Newsletter Archives

What to Do Now?

I am completing one of the best trading years of my 45-year career in the stock market. The Trade Alert service is up by a stunning 41.5% so far in 2013 and by 96.55% since inception 35 months ago.

Pretty much every forecast I made for the year came true (click here for ?My 2013 Annual Asset Class Review?). The question now is: ?What to do here??? How do I beat the performance of the ages?

It seems that the world has come around to my point of view on virtually every asset class. Stocks are soaring, lead by the sectors I suggested, technology, industrials, health care, and consumer cyclicals. Since I wrote ?Apple is About to Explode? the shares have been up nine consecutive trading days, and are now 36% above its June lows.

Commodities have, at last, begun their long crawl off the bottom, with copper producer Freeport McMoRan (FCX) massively outperforming the market since August. Gold, silver, and the agricultural commodities have been dead in the water, as expected. Bonds are going nowhere. Oil is falling, as it should. It took a poison gas attack to squeeze me out of my short position there, (thanks a lot Bashar!).

The Washington shutdown came to a big nothing, and translated into ?BUY,? as I expected. Of course, the data flow is going to be gobbledygook for the rest of the year, as different parts of the economy shut down, restart, and then report at different rates. Only privately sourced information, like corporate earnings and the endless torrent of real estate numbers, will be reliable. You can bet that the Federal Reserve is watching these numbers more than usual too.

It looks like we lost about a fifth of our economic growth for the year, while achieving absolutely nothing. For this, the Republicans will have hell to pay next year. More on that later.

There is only one problem with this scenario. When the world agrees with me, I get nervous. Much of my money is made betting against the consensus, not agreeing with it. I am getting run over by bulls on stocks catching up with me from behind. As a result, I have sold out of all of my positions and let my remaining options positions expire well in-the-money. For the first time in years, I am 100% cash. What a bizarre feeling.

Any experienced, seasoned trader will tell you that the best thing to do now is nothing. Maintain your discipline and don?t chase. Buying something that is up ten days in a row is idiotic. Leave that behavior to the wanabees, newbies, and dummies. Just wait for an extreme move in something, anything, and then go the other way.

Let?s take a look at corrections in the S&P 500 this year, which have been few and far between. It has been a market where once you got out, it has really been hard to get back in. Someone else always came by to take your seat. Here were those rare points:

May - 8%
July - 4.7%
September - 4.6%

The primordial, lizard brained trader will look at this chart and come to the same conclusion, regardless of its ticker symbol. They?ll buy once on a 4.6% dip, double up on an 8% dip, and place a stop loss order not far below there.

If the market continues to run away to the upside, then just sit back and watch it. If you already have a monster year, and you should if you have been following the advice of this letter, that?s fine. Let your friends pick up the tab for the next dinner.

Some of the indicators I follow are starting to shout about a top. Individual margin debt is at an all time high. And my buddy, Henry Blodget, of Business Insider sent me the chart below. It shows the funds held in Rydex money market funds, one of the best contrarian indicators out there.

Peaks in assets held by this very low risk family of funds are highly coincident with stock market bottoms, the last two of which were found in November, 2012 and July, 2013. The markets roared after that. Bottoms of assets held in the Rydex funds very roughly coincide with stock market tops, although they may take months to play out. This presages a selloff in risk assets that could start at anytime.

Sometimes, discretion is the better part of valor.

Hey, Save My Place, Will You?

October 21, 2013

Diary, Newsletter, Summary

Global Market Comments
October 21, 2013
Fiat Lux

Featured Trade:
(NOVEMBER 1 SAN FRANCISCO STRATEGY LUNCHEON),
(SEND ME YOUR IDEAS),
(REVISITING THE FIRST SILVER BUBBLE),
(SLV), (SLW)

iShares Silver Trust (SLV)
Silver Wheaton Corp. (SLW)

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.

Send Me Your Ideas

Diary, Newsletter

The Diary of a Mad Hedge Fund Trader is now approaching its seventh year of publication.

During this time, I have religiously been pumping out 1,500 words a day, or eight double spaced typed pages, of original, independent minded, hard hitting, and often wickedly funny research.

I?ve been covering stocks, bonds, commodities, precious metals, real estate, and agricultural products. You?ve been kept up on my travels around the world, and got to listen in on my conversations with those who drive the financial markets. I also occasionally opine on politics, but only when it has a direct market impact, such as with the recent Washington shutdown.

The site now contains over 3 million words, or six times the length of Tolstoy?s epic War and Peace. Unfortunately, it feels like I have written on every possible topic at least 20 times over. So I am reaching out to you, the reader, to suggest new areas of research that I may have missed until now which you believe justify further investigation.

Please send any and all ideas directly to me at support@madhedgefundtrader.com/, and put ?Research Idea? in the subject line.

The great thing about running an online business is that I can evolve it to meet your needs on a daily basis. Many of the new products and services that I have introduced since 2008 have come at your suggestion. That has enabled me to improve the product?s quality, to your benefit.

The Diary originally started out as a daily email to my hedge fund investors giving them an update on fast market moving events. This was at a time when the financial markets were in free fall, and the end of the world seemed near.

I thought, differently, but didn?t have time to hold hands with every customer individually over the phone. The daily emails gave me the scalability that I so desperately needed. Today?s global mega enterprise grew from there. Presently, the Diary of a Mad Hedge Fund Trader is read in 140 countries.

If you want to read my first pitiful attempt at a post, please click here for my February 1, 2008 post. It urged readers to buy gold at $950 (it soared to $1,920), and buy the Euro at $1.50 (it went to $1.60). Now you know why this letter has become so I popular. Unfortunately, I also recommended that they sell bonds short. I wasn?t wrong on that one, just early, about five years too early.

I always get asked how long will I keep doing this? The government tells me that the latest I can start drawing down on my retirement funds and Social Security is 70 ?. That?s some 8 ? years off for me. Then I?ll reassess whether I want to carry on for another decade, or find something else more fun to do. Given the absolute blast I have doing this job, that is highly unlikely. Take a look at the testimonials I get on an almost daily basis and you?ll see why this business is so hard to walk away from (click here for Testimonials).

Fiat Lux (let there be light).

Revisiting the First Silver Bubble

Diary, Newsletter

With smoke still rising from the ruins of the recent silver crash, I thought I'd touch base with a wizened and grizzled old veteran who still remembers the last time a bubble popped for the white metal. That would be Mike Robertson, who runs Robertson Wealth Management, one of the largest and most successful registered investment advisors in the country.

Mike is the last surviving silver broker to the Hunt Brothers, who in 1979-80 were major players in the run up in the 'poor man's gold' from $11 to a staggering $50 an ounce in a very short time. At the peak, their aggregate position was thought to exceed 100 million ounces.

Nelson Bunker Hunt and William Herbert Hunt were the sons of the legendary HL Hunt, one of the original East Texas oil wildcatters, and heirs to one of the largest fortunes of the day. Shortly after president Richard Nixon took the US off the gold standard in 1971, the two brothers became deeply concerned about financial viability of the United States government. To protect their assets they began accumulating silver through coins, bars, the silver refiner, Asarco, and even antique tea sets, and when they opened, silver contracts on the futures markets.

The brothers? interest in silver was well known for years, and prices gradually rose. But when inflation soared into double digits, a giant spotlight was thrown upon them, and the race was on. Mike was then a junior broker at the Houston office of Bache & Co., in which the Hunts held a minority stake, and handled a large part of their business.?The turnover in silver contracts exploded. Mike confesses to waking up some mornings, turning on the radio to hear silver limit up, and then not bothering to go to work because he knew there would be no trades.

The price of silver ran up so high that it became a political problem. Several officials at the CFTC were rumored to be getting killed on their silver shorts. Eastman Kodak (EK), whose black and white film made them one of the largest silver consumers in the country, was thought to be borrowing silver from the Treasury to stay in business.

The Carter administration took a dim view of the Hunt Brothers' activities, especially considering their funding of the ultra-conservative John Birch Society. The Feds viewed it as a conspiratorial attempt to undermine the US government. It was time to pay the piper.

The CFTC raised margin rates to 100%. The Hunts were accused of market manipulation and ordered to unwind their position. They were subpoenaed by Congress to testify about their motives. After a decade of litigation, Bunker received a lifetime ban from the commodities markets, a $10 million fine, and was forced into a Chapter 11 bankruptcy.

Mike saw commissions worth $14 million in today's money go unpaid. In the end, he was only left with a Rolex watch, his broker's license, and a silver Mercedes. He still ardently believes today that the Hunts got a raw deal, and that their only crime was to be right about the long term attractiveness of silver as an inflation hedge.

Nelson made one of the great asset allocation calls of all time and was punished severely for it. There never was any intention to manipulate markets. As far as he knew, the Hunts never paid more than the $20 handle for silver, and that all of the buying that took it up to $50 was nothing more than retail froth.

Through the lens of 20/20 hindsight, Mike views the entire experience as a morality tale, a warning of what happens when you step on the toes of the wrong people.

And what does the old silver trader think of prices today? Mike saw the current collapse coming from a mile off. He thinks silver is showing all the signs of a broken market, and doesn't want to touch it until it revisits the $20's. But the white metal's inflation fighting qualities are still as true as ever, and it is only a matter of time before prices once again take another long run to the upside.

Silver is Still a Great Inflation Hedge

October 18, 2013

Diary, Newsletter, Summary

Global Market Comments
October 18, 2013
Fiat Lux

Featured Trade:
(OCTOBER 23 GLOBAL STRATEGY WEBINAR),
(THE SHUTDOWN IS OVER?FOR NOW), (SPY),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)

SPDR S&P 500 (SPY)

The Shutdown is Over?.For Now

Newsletter

After 16 days of high drama, bluster, and handwringing, the Great Washington Shutdown of 2013 is finally over. President Obama held fast and won. The Republicans kept changing their goals by the day and lost.

But what we got was anything but a resolution. The next shutdown is now scheduled for January 15, and the Treasury bond default has been pushed back to March, 2014.

The big winners in all of this have been stock investors. In the wake of the midnight deal, the S&P 500 blasted through to a new all time high. Those who called Republican bluff to crash the economy if Obamacare wasn?t ditched were richly rewarded.

The world was hoping for a Washington induced 10% sell off in shares so they could buy more. In the end, they only got a 4.6% dip, and were forced to chase for the umpteenth time this year. It all has the hallmark of a market that seriously wants to go higher.

So are we going to have to endure all of this again in the New Year?

I doubt it. The Republicans have been severely chastened and are unlikely to push their luck so far next time. Their standing in opinion polls has fallen to all time lows. According to Arizona Senator John McCain, ?we are now down to only paid staff and close family members.? The Democrats have been rewarded for standing fast, and therefore will continue to do so. Missing here is the detonator basis for another freeze in government spending.

The market may be so strong in January that investors may not even notice further antics in our nation?s capitol. Individuals and institutions are still massively underweight equities. The great rotation out of bonds into stocks never really happened this year. Instead, investors sold bonds, but moved the money into cash. Next year, the Great Rotation may really begin in earnest.

This presages a tidal wave of capital flows into stock in the New Year, which could run all the way until March. Expect a strong December, as traders try to front run this move. Extra juice will come from the Federal Reserve, which now has to postpone any taper for another 6-9 months, thanks to the economic slowdown induced by the shutdown. It seems that Ben Bernanke saw it all coming.

Paying readers of this letter are already well aware of my bullish view of stocks (click here for ?Why You Should Buy This Dip?, and ?My 2013 Stock Market Outlook?). If you are still starved for reasons to load the boat with equities, please click here for ?Why US Stocks Are Dirt Cheap?.

All of this makes my yearend target for the S&P 500 of 1,780 a chip shot. It also makes 2014 look pretty good, when I think the index could possibly run up to 2,000.

Until Next Time

European Style Homeland Security

Diary, Newsletter

The English are feeling the pinch in relation to recent events in Libya, and have therefore raised their security level from ?Miffed? to ?Peeved.? Soon, though, security levels may be raised yet again to ?Irritated? or even ?A Bit Cross.? The English have not been ?A Bit Cross? since the blitz in 1940, when tea supplies nearly ran out. Terrorists have been re-categorized from ?Tiresome? to ?A Bloody Nuisance.? The last time the British issued a ?Bloody Nuisance? warning level was in 1588, when threatened by the Spanish Armada.

The Scots have raised their threat level from ?Pissed Off? to ?Let?s get the Bastards.? They don?t have any other levels. This is the reason they have been used on the front line of the British army for the last 300 years.

The French government announced yesterday that it has raised its terror alert level from ?Run? to ?Hide.? The only two higher levels in France are ?Collaborate? and ?Surrender.? The rise was precipitated by a recent fire that destroyed France?s white flag factory, effectively paralyzing the country?s military capability.

Italy has increased the alert level from ?Shout Loudly and Excitedly? to ?Elaborate Military Posturing.? Two more levels remain: ?Ineffective Combat Operations? and ?Change Sides.?

The Germans have increased their alert state from ?Disdainful Arrogance? to ?Dress in Uniform and Sing Marching Songs.? They also have two higher levels: ?Invade a Neighbor? and ?Lose.?

Belgians, on the other hand, are all on holiday as usual; the only threat they are worried about is NATO pulling out of Brussels.

The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy.

Australia, meanwhile, has raised its security level from ?No worries? to ?She?ll be alright, Mate.? Two more escalation levels remain: ?Crikey! I think we?ll need to cancel the barbie this weekend!? and ?The barbie is canceled.? So far no situation has ever warranted use of the final escalation level.

? John Cleese ? British writer, actor and tall person.

October 17, 2013

Diary, Newsletter, Summary

Global Market Comments
October 17, 2013
Fiat Lux

Featured Trade:
(DOGS OF THE DOW REVISTED)
(XME), (XLB), (DBB), (JJG), (MOO), (DBA), (GLD), (SLV),
(PLEASE USE MY FREE DATA BASE SEARCH)

SPDR S&P Metals & Mining (XME)
Materials Select Sector SPDR (XLB)
PowerShares DB Base Metals (DBB)
iPath DJ-UBS Grains TR Sub-Idx ETN (JJG)
Market Vectors Agribusiness ETF (MOO)
PowerShares DB Agriculture (DBA)
SPDR Gold Shares (GLD)
iShares Silver Trust (SLV)

Dogs of the Dow Revisited

Newsletter

Sitting at my lakefront estate at Lake Tahoe?s Incline Village, I began to cogitate on what my trading portfolio for 2014 should look like. Then I thought, ?Why wait?? Better to get the message out now than wait two and a half more months. The entry point for risk assets is better now than it will be early next year. So let?s get the lead out and start posting those ideas.

Which brings me to an investment approach known as the ?Dogs of the Dow.? This has traders seeking out the worst performers of the year and buying them in the hope that they will do better next year.

There is no to rocket science behind this. But I know that statistically it works out pretty well over time, assuming that you didn?t start buying the Japanese stock market after it crashed in 1990, and then kept averaging down every year for two more decades. I know people who did this. They?re now working as baristas at Starbucks (great benefits plan!).

One of the best retirement strategies is to discern major long-term trends, and then buy those assets in the off years. I know that George Soros, Warren Buffet, and Stanley Druckenmiller have parlayed this approach into multi billion dollar personal fortunes. If it works for them, then it should work for you as well. ?Dogs of the Dow? can fit into this style nicely.

One doesn?t have to look far to find this years canine?s. Global warming failed to show this year, so vast overplanting has produced the largest crops in history, crushing prices. The China slowdown knocked the stuffing out of a broad range of base metals and other hard assets. Finally, gold didn?t turn out to be such a safe haven after all, and is plummeting to new multi year lows as we speak.

Long time readers (yes, there are a lot of you by now) are well aware of my positive view of agriculture products. The world is producing people faster than the food to feed them. The global population is expected to soar from 7 billion to 9 billion over the next 36 years. The highest population growth will be in parts of the world that are unable to feed themselves today, like the Middle East, and must rely precariously on imports. What do you think the ?Arab Spring? is really all about?

Having suffered through a real famine in China during the Cultural Revolution in the early 1970?s, I can personally tell you that there are no substitutes for food. All you need is a spate of bad weather like we had in 2012, and this sector can double very quickly. For more on the fundamental case for food, please click here for ?Is Food the New Distressed Asset?.

Fortunately, there are now a wealth of ETF?s you can buy to profit from this impending shortage. The PowerShares DB Multisector Commodity Trust Agriculture Fund (DBA) invests in the futures contracts of a broad range of commodity foods. The iPath Dow Jones-AIG Grains Total Return ETN (JJG) is similar, but with a much higher concentration in the gains.

Perhaps the best way to participate is through the Market Vectors Agribusiness ETF (MOO). This buys the shares of major food related companies, thus getting you the opportunities to cash in on multiple expansions and dividend payments, while missing out on the contango that can plague futures based ETF?s.

The other great kennel for poorly performing shares this year has been the victims of the China slowdown, which now appears to be gradually coming to an end. Base metals, coal, aluminum or anything else you need to supply this economic giant saw their shares pummeled during the first half of the year.

Now that the Middle Kingdom is on the mend, we are spoiled for choice with laggard plays. The SPDR S&P Metal and Mining ETF (XME) is one pick. So is the Materials Select Sector SPDR ETF (XLB). Both of these look like they have successfully engineered turnarounds on the charts.

What about that third dog of the Dow, gold? I am afraid it is going to have to stay in the doghouse. We have just seen the best case scenario imaginable for the barbarous relic unfold, total gridlock in Washington and an imminent default on Treasury securities. The yellow metal was supposed to go to the moon if this Armageddon scenario ever occurred. It collapsed instead. Failure to positively respond here makes me want to walk away as briskly as possible.

There is obviously a lot wrong with gold now. But that will be a piece for another day. It is time for my daily hike, and there is a snow capped 11,000 foot peak in my backyard begging for my attention.