Load the Boat With the Chinese Yuan

Any doubts that the Chinese Yuan is a huge screaming buy should have been dispelled when news came out that China had displaced Germany as the world?s largest exporter. The Middle Kingdom shipped $1.9 trillion in goods in 2012, compared to only $1.4 trillion for Deutschland. The US has not held the top spot since 2003.

China?s surging exports of electrical machinery, power generation equipment, clothes, and steel were a major contributor. German exports were mired down by lackluster economic recovery in the EC, which has also been a major factor behind the weak euro. Sales of luxury Mercedes and BMW cars, machinery, and chemicals have cratered.

Back-to-back interest rate rises for the Yuan, and a snugging of bank reserve requirements by the People?s Bank of China, have stiffened the backbone of the Yuan even further. That is the price of allowing the Federal Reserve to set China?s monetary policy via a fixed Yuan exchange rate. Is it possible that Obama?s stimulus program is reviving China?s economy more than our own? That?s what highly divergent economic growth rates suggest, with China taking on 8% a year, versus only 2% for the US.

The last really big currency realignment was a series of devaluations that took the Yuan down from a high of 1.50 to the dollar in 1980. By the mid nineties it had depreciated by 84%. The goal was to make exports more competitive. The Chinese succeeded beyond their wildest dreams. This is why today?s Chinese complaints that Japan is using their country as a ?garbage dump? for the yen is falling on deaf ears in Tokyo.

There is absolutely no way that the fixed Yuan rate regime can continue. There are only two possible outcomes. An artificially low Yuan has to eventually cause the country?s inflation rate to explode. Or a global economic recovery causes Chinese exports to balloon to politically intolerable levels. Either case forces a major Yuan revaluation.

Of course, timing is everything. It?s tough to know how many sticks it takes to break a camel?s back. Talk to senior officials at the People?s Bank of China, and they?ll tell you they still need a weak currency to develop their impoverished economy. Per capita income is still at only $5,000, a tenth of that of the US. But that is up a lot from $100 in 1978. I remember the grinding poverty of the ?old? China all too well.

Talk to senior US Treasury officials, and they?ll tell you they are amazed that the Chinese peg has lasted this long. How many exports will it take to break it? $2 trillion, $3 trillion, or $24 trillion? It?s anyone?s guess.

One thing is certain. A free-floating Yuan would be at least 50% higher than it is today, and possibly 100%. In fact, the desire to prevent foreign hedge funds from making a killing in the market is not a small element in Beijing?s thinking. The Chinese Central bank governor says he won?t entertain a revaluation for the foreseeable future. The Americans say they need it tomorrow.

To me, that means about six months. Buy the Yuan ETF, the (CYB). Just think of it as an ETF with an attached lottery ticket. If the Chinese continue to stonewall, you will get the token 3% annual revaluation the swaps have been discounting. Since the chance of the Chinese devaluing is nil, that beats the hell out of the zero interest rates you now get with T-bills. If they cave, then you could be in for a home run.

How Many Did You Want?

How to Avoid the Ponzi Scheme Trap

Diary, Newsletter

I spent a sad and depressing, but highly instructional evening with Dr. Stephen Greenspan, who had lost most of his personal fortune with Bernie Madoff. The University of Connecticut psychology professor had poured the bulk of his savings into Sandra Mansky's Tremont feeder fund; receiving convincing trade confirms and rock solid custody statements from the Bank of New York.

This is a particularly bitter pill for Dr. Greenspan to take, because he is an internationally known authority on Ponzi schemes, and just published a book entitled Annals of Gullibility-Why We Get Duped and How to Avoid It. It is a veritable history of scams, starting with Eve's subterfuge to get Adam to eat the apple, to the Trojan horse and the Pied Piper, up to more modern day cons in religion, politics, science, medicine, and yes, personal investments.

Madoff's genius was that the returns he fabricated were small, averaging only 11% a year, making them more believable. In the 1920's, the original Ponzi promised his Boston area Italian immigrant customers a 50% return every 45 days. Madoff also feigned exclusivity, often turning potential investors down, leading them to become even more desirous of joining his club. For a deeper look into Greenspan's fascinating, but expensively learned observations and analysis, go to his website at http://www.stephen-greenspan.com/.

Testimonial

Testimonials

We view The Mad Hedge Fund Trader as a vital resource that helps us focus on major market trends that are most likely to make money over time. It is a resource that helps us filter out the daily noise in various markets and the mostly irrelevant commentary of TV's talking heads.

Unlike many newsletters that focus on one strategy or asset class The Mad Hedge Fund Trader's experience stretches across currencies, commodities, international markets, and equities. His writing sews these themes together, painting an investment picture that makes you never want to miss an issue. He is also able to bring a deep network of professionals into his analysis, providing a perspective that is hard to match elsewhere.

We find that MHFT is often early in identifying major potential changes in the market. It is not a market-timing tool. It sometimes takes patience to see ideas come to fruition, but when they do, the surprise is often to the upside.

It has helped us to identify important trades that really help us add alpha to a portfolio. Whether we are looking for equity ideas in emerging markets or analysis of real time macro situations nearer to home The Mad Fund Hedge Trader provides great perspective on what is important now.

Lee
Napa, California

March 12, 2013 - Quote of the Day

Quote of the Day

?China thinks strategically. We think reactively,? said Stephen Roach, former chairman of Morgan Stanley Asia, and my friend and former mentor.

March 11, 2013

Diary, Newsletter, Summary

Global Market Comments
March 11, 2013
Fiat Lux

Featured Trade:
(WHY THE STOCK MARKET IS STILL GOING UP),
(SPX), (SPY), (QQQ), (IWM), (OEX), (RSP),
(KKR) (APL) (LINE) (RIG) (AXP), (BMY)
(MURRAY SAYLE: THE PASSING OF A GIANT IN JOURNALISM)

S&P 500 Large Cap Index (SPX)
SPDR S&P 500 (SPY)
PowerShares QQQ (QQQ)
iShares Russell 2000 Index (IWM)
S&P100INDEX (OEX)
Guggenheim S&P 500 Equal Weight (RSP)
Kohlberg Kravis Roberts & Co. (KKR)
Atlas Pipeline Partners, L.P. (APL)
Linn Energy, LLC (LINE),
Transocean Ltd. (RIG)
American Express Company (AXP)
Bristol-Myers Squibb Company (BMY)

Why the Stock Market is Still Going Up

Diary, Newsletter

I have had an extremely hot hand this year, pushing the 2013 performance of my Trade Alert Service above a stellar 30%. So I am going out on a limb here and predict that the S&P 500 is about to grind up to a new all time high.

Since 2009, Federal Reserve governor, Ben Bernanke, has clearly made our central bank?s top priority jobs and growth, at the eventual expense of a higher inflation rate. The higher stock and home prices, a vast monetary expansion enabled, has also created a huge wealth effect. This is spurring newly emboldened investors to pour more money into risk assets everywhere, save commodities and precious metals. This creates more consumption, and, in the end, finally, more jobs.

Thanks to Ben?s efforts, stock prices have financially reached what most traditional analysts consider ?fair value? after a long four-year slog. The historic 50 year range for price earnings multiples is 9-22, and here we sit today, dead center at 15.5, assuming S&P 500 earnings of $100/share.

But this time, it?s different. Ten year Treasury yields at 2.05% today, are about 400-500 basis points lower than seen during past stock market peaks. Even after the $85 billion sequestration hit, Washington is still pumping $800 billion a year into the economy, even though the recovery is four years old. And Ben Bernanke shows no sign of taking the punch bowl away anytime soon.

This is why, having failed to break 1,485 of the downside on the heels of the Italian election disappointment on February 25, the index has little choice but to gun for the upside target of 1,585.

Health of this market top is vastly more robust than previous ones. Currently, 85% of the stocks in the (SPX) are trading above their 200 day moving averages, compared to only 50% when markets peaked in 2007, when the market actions was far more concentrated in a handful of stocks.

Such a broad base suggests that a lot of managers are still underinvested, and that the pain trade is to the upside. This is why the February correction that everyone was waiting for never came, and why we saw an incredibly bullish ?time? correction instead of a ?price? one. I was expecting as much.

Indeed, the technical outlook for the market is becoming increasingly positive as is obvious from the charts below. We have seen several successive new highs for the Dow transports for many weeks now, an index of a much more economically sensitive group of stocks.

Look at an equal weighted index of the S&P 500, like the (RSP), and it has already hit a new all time high, a huge plus. Finally, the NASDAQ (QQQ) looks like it is, at long last, putting its lost decade behind it by breaking to new ten-year highs.

Still, there are some qualifications here. The Dow needs to stay above 14,198 for the rest of March for this breakout to be valid. So far, so good. The capitalization weighted (SPX) is also approaching its high in the most overbought condition since 2007, with RSI?s well into the 70 territory. That means a round of profit taking will hit once we do hit a new high.

Another development that has technical analysts extremely excited is that many leadership stocks are catapulting off of bases that took 10-12 years to form. The number of new decade highs greatly exceeds the new lows. This has many chartists calling for a further move in the main indexes up another 10% from here.

Every bull market ends in overvaluation, often an extreme one, and sitting here at fair value, we are not even close for this cycle. Not a day goes by now that I don't get emails from readers asking what to do with cash here. I think the safer bet will be to go with high quality, high growing names where a hefty dividend gives you a cushion against any short-term volatility.

That list would include KKR Financial (KKR) (7.4%), Atlas Pipeline (APL) (7.7%), Linn Energy (LINE) (7.7%), and Transocean (RIG) (4.2%). You could also do worse than American Express (AXP), (1.30%), and Bristol Myers-Squib (BMY) (3.80%).

Party on!

Party On!

Murray Sayle: The Passing of a Giant in Journalism

Evening VIP

I was saddened to hear of the death of my close friend, the Australian, Murray Sayle, after a long battle with Parkinson's disease at the age of 84.

Murray was one of the giants of journalism in the second half of the 20^th century. He started by editing the newspaper at University of Sydney, where his incendiary opinions got him expelled from school. It seems there was a problem with his suggestion to erect a statue of Priapus at the administration building honoring the chancellor, but only at the back door. He moved on to London's Fleet Street in 1952, arriving as a wet behind the ears, but sassy colonial, and landed a job with a small paper named The People. This was when the media was then dominated by giant daily broadsheets. He went on to become the quintessential war correspondent, reporting for the London Times, known in the trade as the ?Thunderer?, because the building shook when its giant presses ran.

I first met Murray in 1975 at a Mensa meeting in Tokyo where I was presenting a paper on the chemical structure and properties of tetrahydrocanabinol. Murray was on the hunt for a story, as always. He was cooling off after a decade of dodging bullets, bombs, shrapnel, and napalm covering the war in Vietnam. Murray once told me that since his writings were often perceived as antiwar, it was a tossup who would shoot him first, the Vietcong or the Americans. Murray told me that the Foreign Correspondents' Club of Japan had one of the best English language libraries in the country, and that he would be happy to sponsor me for membership; thus inadvertently, launching me on a career in journalism.

Murray moved into a converted 19^th century silk worm grower's farm house in a small mountain hamlet three hours outside of Tokyo with his wife Jenny, his tireless and loyal supporter. There, they raised three children who went through the local Japanese school system, soldiering on in their 19^th century black German cadet uniforms as the only white kids in the district, emerging as flawless interpreters. I often made the long and arduous trip to Aikawa-cho (?Love River?) on weekends; spending long nights over endless flasks of hot sake listening to Murray drunkenly quote extended passages verbatim from Rudyard Kipling. We passionately debated the issues of the day until we fell asleep at the kotatsu. If I learned nothing else, it was that there is always another way to look at any issue. As I had the tendency to always turn up with a different Japanese girlfriend, his pet name for me became 'Randy'.

Over a career that spanned nearly 70 years, Murray scored countless interviews with notoriously difficult to reach figures, like Ch? Guevara and Yasser Arafat. He managed to nail defecting British spy, Kim Philby, by staking out the one newspaper stand in Moscow that sold the Financial Times. Murray would regale me with tales of Ugandan dictator 'Big Daddy' Idi Amin, who stored the severed head of his wife's former lover in his refrigerator. Murray won numerous awards for his Vietnam coverage and for his description of the barbarous downing of a Korean Airlines flight 007 off the coast of Japan by a Russian fighter in 1983, which killed 269 helpless civilians.

Just before he died, the university that shamefully ejected him 65 years earlier, made amends by awarding him an honorary doctorate. The wit, candor, and insight of this larger than life figure will be sorely missed.

March 11, 2013 - Quote of the Day

Quote of the Day

?One must marvel at where the stock market is in relation to the rest of our world. With the economy in relation to the politics, it?s not a happy time. If you look at how they were viewing Obama just before the election, we?ve just walked through the raindrops in regards to the stock market with the fiscal cliff, the debt ceiling crisis, and all sorts of other issues that were plaguing the market,?
said legendary hedge fund manager and chairman of Wisdom Tree Investments, Michael Steinhardt.

Trade Alert - (FXY) March 8, 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 - (FXY) 2 of 2, March 8, 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