Newsletter Archives

Time to Buy JP Morgan

This is far and away the world?s premier banking institution. Estimates of the huge trading losses by the London ?whale?, initially pegged at $2 billion, have since skyrocketed to $6 billion. I?ll ignore the Internet rumors that speculate about a $30 billion hickey. As you well know, almost everything on the net is not true, except what you read in my own newsletter.

Back in the 1980?s when I was at Morgan Stanley, the inside joke was to look for nice office space for ourselves whenever we visited clients at (JPM). The expectation was that they would take us over when Glass-Steagle ended, as they were both the same institution before the Securities and Exchange Act broke them up in 933. When the separation of commercial and investment banking finally came in 1999, Morgan Stanley had grown far too big to swallow and the egos too big to manage.

I?ll tell you another way to look at this trade. (JPM) lost 4.7% of its capital, so Mr. Market chewed 30% out of its capitalization. Sounds a bit overdone, no? The bad news is already in the price. A large part of the offending position has already been liquidated.

I have known Jamie Diamond for a long time, and can tell you that he is the best manager of a financial institution anywhere. I have been warnings him for years that his traders were understating risk and leverage in esoteric derivatives in order to boost their own bonuses. It was just a matter of time before they blew up. Presumably, by now Jamie has tightened up internal controls and in the future won?t pay so much attention to presentations by wet behind the ears traders pitching schemes that are too good to be true. As a result, you can now buy (JPM) at the blow up price.

I have analyzed the specific trade that got (JPM) into so much trouble, the now infamous ?Investment Grade Series 9 Ten Year Index Credit Default Swap.? The chart of its recent performance and its hedge is posted below. It was in effect a $100 billion ?RISK ON? trade that came to grief in early May.

The trader involved, Bruno Iksil, broke every rule in the trading Bible: too much leverage in an illiquid credit derivative with no real risk control and hedges that were imprecise at best. As I never tire of pointing out to hedge fund newbies, when your longs go down and your shorts go up in a hedge fund, you lose money twice as fast as a conventional long only fund. Play at the deep end of the pool, but be aware of the risks.

Few outside the industry are aware that this was a $6 billion gift to two dozen hedge funds who are now shouting about record performance. It is, after all, a zero sum game. Didn?t Bruno get the memo to ?Sell in May and go away?? He obviously doesn?t read The Diary of a Mad Hedge Fund Trader either.

Even if the worst case scenario is true and the $6 billion numbers proves good, that only takes a 4.7% bite out of the bank?s $127 billion in capital. It is in no way life threatening, nor requiring any bailouts. These shares at this price are showing an eye popping low multiple of 7X earnings, and have already been punished enough. Getting shares this cheap in this company is a once in a lifetime gift, and twice in a lifetime if you count the 2009 crash low.

You don?t have to run out and bet the farm right here. Scale in instead, and if the market drops, you can always cost average down. If Greece forces us into major meltdown mode, we can also hedge this? ?RISK ON? trade through taking more aggressive ?RISK OFF? positions, like selling short the (FXE), (SPX), (IWM), (GLD), or the (SLV) by buying puts.

Short Red and Long Black Was Not Good

What Hot?and Not

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My friend, Tom Dorsey of the technical research boutique Dorsey Wright, inundates me daily with a never ending stream of market sensitive data which has been helping me make some of my more successful market calls. For example, when the S & P 500 hundred broke 1,380 in April, he completely nailed the 1,280 bottom in the current move.

So, I thought I?d pass on the asset class performance table below for the last 1, 6, and 12 months for your edification. The top performing three categories are all in bonds, with the 30 year Treasury easily taking the number one spot at 35%. They have continued the hot streak this year, clocking 7% year to date. All equity classes are showing negative YOY returns, not a surprising result in the middle of a lost decade in a low growth economy.

Which asset class gets the booby prize? No surprise that its European equities, down a hair raising 21%, whose travails have been eloquently detailed in these pages.

You can see this performance mirrored in the mutual fund cash flows table next. Money continues to pour into fixed income like Niagara Falls, with the taxable sector soaking up a stunning $112 billion in cash this year. The money is flocking to debt at negative real interest rates. This has been at the expense of domestic equity mutual funds, which suffered $44 billion in outflows. I liken this to driving 80 miles an hour, but only looking in the rear view mirror. It can only end in tears.

These numbers are a major reason why I turned bearish so early this year. Retail investors clearly aren?t drinking the Kool-Aid any more. It further bolsters my belief that the stock markets permanently lost a generation of investors after the gut churning trauma of the 2008 crash. The disastrous Facebook (FB) IPO just threw more fat on the equity bonfire.

Finally, for the sake of levity, Tom listed all of the possible responses to be heard around a Memorial Day BBQ, and the strategic response you should adopt. Read it for a good post-holiday laugh. To visit Tom?s ever useful website please click here at http://www.dorseywright.com/ .

Watch Out for That BBQ Advice

Playing at the Deep End With the Euro

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I never wanted to join any club that would have me as a member. That is the little nugget of wisdom comedian Groucho Marx imparted to me during his visit to the UCLA campus 40 years ago. It is also what came to mind when I saw the shocking Commitment of Traders Report for Euro futures that came out last Friday.

Short positions in the beleaguered European currency soared to another all-time high. From the May, 2011 peak, they have swung from a long position of 120,000 contracts to a short position of 220,000 contracts. That is a reversal of $34 billion in cash money.

Here is the problem for Euro traders. A position this large means that the risk/reward of selling the Euro versus the dollar is running against you. In the current environment bad news brings slow, grinding, marginal new lows. It is not exactly a secret that Europe is having problems these days. Good news brings furious, frantic, and large spikes up. Welcome to a hard market to trade, even if you are running a global 24 hour multi time zone desk with the best talent that money can buy. It is also why I covered my own Euro short for a big profit on the initial breakdown last week.

Watch for this week?s Friday report. They will probably show even greater record highs.

Groucho

My Tactical View of the Market

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The easy money has been made on the short side this year for a whole range of asset classes. While we will probably see lower lows from here, the risk/reward ratio for taking short positions in (SPX), (IWM), (FXE), (FXY), (GLD), (SLV), (USO), and (CU) are less favorable than they were two months ago.

Of course, the ultimate arbiter will be the news play and the economic data releases. It they continue to worsen as they have done, you can expect a brief rally in the (SPX) up to the 1,340-1,360 range before the downtrend resumes. First, we will revisit the old low for the move at 1,290. Then 1,250 cries out for attention, which would leave us dead unchanged on the year. Lining up next in the sites is 1,200. But to get that low, probably by August, we would need to see something dramatic out of Europe, which we may well get. For the Russell 2000, look to sell it at the old support range of $78-80, which now becomes overhead resistance, to target $72 on the downside.

Don?t underestimate the devastating impact the Facebook (FB) debacle will have on the overall market. Retail investors lost $6 billion on the deal after institutional investors were given the heads up on the impending disaster and stayed away in droves. The media has plenty of blood on its hands on this one. The day before the pricing, one noted Cable TV network reported that the deal was oversubscribed in Asia by 30:1. Morgan Stanley reached for the extra dollars, increasing the size, and boosting the price by 15%. It all came to tears.

Expect investigations, subpoenas, congressional hearings, prosecutions, multi million out of court settlements, thousands of lawsuits, and many careers ended ?to spend more time with families.? Horrible thought of the day: Apply Apple?s (AAPL) 8X multiple, which is growing at 100% a year, to Facebook, which is not, and you get a (FB) share price of $5. None of this exactly inspires confidence in the stock market.

Notice that emerging markets have really been sucking hind teat this year, dragged down by falling commodity prices, a slowing China, and a general ?RISK OFF? mood. This is probably the first sector you want to go back in at the summer bottom to take advantages of their higher upside betas.

The Euro went through the old 2012 low at $1.260 like a hot knife through butter. On the breach, a lot of momentum programs automatically kicked in and doubled up their short positions. That is what has taken us all the way down to the high $124 handle in the cash. Let?s see how the market digests this breakdown. The commitment of traders report out on Friday should be exciting, as we already have all-time highs in short positions in the beleaguered European currency.

The problem is that any good news whispers or accidental tweets on the sovereign debt crisis could trigger ferocious short covering and gap openings which the continental traders will get a head start on. So again, this is not the low risk trade that it was months ago.

Still, the 2010 lows at $1.18 are now on the menu. I would sell all the ?good news? rallies from here two cents higher. Aggressive traders might consider selling penny rallies, like the one we got today. Notice that the Euro is rallying into the US close every day. This is caused by American traders covering shorts, not wishing to run them into any overnight surprises.

The Japanese yen seems to be stagnating here once again, now that the Bank of Japan has passed on another opportunity to exercise more much needed quantitative easing. Therefore, I will use the next dip to get out of my September put options at a small loss. There is a better use of capital and bigger fish to fry these days.

The Australian dollar has been far and away the world?s worst major currency this year, falling from $110 all the way down to $94 on a spike. It now languishes at $97. I long ago stopped singing ?Waltzing Matilda? in the shower. I hope all my Ausie friends took my advice at the beginning of the year and paid for their European and American vacations while their currency was still dear. We could see as low as $90 in the months to come.

Gold (GLD) and silver (SLV) still look week, as this week?s failed rally attests. The strength of the Indian rupee still has the barbarous relic high priced for the world?s largest buyer, and this will continue to weigh on dollar based owners. But we are also reaching the tag ends of this move down from $1,922. Speculative short positions are at a multi-year low. It would take something pretty dramatic to get me to sell short gold again. For the time being, I am targeting gold at $1,500 on the downside, $1,450 in an extreme case, and $25 in silver.

We are well into the move south for oil, which peaked just at the March 1 Iranian elections just short of $110/barrel. The market now seems to be targeting $87 for the short term. The global economic slowdown is the clear culprit here. But in the US, we are starting to see a clear drag on oil prices caused by the insanely low price of natural gas. You can see this clearly on the charts below where gas has been rising while Texas tea has been plunging. Utilities and industry are switching over to the cleaner burning ultra cheap fuel source as fast as they can. As a result, greenhouse gas emissions are falling faster in the US than any other developed country, according to the Paris based International Energy Agency. Sell any $4 rally in crude and keep a tight stop.

When China catches cold, copper gets pneumonia. So does Australia (FXA), (EWA), for that matter. The China slowdown will most likely continue on into the summer, knocking the wind out of the red metal. If copper manages to rally back up to $3.60, grab it with both hands and throw it out the window. Cover when you hear a loud splat. That works out to about $26.50 in the ETF (CU).

It all points to a highly choppy and volatile ?RISK ON? rally that could last a week or two. It will be a time when you wish you took your mother in law?s advice to get a real job by becoming a cardiologist or plastic surgeon. Do you want to know when I want to reestablish my shorts? If you get a modestly positive nonfarm payroll on at 8:30 am on Friday, June 1, that could deliver a nice two day rally that would be ideal to sell into.

Why My Boeing Trade Crashed and Burned

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This trade was an unmitigated disaster, and hopefully it will be the worst of the year. I?m glad we had one of these because it provides a wonderful opportunity to illustrate everything that can go on with a trade. Every loss is a learning opportunity, and a loss not learned from is an opportunity wasted, and dooms one to repetition. Let me count the ways:

1) I was too aggressive on the strike. I should have matched my long August $70 strike with a short May $70 strike instead of reaching for the extra income by selling the $72.50?s. I got away with this on the (PHM) trade. Not so on (BA).

2) I shouldn?t have leveraged up with a 1:2 ratio. Those who did straight 1:1 spreads did much better and slept well at night. They saw only a slight opportunity cost as some losses were offset by profits in the August $70 puts as intended.

3) I was not aware that individual investors were so harshly treated by margin clerks. Hedge funds only get charged margin on the delta plus some small maintenance, which they then continuously rehedge. Most retail investors were prevented from doing this trade by broker policies banning naked put selling.

4) The Morgan Stanley guy who decided to price the Facebook (FB) issue on an options expiration day has to have a hole in his head. That only succeeded in increasing market volatility. I?m sure that when they made the call, they thought this would make (FB) go up faster. Instead, the reverse happened. On Friday, everyone?s portfolio effectively turned into a long Facebook position, tracking (FB) tick for tick. This did not end well.

5) This was a really unlucky trade. Although the global macro situation is pretty much unfolding as I expected, I didn?t think the rot would spread so fast once it set in. Even a one-day short covering rally on Friday would have turned this trade profitable. Thank Greece for that. Facebook too. It took one of the longest continuous market moves down, 12 out of 13 days, for this trade to lose money.

6) The only consolation is that those who had puts exercised against them and saw stock delivered into their accounts Monday morning at a cost of $72.50 were granted a huge short covering rally to sell into, with (BA) rising $2.85 back up to $72. This enabled shareholders to recover 85% of their losses on the position.

Taking in the entire May short option expiration play, and it is clear that this didn?t work. Add up all the P&L?s and this is what the damage came to:

(FXE) $127 puts? +$950
(FXE) $132 calls? +$950
(FXY) $121 puts? +$1,500
(PHM) $8 puts? +$980
(IWM) $77 Puts? -$5,544
(BA) $72.50 puts -$8,708

Total?? -$9,872, or ?9.87% for the notional $100,000 model portfolio.

Of course, this loss was more than offset by the enormous profits that we took in on our long put positions in the recent market meltdown. Since I initiated the short put strategy on May 3, the long put positions added a welcome 30% to the value of the portfolio.

We did get the protection against a sideways market that had been killing my performance in April. So it did perform its insurance function as intended. As I often remind readers, when you buy fire insurance, you don?t complain to the company when your house doesn?t burn down.

The way this strategy usually works is that you make money like clockwork all year, then one bad month wipes out two thirds of your total profits. That means repeating this play will probably work for the rest of 2012.

This also illustrates how the neophytes who attempt this strategy with tenfold leverage regularly get wiped out. What looks like easy money on the outside quickly becomes toxic waste on your position sheet. The rich uncle morphs into a serial killer overnight. When I look at those miracle 100% a year track record regularly touted on the Internet, this is usually what I find.

These calculations assume that you sold your (BA) at the close on Friday, which was a new low for the year. The net loss on the short (BA) May $72.50 puts comes to ($72.50 - $69.15 + $0.24 = $3.11). This subtracts (100 X 28 X -$3.11) = -$8,708, or -8.70% for the notional $100,000 model portfolio.

Oops

Facebook Flop Frustrates Ferocious Fans

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This had to be one of the greatest change of life weekends in human history, endured by one Mark Zuckerberg. On Friday, he earned $9.2 billion with the flawed Facebook (FB) flotation. On Saturday, he married a Chinese doctor and longtime girlfriend, Pricilla Chan. Then on Monday, oops honey, I lost $1.2 billion. Talk about a rocky start! Never mind that the precise timing was intended to undercut any future divorce claims, hence no prenuptial. Her cost basis is $38 a share, his is zero.

I knew that when the stock closed pennies above the $38 syndicate bid on Friday that there would be a Monday MORNING massacre. I warned away people from this issue at every opportunity. When Wall Street starts drinking its own Kool-Aid you, can count on a mass murder to follow.

Brokers we urging clients to apply for 100 times the shares they really wanted in the expectation that that would get only 1% of their request. That paved the way for the ugliest broker confirm of the year, that you received the entire allocation that of Facebook shares that you applied for, and they were now down 13%.

By Monday, some hapless investors still had not received notice of the allocation. At least they are faring better than the suckers lured into the aftermarket to buy stock at $43, now down 30%. Think of the entire flotation as a full employment act for the legal profession.

There was enough mud on lead underwriter, Morgan Stanley?s face to fill Yankee Stadium. It is sad to see how low the standards and competence have fallen at this once great firm.? I am now seriously thinking of taking this sullied name off of my resume, even though it is an ancient entry. Don?t worry, they?ll get their just punishment. The losses on their Facebook Stabilization fund is thought to be as high as $100 million, wiping out any underwriting fees earned. Expect investors to defriend (MS) post haste. What was expected to be the biggest payday of the year for Wall Street turned out to become the largest bill due.

I made a killing on Facebook, not through any direct participation, but from the market timing it clarified. When the (FB) was down $5, the Dow should have been off 300. They fact that it wasn?t flashed a huge ?BUY? signal to me, enough to cause me to rush to cover all of my profitable shorts and flip my model trading portfolio from a big ?RISK OFF? stance to a moderate ?RISK ON?. So far, it?s working, with Apple (AAPL) up $25 since my call, and (IWM) rocketing two full points.

Global Trading Dispatch, my highly innovative and successful trade mentoring program, earned a net return for readers of 40.17% in 2011. The average annualized return since inception is 25%. That would rank it as the 35th most profitable hedge fund in the industry according to a recent Barron?s survey.

The service includes my Trade Alert Service, daily newsletter, real time trading portfolio, an enormous trading idea data base, 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.

A Conversation With Charles Nenner

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I managed to catch my longtime friend, technical analyst, Charles Nenner, on the fly between London appointments yesterday. The must go to guy for big hedge funds, family offices, sovereign wealth funds, and high net worth individuals, says that the global markets are on the verge of completing round one of a major risk off trade, and there is much more to come.

A ferocious short covering rally could ensue as early as next week and run well into June. This is a rally you want to slam big time. A failure to reach new highs will lead to substantial new lows by August. To me, this means that the short selling opportunity of the year is in the process of setting up.

Intrigued, I asked Charles to go into as much detail on a ticker by ticker basis as London?s spotty cell phone coverage and bumpy roads would permit. I break out his answers below by asset class.

Equities

The S&P 500 will start one more run at a new high for the year next week, or the following week at the latest. A failure heralds a much more serious correction that could last into August. Use a downside break of 1,325 as a sell signal. The Russell 2000 looks much more dubious. Pierce $77.20, spitting distance from here, and we will soon be visiting $71.

NASDAQ (QQQ) has recently been underperforming recently and could lead any new charge to the downside. Emerging markets (EEM) fighting a monkey on their back with plunging commodity prices look even worse, and may not even bother to rally at all in this bounce. They look weak straight into July.

I covered a few individual high profile equities with Charles. He doesn?t like Apple (AAPL), which he sees touching $540, down $100 from the post earnings top. Ditto for IBM (IBM) which has probably squeezed out as much performance as it can for the time being. He says my short in Pulte Homes (PHM) will blow up in my face, remaining strong into July. Disney (DIS) looks pretty good and should maintain strength for a few more months. On the other hand, Boeing (BA) looks like it is rolling over and will track the indexes on any move south.

Bonds

Charles was ultra-bearish on the Treasury bond market, believing that the 30 year bull market peaked last September. The current run to those highs will fail, setting up one of the biggest short side trades in the coming decade. His favorite instrument here is the (TBT), which he recommends selling puts on four months out. The expected disorder and thin markets this summer could take ten year? Treasury yields as low as 1.57% from today?s 1.78%, but won?t be able to sustain beyond that. His downside target for the 30 year is a gob smacking 2.6% yield.

Foreign Exchange

The Euro (FXE) has already breached his first downside target of $1.2850. If we can?t recover that level soon, next on the menu is $1.2420. His longer term charts are showing a final goal of $1.00, but he refrains from mentioning this to the media because it is so extreme.

The Japanese yen (FXY) has just completed a nice one month consolidation and will resume a major long term downtrend imminently. If the cash market clears ?80.60, pennies from here, a much bigger move down is in store for the ETF, from the current $122.40 to $119.70, then $114. The Australian dollar (FXA) is looking equally sick and could be printing $89.5 in the months ahead. Further interest rate cuts by the Reserve Bank of Australia to combat a fading economy in China will add fat to the fire.

?Energy

The wily Dutchman has been negative on oil (USO) since it peaked at $110 a barrel in early March. It has already hit his initial goal of $93. If the markets move into a broader ?RISK OFF? mode, we could see $68 by November, no doubt sending chills down the spines of oil men everywhere.

Natural Gas (UNG), the worst performing asset of 2012, is enjoying a brief rally that may continue until the end of May. After that, the ETF for this unloved molecule should crater from $18.90 to below $14 this summer, around when the gas storage Armageddon hits. Longer term, he wants to scale into the long side, but not through (UNG), which has a huge contango and the worst tracking error of any ETF alive. He prefers to participate in any gas recovery through Canadian gas producer, EnCana (ECA), which derives almost 100% of its revenues from CH4.

Commodities

Nenner was early in jumping all over the copper (CU) trade, which was the first asset class to peak this year, in early February, unloading the red metal under $3.80. He thinks copper could trade as low as $2.80 in this cycle, down 28% from here. He also has been negative on the grain complex for some time, and thinks corn (CORN) has another 10% of downside to go. There he wants to load the boat for a potential double in coming years.

Precious Metals

Charles argues that the precious metals will be anything but a safe haven. We could get a bounce in gold off of $1,510 in the near future. But if that make or break level doesn?t hold, the barbarous relic could be paying a visit to $1,369, delivering the gold bugs a fatal dose of insecticide. Silver may challenge $23 soon, and substantially lower if no one steps up there.

Charles hails from Holland, and has a long career that includes stints at medical school, Merrill Lynch, Rabobank, and ten years at the Vampire Squid, Goldman Sachs. He has spent three decades developing his proprietary Cycle Analysis System, which generates calls of tops and bottoms for every major market in the world.

Charles developed a huge following after 2007, when he accurately nailed the top in the Dow at 14,500 and urged his clients to put on short positions when everyone else was predicting that the market would keep grinding higher. Today, Charles Nenner counts major hedge funds, banks, brokerage houses, and high net worth individuals among his clients. To learn more about Charles Nenner?s cutting edge research organization, please visit his website by clicking here at http://charlesnenner.com/ .
I have been following Charles? daily research reports myself for many years, and found them to be uncannily accurate. Whenever I feel like playing a three dimensional mental chess game, I call him to argue about the connections between human behavior and mathematics, a key market driver.

I thanked him for his time, and offered to share a bottle of the fiery Dutch spirit, Bols, on his coming trip to San Francisco. I also told him that the next time Holland?s canals freeze over, an event that happens only once a decade, I would race him mano a mano in the "Elfstedentocht," a 125 mile race around the country?s canals on ice skates.

My Go To Source for Charts

The "Elfstedentocht"

Charts Are Breaking Down All Over

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They say a picture is worth a 1,000 words, so here are 4,000 words worth. My friends at www.stockcharts.com put together this series of charts establishing beyond any reasonable doubt that the ?RISK ON? trade is breaking down across all asset classes.

Everything is breaking down, simultaneously and in unison, including the S&P 500 (SPX), Gold (GLD), Silver (SLV), Oil (USO), Copper (CU), the Euro (FXE), the Australian dollar (FXA), and the Canadian dollar (FXC). In the meantime, Treasury bonds (TLT), (TBT) are moving from strength to strength.

The news from Europe can only get worse. An American recession, considered impossible by strategists only a month ago, is now looming large as our own economic data continues to deteriorate. The flight safety has exploded into a stamped, driving the US dollar index up 12 consecutive days, a new record.

I have included a cartoon below from my old employer, The Economist, that neatly sums up the implications of the Socialist win in the French presidential elections. German chancellor, Angela Merkel, is meeting French president, Fran?ois Hollande, for dinner at Das Austerity Euro-Caf?. Austerity preaching Merkel is having a miniscule single sausage for dinner, while Hollande is enjoying a sumptuous repast and obviously ordering the most expensive wine from the list.

The cartoon would be funnier if it weren?t so true. Austerity is now suffering a retreat on the order of Napoleon?s retreat from Russia in the winter of 1815. Her Christian Democratic Union party suffered its worst post WWII defeat in last weekend?s North Rhine-Westphalia elections. It is now looking like Germany will have to accept a higher inflation rate as the price for bailing out Europe, something it is loath to do. Needless to say, this is terrible news for the Euro.

If these charts continue to break down, as the news flow dictates they should, here are my immediate downside targets.

(SPX)? 1,280
($INDU)? 12,200
(IWM) $70
(FXE)? $126
(FXA) $95
(GLD) $150
(SLV)? $25
(USO)? $32
(CU)? $22

Don?t Worry, She?s Picking Up the Bill

Strong Dollar Spells Death for Commodities

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Panic is on deck, to use the baseball terminology that my foreign readers are often attempting to decipher. That is the only conclusion one can reach after getting gob smacked by the price action this morning. Copper got spanked for eight cents, oil burned $2, gold shed another $26, and silver puked 70 cents.

The tantrum like stock behavior in producing and equipment companies, like Freeport McMoRan (FCX) and Caterpillar (CAT) has been atrocious. How many of you out there know that JP Morgan (JPM) is the largest holder of futures contracts in the silver market and just got hit with a massive margin call? Why is all this happening on the 100 year anniversary of the sinking of the HMS Titanic?

Blame it all on Uncle Buck, whose recent steroid treatments has enabled him to unload the pounds, shed the fat, and adopt a new, more virile attitude towards life. Every other currency now looks like a 98 pound weakling. We now awake each morning to be greeted by the latest disastrous headline from Europe that accelerates the capital flight from the continental currency.

The Euro (FXE), (EUO), is deteriorating from bad to worse, with the foreign exchange community now clearly gunning for the next short term support at $1.26. Look at a ?10 note these days and it has recently printed upon it ?Abandon hope all ye who enter here.?

Traditional diversification currencies, like the Australian (FXA) and Canadian dollars (FXC) are now biting the hands that fed them, dragged down by their export commodities? pitiful performance. Hard as it is to imagine, the Ausie has been the world?s worst performing major currency this year, even underperforming the dreadful euro. Australian readers who followed my advice to pay for their summer vacations in advance at the $1.10 that prevailed at the beginning of the year are smiling. Those they didn?t are now looking for a discount caravan at a remote, dingo plagued campsite somewhere in the Outback.

The Japanese yen, the currency that everyone loves to hate, has perked up to a flight to safety bid while the rest of the world goes to hell in a hand basket. We are currently in between Bank of Japan quantitative easings there, so don?t expect this to last much longer. The tipping point into hyper debt driven, economic Armageddon there creeps ever forwards with each passing day on the calendar.

Take a look at the charts below for the US Dollar Index and it is obvious that things may soon get a whole lot worse. For starters, the dollar has only rallied back to the midpoint of a multiyear range. To get back up to the top of that range it needs to appreciate another 10%. To understand why this is a problem, look at the second chart that proves a tremendous inverse correlation between the dollar and commodities. A strong dollar always leads to falling demand for the hard stuff.

The third chart suggests that the other grotesquely overvalued asset class, US stocks, is also cruising for a bruising. Commodities led equities in this downturn by three months, as they usually do. If they break support here, then they will easily drag the (SPX) down to my medium term target of 1,275, off a heart thumping 10.3% from the recent top. If the economic data continues to worsen on a daily basis, as I have been chronicling on a daily basis for the last two months ad naseum and ad absurdum, then we have a clear shot at the fall, 2011 low at 1,060.

Oops, There Goes My Equity Portfolio

Why is Gold Broken?

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Gold bugs are puzzled by the recent collapse in the price of the barbarous relic. Physical demand has been outstripping supplies for some time now and threatens to reach all-time highs. Demand for 100 ounce gold bars by the 1%?ers is as high as it has ever been. Negative real interest rates for almost all Treasury securities also underpin the bull argument for gold.

Mine supply of the yellow metal is just 2,200 tonnes a year. This does not include Russia or China, where production is entirely consumed domestically and never reaches the world market. China alone bought 64 tonnes off the international market in February. Other non G6 central bank buying continues unabated. India?s gold import duties were rescinded, which had been the explanation from the drop from $1,700 after widespread strikes by the country?s jewelers.

But paper selling of gold through ETF?s like the (GLD) has delivered a stiff dose of insecticide to the gold bugs, causing prices to plummet. It is all a broader symptom of the global ?RISK OFF? trade which has gripped assets of every description, smashing any diversification assumptions about gold. Watching the economies of the biggest sovereign gold buyers slow has not exactly thrilled speculators. The tightening of margin requirements by the CFTC two weeks ago, originally intended to damped oil speculation to get gasoline prices down, had the unintended consequence to paring back other commodity and precious metals prices as well.

Hints from Ben Bernanke that QE3 is on hold delivers a sucker punch to gold holders every time. And as we saw on Tuesday, the slightest hint that the International Monetary Fund will sell gold to rescue Europe is good for about a $50 down day.

It looks like gold will hit my downside target of $1,500 fairly quickly. Too bad some dubious price action spooked me out of my puts too soon last week. This would have been the home run of the year if I only held on for two more days. Welcome to show business.

Beyond that, the chart below shows major support at $1,425. To get down to $1,250, you need to see a true double dip recession, which the recent soggy economic data has been hinting at. I am sure we will see my long term inflation adjusted all time high of $2,300 in the years ahead. But you may have to suffer some serious pain along the way to get there.

Goldfinger Stared Me Down Once Again