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
The gold rush is back on in California. On my way back from Lake Tahoe recently, I saw that every bend of the American river was dotted with hopeful amateur 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. A sharp-eyed veteran can take in $2,000 worth of gold dust a day. The new 2012?ers were driven by a price of gold at $1,700 and the attendant headlines, but also by unemployment, and recent heavy rains last winter that flushed huge new quantities of the yellow metal out of the High Sierras.
They were no doubt inspired by the chance discovery of an 8.7 ounce nugget in May near Bakersfield, worth an impressive $10,000. 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 U.S. 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. Of course, they could much more easily buy the Spider Gold Trust Shares ETF (GLD), but it wouldn?t be as much fun.
Nice to Meet You
I have just finished reading the best financial book ever, and I have read most of them. It is The Ascent of Money: A Financial History of the World by Harvard professor Niall Ferguson. It gives you a great explanation of how the broad sweep of history delivered us to the doorstep of today?s crisis.
Ferguson starts with an ancient accounting system written on clay tablets in Mesopotamia 5,000 years ago, and then takes us through the economic dominance of Greece and Rome. We learn about a medieval Italian diplomat named Fibonacci, who imported advanced mathematical concepts from the Middle East, which we still trade around today. He plots the rise of the great banking dynasties, such as the Medici?s and the Rothschild?s (Jacob was my neighbor in London).
It is also a pot boiling narrative of the great financial scandals, starting with the Mississippi bubble which wrecked France, the South Sea bubble where Sir Isaac Newton lost his shirt, to the Ponzi schemes of the 20th century. The story tells us how the financial center of the world has migrated from Babylon to Cairo, Rome, Venice, Amsterdam, London, and eventually ending up in a hedge fund dominated New York.
Ferguson is particularly astute in explaining in layman?s terms the borrowing binge and the exotic, super leveraged derivatives that lead to the current crash. The author finishes with an explanation of how American overconsumption is financed by Chinese saving, and why this can?t last. If you are looking for a single tome which ties it all together, this is it. To obtain preferential pricing in the purchase of this book, please click here.
?The most expensive advice that you will ever get is to be told at a market top that ?This time it?s different,? said Harvard economics professor Kenneth Rogoff
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
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
Those who have been dying of boredom during August -- the lowest volume, tightest ranging month in many years -- may be about to get their respite. September 12 (or Wednesday next week) offers a potential cornucopia of either fantastically good or terribly bad news, and maybe both.
Let me give you a program of the upcoming events on this momentous day:
*The German Supreme Court renders its decision on the legality of the country?s bailout of troubled southern Europe. If they approve, as expected, the Euro should rally to a new multi-month high, possibly as high as $1.29, triggering a global ?RISK ON? move. If they don?t, then the beleaguered continental currency craters very quickly back to $1.20, from whence it came.
*The Federal Reserve Open Market Committee meets, which may finally give us the good news on QE3. If they deliver, markets will gap up. If they don?t, then everyone will assume that quantitative easing at the next meeting is a sure thing and the markets will go to sleep until then. Personally, I don?t think the Fed will act until the Dow drops below 10,000 and puts the fear of God into everyone. This is the day when we find out how real the ?Bernanke/Draghi Put? is.
*Apple releases the iPhone 5, which will become the greatest consumer electronics release in history, and possibly the most expensive. It turns that that all those leaks I was receiving about timing, price, and performance were correct. This should cause the stock to blast through $700, which is why it is my largest position, with a 35% weighting in my model portfolio. But we may not get much more action than that for the short term. The iPhone 5 launch is what the last $160 point move up since the end of May has been all about.
*The next biweekly Mad Hedge Fund Trader global strategy webinar takes place. Yikes! Whose idea was this? This timing is as bad as scheduling the Republican National Convention in Florida in the middle of the hurricane season. I may have to ask listeners to update me on prices while my broadcast is in progress, as I can?t tie up too much bandwidth with price feeds without crashing the program.
If you net out all the likely outcomes of the above, it is market positive. But surprises will have an outsized downside market impact. Whatever the case, life is about to become much more interesting.
How Real is the ?Bernanke/Draghi Put??
Sell Short the Currency Shares Australian Dollar Trust October, 2012 (FXA) $105-$108 call spread at $0.35 or best
Opening Trade
9-4-2012 ? 2:00 PM EST
expiration date: October 19, 2012
Portfolio weighting: 10% = 45 contracts on a net delta adjusted basis
This is a bet that the Currency Shares Australian Dollar Trust October, 2012 (FXA) trades at or below $105.35 on the October 21 expiration in six weeks. That means that the cash market has to move up 3.1 cents, or 3.0% from today?s level of $102.25 for you to lose money.
I saw this one coming a mile off, and have been urging listeners of my biweekly strategy webinars to use any good entry point to sell short the Australian dollar. But I missed my own chance to sell at the recent top at $105. I should try reading my own research someday.
Here is the base case to quit singing ?Waltzing Matilda? in the shower every morning. Australia?s largest export is iron ore, which accounts for 25% of the total. The problem is that the three-year slowdown in the Chinese economy has dragged the price for iron ore down 25% in the past month, and 50% from its 2011 top. It is the world?s second largest bilateral trade and a valuable window for traders and investors on the health of the global economy.
The country?s largest producers, Broken Hill (BHP) and Rio Tinto (RIO) have taken a major hit to profitability, and have begun delaying or cancelling new mines. To learn more about this foreboding developing in depth, please click here for ?BHP Cut Bodes Ill for the Global Economy? at http://madhedgefundradio.com/bhp-cut-bodes-ill-for-the-global-economy/). The hemorrhage is now predictably starting to feed into weaker Australian GDP growth figures.
Last night?s weaker-than-expected Chinese Purchasing Manager Index figure was the stick that finally broke the camel?s back. The Aussie responded by plunging a full penny, and slicing through the bottom of its recent trading range at $1.03.
The ideal way to do this trade was to buy something like an (FXA) November $101-$105 put spread. Since we are well off the top, there is no point in pursuing the Aussie with such an aggressive position at this level.
However, there is still plenty of nice, juicy premium left in out-of-the-money calls sitting on the table. I am more than happy to reap these in the form a short position in the (FXA) October $105-$108 call spread.
Tonight the Ministry of Finance in Canberra announces the most-recent GDP figures. If they come in weak, as I expect, the Aussie may accelerate its downward descent. If they come in better than expected, use the opportunity to add a short position in the Aussie at better prices. Neither the iron ore trade, nor the Chinese economy, are things that turn on a dime, as the capital investment lead times are so long.
If this spread expires anywhere under $105, as I hope, your total profit should amount to (45 X 100 X $0.35) = $1,575. That gives you a profit on this six-week play of 1.57% for the notional $100,000 model portfolio.
Keep in mind that this is a solid ?RISK OFF? trade, as it bets on the continued slowing of the global economy, especially for hard commodities like the base metals. It can therefore be used to offset the existing aggressive ?RISK ON? trades we already have in Apple (AAPL) and gold (GLD).
Don?t place a market order for this trade or the floor traders will rip your eyes out. Don?t place individual orders for the legs either. Instead, place a limit day order in the middle market to sell the entire call spread only around $0.35, and wait for the market to come to you. It will find you.
The market can be illiquid for the deep out-of-the money $108 calls. You need this leg to cap and define your risk, as well as minimize your margin requirement for the position.
If nothing happens then start raising your bid for the spread in 5 cent increments until something happens. You might also consider scaling into less leveraged short positions, such as through selling short the ETF (FXA) on any rally.
If you can?t get done at a price that you are happy with, then walk away and wait for the next trade alert. There will be plenty of trading opportunities in coming months. The same is true if I have failed to adequately explain this trade and you don?t understand it.
These are the trades you should execute:
Sell short 45 October, 2012 (FXA) $105 calls at??$0.40
Buy 45 October, 2012 (FXA) $108 calls at????.$0.05
Net Premium Proceeds:????.?..?????...$0.35
Time to short Crocodile Dundee
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
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