Page 1906 - Mad Hedge Fund Trader

Buy Every Black Swan

At least that?s what Ben Bernanke thinks. He said as much in his press conference yesterday in the wake of the latest Fed statement. He might as well have waved a red Flag at a bull.

The central bank took the opportunity to downgrade its US growth forecasts going forward as a result of sequestration imposed government spending cuts. What is impressive is how minimal the impact will be, each year only pared back 0.1%. Armageddon, not! Here are the new GDP numbers:

2013? +2.55%
2014? +3.15%
2015? +3.30%

These are at the high end of most private sector predictions. Does Uncle Ben know something that he is not telling us? If the Fed is anywhere close to being right on these predictions, it justifies the meteoric rise in share prices we have seen so far this year. It also suggests we have more upside to go.

Let me throw out a theory here. Ben Bernanke is so fearful of repeating the Federal Reserve mistakes of 1938 that he is going to ere on the side of caution on the monetary easing front. That is when the government tightened too soon, triggering the second leg of the Great Depression and another 50% fall in the Dow average. He certainly is getting a free pass on the inflation front. When is the last time you heard of a worker getting a pay increase?

All of this paints an outlook for stocks that is pretty bullish. We could well continue on up for the rest of 2013, save for a 5%-10% correction in the summer. In the meantime, I added more longs to my model-trading portfolio this morning, using the Oracle (ORCL) inspired dip to tack on positions in United Continental Holdings (UAL) and Apple (AAPL).

By the way Ben, how much is a gallon of milk at the supermarket? Watch this space.

Something on Your Mind, Ben?

Revisiting Cheniere Energy (LNG)

Diary, Newsletter

Occasionally, I so totally knock the ball out of the park that I qualify for a place in the stock picker?s Hall of Fame. That was the case when I put out a recommendation to buy LNG exporter, Cheniere Energy (LNG), a year ago (click here? for Take a Look at Cheniere Energy (LNG).

Since then, the stock has soared an eye popping 85%. The great thing here is that I think the stock is still a buy. An upside target of $30 is a chip shot, and the all time high at $45 is within range. So get a 10%-20% dip in the price, and you might shovel some into your long-term portfolio. I quote below the entire original piece:

?I am constantly asked if there are any ways investors can take advantage of the collapse of the natural gas market, where at $2.34/MMBTU prices are plumbing decade lows. I have recently made good money buying puts on the ETF (UNG), but these are not for the faint of heart. They call this contract the ?widow maker? for a good reason.

You don?t want to touch the gas producing companies, like Chesapeake (CHK) and Devon (DVN), because prices are probably going to stay down for years. Good firms that benefit from the increased volume of gas pumped are few and far between. Unless you are a large consumer of this despised molecule, such as an electric power company or a petrochemical plant, it is tough to find a profitable niche.

However, there is one company that delivers a narrow rifle shot that could do extremely well in coming years, and that is Cheniere Energy (LNG). I first started following (LNG) a decade ago when I was still wildcatting for CH4 in the Texas Barnet Shale.

Back when natural gas was trading at a loft $5/MBTU, Qatar invested $50 billion in in developing its own substantial gas resources. The plan was to liquefy the gas at -256 degrees Fahrenheit in the Middle East, ship it to the US in a fleet of specialized LNG carriers, and have Cheniere convert it back into gas at its Sabine River plant for distribution to an energy hungry US market through the Creole Trail pipeline. It all looked like a great plan, and (LNG) shares traded up to $45.

Then ?fracking? technology came along and blew up the entire model. The discovery of a new 100-year supply of gas under our feet caused gas prices to crash from a post Amaranth peak of $17/MMBTU down to $2/MMBTU. Any plans to import LNG from the other side of the world were rendered utterly worthless. Chenier?s billion-dollar investment in a gasification plant was now worth only so much scrap metal. (LNG) shares plumbed low single digits as the firm flirted with bankruptcy.

Enter China. The Middle Kingdom?s voracious demand for energy in this recovery has caused the price of oil (USO) to soar from a 2008 low of $30 to $110. Despite accounting for an overwhelming share of the world?s new energy purchases, Chinese cities are suffering from brown outs due to power shortages. This is why China is resisting immense American pressure to quit buying Texas tea from Iran.

Enter the arbitrage. While oil has been spiking, gas has been crashing. Gas is now selling at 15% of the cost of oil on an adjusted BTU basis. Another way of saying this is that you can buy oil for $16 a barrel instead of $110. It only takes a second with an abacus to understand the appeal of such a disparity.

Gas also has the additional benefits in that it is much cleaner burning than crude, lacks the sulfur and nitrogen dioxides, and produces half the carbon dioxide. That?s a big deal in Beijing where the air is so thick you can cut it with a knife on a bad day.

Enter the long-term contracts. During the 1960?s and 1970?s Japan entered into huge long term contracts to buy LNG from Australia and Indonesia to feed their own economic miracle of the day. Because very expensive and hard to get, offshore supplies were tapped, the price was set at $16/MBTU. Those contacts are now expiring. Do you think they?ll renew at the old price, or go to Cheniere for the $2 stuff? Gee, let me think about that one for a bit.

Enter Fukushima. The nuclear meltdown last March prompted Japan to shut down 49 of 54 nuclear power plants that accounted for 25% of the country?s electric power generation. The brownouts that followed forced a sweltering summer on millions as the government urged consumers to shut off air conditioners to save juice. Power companies there have been scrambling to obtain conventional energy supplies, and have been a major factor in driving oil up from $75 to $100 since the fall. Cheap gas supplies from the US would meet this demand nicely.

The trigger. Last May, Cheniere got US government permission to export 2.2 billion cubic feet a day for 20 years. That would require it to convert the existing gasification plant to a liquifaction plant, something that can be done with some expensive re-engineering. It has already found several large international buyers to take delivery of the new end product. All that was missing was the money to finish the plant. My hedge fund buddies have been accumulating this stock since October, when it bottomed at $3, expecting an angel investor to appear. But it was one of those ?someday, it might happen? kind of stories better left to long term players.

Then last week, Blackstone jumped in with a beefy $2 billion investment in Cheniere. That will enable them to obtain an additional $3 billion in debt financing needed to finish the first of two export facilities. They are now expected to come online in 2016.

How does Cheniere stack up as an investment? Frankly, it is kind of scary. The market cap is only $2 billion, and it pays no dividend. When the current spate of deals are done, it will have $5 billion in debt. The Stock has just run up from $3 to $17. And these facilities are dangerous to operate. One blew up in Texas in 1937 and killed 300 schoolchildren. As a result, local permits for these are very hard to come by.

But as you can see, a whole host of geopolitical, technology and economic strands tie together in this one company, all of which are positive for the share price. If the story comes true, as Blackstone hopes, then there could be a double or triple in the shares for the patient. To learn more about Cheniere Energy, please click here for their website at http://www.cheniere.com/default.shtml .?

Did Somebody Light a Match?

March 22, 2013 - Quote of the Day

Quote of the Day

?The bond market, like every other market, is artificially overvalued because of the involvement of the Fed,? said Mohamed El?Erian of bond giant, PIMCO.

Follow Up to Trade Alert - (AAPL) March 21, 2013

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

Trade Alert - (AAPL) March 21, 2013

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more

Trade Alert - (UAL) March 21, 2013

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more

March 21, 2013

Diary, Newsletter, Summary

Global Market Comments
March 21, 2013
Fiat Lux

Featured Trade:
(TRADE ALERT SERVICE SEIZES 31.8% GAIN IN 2013),
(SPY), (FXY), (IWM, (BAC), (AIG), (FCX),
(FXE), (FXB), (GLD), (USO),
(THE BULL CASE FOR BANK OF AMERICA), (BAC),
(WHEN STERILIZATION IS NOT A FORM OF BIRTH CONTROL), (TLT), (PCY), (MUB), (JNK),
(TESTIMONIAL)

SPDR S&P 500 (SPY)
CurrencyShares Japanese Yen Trust (FXY)
iShares Russell 2000 Index (IWM)
Bank of America Corporation (BAC)
American International Group, Inc. (AIG)
Freeport-McMoRan Copper & Gold Inc. (FCX)
CurrencyShares Euro Trust (FXE)
CurrencyShares British Pound Sterling Tr (FXB)
SPDR Gold Shares (GLD)
United States Oil (USO)
iShares Barclays 20+ Year Treas Bond (TLT)
PowerShares Emerging Mkts Sovereign Debt (PCY)
iShares S&P National AMT-Free Muni Bd (MUB)
SPDR Barclays High Yield Bond (JNK)

Trade Alert Service Seizes 31.8% Profit in 2013

Diary, Newsletter

The Trade Alert Service of the Mad Hedge Fund Trader has posted a 31.8% profit year to date, taking it to another new all time high. The 27-month total return has punched through to an awesome 86.9%, compared to a miserable 18.5% return for the Dow average during the same period. That raises the average annualized return for the service to 36.5%, elevating it to the pinnacle of hedge fund ranks.

My bet that the stock markets would continue to grind up to new all time highs in the face of complete disbelief and multiple international shocks paid off big time, as I continued to run long positions in the S&P 500 and Bank of America (BAC).

My substantial short volatility positions are contributing to profits daily, with the closely watched (VIX) Index plummeting to a new five year low at 11.5%. I booked nice profits from holdings in American International Group (AIG) and copper producer, Freeport McMoRan (FCX), and the Russell 2000 (IWM). I also prudently doubled up my short positions in the Japanese yen for the third time this year.

It has truly been a month where everything is working. Even my short positions in deep out-of-the-money calls on the (SPY) are breaking even. While the (SPY) has been going up like clockwork, it has not been appreciated fast enough to hurt the position.

Trade Alerts that I wrote up, but never sent, worked. That?s because I have been 100% invested for the entire year in long stock/short positions. However, followers of my biweekly strategy webinars caught my drift and benefited from the thinking, and many did these trades on their own. These included shorts in the Treasury bond market, (TLT), the Euro (FXE), (EUO), and the British pound (FXB).

Sometimes the best trades are the ones you don?t do. I have been able to dodge the bullets that have been killing off other hedge funds, including those in gold (GLD), oil (USO), and commodities (CORN), (CU).

All told, the last 24 consecutive recommendations of the Trade Alert Service have been profitable. I have two trades to go to beat this record. Watch this space.

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.

The Bull Case for Bank of America

Newsletter

I?ll give you the quick and dirty argument behind buying Bank of America. For the past four years, the main argument for avoiding this stock like the plague was the hidden book of bad home loans it was hiding on its back bookshelf, thought to be in the tens of billions of dollars. This is why the shares spent most of the last half decade trading at a pitiful 50% of its book value. Nobody believed what management was representing as its true value.

Throw a sustainable recovery in the real estate market into the mix, and that excuse goes out the window. Rising property values means better quality collateral for the bank and more credible asset value representations. This will encourage equity investors to pay up to book value, 60% higher than price to book of 63%, and possibly more. That gets you at least to $20/share right there.

Do any search on (BAC), and a vast outpouring of contentions litigation, regulatory transgressions, and fines will pour out. Wherever there has been trouble in the financial system for the past decade, Bank of America was there, and up to its neck. The key point is that these are all in the past, settled, and accounted for in the future earnings stream.

Some of the acquisitions that (BAC) made during the crash were horrendous in their timing. It never missed an opportunity to overpay. The $2 billion Countrywide Financial acquisition stands out for its stupidity, which ate up masses of management time. Merrill Lynch at $50 billion? You must be joking. At that price, I have a pretty orange bridge here in San Francisco I?d like to sell them, as well. This was when a charitable valuation for the old raging bull would have been zero. Add 130% to the Dow average and it is a different story. The booming stock market has enabled Merrill?s profits to surge, and (BAC) could probably flip it here for a tidy profit.

After winding down positions in financials for five years, many long-term institutional investors are now running generational lows in this unloved sector. Return to market weightings could take years. Sure, we have already covered some serious ground with (BAC), from $5 to $12.75. I think the stock could make it up to $20 this year, and $30 eventually. Trend reversals like this go on for years. Looks like Warren Buffet got the bottom at $5, again!

Finally, (BAC), along with the entire banking industry, is perfectly positioned to profit from rising interest rates. Steep yield curves are where banks traditionally make their bread and butter, through borrowing short and lending long. The collapse of the Treasury bond market (TLT) may not be imminent, but it is coming. Think of (BAC) as an undated put on Treasury market.

This particular option spread, the $11-$12 in April is attractive because the upper strike matches the old upside breakout level on the charts. This should provide ample support during the inevitable correction. The April expiration is only 22 trading days away.

When Sterilization is Not a Form of Birth Control

Diary, Newsletter

I received a flurry of inquires the other day when Ben Bernanke mentioned the word ?sterilization? in his recent congressional testimony. And he wasn?t giving advice to the country?s wayward teenaged girls, either.

Sterilization refers to a specific style of monetary policy. Sterilized policies seek to manipulate the money markets without changing the overall money supply. The Fed implemented just such a strategy in 2011 when they initiated their ?twist? policy. This involved buying 10, 20, and 30 Treasury bonds and selling short an equal amount of short-term Treasury bills.

The goal here was to force investors out of the safety of Treasury bonds and into riskier assets like stocks, commodities, and real estate. Given the market action since then, I?d say they succeeded wildly beyond their dreams.

Dollar for dollar there is no change in the Fed?s balance sheet when sterilized actions are undertaken, although there is a huge increase in the risk profile of their portfolio. A private institution would be insane to do this at this stage of the economic cycle, as the risk of capital loss is great. But governments are exempt from mark to market rules and can carry this paper at cost or par, whatever they want. That?s why we have a central bank.

The Fed is now running up against a unique problem. The twist program is so large that it is literally running out of short-term securities to sell. When this happens, they may well resort to 28-day repurchase agreements instead, which are essentially sales of short term paper out the back door. This is what Uncle Ben was attempting to explain to our congressional leaders, which I?m sure went straight over their heads.

The really interesting thing here is why Bernanke is suddenly interested in sterilization? These are the types of policies you pursue to head off inflation. With wages continuing to fall, it is difficult to see why this should be an issue.

Maybe he?s looking at the price of homes and the stock market instead, which have recently been going through the roof. Perhaps he?s looking several years down the road. The great challenge for the Federal Reserve from here will be unwinding their massive $3.5 trillion balance sheet it built up during the Great Recession, without triggering runaway price increases.

For an excellent explanation of the history of monetary sterilization, please click here at http://en.wikipedia.org/wiki/Sterilization_(economics).