaking to dozens of CEO?s every month, whose views on the health of their own business usually beat the government data releases by 3-6 months. Believe me, I don?t talk to these guys because they wear snappy suits.
Of course, the initial market reaction was negative, since the good news is seen as advancing the Federal Reserve?s tapering of its quantitative easing program. This certainly was the read by the stock market on Thursday, when a surprise interest cut in the Euro and a blistering 2.8% Q3 GDP report triggered a 150 sell off in the Dow. Gold took it on the nose again, dropping $25. But we made it all back, and more, the next day, disproving this analysis, for everything, except gold.
Bonds really took it in the keister, the (TLT) dropping two and a half full points, bumping ten year Treasury yield up from 2.60% to 2.77%, one of the most extreme pops of the year in the fixed income markets. I came within a hair?s breadth of doubling my bond shorts the previous day, but decided to wait for the payroll report. This time, discretion was not the better part of valor.
If anyone had any doubts about the extreme, but underestimated strength of the economy, better take a look at the chart below of growth of the broader monetary aggregates. We are running at a nearly white hot 40% YOY growth rate.
This reflects a huge increase that is occurring in the velocity of money, a number that almost no one tracks, in addition to the Federal Reserve?s never ending monetary expansion. This is because more people everywhere are doing more business with each other. Despite what you hear in the media, confidence is rocketing. This eventually has to feed into higher reported GDP growth rates and will justify ever-higher share prices.
How many individual investors believe this? Almost no one. This year, $114 billion has trickled back into equity mutual funds. That is only a dent in the $600 billion this group tore out of equity mutual funds over the last five years. That fact alone should be worth another 25% of upside in the indexes.
For more depth on the rapidly evolving fundamentals in the economy, click here for my recent piece on ?The Rising Risk of a Market Melt Up?.
In Better Shape Than He LooksThere are only 4 days left until the equity option expiration on November 15. My short dated November expiration play turned out to be wildly successful, with all nine of these trades quickly turning profitable. Including the six positions we now have on board, the last 14 consecutive Trade Alerts have been profitable, raising the success rate of our service to a stunning 85%.
The Mad Hedge Fund Trader?s model trade portfolio has three remaining positions that are deep in-the-money that expire that day. So, it is important that we tread carefully to get the full benefit.
I received a few emails from readers whose option holdings have already been exercised against them, and have asked me for advice on how best to proceed. So, here we go.
The options traded on US exchanges and referred to in my Trade Alerts are American style, meaning that they can be exercised at any time by the owner. This is in contrast to European style options, which can only be exercised on the expiration day.
The call option spreads that I have been recommending for the past year are composed of a deep out-of-the-money long strike price plus a short portion at a near money strike price.
When stocks have high dividends, there is a chance that the near money option you are short gets exercised against you by the owner. This requires you to deliver the stock equivalent of the option you are short, plus any quarterly dividends that are due. Don?t worry, because your long position perfectly hedges you against this possibility.
You usually get notice of this assignment in an email after the close. You then need to email or call your broker back immediately informing him that you want to exercise your remaining long option position to meet your assigned short position.
This is a gift, as it means that you can realize the entire maximum theoretical profit of the position without having to take the risk of running it all the way into expiration. You can either keep the cash, or pile on another short dated option spread position and make even more money.
This should completely close out your position and leave you with a nice profit. This is not an automatic process and requires action on your part!
Assignments are made on a random basis by an exchange computer, and can happen any day. Exercise means the owner of the option that you are short completely loses all of the premium on his call.
Dividends have to be pretty high to make such a move economic, usually at least over 3% on an annual rate. But these days, markets are so efficient that traders, or their machines, will exercise options for a single penny profit.
Surprise assignments create a risk for option spread owners in a couple of ways. If you don?t check your email every day after the close, you might not be aware that you have been assigned. Alternatively, such emails sometimes get lost, or hung up in local servers or spam filters, which occasionally happens to readers of my own letter.
Then, you are left with the long side deep out-of-the-money call alone, which will have a substantially higher margin requirement. This is equivalent to going outright long the stock in large size.
This is a totally unhedged position now, and suddenly, you are playing a totally different game. If the stock then rises, you could be in for a windfall profit. But if it falls, you could take a big hit. Better to completely avoid this situation at all cost and not take the chance. You are probably not set up to do this type of trading.
If you don?t have the cash in your account to cover this, you could get a margin call. If you ignore this call as well, your broker will close out your position at market without your permission.
It could produce some disconcerting communications from your broker. They generally hate issuing margin calls, and could well close your account if it is too small to bother with, as they create regulatory issues.
In order to get belt and braces coverage on this issue, it is best to call your broker and find out exactly what are their assignment policies and procedures. Believe it or not, some are still in the Stone Age, and have yet to automate the assignment process or give notice by email. An ounce of prevention could be worth a pound of cure here. You can?t believe how irresponsible some of these people can be.
Consider all this a cost of doing business, or a frictional execution cost. In-the-money options are still a great strategy. But you should be aware of all the ins and outs to get the most benefit.
John Thomas
Global Market Comments
November 11, 2013
Fiat Lux
Featured Trade:
(MAD HEDGE FUND TRADER 2013 PERFORMANCE TOPS 51%),
(TLT), (TBT), (AAPL), (XLI), (IWM), (SPY)
(TESTIMONIAL),
(A TRIBUTE TO A TRUE VETERAN)
iShares 20+ Year Treasury Bond ETF (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
Apple Inc. (AAPL)
Industrial Select Sector SPDR (XLI)
iShares Russell 2000 ETF (IWM)
SPDR S&P 500 (SPY)
The Trade Alert service of the Mad Hedge Fund Trader has posted a new all time high in performance, taking in 46.05% so far in 2013. The three-year return is an eye popping 101.7%, taking the averaged annualized return to 35%. That compares to a far more modest increase for the Dow Average during the same period of 19%.
This has been the profit since the groundbreaking trade mentoring service was launched 35 months ago. These numbers place me at the absolute apex of all hedge fund managers, where the year to date gains have been a far more pedestrian 3%.
These numbers come off the back of a blistering week in the market where I added 5% in value to my model-trading portfolio. I called the top in the bond market on Monday, shorted the Treasury bond ETF (TLT), and bought the short Treasury ETF (TBT). Prices then collapsed, taking the ten-year Treasury bond yield from 2.47% to 2.63%.
I then pegged the top of the Euro (FXE) against the dollar, betting that the European Central Bank would have to cut interest rates to head off another recession. Since then, the beleaguered continental currency has plunged from $1.3700 to $1.3350 to the buck.
I then bet that the stock market would enter another tedious sideways correction going into the Thanksgiving holidays. I bought an in the money put spread on the S&P 500, and then bracketed the index through buying an in the money call spread.
Carving out the 2013 trades alone, 57 out of 71 have made money, a success rate of 80%. It is a track record that most big hedge funds would kill for.
This performance was only made possible by correctly calling the near term direction of stocks, bonds, foreign currencies, energy, precious metals and the agricultural products. It all sounds easy, until you try it.
My esteemed colleague, Mad Day Trader Jim Parker, has also been coining it. He caught a spike up in the volatility index (VIX) by both lapels. He also was a major player on the short side in bonds.
The coming winter 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 in 2014. The Trade Alerts should be coming hot and heavy.
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 and my daily newsletter, the Diary of a Mad Hedge Fund Trader. You also get a real-time trading portfolio, an enormous trading idea database, and live biweekly strategy webinars, order?Global Trading Dispatch PRO?adds Jim Parker?s?Mad Day Trader?service.
To subscribe, please go to my website at www.madhedgefundtrader.com, find the ?Global Trading Dispatch? or "Mad Hedge Fund Trader PRO" box on the right, and click on the blue ?SUBSCRIBE NOW? button.
Mad Day Trader Jim ParkerGlobal Market Comments
November 8, 2013
Fiat Lux
Featured Trade:
(THE RISING RISK OF A MARKET MELT UP)
(FXE), (FXY), (YCS), (FXA), (SPY), (USO),
(THE PARTY IS JUST GETTING STARTED WITH THE JAPANESE YEN),
(FXY), (YCS), (DXJ)
CurrencyShares Euro Trust (FXE)
CurrencyShares Japanese Yen Trust (FXY)
ProShares UltraShort Yen (YCS)
CurrencyShares Australian Dollar Trust (FXA)
SPDR S&P 500 (SPY)
United States Oil (USO)
ProShares UltraShort Yen (YCS)
WisdomTree Japan Hedged Equity (DXJ)
The risk of a major market melt up just took a quantum leap upward with the European Central Bank?s surprise 25 basis points in interest rates a few minutes ago. The move had not been expected from normally sleepy and moribund European monetary authorities for a few more months.
The ECB?s action has major positive implications for the world economy. It gives a shot of adrenalin to a global synchronized economic recovery, which was already in the cards for 2014. The effect on all asset classes will be huge.
Of course, the Euro ETF (FXE) crashed by $1.70, as one would expect, one of the largest moves of the year in the foreign exchange markets. We already took profits on a short position we strapped on in the Euro the last time it ran up to $1.38, which turned out to be the peak of a multi month move. But it has also spilled over into the other currencies, expanding into a much broader move into the US dollar.
The Japanese yen (FXY), (YCS) has just puked up 60 basis points, where we have a major short position and were looking to add. As a result, we have already gained 58% of the potential profit for a position that we added only two days ago. The Australian dollar (FXA), where I am also attempting to go long on a bigger dip, has lost 50 cents. Gold took it on the nose, again.
The other blockbuster event, which transpired this morning, was the release of the early read of US Q3 GDP, coming in at a red hot 2.8%. This was much higher than expected, with many estimates hovering around the 2.0% level. This means that the 0.5% we lost in the Washington shut down will turn out to be just a speed bump. We should make it all back, and much more, in the run up to Q1, 2014.
But wait! There?s more!! The price of oil has plunged by $20 in six weeks, thanks to the massive oversupply coming out of US fracking fields, and the movement of US-Syrian hostilities to a back burner. Even an Israeli attack on a Russian resupply of missiles at a Syrian port failed to generate any interest in Texas tea. Two months ago, this would have been worth a one day, $5 spike.
The US Energy Information Agency calculates that a $20 cut in the price of oil adds 0.4% to US GDP, and cuts unemployment by 0.1%. Newly enriched consumers spend more money and corporations with lower costs earn more profits. In other words, it cancels out the negative effects of the Washington shutdown in one fell swoop.
The University of California argues that ten out of the last 11 recessions were triggered by oil price spikes. The inverse is true as well. Collapsing oil prices create economic booms. Guess which way we are headed?
US Q3 earnings reports are generating extremely favorable comparisons, up about 10% YOY in aggregate. We have an extremely favorable calendar right now, as November and December are traditionally strong months for risk markets. Maybe it?s also that holiday grog. We also have the 2014 ?Great Reallocation? out of stocks and into bonds to look forward to, which has probably already started.
It all adds up to a first class market melt up, which could start at any time. Indeed, given the torrid market performance since the summer, and its Teflon like behavior during the October Washington shutdown, some strategists are claiming that a melt up has already started. The net net of all of this is that the world looks like a much friendlier place, and I am much more inclined to add risk than I was only a few minute ago when I dragged my sorry ass out of bed.
Below, please find the posture you should take in the markets listed by asset class.
*Stocks - ?buy the dips, running to a new yearend highs, especially in technology,? industrials, health care, and consumer cyclical
*Bonds - ?sell rallies, heading to the top of the 2.50%-3% 10 year yield range
*Commodities - start scaling in on dips in copper, iron ore
*Currencies - sell yen on any rallies, buy the Australian dollar on a China recovery
*Precious Metals - stay away, the world wants? paper assets
*Volatility - stand aside, will bounce along bottom
*The Ags - stay away until next year, great weather is killing prices, but too late to sell short
Global Market Comments
November 7, 2013
Fiat Lux
Featured Trade:
(SELLING THE YEN, AGAIN), (FXY), (YCS), (DXJ),
(ENJOY THE DOLLAR RALLY WHILE IT LASTS),
(FXA), (FXC), (BNZ), (CYB), (FXE)
CurrencyShares Japanese Yen Trust (FXY)
ProShares UltraShort Yen (YCS)
WisdomTree Japan Hedged Equity (DXJ)
CurrencyShares Australian Dollar Trust (FXA)
CurrencyShares Canadian Dollar Trust (FXC)
WisdomTree Dreyfus New Zealand Dollar (BNZ)
WisdomTree Chinese Yuan (CYB)
CurrencyShares Euro Trust (FXE)
The Bank of Japan released the minutes of its previous meeting last night, so we now officially know what?s bothering them.
While the inflation rate has edged up to 0.7%, it is still miles (kilometers) away from its two year target of 2.0%. The 100% growth in the money supply promised by the end of 2014 is arriving on schedule. Since October, 2012, the central bank?s balance sheet has ballooned by an awesome 45%.
However, the desired effects on the economy are starting to fade. Real wages are still falling in September for a hair raising 16 months in a row, creating a deflationary effect on the economy that is huge. Prime Minister, Shinso Abe, is also shooting himself in the foot by raising taxes next April, and again in 2015.
It is a problem that is all too familiar to those of us here in the US. The BOJ can step on the accelerator all it wants. But as long as the Diet (their parliament) applies the brakes at the same time to keep the deficit hawks happy, the economy will go nowhere. Indeed, the recent data releases from Japan, white hot in the first half of the year, are starting to cool.
So the BOJ will do exactly as Ben Bernanke has done and throw more gasoline on the fire in the form of further, aggressive monetary stimulus. In layman?s terms this means it?s time to speed up the yen printing presses. That is the only way the central bank can offset the fiscal drag coming out of Tokyo. This is terrible news for the Japanese yen.
The BOJ is certainly going to pursue what is working. By engineering a collapse of the yen in the first half of 2013, they delivered a windfall profit for Japanese exporters. Dollar sales, when brought home are now worth a quarter more. That?s how Toyota was able to announce yesterday blockbuster earnings up 70% YOY.
Rising sales in an appreciating currency deliver a hockey stick effect on profits. The BOJ will take more of that, thank you very much.
This means that it is time to sell short the Japanese yen once again. When we peaked in March around the ?100 level in the cash markets, I thought that we could enter a sideways consolidation that could last as long as six months, since the recent move down had been one of the sharpest in foreign exchange history. That is exactly what we got. In recent months, the currency has almost been nailed to the 50 day moving average.
So I am taking this opportunity to return to a short position in the Japanese yen, the currency that everyone loves to hate. The December 20 expiration gives us a nice ?RISK ON? position in the run up to the yearend, which should be the correct way to lean. It also gives us a December position we can carry after our five November positions expire deep in the money next week.
I have written endlessly on the fundamental case for a weak yen for the past two years (for a link why you should sell short the yen, please click ?Rumblings in Tokyo?, here ?New BOJ Governor Craters Yen? , and finally here ?New BOJ Governor Crushes the Yen?.
From a technical point of view, what is unfolding here is classic chart reading 101. When you get a huge move over a short period of time, such as the 25% collapse in the yen that started in November, 2012, the consolidation and digestion period that follows can be very long. A rapidly declining 200 day moving average, now at $102 in the (FXY) should cap any short covering rallies.
Japanese portfolio managers and corporations have now had half a year to realize their windfall profits on their foreign investments in dollar denominated assets. That was generating hundreds of billions of dollar selling and yen buying that was supporting the beleaguered Japanese currency, no matter how lousy the fundamentals.
Thanks to the BOJ minutes, that support is about to end. Whoever has not sold their yen by now is in for the duration, or at least until the next 10% drop, which may be upon us. A breakdown to new lows could take us as far as ?110 in the cash market, or $88 in the (FXY).
For those who can?t play the options markets, better to just buy outright the ETF (YCS).
Back Into the Short Side
Any trader will tell you the trend is your friend, and the overwhelming direction for the US dollar for the last 220 years has been down.
Our first Treasury Secretary, Alexander Hamilton, found himself constantly embroiled in sex scandals. Take a ten-dollar bill out of your wallet and you?re looking at a picture of a world class horndog, a swordsman of the first order. When he wasn?t fighting libelous accusations in the press and the courts, he spent much of his six years in office orchestrating a rescue of our new currency, the US dollar.
Winning the Revolutionary War bankrupted the young United States, draining it of resources and leaving it with huge debts. Hamilton settled many of these by giving creditors notes exchangeable for then worthless Indian land west of the Appalachians.
As soon as the ink was dry on these promissory notes, they traded in the secondary market for as low as 25% of face value, beginning a century?s long government tradition of stiffing its lenders, a practice that continues to this day. ?My unfortunate ancestors took him up on his offer, the end result being that I am now writing this letter to you from California?and am part Indian.
It all ended in tears for Hamilton, who, misjudging former Vice President Aaron Burr?s intentions in a New Jersey duel, ended up with a bullet in his back that severed his spinal cord.
Since Bloomberg machines weren?t around in 1790, we have to rely on alternative valuation measures for the dollar then, like purchasing power parity, and the value of goods priced in gold. A chart of this data shows an undeniable permanent downtrend, which greatly accelerates after 1933 when Franklin Delano Roosevelt took the US off the gold standard, banned private ownership of the barbarous relic, and devalued the dollar. Gold bugs have despised him ever since.
Today, going short the currency of the world?s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer. But once it became every hedge fund trader?s free lunch, and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic corrections, which began two weeks ago month ago, and could continue for months, or even years.
The euro has its own particular problems, with the cost of a generous social safety net sending EC budget deficits careening. Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses, and possess small consuming populations.
I?m talking about the Canadian dollar (FXC), the Australian dollar (FXA), and the New Zealand dollar (BNZ), all of which will eventually hit parity with the greenback. Think of these as emerging markets where they speak English, best played through the local currencies.
For a sleeper, buy the Chinese Yuan ETF (CYB) for your bank book. A major revaluation by the Middle Kingdom is just a matter of time.
I?m sure that if Alexander Hamilton were alive today, he would counsel our modern Treasury Secretary, Jack Lew, to talk the dollar up, but to do everything he could to undermine the buck behind the scenes, thus over time depreciating our national debt down to nothing through a stealth devaluation. (Click here for my interview with him, ?Riding with Treasury Secretary Jack Lew.)
Given Lew?s performance so far, I?d say he studied his history well.
Hamilton must be smiling from the grave.
