Global Market Comments
October 29, 2013
Fiat Lux
Featured Trade:
(MAD DAY TRADER EDUCATIONAL WEBINAR),
(THE RUN IN BONDS IS OVER),
(TLT), (JNK), (HYG), (MUB), (ELD), (LINE),
(AUSTERITY HITS WALL STREET)
iShares 20+ Year Treasury Bond ETF (TLT)
SPDR Barclays High Yield Bond (JNK)
iShares iBoxx $ High Yield Corporate Bd (HYG)
iShares National AMT-Free Muni Bond ETF (MUB)
WisdomTree Emerging Markets Local Debt (ELD)
Linn Energy, LLC (LINE)
This is a bet that the ten-year Treasury bonds, now trading at a 2.50% yield, don?t fall below 2.40% over the next 14 trading days. It has to make this move on top of an unbelievable decline in yields from 3.0% to 2.50% since September. And it has to do it quickly.
The Federal Reserve on Wednesday to consider whether they should raise rates, lower them, or leave them unchanged. Some traders are looking for hints of a taper that may arrive earlier than expected. I think there is zero chance of this. The futures markets for overnight money are trading at prices suggesting that this won?t occur until April or May of 2015! (No typo here). We could be setting up for a classic ?buy the rumor, sell the news? move here.
We are also blessed with a short calendar for the November 15 expiration, as November 1 falls on a Friday. This also takes us into the usual volatility sapping Thanksgiving holidays.
My standing view on bonds is that we will trade in a 2.40%-3.0% range for some time. Given that the ?Great Reallocation? trade may begin in earnest in 2014. We should take a run at the higher end of that range as we go into yearend.
Loss of 1.5% in fiscal drag from Washington next year could take US GDP growth up from a sluggish 2.0% to a more sporty 3.5%. This is not an environment where you want to own any kind of fixed income security.
You might also consider buying November call spreads on the double short Treasury bond ETF, the ProShares Ultra Short 20+ Treasury Fund (TBT), or just buying the (TBT) outright. Another run at the highs for the year from here is worth ten points.
While examining your own fixed income exposure, you might want to use the current strength in bonds to lighten up in other areas. Municipal bond prices (MUB) are now so high that the capital risk no longer justifies the tax savings. Get rid of them! The only successful muni bond strategy here is to die, and let your heirs sort out the wreckage. That way, your widow gets the step up in the cost basis.
Ditto for junk bonds (JNK), (HYG), which after the latest humongous rally, also see low yields no longer justifying the principal risk. The only bonds I like here are master limited partnerships (LINE), where double digit yields adequately pay you for your risk. I also like sovereign bonds (ELD), which will be supported by emerging market currencies appreciating against the US dollar.
The Run in Bonds is OverGlobal Market Comments
October 28, 2013
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE NOVEMBER 1 SAN FRANCISCO STRATEGY LUNCHEON),
(WHY US STOCKS ARE DIRT CHEAP),
(SPY), (IWM), (QQQ), (TSLA)
SPDR S&P 500 (SPY)
iShares Russell 2000 ETF (IWM)
PowerShares QQQ (QQQ)
Tesla Motors, Inc. (TSLA)
Come join me for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in San Francisco on Friday, November 1, 2013. An excellent meal will be followed by a wide-ranging discussion and an extended question and answer period.
I?ll be giving you my up to date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Tickets are available for $191.
I?ll be arriving at 11:00 and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at a private club in downtown San Francisco near Union Square that will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheons, please go to my online store.
Global Market Comments
October 25, 2013
Fiat Lux
Featured Trade:
(FEEL LIKE INVESTING IN A STATE SPONSOR OF TERRORISM?),
(GAF), (AFK), (EZA),
(WHO SAYS THERE AREN?T ANY JOBS?),
(WILL GOLD SUFFER THE FATE OF THE $10,000 BILL?)
(GLD), (GDX)
(THE TWELVE DAY YEAR)
SPDR S&P Emerging Middle East & Africa (GAF)
Market Vectors Africa Index ETF (AFK)
iShares MSCI South Africa Index (EZA)
SPDR Gold Shares (GLD)
Market Vectors Gold Miners ETF (GDX)
How about buying shares in a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped?
Another country lost four wars in the last 40 years. Still interested? How about a country that suffers one of the world's highest AIDs rates, endures regular insurrections where all of the Westerners get massacred, and racked up 5 million dead in a continuous civil war?
Then, Africa is the place for you! Today, it is the world's largest source of gold, diamonds, iridium, chocolate, and cobalt. The countries above are Libya, Nigeria, Egypt, and the Congo. Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms.
Goldman Sachs has set up Emerging Capital Partners, which has already invested $2 billion there. China sees the writing on the wall, and has launched a latter day colonization effort, taking a 20% equity stake in South Africa's Standard Bank, the largest on the continent. There are now thought to be over one million Chinese agricultural workers in Africa.
In fact, foreign direct investment in 2010 jumped from $53 billion to $61 billion, while cross border M & A leapt from $10.2 billion to $26.3 billion. The angle here is that all of the terrible headlines above are in the price, that prices are very low, and the perceived risk is much greater than actual risk.
Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. These numbers remind me of those found in Japan during the fifties, right after it lost WWII.
The reality is that Africa's 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure.
For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It's similar to the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years, because the risks were so high.
This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has 29% of its holdings in South Africa and 20% in Nigeria. There is also the SPDR S&P Emerging Middle East & Africa ETF (GAF). For more of a rifle shot, entertain the iShares MSCI South Africa Index Fund (EZA). Don't rush out and buy these today. Instead, wait for emerging markets to come back in vogue, I'll send you a trade alert when this is going to happen.
Meet Your New PartnerGlobal Market Comments
October 24, 2013
Fiat Lux
Featured Trade:
(THE CASE AGAINST TREASURY BONDS), (TBT), (TLT),
(MY PERSONAL LEADING ECONMIC INDICATOR),
(HMC), (NSANY), (DXJ)
(A FILM REVIEW OF ?MARGIN CALL?)
ProShares UltraShort 20+ Year Treasury (TBT)
iShares 20+ Year Treasury Bond ETF (TLT)
Honda Motor Co., Ltd. (HMC)
Nissan Motor Co. Ltd. (NSANY)
WisdomTree Japan Hedged Equity (DXJ)
Now it?s time for some cultural edification. I first became aware of ?Margin Call? as a pre-production project four years ago when news leaked out that the principal actors, Kevin Stacey, Demi Moore, Stanley Tucci, and Jeremy Irons, were reading The Diary of a Mad Hedge Fund Trader to learn about the industry and get in character.
The plot covers a 24-hour period on the eve of the 2008 financial crisis at a fictitious Wall Street house obviously modeled on Lehman Brothers. A strategic downsizing sacks the firm?s risk manager, Stanley Tucci, who casually mentions to a young associate as he carries his cardboard box down the elevator that the firm is on the verge of getting wiped out in the subprime securities market.
A series of emergency, all night meetings ensue. At the last minute, the CEO, John Tuld, not to be confused with Lehman?s Dick Fuld, alights, godlike, on the roof in a helicopter, obviously clueless about what has been going on in his firm, and the securities involved. The decision is made to dump their entire position at a huge loss at the market opening, even if it means causing the failure of many of the firm?s clients and counterparties.
When the sales staff rebel, they are offered extra million dollar bonuses if the positions are gone by noon. On orgy of predatory salesmanship ensues, which I have seen myself on trading floors a thousand times. In an hour, prices for some bonds drop 40%. The firm lives on to fight another day, but only at the cost of wiping out reputations and ending careers. The CEO has a laugh and flies away.
Those in the business will uncomfortably recognize many of the hard hearted practices, half-truths, and ethical lapses endemic on Wall Street. It really is only about making money and survival of the fittest.
Despite being a total flop at the box office on a limited release, the acting is incredible. The movie is still showing on some long distance, intercontinental flights. So if you have some free time, order the DVD on Netflix (but don?t touch the stock!).
And hey, Kevin baby, have your people call my people and let?s do lunch when I?m in Beverly Hills in January!
Global Market Comments
October 23, 2013
Fiat Lux
Featured Trade:
(THE WORST IS YET TO COME), (SPY),
(MY OLD PAL, LEONARDO FIBONACCI),
(TESTIMONIAL)
SPDR S&P 500 (SPY)
I was not surprised to see the belated September nonfarm payroll come in at a miserable 148,000. It clearly shows that companies were already hunkering down with their overheads in the run-up to the recent DC slugfest. The figure had been delayed by the Washington shutdown, which froze all government data releases.
In fact, the job market is weaker than even this number suggests because it includes the one time only addition of hundreds of thousands of part time teachers who went back to work for the new school year.
I think that this will be only the first of many data releases showing that the economy completely fell off a cliff in October. I have received emails from readers all over the country supplying a treasure trove of anecdotal evidence of how bad conditions got. It sounds like business came to a complete standstill in the metro Washington DC area.
If November comes and we suddenly get a whole raft of bad October numbers at once, the talking heads who drive the short term market will go into a tizzy. They?ll predict that the bull market is over, that we are going into a long awaited recession, and that it is time to dump all your stocks. A forecast of ?Dow 3,000? will once again show its ugly face. The net net of all this will likely be a 4.7% or 8% correction in the S&P 500 of the sort I discussed yesterday.
Take the gift.
That?s when you want to jump in with both feet. Because, after the politically induced October hiccup, the economy will roar once again.
The outlook for 2014 is looking mighty damn fine. For the first time in many years, we will be looking at a global synchronized recovery, with the US, Europe, China, and Japan all delivering multi year highs in GDP growth at once. The fiscal drag emanating from falling government spending will be the lowest in years. Corporate profits everywhere will soar.
The taper, the reduction of the Federal Reserve?s $85 billion a month in bond buying, is now not slated to start until June. It may not happen at all in 2014 if the jobless rate falls insufficiently and the ruckus in Washington continues. The Fed has clearly concluded that in order to prevent the US from falling back into recession it must continue to pump money into the economy as long as the gridlock lasts.
All of this is a magic formula for higher stock prices. Many of the spectacular gains in share prices we are seeing this year are in fact a front run of next year?s best case scenario. But there will still be more to run. My guess is that we could tack on another 10% to 15% from current levels in the New Year. That takes the (SPX) as high as 2,100.
So buy the next dip with reckless abandon. And write a letter to your congressmen thanking him for being such an ?hole and creating a great entry point in this melting up bull market.
