Global Market Comments
May 3, 2013
Fiat Lux
Featured Trade:
(SO I LIED),
(TURKEY IS ON THE MENU), (TUR), (TKC)
(THE NEW CALIFORNIA GOLD RUSH), (GLD)
iShares MSCI Turkey Invest Mkt Index (TUR)
Turkcell Iletisim Hizmetleri AS (TKC)
SPDR Gold Shares (GLD)
I sit here with my fingertips battered, bruised, and bleeding. My lower back aches, and my shoulders are as tight as a drum. After promising to take it easy for a while because the risk/reward in the market so badly sucks, I knocked out six Trade Alerts in one day. That is on top of conducting a one-hour strategy webinar and writing a 1,600 word daily newsletter. So I lied.
So far in 2013, I have issued an exhausting 114 opening, closing, and updated Trade Alerts. That includes one amazing run of 19 consecutive profitable trades. You have to strike while the iron is hot, make hay while the sun shines, yada, yada, yada. Making money in the market this year has been a turkey shoot.
Since writing about my performance a few days ago, which now stands at an eye popping 35.88% for 2013 and 90.93% over the past 30 months, I have been deluged with inquiries about how I pulled off this trading miracle from the incredulous. Is he using insane amounts of leverage? Or is he just telling porky pies, a not unheard of practice in this sullied industry.
So in the interest of full disclosure, I am posting below every trade I have alerted readers to since January 1, along with the profit and loss. Of the 43 trades executed in 2013, 37 have been profitable, some quite impressively so. Each trade is shown in terms of its contribution to the portfolio?s total annual return. That is a success rate of 86%, which rightly earns me an honored place in the Hedge Fund Trader?s Hall of Fame.
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.
Feast your eyes.
On my way back from Lake Tahoe last weekend I saw that every bend of the American river was dotted with hopeful miners, looking to make a windfall fortune. Weekend hobbyists were there panning away from the banks, while the hardcore pros stood in hip waders balancing portable pumps on truck inner tubes, pouring sand into sluice boxes. Welcome to the new California gold rush.
A sharp-eyed veteran can take in $2,000 worth of gold dust a day. The new 2013'ers were driven by a price of gold at $1,450 and the attendant headlines, but also by unemployment, and heavy rains that flushed new quantities of the yellow metal out of the Sierras. They were no doubt inspired by the chance discovery of an 8.7 ounce nugget in May near Bakersfield, worth an impressive $12,615.
Local folklore says that The Sierra's have given up only 20% of their gold, and the remaining 80% is still up there awaiting discovery. Out of work construction workers are taking their heavy equipment up to the mountains and using it to reopen mines that have been abandoned since the 19th century.
The US Bureau of Land Management says that mining permits in the Golden State this year have shot up from 15,606 to 23,974. Unfortunately, the big money here is being made by the sellers of supplies and services to the new miners, much as Levi Strauss and Wells Fargo did in the original 1849 gold rush.
I am building lists of emerging market ETF?s to snap up during any summer sell off, and Turkey popped up on the menu. The country is only one of two Islamic countries that I consider investment grade, (Indonesia is the other one). The 82 million people of Turkey rank 15th in the world population, and 16th with a GDP of $960 billion GDP. Some 25% of the population is under the age of 15, giving it one of the planet?s most attractive demographic profiles.
The real driver for Turkey is a rapidly rising middle class, generating consumer spending that is growing by leaps and bounds. Its low wage labor force is also a major exporter to the European Community next door.
I first trod the magnificent hand woven carpets of Istanbul?s Agia Sophia in the late 1960?s while on my way to visit the rubble of Troy and what remained of the trenches at Gallipoli, a bloody WWI battlefield. Remember the cult film, Midnight Express? If it weren?t for the nonstop traffic jam of vintage fifties Chevy?s on the one main road along the Bosporus, I might as well have stepped into the Arabian Nights. They were still using the sewer system built by the Romans.
Four decades later, and I find Turkey among a handful of emerging nations on the cusp of joining the economic big league. Exports are on a tear, and the cost of credit default swaps for its debt is plunging. Prime Minister Erdogan, whose AKP party took control in 2002, implemented a series of painful economic reform measures and banking controls, which have proven hugely successful.
Foreign multinationals like General Electric, Ford, and Vodafone, have poured into the country, attracted by low costs and a rapidly rising middle class. The Turkish Lira has long been a hedge fund favorite, attracted by high interest rates.
Still, Turkey is not without its problems. It does battle with Kurdish separatists in the east, and has suffered its share of horrific terrorist attacks. Inflation is a worry. The play here long has been to buy ahead of membership in the European Community, which it has been denied for four decades. Suddenly, that outsider status has morphed from a problem to an advantage.
The way to get involved here is with an ETF heavily weighted in banks and telecommunications companies, classic emerging market growth industries like (TUR). You also always want to own the local cell phone company in countries like this, which in Turkey is Turkcell (TKC). June elections could provide us with the trigger to move into this enchanting country. Turkey is not a riskless trade, but is well worth keeping on your radar.
Global Market Comments
May 2, 2013
Fiat Lux
Featured Trade:
(SELLING GOLD AGAIN), (GLD),
(IS USA, INC. A ?SELL?),
(COLUMBIA IS POPPING UP ON MY RADAR), (GXG), (EEM)
SPDR Gold Shares (GLD)
Global X FTSE Colombia 20 ETF (GXG)
iShares MSCI Emerging Markets Index (EEM)
The real shocker today in the Fed?s announcement is that it may increase monetary easing from here. As if we haven?t had enough already, with the US and Japan throwing in a combined $170 billion a month worth of monetary stimulus!
More easing means that the America?s central bank thinks the global economy is even weaker than you and I realize. Yikes! Man the lifeboats, pass out the parachutes, and tighten your seatbelts! This is bad for commodities and even worse for precious metals, especially gold.
The barbarous relic has managed an impressive $155 rally off its $1,325 bottom made two weeks ago. This is one of the sharpest and fastest moves up in the yellow metal in history. It has been largely achieved through massive buying of physical coins in India and the US, as well as short covering in the futures markets and the ETF (GLD). The disappearance of margin calls has also been a major help.
The heavy hand of the China slowdown is still with us. So I am more than happy to buy the SPDR Gold Trust Shares June, 2013 $150-$155 in-the-money bear put spread. The big attraction here is that I have a generous $97 safety cushion over the next six weeks before I lose money on this trade.
You can thank the sky high implied volatilities on the (GLD) puts for getting such a great deal on this spread. Just for the sake of comparison, the implied on the (GLD) $150 puts you just sold short is 18.2%, some 30% higher than the 14% front month implied on the Volatility Index on the S&P 500. If you don?t understand why this is important, please buy the book, Options for the Beginner and Beyond, at Amazon by clicking the title or the book cover below.
What would happen if I recommended a stock that had no profits, was cash flow negative, and had a net worth of negative $44 trillion? Chances are, you would cancel your subscription, demand a refund, de-friend me from you Facebook account, and delete my email address from your address book.
Yet that is precisely what my former colleague at Morgan Stanley did, technology guru Mary Meeker. Now a partner at venture capital giant Kleiner Perkins, Mary has brought her formidable analytical talents to bear on analyzing the United States of America as a stand alone corporation. The bottom line: the challenges are so great they would daunt the best turnaround expert. But our problems are not hopeless or unsolvable.
The US government was a miniscule affair until the Great Depression and WWII, when it exploded in size. Since 1965 when Lyndon Johnson?s ?Great Society? began, GDP rose by 2.7 times, while entitlement spending leapt by 11.1 times. If current trends continue, the Congressional Budget Office says that entitlements and interest payments will exceed all federal revenues by 2025.
Of course, the biggest problem is with health care spending, which will see no solution until health care costs are somehow capped. Despite spending more than any other nation, we get one of the worst results, with lagging quality of life, life spans, and infant mortality. Some 28% of Medicare spending is devoted to a recipient?s final year of life. Somewhere, there are emergency room cardiologists making a fortune off of this.
Social Security is an easier fix. Since it started in 1935, life expectancy has risen by 26% to 78, while the retirement age is up only 3% to 68. Any reforms have to involve raising the retirement age to at least 70, and means testing recipients.
The solutions to our other problems are simple, but require political suicide for those making the case. For example, you could eliminate all tax deductions, including those for home mortgage deductions, charitable contributions, IRA contributions, dependents, and medical expenses, and raise $1 trillion a year. That would wipe out the current budget deficit in one fell swoop.
Mary reminds us that government spending on technology laid the foundations of our modern economy. If the old ARPNET had not been funded during the sixties, Google, Yahoo, EBay, Facebook, Cisco, and Oracle would be missing today. Global Positioning Systems (GPS) was also invented by and is still run by the government and has been another great wellspring of profits.
There are a few gaping holes in Mary?s ?thought experiment?. I doubt she knows that the Treasury Department carries the value of America?s gold reserves, the world?s largest at 8,965 tons worth $414 billion, at only $32 an ounce, versus an actual market price of $1,445.
Nor is she aware that our ten aircraft carriers are valued at $1 each, against an actual cost of $5 billion in today?s dollars. And what is Yosemite worth on the open market, or Yellowstone, or the Grand Canyon? These all render her net worth calculations meaningless.
Mary expounds at length on her analysis, in her book entitled USA Inc. which you can buy at Amazon by clicking on the title or the book cover below.
How About $32 an Ounce?
My current scenario for global equities has them selling off over the summer, then a rebounding led by emerging markets starting sometime in the fall. In that case, you want to start building short lists of high growth countries to pile into, once the turn comes.
I would be including Columbia on any such list. It enjoys that sweet spot of being an oil exporting emerging country whose shipments hit an all-time high of 884,000 barrels a day, about half the quantity that Libya once shipped. The quality of the government has improved dramatically over the last decade. It is a narco state no more, although public and investors? perceptions lag deeply. The country has seen upgrades by leading credit agencies. Billionaire Carlos Slim, the world?s richest man, has recently been seen as a major investor.
The country also enjoys one of the world?s most favorable demographic pyramids. A young, upwardly mobile workforce is producing a rising tide of consumers and a burgeoning middle class, while expensive seniors requiring social services and medical care are few and far between.
Columbia was the world?s best performing equity market in 2010, bringing in gains of over 100%. That was how the country ETF (GXG) performed. Is history about to repeat itself?
Like most emerging stock markets this year (EEM), Columbia has been beaten like a red headed step child. That makes it a prime target for a rotation, should another leg to the ?RISK ON? market develop later in the year, as I expect. They also make great coffee. Just ask Juan Valdez.
Global Market Comments
May 1, 2013
Fiat Lux
Featured Trade:
(MAY 1 GLOBAL STRATEGY WEBINAR),
(OLD TECH?S BIG COMEBACK),
(AAPL), (MSFT), (INTC), (HPQ), (XLK), (AMAT),
(GET READY FOR YOUR NEXT BIG TAX HIT)
Apple Inc. (AAPL)
Microsoft Corporation (MSFT)
Intel Corporation (INTC)
Hewlett-Packard Company (HPQ)
Technology Select Sector SPDR (XLK)
Applied Materials, Inc. (AMAT)
Apple blew away the bears today with the issuance of $17 billion in bonds, the largest such corporate debt issue in history. Spread over two, five, ten, and 30 years, the deal was oversubscribed by more than 3:1, with $40 billion in demand left unfilled.
Foreign investors took down a major part of the deal, which explains Deutsche Bank?s senior role in the syndicate. The yield on the ten-year bonds came in at 2.40%, a mere 70 basis points over equivalent US Treasury paper.
The mega deal, dubbed ?iBonds? by traders, underlies the tremendous shortage of high-grade fixed income securities worldwide. Since 2007, the amount of double ?A? or better rated paper has declined by 60%, thanks to widespread downgrades inspired by the newfound religion of the ratings agencies.
As I never tire of pointing out at my strategy luncheons and lectures, the principal sin of governments is not that they are borrowing too much money, but not enough. This has given us a global bond shortage that has taken returns to insanely low levels. Look no further than the ten-year yield of 1.68% in the US, 1.20 % in Germany, and a pitiful 0.60% in Japan.
The issue also highlights the sudden fascination of all things Apple since its better than expected calendar Q1 earnings report last week, with $43 billion in revenues spinning off $9.5 billion in profits. Since then, we learned that the richest man in Russia, Alisher Usmanov, soaked up some $100 million of stock close to the $392 bottom. This is a man who?s proven track record of market timing is uncanny.
It doesn?t require a lot of imagination to figure out what this deal is all about. With $145 billion in cash on the balance sheet, why borrow another $17 billion? The reality is that this is a way of repatriating, through the back door and tax-free, some of the estimated $100 billion in cash the company has parked in offshore bank accounts.
What will it do with the money? How about buying back $17 billion worth of stock? Buy borrowing at 2.4% and retiring 3.2% dividend stock, the yield pick up on the transaction comes to $136 million a year. That goes straight to the bottom line. The deal reminds me of the kind of financial engineering that dominated Japanese finance during the late 1980?s. When I was a director of Morgan Stanley, I signed many of these multi billion dollar deals as a co-manager.
It wasn?t just Apple that has returned from the grave, which saw its stock rise by 14% since last week?s two year low. Look at many of the old tech warhorses, like Microsoft (MSFT), Applied Materials (AMAT), Hewlett Packard (HPQ), and Intel (INTC), which have blasted forth from long moribund levels in recent weeks.
Which raises an interesting possibility. What if the long predicted selloff in May does a no show? What if, instead of the usual 10%-25% swan dive, we only get the 2.5% that has been the pattern for 2013? The possibilities boggle the mind.
In that case where will the money flood into next? Stocks that have been going up like a rocket for the past eight months, or shares that have either fallen like a stone during this time, or barely budged? Stocks that are trading at double the market multiple, or at half the market multiple? Hmmmm. Let me think about this one.
There are two major categories of the latter, commodity related shares and technology ones. China is still slowing, placing a monkey on the back of most commodities related companies. So I vote for technology, which by the way, is the cheapest it has ever been on an earnings multiple basis.
In that case, the strength in old tech will develop into far more than a one-week wonder. It could provide the rocket fuel that will power the major indexes for the rest of the year. That would take the S&P 500 up to 1,700 where it can flaunt a glitzy earnings multiple of 17.
Don?t get too giddy. This is definitely a best-case scenario. But then lately, the best-case scenarios have been happening, thanks to the reflationary efforts of our friend, Ben Bernanke.
That would be fantastic news for Apple?s long-suffering shareholders. Now that its stock has clearly broken through the 50-day moving average on the upside, the eventual target of this leg could be as high as the 200-day moving average at $541. One can only hope.
