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No, the important economic event of the week was not the snail like progress towards solution of the European debt debacle. It was the weekly jobless claims announced on Thursday that plunged 23,000 to 381,000, a six month low. That puts it well below the 400,000 level where the economy is generally thought to be expanding.
Yes, you can argue that there are all kinds of temporary, one off hires in these numbers, as retailers step on the gas going into the Christmas season with temp hiring. But there seems to be a lot more than that going on here.
More confirming data came out the next day showing that December consumer sentiment leapt to a surprising 67.7, from 64.1. I think that one big factor in consumers? more positive feelings derive from the fact that the stock market that is no longer crashing, and double dip fears for the economy are now but distant and fading summer memories.
And you can?t view the reports in isolation. They are only the latest in a long stream of modestly improving economic reports which occasionally blow out to the upside.
The news may be enough the enable the S&P 500 (SPX) to tack on another 25 to 50 points by year end. All Europe has to do is to shut up for a few weeks and the US markets will rise. Given that this is the last real working week of the year, that is a distinct possibility.
I am going to use this strength to unload my remaining ?RISK ON? positions in silver (SLV) and the (TBT) so I can go into the New Year fresh, with a flat book. Keep in mind, also, that this is a lousy place to buy. As my friend and former mentor, Barton Biggs, always used to tell me, always leave the last 10% of a move to the next guy.
Having the flu during the holidays is the pits. This weekend, I blew my nose at the Cirque du Soliel so loudly that is perilously distracted some of the high wire acrobats. I coughed and hacked my way through the San Francisco Ballet?s Nutcracker Suite. Even the eggnog is utterly tasteless, no matter how much Myers Rum I pour in it. I am writing this piece with a fever and chills through a haze induced by Robitussin, Dayquil, and Tylenol PM.
Nevertheless, I did manage to get a dozen calls through to an assortment of European bankers, hedge fund managers, central bank officials, and finance ministry staffers this weekend to get a read on the true meaning of the Friday ministers summit agreement.
Don?t kid yourself. The deal that they cobbled together with spit, duct tape, and bailing wire was no panacea. It was just enough to keep the Euro (FXE) from collapsing, but lacked the oomph to send it off to the races. And there was some serious kicking of the can forward, with a March deadline set for the most important elements.
However, it had the juice to send US stocks soaring and European sovereign bond interest rates plunging. After a marathon, ten hour negotiating session that ended at 5:00 am local time, a deal was hammered out that includes:
*Automatic sanctions for violators of the 3% of GDP debt ceiling.
* Brussels (read Berlin) has the power to veto national budgets.
*?200 billion was chipped into the IMF to help troubled countries like Greece.
*Added with other bailout measures, the value of the safety net rises to ?700 billion, or nearly $1 trillion.
While a good start, this is by no means a grand solution. No mention was made of the $100 billion needed to recapitalize European banks, or where it is going to come from. Deleveraging will be decade long process in Europe and be a drag on asset prices worldwide.
Sovereign rating downgrades are a certainty and will trigger a bad day for the markets when they are announced. However, the bond markets won?t crash as yields are already at levels that attract serious buyers. Witness the George Soros move to buy MF Global?s distressed $2 billion portfolio of European paper and the continued purchases by a dollar diversifying Chinese government.
Mario Draghi?s European Central Bank has, in fact, done more on its own to rescue the economy that the political leaders. It cut Euro interest rates by an additional 25 basis points, the second in sext weeks. It eased collateral requirements, extended reserve ratio cuts, and permitted longer term repo agreements
Despite all of this, there was not much of a recovery in the Euro, which ticked as high as $134.20. Maybe it is heavy, or just plain tired. In any case, if we somehow get a rally as high as $1.36, take it as a gift, and sell it short one more time. Parity is still on the long term horizon.
?I don?t know where the next 1,000 points is coming from, but I know where the next 10,000 points is coming from,? said Sir John Templeton, when he was playing chess with me at his home at Lyford Cay in the Bahamas many years ago.
Given the failure of the ?RISK OFF? trade to develop any serious downside momentum this week, I am using the dip this morning to take a small profit on my S&P 500 ETF (SPY) puts.
We had every reason to go down, given the Standard and Poor?s threatened European debt downgrade on Monday night. If this despised and deeply flawed ratings agency had made this announcement in September or October it would have been worth at least ten (SPY) points to the downside.
But they didn?t announce it then, they announced it now, and in the post Armageddon world this gets you only a modest two point dip. It?s an old trader?s adage that if you throw bad news on a market and it doesn?t go down, then you buy it. The risks have just risen that the Santa Claus rally continues for a few more weeks. Plus, if I can duck a major headline risk this weekend and still keep some change in my pocket, like the European ministers meeting, I am going to take it.
As it is way too late to buy, this means cover your shorts. This is doubly true for options holders who have a heavy price to pay in time decay and falling volatility over the holidays.
On top of this, we are looking at retail holiday sales that are coming in better than expected and a seasonal liquidity push to year end. Although consumers are depressed about the outlook for the economy in 2012, they are apparently dealing with their sorrows through buying a big screen TV, an Apple iPad, an Xbox 360, or a Snuggie.
There is another factor at work here. Any hedge fund manager who has had a great 2011 tends to step out of the market now and go flat. This locks in their gains until their 20% performance bonuses are paid out in January. Any profits in hand now get paid out in cash in 30 days. With a 42% year to date return, I certainly fall into that category.
My profit on this trade came to (9 contracts X 100 X $.32) = $288. For the model $100,000 virtual portfolio this adds 29 basis points to the total return. It?s better than a poke in the eye than a sharp stock, and will afford me some silver eagles to toss in the Salvation Army pot next time I go to the mall.
For those who wish to participate in my Trade Alert Service, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Trade Alert Service? in the subject line, as we are getting buried in emails.
?You are either looking out five days or five years in this market. You?re either a surfer or a yacht. There are no small boats anymore,? said Bob Iaccino, a trader at Your trading room.com.
Trade Alerts are a premium subscription service, you must login to read the details. 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
Have you ever wanted to spend your summers basking in the sunlight at your mountain top Tuscan villa, surveying the manicured vineyards which produce your own estate bottled wine? Are you drawn by the cachet of claiming George Clooney as a celebrity neighbor on the model strewn shores of Lake Como? How about a luxury apartment that is walking distance from the Vatican?
Hedge fund managers are salivating at the prospect of one of the greatest fire sales in history, as assets of every description are being dumped in anticipation of the hard times now hitting Europe. On the menu will be trillions of dollars of distressed loans hived off by desperately downsizing and deleveraging continental banks. Corporations are expected to dump money losing divisions and subsidiaries in a race to beat the coming recession, which is expected to be severe.
In many respects, these deals of the century represent the second shoe to fall after similar bargains were had in the US during the 2008 crash. Europe?s day of reckoning was postponed by four years, thanks to a recovery in the US, QE1, QE2, and Federal Reserve policies that kept interest rates at century lows.
The complacency in Europe since then has been staggering, with many turning their noses up, claiming it could never happen there. Some are predicting that the balance sheet scrub could take as long as a decade, similar to Japan?s tortuously long repair of its own banking system.
Some hedge funds are taking advantage of the wholesale withdrawal of European banks from the credit markets to beef up their own international lending?at much higher interest rates. The same funds, like Highbridge, similarly locked in enormous spreads in the US when conditions were dire. Several American private equity firms are said to be setting up new European distressed asset funds to peddle to pension funds and high net worth individuals. Those who made similar investments in the US four years ago, made fortunes.
For individual investors the easiest and ripest pickings may be among the European bond ETF?s that already trade in the market. Many of these have suffered gut churning declines in recent months as the European melt down unfolded, despite offering yields multiples of what can be found at home.
Below is a short hit list ranked in order of damage incurred from the recent peak to the trough:
PowerShares DB Italian Treasury Bond Fund (ITLY): -19%
Wisdom Tree Euro Debt Fund (EU): -13%
iShares S&P Citigroup International Treasury Bond Fund (IGOV): -11%
SPDR Barclays Capital International Treasury Bond ETF (BWX): -9.5%
Germany Bond Index (BUND):? -4%
Of course, the eternal question of when to buy is the open to debate. There have been enormous declines in European bond yields since the peak seen last week, with Italian ten year yields plunging from 8% to 6%, and Spanish yields plummeting from 7% to 5%. It was a simple shortage of paper, not any ECB intervention that drove yields down so rapidly.
Aggressive traders are already starting to scale in. Others say the worst is ahead of us and that these sovereigns could see 9% yields before the fat lady sings.
I think the safe play here is to use the major sell offs to start accumulating positions and count of the big cash flow to pay for it over time. You can hedge out your currency risk by taking out an equal dollar amount in short (FXE) positions. Triple ?A? French bonds were yielding 7% last week, while ?AAA-? US Treasuries paid a paltry 2.0%. Is something wrong with this picture? Guess how it will end.
Is the Fat Lady Singing for the European Bond Market?
Hey, Neighbor!
I am pulling the plug on my short position in the Euro here, selling my Euro ETF (FXE) January, 2012 $134 puts at cost.
It?s not that I have suddenly fallen in love with the beer drinkers and the garlic eaters. This is an option driven decision. With market volatility falling across all asset classes, the short dated options are eroding away faster than the underlying is moving in my favor.
Time decay is also taking its toll, accelerating into the January 19, 2012 expiration. This continues even while the markets are closed over the holidays. In fact, Christmas and New Years are the best time of the year to run a volatility short. So while I managed to catch a two cent move down in the (FXE) since I added this position on November 18, the options are trading at my cost. There is nothing worse than being right and not getting rewarded for it. All work and no pay makes the Mad Hedge Fund Trader an irritable boy.
On my last four trade alerts the options quickly rose substantially, only to give back all the profits within days. That happened with Jeffries (JEF), the Euro (FXE), silver (SLV), and the S&P 500 (SPY). The time frame that markets allow traders to make money has suddenly shortened. The lesson here is to take the money and run.
By going neutral on the Euro here, I now have dry powder to sell it again on the next short lived ?feel good? rally to $1.3550 or higher. The headline risk going into this weekend is also large. I can roll into the next strike in February to partially sidestep the holiday time decay. With the (FXE) bang in the middle of its recent $1.3180-$1.3550 range, this is no time to let positions grow hair on them.
Live on the fight another day.
?Europe is in the terminal phase of its life,? said David Murrin of Emergent Asset Management.
