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
When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, you don't think I talk to all of those generals because I like their snappy uniforms, do you?
The word is that the despotic, authoritarian regime in Syria is on the verge of collapse, and is unlikely to survive more than a few more months. The body count is mounting, and the only question now is whether Bashar al-Assad will flee to an undisclosed African country or get dragged out of a storm drain to take a bullet in his head a la Gaddafy. It couldn?t happen to a nicer guy.
The geopolitical implications for the U.S. are enormous.? With Syria gone, Iran will be the last rogue state hostile to the U.S. in the Middle East, and it is teetering. The next and final domino of the Arab spring falls squarely at the gates of Tehran.
Remember that the first real revolution in the region was the street uprising there in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.
At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy IPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have failed to cater to these desires
When Syria collapses, the Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process. Secretary of State Hillary Clinton has stiffened her rhetoric and worked tirelessly behind the scenes to bring about the collapse of the Iranian economy.
The oil embargo she organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 25%.? Iranian banks are about to get kicked out of the SWIFT international settlements system, which would be a deathblow to their trade.
Let?s see how docile these people remain when the air conditioning quits running this summer because of power shortages. Iran is a rotten piece of fruit ready to fall off its own accord and go splat. Hillary is doing everything she can to shake the tree. No military action of any kind is required on America?s part.
The geopolitical payoff of such an event for the U.S. would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.
Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic $1.66 trillion tax cut for not just the U.S., but the entire global economy as well (87 million barrels a day X 365 days a year X $100 dollars a barrel X 50%). Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare.
At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.
The implications for the financial markets will be enormous. The U.S. will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom. A collapse in oil imports will cause the U.S. dollar to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the U.S. government gone as a major new borrower, interest rates across the yield curve will fall further.
A peace dividend will also cause U.S. GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food. The Dow will soar to 20,000, the Euro collapses to parity, gold rockets to $2,300 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60-year bull market in bonds ends.
Some 1 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up. We will enter a new Golden Age, not just at home, but for civilization as a whole.
Wait, you ask, what if Iran develops an atomic bomb and holds the U.S. at bay? Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime. The head of the miniscule effort they have was assassinated by Israeli intelligence two weeks ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).
If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.
I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.
If the collapse of Iran was going to lead to a global multi-decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, led by the technology sector, offering no substantial pullbacks for latecomers to get in. That is exactly what they have been doing since mid-December. If you think I?m ?Mad?, just check out Apple?s chart below.
?For the third year in a row, high oil prices have slowed down the general economy, because disposable income is lost to high gasoline prices,? said John Hofmeister, former CEO of Shell Oil.
Following Howard Ruff for the last 35 years has always been eye opening, if not entertaining. The irascible Mormon is the publisher of Ruff Times ( http://www.rufftimes.com? ), one of the oldest investment letters in the business, and one of the original worshipers of hard assets.
The great thing about the end of the world crowd is that all of their trades are going gangbusters now and we?re all still here. Talk about a win-win! He says that any investment denominated in dollars is a mistake, which is in a long term down trend, along with all paper assets. Silver (SLV) is his first choice, which will outperform gold, and eventually top $100 from the current $27. His personal target for the barbarous relic (GLD) is $2,300, but that might prove conservative.
With the Chinese building 100 nuclear power plants over the next ten years, uranium (CCJ) has great potential. Equities may never come back from their lost decade. Don?t buy ETF?s because they are just another form of paper, and may not actually own the gold or silver they claim. The government is laying the foundation for a massive inflation, which will begin soon.
Howard has long been considered card-carrying member of the lunatic fringe of the investment world, sticking with hard assets throughout their 20 year bear market during the eighties and nineties, and annually predicting the demise of the federal government. Maybe it?s a case of a broken clock being right twice a day, but in recent years I find myself agreeing with Howard more and more. Whether that means I?m now a lunatic too, only time will tell.
When I was remodeling my 160-year-old London house, the chimney was in desperate need of attention. After the bricklayer crawled up the fireplace, he found a yellowed and somewhat singed envelope addressed to Santa Claus. Thinking it was placed there by my kids, he handed it over to me. In it was a letter dated Christmas, 1910 asking for a Red Indian suit.
Europeans have long had a fascination with our Native Americans. So in preparation for my upcoming European strategy luncheon tour I thought I would get myself up to date about out earliest North American residents.
Business is booming on Indian reservations these days, or it isn?t, depending on where they live. Of the country?s 565 reservations, some 239 have moved into the casino business and the cash flow has followed. In 2010, Indian gaming reaped some $26.7 billion in revenues, or some $9,275 per indigenous native. That is a stunning 44% of America?s total casino revenues.
Some, like the Pequot tribe?s massive Foxwood operation just two hours from New York City, now the world?s largest casino, once had money raining down upon it. But the casino grew so large that it entirely occupied the diminutive Connecticut reservation allocated to it by an obscure 17th century.
During the salad days, the profits were so enormous that an annual $250,000 stipend was paid to each officially registered tribal member. A poker boom helped. No surprise that the tribe grew from 167 to 665 members during the last 30 years. Today, the operation is burdened with $2.5 billion in debt, thanks to some bad investments and an ill-timed expansion.
Casinos in more rural locations in the far west distant from population centers have fared less well. Those that contracted out for professional management from Las Vegas and Atlantic City firms, like Harrah?s, MGM, and Caesars, earn a modest living. But the reservations attempting local management on their own fall victim to inefficiencies, incompetence, corruption, over hiring of locals, and outright theft. Believe it or not, it is possible to lose money in the casino business, and some have had to shut down.
Overbuilding is another problem. It Northern New Mexico you can find several casinos within five miles of each other competing for the same customer. Most of their clients (real losers) are in fact local tribal members, the same individuals these houses are intended to help.
The 326 tribes that avoided the casino industry do so at the cost of a big hit to their standard of living. That explains why Native American median household income reaches only $35,062, compared to $50,046 for the US as a whole. Many, like the numerous Hopi, shun it because of their religion.
Without gambling there are few economic opportunities on the reservations. The parched conditions of the west limit farming. Unemployment runs as high as 80% on some reservations, such as the White Mountain Apaches. As a result, a high proportion of the country?s 2.9 million Native Americans are wards of the federal government, living on food stamps and other government handouts.
That?s not how it was supposed to be. The first modern reservation was set up for the Navajo tribe in 1851 at a baking hell hole on the Pecos River, with the intention of enforcing a primitive form of apartheid to insure their survival. Today, they are the most populous tribe, with 160,000, owning the largest reservation, at 24,000 square miles, mostly in Arizona.
Those who signed treaties early survived, which gave them status as an independent nation, but ceded all matters regarding defense to the federal government. In fact the Iroquois, Sioux, and the Chippewa separately declared war on Germany during WWII. Some even issue their own passports. Those that didn?t had to settle for much smaller reservations, or got wiped out.
In 1975, congress passed the Indian Self-Determination Act, which devolved power from the government to the tribes. Florida?s Seminole tribe won the right to open a casino in court in 1981, which was confirmed by the Supreme Court in 1987. After that, it was off to the races with Indian bingo parlors sprouting across the country.
During the 19th century Indian wars when hundreds of thousands died, the practice was to attack a wagon train, kill all the men, marry the women, and adopt the children. As a result, I am descended from three different tribes, the Delaware, Sioux, and the Cherokee, as are about a quarter of native Californians my age. So I tried to cash in on government largess by applying for tribal scholarships to go to college.
It was to no avail. Only those who can trace their lineage to a 1941Bureau of Indian Affairs census and are one eighth Native American can qualify. When whites married Indians 150 years ago, the?? common practice was to baptize them and give western names, making their origins untraceable. They were also pretty casual with marriage records in the Wild West. But we still have many of the wedding photos and know who they are.
I never did find out if that little boy got his Red Indian suit for Christmas, but I hope he did.
So, Should I Double Down?
I wouldn?t say that I?ve made a great deal of money from using your recommendations, as I?ve got caught by bad timing on silver, SDS, TBT and EUO. I?ve also done very well out of your other recommendations. Your views on the market are invaluable, and you?ve helped a lot in learning how to manage an investment account and to hedge.
However, your latest bulletin about the Occupy Campers, and also the biofuels are very welcome ? I couldn?t agree more. It?s a cynical old World out there, and it is very refreshing to encounter a very wealthy man in capital markets who is not a cynic. I meet far too many of them in trying to nudge peoples? attitudes towards taking responsibility for their impact upon environment and society.
Best wishes,
Doug
