Newsletter Archives - Mad Hedge Fund Trader

Why I?m Buying the Treasury Bond Market

The Fed?s decision not to taper, and therefore keep interest rates lower for longer, gave a great flashing green light to the bond market. It has been off to the races ever since, with the iShares Barclays 20+ Year Treasury Bond Fund (TLT) blasting through resistance this morning to new two month high. As this is off a double bottom on the charts that has been unfolding since July, the move looks pretty solid.

With the imminent appointment of my friend, Janet Yellen, as the next chairman of the Federal Reserve, I think we may not see a real taper until well into 2014. I heard yesterday that the White House staff has been ordered to start talking her up, now that their favorite, Larry Summers, has been sent to an assisted living facility.

So bonds have more to run, easily taking the yield on ten year Treasuries from this morning?s 2.70% down to 2.50%. There, we may stall out and define the lower end of the new range for bond yields for quite some time.

I have been begging, pleading with, and cajoling readers for the past month to take profits in their short bond positions and sell their holding in the ProShares Ultra Short 20+ Year Treasury ETF (TBT). If they did, they are nicely positioned to buy it back the next time it hits $70, down from the recent $82 peak. That is roughly where we hit the 2.50% ten-year yield.

That could be the bond trader?s lot for the next six months, buying paper every time we hit a 3% yield, and going short at the 2.50% yield. They deserve nothing less. If they had real balls, they?d be stock traders.

Keep in mind that this is a counter trend trade, which are always dangerous. I am convinced that we are now 13 months into the Great Bear Market for bonds that could last another 20 years. Future capital flows will be defined by moving out of bonds into stocks probably until the end of the 2020?s, the so called ?Great Rotation.? So I am being careful here, keeping maturities short at a little more than three weeks, the size small, and the strikes distant.

This is not my best-timed trade of the year, and I am a little late to the party. I am resorting to finishing off the left over drinks abandoned by the early arrivals. As has lately so often been the case, prices turn on a dime, and then don?t let anyone in, as there are no pullbacks. This is a sign of a market dominated by professional momentum traders, not stay at home day traders.

So the potential profit on this trade is only a modest $630, or 0.63% for the model $100,000 trading portfolio. The risk is small, and therefore, so is the payoff. If this doesn?t appeal, or if the commissions end up eating too much of your potential profit, just walk away. Or, you could wait for better prices with a pullback in the (TLT) to get the better return. Or, just watch it play out in the paper portfolio as a training exercise.

The attraction of this position is that it gives us a participation in the unfolding, politically driven smack down in Washington over the debt ceiling crisis. It also establishes a ?RISK OFF? position, which I can use to counterbalance my existing ?RISK ON? positions.

It?s always nice to have a hedge on in case the wheels fall off the market.

Always Nice to Have a Hedge On

September 24, 2013

Diary, Newsletter, Summary

Global Market Comments
September 24, 2013
Fiat Lux

Featured Trade:
(APPLE?S BLOWOUT NUMBERS SEND BEARS SCAMPERING),
(AAPL), (QCOM), (CHL), (SSNLF), (MSFT), (GOOG),
(EXPIRATION OF MY YEN BEAR PUT SPREAD),
(MY PERSONAL LEADING ECONOMIC INDICATOR),
(NOTICE TO MILITARY SUBSCRIBERS)

Apple Inc. (AAPL)
QUALCOMM Incorporated (QCOM)
China Mobile Limited (CHL)
Samsung Electronics Co. Ltd. (SSNLF)
Microsoft Corporation (MSFT)
Google Inc. (GOOG)

Apple?s Blowout Numbers Send Bears Scampering

Newsletter

Apple?s (AAPL) report this morning that it sold a stunning 9 million model 5s and 5c iPhones has bowled over even the company?s most optimistic cheerleaders and sent the bears running. The consensus estimate had been only for 5 million units. At the opening highs, shares were up $30 to $497, well above the $468 that prevailed at my September 11 Trade Alert to buy the calls.

The blowout success emboldened Apple to substantially raise its Q4 guidance. Forecast revenues were quickly taken up from $34 to $37 billion, while margins edged up from 36% to 37%.

Analysts complained that the company muddled the numbers by simultaneously launching two new phones and retiring one. Certainly that generated some Apples to orange comparisons (no pun intended!). But the bottom line here is that this was a spectacular launch.

There are a number of reasons why both the analyst community and Wall Street got this so wrong. For an incremental upgrade, so many improvements were unleashed at once that it took some time to digest them all.

The iOS 7 64 bit operating system on the new A7 chip, the first ever for a smart phone, substantially boosted speeds, up to ten times for some functions for long suffering iPhone 4 owners. The iSight camera makes a generational leap to a very fast 8 megapixels. Other improvements came through for hundreds of other applications, which I am still trying to figure out. It?s like having to learn how to use an iPhone all over again, so save your upgrade for a free weekend.

Entire new business lines were introduced with barely any notice, like the free Internet radio service, which saw an amazing 11 million unique listeners sign up during the first few days. The agreement with Japan?s NTT Docomo to offer iPhones was hugely overlooked. With 60 million high earning customers, it makes the China Mobile (CHL) now show almost an irrelevance. Even without a (CHL) deal, consumers can now simply buy a 5c for $475 and connect to the domestic network for the first time.

Apple is still the fastest smart phone by miles, according to the chart below, beating the pants off of Google?s Android (GOOG), the Samsung Galaxy (SSNLF), and the Windows smart phone (MSFT). This is a crucial element in the company maintaining its premium pricing. Consumers don?t want to start collecting Social Security by the time their next page loads. If you are a fast typist, unlike me, you can hit the keys faster than the other operating systems? ability to process the commands, muddling the text.

It didn?t hurt that a staggering 200 million customers downloaded the new iOS 7 since last week, reminding us once again of the firm?s dominance in this space. Now we learn that several car manufacturers are going to build in iOS 7 into new models coming out next year. Apple is muscling into huge markets that no one else is even thinking about now. That?s another potential 30 million unit a year business.

I think we are 5 months into a 17 month leg up in Apple stock since it bottomed on April 21 at $380. In the wake of the 5s and 5c launch, we will probably trade in a range from $460 to $525. We will then break out to the upside in the new year, spurred on by another raft of new product launches for the iPad and iMac that could take us as high as $600.

A second period of digestion will follow. Then the prospect of an iPhone 6 launch in September 2014 should return us to the old high of $707. That gives you a potential gain in the stock from this level of 44%.

The company is putting its money where its mouth is. During a long, tedious summer, when its shares were trading in the low $400?s, it was the major buyer. The bulk of its $50 billion war chest is still in place to buy the dips.

I never believed the ultra bears, who seemed to berate the firm for its successes as much as its failure (iMaps, etc.). Downside targets have gone as low at $250 a share.

I have never been one to hold back from throwing rocks at the establishment. But this is a company that is making net profits of $14 million an hour, and they want to sell it short? If they were based in California, I?d say they were smoking something. Oops, they are based in California.

Short? What?s a Short?

Expiration of my Yen Bear Put Spread

Diary, Newsletter

Add this one to the ?WIN? column.

I strapped on this position because I believed that the world was adding risk, expecting major bull moves, once it becomes clear that the multiple disasters now threatening the world don?t actually happen. The list includes war with Syria, the taper, the Bernanke replacement, the debt ceiling crisis, another sequester, yada, yada, yada.? A yen short is one of many ways to achieve this.

This is why US stocks refuse to sell off in any meaningful way. We are setting up for a great ?buy the rumor, sell the news? event. Remember when the first Gulf War started in 1991? Stocks drifted for six months in the run up, then soared once the bombs actually fell. We could be in for another one of those. That would take the yen and the euro to new lows for 2013.

Count on President Obama to draw out the Syria crisis for as long as possible. This gives the message of the coming military action the greatest political impact internationally. It also boosts his own political fortunes at home, leaving the Republicans drifting in the wind. Why be in a hurry to end it? They are now in the uncomfortable position of having to turn pacifist, after supporting Middle Eastern wars with a blank check for the last 11 years.

All of this worked out exactly as expected for our yen short, which is why it expired on Friday at its maximum value. The expiration print of $98.35 cleared our nearest strike of $103 by miles. This added a welcome $1,330 in profits to our $100,000 model trading portfolio for 2013.

On to the next one.

Kaching!

My Personal Leading Economic Indicator

Diary, Newsletter

One of the joys of having small children is that you get to know the guy at the local plumbing supply shop really well. It?s amazing what will fit down a toilet these days.

He once told me that when Troll Dolls hit the market, every plumber in the country was guaranteed a job for life. When I went there yesterday I thought I?d pick up some leading economic indicators as well. After a deadly year, business is picking up a bit. Sure, it is still down from the onset of the Great Recession five years ago, but there is a definite improvement going on.

This was the Eureka moment! His comments confirm the sort of modest recovery I have been expecting. We aren?t going to zero anymore, but it is not exactly off to the races either. Throughout the nineties, a salesman at Circuit City (RIP) walked me through every generation of technology, and he was worth his weight in gold. All I had to do was buy a new TV from him every year, and they kept getting bigger and more expensive. I bought the second high definition TV sold in California, after George Lucas, who I used to run into at the local IHOP having breakfast with an aspiring young starlet. It was his casting couch.

Sometimes figuring out the direction of the economy is as simple as going down to the local butcher, baker, or candlestick maker and asking. They are on the front lines of economic activity, and they will see any changes months before those of us glued to computer screens. Make it your own unfair advantage, your own heads up in the marketplace. Just keep your eyes open and observe.

Asking George Lucas also helps.

A Troll Doll

Notice to Military Subscribers

Diary, Newsletter

To the dozens of subscribers in Iraq, Afghanistan, and the surrounding ships at sea, thank you for your service! I think it is very wise to use your free time to read my letter and learn about financial markets in preparation for an entry into the financial services when you cash out. Nobody is going to call you a baby killer and shun you, as they did when I returned from Southeast Asia four decades ago.

I have but one request. No more subscriptions with .mil addresses, please. The Defense Department, the CIA, the NSA, Homeland Security, and the FBI do not look kindly on newsletters entering the military network, even the investment kind. If you think civilian spam filters are tough, watch out for the military kind! And no, I promise that there are no coded secret messages embedded with the stock tips. ?BUY? really does mean ?BUY.?

If I did not know the higher ups at these agencies, as well as the Joint Chiefs of Staff, I might be bouncing off the walls in a cell at Guantanamo by now. It also helps that many of the mid-level officers at these organizations have made a fortune with their meager government retirement funds following my advice. All I can say is that if the Baghdad Stock Exchange ever become liquid, I?m going to own it.

Where would you guess the greatest concentration of readers The Diary of a Mad Hedge Fund Trader is found? New York? Nope. London? Wrong. Chicago? Not even close. Try a ten-mile radius centered on Langley, Virginia, by a large margin. The funny thing is, half of the subscribing names coming in are Russian. I haven?t quite figured that one out yet.

So keep up the good work, and fight the good fight. But please, only subscribe to my letter with personal Gmail, Hotmail or Yahoo addresses, or with your spouse?s address. That way my life can become a lot more boring. Oh, and by the way, Langley, you?re behind on your bill. Please pay up, pronto, and I don?t want to hear whining about any damn budget cuts!

I Want My Mad Hedge Fund Trader!

September 23, 2013

Diary, Newsletter, Summary

Global Market Comments
September 23, 2013
Fiat Lux

Featured Trade:
(NOVEMBER 1 SAN FRANCISCO STRATEGY LUNCHEON),
(TAKE A LOOK AT OCCIDENTAL PETROLEUM),
(OXY), ($WTIC), (USO),
(TESTIMONIAL)

Occidental Petroleum Corporation (OXY)
Light Crude Oil ($WTIC)
United States Oil (USO)

November 1 San Francisco Strategy Luncheon

Diary, Lunch, Newsletter

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.

Take a Look at Occidental Petroleum (OXY)

Diary, Newsletter

I have kept oil companies in my long term model portfolio for many years now. But there are a lot of belles at the ball, but you can?t dance with all of them.

While a student at UCLA in the early seventies, I took a World Politics class, which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, fighting rebels and bandits, crawling out of the desert starved, lice ridden, and half dead.

I concluded in my paper that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10 (USO).? I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg? egg on his desk.

He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians?

I told him everything I knew, including the two weeks spent in an Algiers jail for taking pictures in the wrong places. His parting words were to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

Some 40 years later, while trolling the markets for great buying opportunities, I stumbled across (OXY) once more (click here for their). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005.

(OXY?s) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. It has raised its dividend for the eighth year in a row, to 2.90%, more than ten year Treasury bonds Need I say more?

The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. A lead in fracking is a huge plus. I think (OXY) will continue to make money, no matter what the price of oil does. That?s why it lives in my long-term model portfolio.

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.