Traders in Japan suffered a rude awakening yesterday morning when the Ministry of International Trade and Industry announced that the troubled country?s GDP shrunk by -1.6% during the third quarter. Analysts had been expecting a gain of 2.2%.
What?s worse, this is the second consecutive quarter of negative GDP, meaning that the Land of the Rising Sun is now solidly in recession, the fourth since 2008, and the umpteenth since the country fell off a demographic cliff 25 years ago.
The Nikkei Average took it on the kisser, plunging some 3% from its high for the year. The Wisdom Tree Japan Hedged Equity ETF (DXJ) declined by half as much.
Half of the gain since the Bank of Japan?s ?shock and awe? monetization measures on October 15 went up in smoke. Now we know why the central bank had been so aggressive and preemptive.
There are immediate implications from the dismal numbers. Prime Minister Shinzo Abe is almost certain to delay a hike in Japan?s VAT sales tax from 8% to 10% scheduled for the new fiscal year starting April 1.
This year?s rise, from 5% to 8%, is viewed as the chief culprit responsible for the shocking slowdown.
It turns out that clever consumers rushed to beat the tax, pulled their spending forward, creating an artificial boost to economic growth in the first quarter. This lulled the government and Japanese retailers, into thinking their recovery strategy was working.
After the tax increase took effect, the spending boom ground to a complete halt, and the economy came to a juddering stop. The end result was a huge inventory build that was the most destructive aspect of the terrible GDP numbers, as higher prices caused consumers to stay away from the stores in droves.
The conservative Abe was behind the government?s grab for more revenues to head off the country?s runaway budget deficit, which is now seen by many economists as reaching catastrophic proportions, some 160% of total GDP.
The problem is that governments should balance budgets when they can, not when they want to. I have lost count of how many Japanese recoveries have been smothered in the cradle by premature tax increases over the last two decades.
Thank goodness the US government had the sense not to try that here, or we?d all be standing in breadlines by now.
The global implications of a new Japanese recession are, fortunately, not as dire. It?s not like many analysts had built in a Japanese economic miracle into their long-term growth forecasts. Japan only accounts for 7% of world GDP these days, and losing a couple percent of that annualized doesn?t move the needle much.
The fall of the Japanese yen this year has been so rapid and dramatic that there hasn?t nearly been enough time for it to have a positive impact on the economy. It will going forward. That alone should pull the country back out of recession in the current quarter.
Remember too that since Japan is far more dependent than America on imported energy, it will benefit greater from the ongoing collapse in the price of oil.
The disastrous GDP numbers should also encourage the BOJ to become even more aggressive in its own reflationary efforts. Think more growth of the money supply, more quantitative easing, and faster. Buy Japanese printing press stocks!
Fortunately, all of these global, multi market cross currents distill down into a single trade for you and I: sell more yen.
A substantially weaker Japanese currency seems to be the one stop solution for all of Japan?s many intractable problems.
You already saw this in action in the foreign currency markets on Monday after the GDP numbers came out. Normally, a downside surprise of this magnitude on the economic data front generates a big ?flight to safety? move across all asset classes. That would have caused the Japanese yen to rise sharply against the buck.
Not this time. In fact, it barely moved. Japan and yen bears weren?t waiting a nanosecond to sell short more of the beleaguered currency, offsetting whatever profit taking there was from pre existing shorts the GDP figures might have incited.
So the set up here is to sell short the Currency Shares Japanese Yen Trust ETF (FXE), or to buy the 2X ProShares Ultra Short Yen ETF (YCS), two positions I have been recommending non stop for the past three years.
It looks like we have only just gotten started with out big down move in the yen.
Back in Recession Again
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Foreign exchange traders are an odd lot. They tend to maintain a laser like focus on specific numbers that are utterly meaningless to us mere mortals, but which have momentous importance to themselves.
Right now, one is hearing the battle cry over the 120/120 targets. Specifically, traders want to take the yen down to Y120 to the US dollar, and the Euro down to $1.20 by the last trading day of 2014.
They may well get their wishes.
Powering the moves is the biggest policy divergence between central banks in a decade. The US Federal is threatening to take interest rates up every other day.
In the meantime, lower interest rates beckon in Europe and Japan as their economies lurch from one disaster to the next, dragging their own currencies down.
Accelerating the move is the gasoline that has been thrown on the economic fires caused by? You guessed it, plunging gasoline prices in the US, which is quickly turning into a massive stimulus program.
Wonder why Wal-Mart (WMT) has suddenly taken off to the races? It?s because their impoverished, gap toothed customers have suddenly received big cash bonuses, thanks to the war for market share among the members of OPEC.
Even a penny drop in the price of petrol adds $1 billion a year in consumer spending. Gas is so cheap that we might even break the $3 level here in high tax California.
Higher interest rates are great for the greenback because they prompt foreign investors to send more money here faster to chase higher returns than available at home.
The sharpest bond market move in history, taking ten year Treasury yields from 1.86% all the way up to 2.38% in four weeks, makes this view even more convincing.
Followers of this letter already know that the currencies have been in deep doo doo all year. That?s why I have been aggressively pushing out Trade Alerts to buy the dollar (UUP) and sell short the Euro (FXE), (EUO) and the Japanese yen (FXY), (YCS) for the past six months.
Readers have been laughing all the way to the bank.
The really thrilling part here is that this is only the beginning of a decade long move. My final target for the yen is Y150 and $1.00 for the Euro. This could be the trade that keeps on giving.
There are also important spillover implications for the stock market. It means more money for stocks at higher prices. The S&P 500 at 2,100 by yearend now looks like a chip shot, and we may probe even higher.
So why am I currently lacking any current positions in the currencies in my model trading portfolio? We are now at the end of extreme moves in all asset classes over the past month.
So, while everything looks hunky dory (a street in Yokohama where the cheap geishas used to hang out) in the markets, risk is, in fact, rising.
I have to admit that, being up 42.5% year to date, I have gotten spoiled. I am holding back for the low risk, high return type of entry points for new trades that my readers have become addicted to.
When I see one, you?ll be the first to know. Watch this space.
Gosh, I love this job.
See the Connection?
The Best Stimulus Program Ever
Wal-Mart Customer
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Be nice to investors on the way up, because you always meet them again on the way down. This is the harsh reality of those who have placed their money in the fracking space this year.
The hottest sector in the market for the first half of the year, investors have recently fallen on hard times, with the price of oil collapsing from a $107 high in June to under $77 this morning, a haircut of some 28% in just five months.
Prices just seem to be immune to all the good news that is thrown at them, be it ISIL, the Ukraine, or Syria.
It wasn?t supposed to be like that. Using this revolutionary new technology, drillers are in the process of ramping up US domestic oil production from 6 million to 10 million barrels a day.
The implications for the American economy have been extraordinarily positive. It has created a hiring boom in the oil patch states, which has substantially reduced blue-collar unemployment. It has added several points to US GDP growth.
It has also reduced our dependence on energy imports, from a peak of 30 quadrillion Btu?s in 2005 to only 13 quadrillion Btu?s at the end of last year. We are probably shipping in under 10 quadrillion Btu?s right now, a plunge of 66% from the top in only 9 years.
The foreign exchange markets have taken note. Falling imports means sending hundreds of billions of dollars less to hostile sellers abroad. Am I the only one who has noticed that we are funding both sides of all the Middle Eastern conflicts? The upshot has been the igniting of a huge bull market in the US dollar that will continue for decades.
That has justified the withdrawal of US military forces in this volatile part of the world, creating enormous savings in defense spending, rapidly bringing the US Federal budget into balance.
The oil boom has also provided ample fodder for the stock market, with the major indexes tripling off the 2009 bottom. Energy plays, especially those revolving around fracking infrastructure, took the lead.
Readers lapped up my recommendations in the area. Cheniere Energy (LNG) soared from $6 to $85. Linn Energy (LINE) ratcheted up from $7 to $36. Occidental Petroleum moved by leaps and bounds, from $35 to $110.
Is the party now over? Are we to dump our energy holdings in the wake of the recent calamitous falls in prices?
I think not.
One of the purposes of this letter is to assist readers in separating out the wheat from the chaff on the information front, both the kind that bombards us from the media, and the more mundane variety emailed to us by brokers.
When I see the quality of this data, I want to throw up my hands and cry. Pundits speculate that the troubles stem from Saudi Arabia?s desire to put Russia, Iran, the US fracking industry, and all alternative energy projects out of business by pummeling prices.
The only problem is that these experts have never been to Saudi Arabia, Iran, the Barnett Shale, and wouldn?t know which end of a solar panel to face towards the sun. Best case, they are guessing, worst case, they are making it up to fill up airtime. And you want to invest your life savings based on what they are telling you?
I call this bullpuckey.
I have traveled in the Middle East for 46 years. I covered the neighborhood wars for The Economist magazine during the 1970?s.
When representing Morgan Stanley in the firm?s dealings with the Saudi royal family in the 1980?s, I paused to stick my finger in the crack in the Riyadh city gate left by a spear thrown by King Abdul Aziz al Saud when he captured the city in the 1920?s, creating modern Saudi Arabia.
They only mistake I made in my Texas fracking investments is that I sold out too soon in 2005, when natural gas traded at $5 and missed the spike to $17.
So let me tell you about the price of oil.
There are a few tried and true rules about this industry. It is far bigger than you realize. It has taken 150 years to build. Nothing ever happens in a hurry. Any changes here take decades and billions of dollars to implement.
Nobody has ever controlled the market, just chipped away at the margins. Oh, and occasionally the stuff blows up and kills you.
As one time Vladimir Lenin advisor and Occidental Petroleum founder, the late Dr. Armand Hammer, once told me, ?Follow the oil. Everything springs from there.?
China is the big factor that most people are missing. Media coverage has been unremittingly negative. But their energy imports have never stopped rising, whether the economy is up, down, or going nowhere, which in any case are rigged, guessed, or manufactured. The major cities still suffer brownouts in the summer, and the government has ordered offices to limit air conditioning to a sweltering 82 degrees.
Chinese oil demand doubled to 8 million barrels a day from 2000-2010, and will double again in the current decade. This assumes that Chinese standards of living reach only a fraction of our own. Lack of critical infrastructure and storage prevents it from rising faster.
Any fall in American purchases of Middle Eastern oil are immediately offset by new sales to Asia. Some 80% of Persian Gulf oil now goes to Asia, and soon it will be 100%. This is why the Middle Kingdom has suddenly started investing in aircraft carriers.
So, we are not entering a prolonged, never ending collapse in oil prices. Run that theory past senior management at Exxon Mobil (XOM) and Occidental (OXY), as I have done, and you?ll summon a great guffaw.
It will reorganize, restructure, and move into new technologies and markets, as they have already done with fracking. My theory is that they will buy the entire alternative energy industry the second it become sustainably profitable. It certainly has the cash and the management and engineering expertise to do so.
What we are really seeing is the growing up of the fracking industry, from rambunctious teenage years to a more mature young adulthood. This is its first real recession.
For years I have heard complaints of rocketing costs and endless shortages of key supplies and equipment. This setback will shake out over-leveraged marginal players and allow costs to settle back to earth.
Roustabouts who recently made a stratospheric $200,000 a year will go back to earning $70,000. This will all be great for industry profitability.
What all of this means is that we are entering a generational opportunity to get into energy investments of every description. After all, it is the only sector in the market that is now cheap which, unlike coal, has a reasonable opportunity to recover.
Oil will probably hit a low sometime next year. Where is anybody?s guess, so don?t bother asking me. It is unknowable.
When it does, I?ll be shooting out the Trade Alerts as fast as I can write them.
Where to focus? I?ll unfurl the roll call of the usual suspects. They include Occidental Petroleum (OXY), Exxon Mobil (XOM), Devon Energy (DVN), Anadarko Petroleum (APC) Cabot Oil & Gas (COG), and the ProShares 2X Ultra Oil & Gas ETF (DIG).
Fracking investments should be especially immune to the downturn, because their primary product is natural gas, which has not fallen anywhere as much as Texas tea. Oil was always just a byproduct and a bonus.
CH4 was the main show, which has rocketed by an eye popping 29% to $4.57 in the past two weeks, thanks to the return of the polar vortex this winter. We are now close to the highs for the year in natural gas.
The cost of production of domestic US oil runs everywhere from $28 a barrel for older legacy fields, to $100 for recent deep offshore. Many recent developments were brought on-stream around the $70-$80 area. So $76 a barrel is not the end of the world.
On the other hand, natural gas uniformly cost just under $2/Btu, and that number is falling. Producers are currently getting more than double that in the market.
And while on the subject of this simple molecule, don?t let ground water pollution ever both you. It does happen, but it?s an easy fix.
Of the 50 cases of pollution investigated by MIT, most were found to be the result of subcontractor incompetence, natural causes, or pollution that occurred 50 or more years ago. Properly regulated, it shouldn?t be happening at all.
When I fracked in the Barnett Shale 15 years ago, we used greywater, or runoff from irrigation, to accelerate our underground expositions. The industry has since gotten fancy, bringing in highly toxic chemicals like Guar Gum, Petroleum Distillates, Triethanolamine Zirconate, and Potassium Metaborate.
However, the marginal production gains of using these new additives are not worth the environmental risk. Scale back on the most toxic chemicals and go back to groundwater, and the environmental, as well as the political opposition melts away.
By the way, can any readers tell me if my favorite restaurant in Kuwait, the ship Al Boom, is still in business? The lamb kabob there was to die for.
Don?t Throw Out the Baby with the Bathwater
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?Be Fearful When Others Are Greedy, and Greedy When Others Are Fearful.?
That is one of my favorite quotes from Oracle of Omaha, Warren Buffet, and it was never more true than during the past 30 trading days.
It turns out that the lowest risk day to buy stocks in 2014 was October 15, when we saw a giant, capitulation, spike low in the S&P 500 (SPY) down to $182.
That was the most fearful day I can recall over the last three years. You wouldn?t believe how many people I begged not to sell out entire portfolios that day!
So where are we now with the markets? Go back to the beginning of that legendary quote, and the word ?fearful? really stands out.
That means traders are stuck right back in the uncomfortable position in which they have spent most of this year.
Do I try to play catch up here and chase the market for a few extra basis points of performance, even at the risk of enduring another calamitous selloff? Or do I sit here in cash and earn precisely zero and get fired at the end of the year?
It is a choice that would truly vex Salomon. But as a king, at least he had job security.
We are now entering the tag ends of 2014, with only 36 trading days left, including three half days. I think it is safe to say that the trends that have predominated since January 1 will continue. Expect markets to continue to over reward risk takers and over punish risk avoiders.
That means there are only three trades in the world to execute:
1) Buy the US Dollar
A yield advantage for the greenback is sucking in capital from all over the world. Concerns about principal risk is a further driver, creating a ?flight to safety? of prodigious proportions. Thanks to the collapse in energy prices and a ramp up in US domestic production, dollar outflows from America are at decade lows.
This can only mean that we are at the beginning of a multi year bull market in the buck. Sell short the Japanese yen (FXY) and the Euro (FXE), and buy the 2X short yen ETF (YCS), and the 2X short Euro ETF (EUO).
2) Buy US Stocks
The majority of US portfolio managers are still underweight stocks and are desperately trying to get in. Now that the 10% correction is finally behind us, they can afford the luxury of being more aggressive loading up on the dips.
The midterm elections, which saw the Republicans take control of the Senate with a seven seat gain, is a new turbocharger for equities. Congress is now seen as pro business. Since the stock market tripled and corporate profits rocketed with an anti business elected body, imagine how well they will do with a friendly one!
I was hoping for the Senate results to get tied up in runoffs and the courts for a couple of months, triggering a 5% market correction and an opportunity to load the boat once more. It was not to be. What is left for us now is to see the (SPX) grind up to close the year at a 2100 all time high.
Who will be the sector leaders? The usual suspects who have led the charge all year, technology, health care, and financials.
3) Sell Short All Commodities
It is truly impressive to see the entire commodity space collapse all at the same time. This includes oil, natural gas, gold, silver, copper, corn, wheat, soybeans, and the commodity producing currencies of the Australian and Canadian dollars.
They have all been hard hit with a perfect storm; overwhelming supply of product, a strong dollar, and weak demand caused by a slowing global economy. The story is the same everywhere.
Commodity collapses always last longer and deeper than you imagine possible because you cannot turn off production by simply flipping a switch, as you can with the paper assets of stocks and bonds. Cutting off supplies means freezing capital spending worth hundreds of billions of dollars spread over decades, no easy task.
So, before you purchase a hard asset of any kind, lie down and take a long nap first. And please stop emailing me asking if this is the bottom for all of the above. It isn?t.
4) Sell All Bonds
There is a fourth secular trend that began exactly on October 15, right after the market opening. The ten year Treasury bond (TLT) hit a yield of 1.86%. This is a secondary low in yields, high in prices, after the 1.39% yield we saw in 2012. This means we are now two years into a 30-year bear market for all fixed income securities.
However, don?t expect a crash like we saw during the 1970?s, when yields soared up to 13%. Expect a slow grind up in interest rates, often spending 3-6 months in tedious, narrow, sleep inducing ranges.
This makes your entry points on the short side important. Only buy the short Treasury bond ETF (TBT) on substantial dips, lest hair starts growing on the position.
There is one other alternative if you have been following the Trade Alerts of the Mad Hedge Fund Trader all year.
Quit trading and take the rest of the year off. Start your Christmas shopping early. Contribute to retail sales and the national GDP. You earned it. The 42% profit you have earned so far is of heroic proportions.
Let?s hope for more of the same in 2015!
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Those who woke up early Friday morning may be forgiven for blinking at their screens quite a few times.
The Japanese yen (FXY), (YCS) was down by an incredible 3%, the Dow Average futures were trading at an all time high of $17,400, and the S&P 500 was just short of a new peak at $202.
The Japanese stock market blasted 5% to the upside, taking the Wisdom Tree Japan Hedged Equity ETF (DXJ) up a staggering 8%.
Was this a trick or treat?
It only took a few seconds for me to learn that this was all in reaction to bold moves announced by the Bank of Japan overnight. In one fell swoop, they boosted their target for monetary expansion this fiscal year from Y60 trillion to Y80 trillion, an instant gain of 33%, or $200 billion.
Prorate this number for the difference in out two nations? GDP?s, and that is like the Federal Reserve announcing a new $700 billion monetary stimulus program out of the blue. Quantitative easing is not dead. The baton has merely been passed from the US to Europe and Japan.
The bottom line for us? Asset prices everywhere go higher.
Of course, readers of the Mad Hedge Fund Trader knew all this was coming.
While taking profits yesterday on my Japan yen put spread, I cautioned holders of the ProShares Ultra Short Yen ETF (YCS) to hang on because the beleaguered Japanese currency was headed much lower.
Those who did so were richly rewarded with a one-day pop of $4.50 overnight to $79.50, an all time high.
Parsing through the BOJ statement, it?s clear that these spectacular, once a decade moves were justified.
When the Japanese government implemented a poorly conceived tax increase in April, the BOJ sat on its hands.
After sleeping through most of the year, the hand of Japanese central bank was finally forced by simultaneous weakness in Europe. It is now implementing the Fed QE policy lock, stock, and barrel, given the proven excellent results here in the US. They are only five years late!
An even bigger blockbuster was another announcement made by Japan?s government controlled Pension Investment Corp. that it was totally reshuffling its massive $1.2 trillion investment portfolio.
It is doubling its allocation to international equities from $150 billion to $300 billion. Given the dire conditions in Europe, you can count on most of that money going into the US stocks. That explains our gap up in the (SPX) this morning, and a similar move down in bonds (TLT), (TBT).
Here is their new Model Portfolio:
Domestic Bonds 35% Domestic Stocks 25% International Stocks 25% International Bonds 15%
Total 100%
The net effect of all of this is to effect an epochal move out of bonds and into stocks, and also to increase international investments at the expense of domestic ones.
I believe this is the beginning of a prolonged world-wide investment trend.
The bottom line for us traders here is that the Japanese action opens up the possibility of an entire ?RISK ON? leg upward. This is occurring on top of one of the sharpest legs up in market history.
All of a sudden, my yearend target of $2,100 for the S&P 500 is firmly back on the table. If you have any outstanding short positions on your books, it is better to cover them at the earliest opportunity.
Tally Ho!
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Finally, at long last, after infinite amounts of speculation and false starts, the Federal Reserve has decided to end quantitative easing.
After five years of soaking up both public and private debt in the marketplace, some $4.5 trillion worth, America?s central bank will quit picking up paper sometime next month. The printing presses are getting turned off and put into cold storage, job well done.
Boy, that was one hell of a monetary stimulus program, the likes of which has not been seen since the Great Depression. So much money flooded into the economy that homes values doubled on the bottom, stock indexes tripled, enriching quite a few traders along the way, including many followers of the Mad Hedge Fund Trader.
Who ended up making most of the money? Risk takers, equity owners, and the 1%. Everyone else was left in the dust, still waiting for the economic recovery to begin.
Since the controversial program was dreamed up and implemented by the former Fed governor, Ben Bernanke, five years ago, some $12 trillion was added to the value of equities alone. Some of my picks, like Cheniere Energy (LNG), Baidu (BIDU), ad Tesla (TSLA) soared by nearly 20 times.
Conservatives hated QE, fearing that such easy money would lead to hyperinflation and the collapse of the US dollar. The only problem is that the Consumer Price Index didn?t get the memo, with deflation now the country?s greatest economic threat. As I write this, the greenback is tickling new multiyear highs.
What QE did do was pull the US away from the brink of complete economic collapse. As far as the Fed is concerned, mission accomplished.
The other message that emanated from the Fed today is that it may raise interest rates sooner than expected. That trashed the bond market, taking Treasury bond yields to 2.35%, off an amazing 40 basis points from the low only two weeks ago.
There are some important points to take here for our trading strategy going forward.
First of all, the final top in bonds is looking more convincing by the day.
Second, the top in bonds, and slightly hawkish tone taken by the Fed today are extremely positive for the banks. I have already loaded up followers with Bank of America (BAC), which just pierced $17 on the upside and appears poised to claim new highs for the year.
I am inclined to add to this position on dips, and expand to my exposure to other names. On the menu are Morgan Stanley (MS), Golden Sachs (GS), JP Morgan (JPM), Wells Fargo (WFC), and American Express (AXP).
The dollar rocketed. Those who followed my recent Trade Alerts to aggressively sell short the Euro (FXE), (EUO) and the yen (FXY), (YCS) were sent laughing all the way to the bank.
I spoke to my colleague after the close today, ace Mad Day Trader, Jim Parker. We concluded that if the market doesn?t show any weakness Thursday morning, we could continue a straight line run up into the month end book closing on Friday, and then on to new all time highs.
I know it?s not gentlemanly to say ?I told you so,? but I told you so.
If you are bemoaning the loss of quantitative easing, don?t worry, it may not be gone for long.
When the economy goes into the tank in two or three years, it may well return from the dead in all its glory, especially if the inflation rate peaks in this cycle at an Appalachian 2.5% and then heads for negative numbers.
Will Quantitative Easing Return From the Dead?
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Her red Tesla is parked in the driveway, her potted plants are back on the balcony, and the closet is once again filled with designer shoes.
Goldilocks is back!
It?s not like she was ever going to be gone for long. Once a woman of a certain maturity gets accustomed to the lifestyle of the rich and famous, it?s hard to give up the better things in life.
However, there were some doubts.
When the Dow Average opened down 400 points on October 15, a gigantic capitulation move saw $70 billion worth of stock sold at market at the absolute low of 15,850, and a spectacular 315 million shares of the S&P 500 ETF (SPY) were unloaded.
One might have thought that Goldilocks had changed her name and moved into a nunnery for good.
It was not to be.
The rally that ensued off of that print was one of the most ferocious in history. After having cleaned out hedge fund trader longs on the downside, the market then ripped their faces off on the upside.
It has not been a good year for hedge funds. It has been a fantastic year for high frequency traders, with September the most profitable month in the history of this arcane, computer trading strategy.
As for me, I never had any doubt that Goldilocks was coming back. As I miraculously pound into my followers on a daily basis, it?s all about the numbers. It?s always about the numbers.
The strength of the economy is such that the sudden 10% swoon we witnessed was in no way justified. All that was really required was that an extreme overbought condition in stocks we say six weeks ago be remedied. Now that is done, it is up, up, and away.
Corporate earnings obliged, with an eye-popping 80% delivering upside surprises. Corporate earnings are now growing at a robust year on year 11% annual rate.
Instead of focusing in on Ebola, Russia and ISIS, traders are now looking at improving Purchasing Managers Indexes in both Europe and China. The Middle East has gone quiet. There were even rumors, later quashed, of an extended quantitative easing for the US.
The European Central Bank announced the results of its bank stress test, and guess what? Almost everyone passed! Only 12 banks need to raise $12 billion in new capital.
Of course, this was never more than a window dressing exercise designed to make us all feel warm and fuzzy about the beleaguered continent.
It worked!
Capital spending also remains robust for the first time in eight years. But I think most analysts are missing the reason why this is happening. It is too late for companies to add capacity for this economic cycle.
They are instead building factories now to accommodate demand for the next economic and financial boom in the early 2020?s, when the stiff demographic headwind created by the baby boomers flips to a brisk tailwind provided by the Gen Xer?s.
The true 800-pound gorilla on the trading landscape these days is the price of oil, which broke the $80 handle yesterday morning. As with every move by every financial instrument everywhere, the more it goes down, the more dire the forecasts become. The savings in energy costs at this level amount to $12,000 per family per year. Do the math.
$10 a barrel? Really?
I think it is safe to say, like interest rates, energy prices will stay lower for longer than anyone imagines possible. So add another 1% to US GDP growth this year, next year and the one after that.
When the stock market figures this out, new highs will follow, probably before year end.
Has Goldilocks Moved Back in For Good?
https://www.madhedgefundtrader.com/wp-content/uploads/2014/10/Goldilocks.jpg337131Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-28 09:12:302014-10-28 09:12:30Goldilocks is Back!
The talking heads on TV have been working overtime speculating on where the worst move down in the stock market in three years will take us.
It all may sound like intelligent prognosticating to you.
As for me, I know they are guessing.
So I shall share with you my ten benchmark indicators that you can closely track to decide for yourself whether stocks are headed for perdition, or are soaring skyward once again.
1) Ten year Treasury bond yields start to rise, and break out above 2.30% (they are now at 2.18%).
2) The US dollar begins to appreciate once again, taking the Euro ETF (FXE) below $125.
3) Inflation expectations start to rise in Europe. Watch the monthly CPI numbers out of France and Italy, which have recently been negative.
4) Fed funds futures start to rise from near zero.
5) The price of crude oil stabilizes. Watch Brent, which will have the sharpest move up once recovery begins.
6) The small cap index, the Russell 2000 (IWM), starts to outperform the S&P 500 (SPY) on the upside. Smaller companies led the retreat on the downside, and should lead a new recovery as traders like me cover shorts (I already have).
7) Cyclical stocks, like airlines (DAL) outperform defensive stocks like soap and shampoo makers (PG) we already captured this with a (DAL) Trade Alert.
8) The junk bond market (HYG) starts to appreciate.
9) The macro data stream delivers a series of positive numbers.
10) People quit talking about the market bottom, and start opining about the next market top.
As you have probably figured out buy now with my flurry of recent Trade Alerts, I am leaning towards the probability that the bottom for stocks is already in. It?s all about oil.
I spent my weekend running numbers on the impact that cheap energy will have on the economy, and they are truly staggering. I list a few points below:
1) If oil stays down in this area, it will deliver a savings of $12,000 per family in gasoline, heating bills (being from California, I have only heard about these) and electricity.
2) The increased spending this will generate will add 1% to US GDP growth next year, as the cost of energy is pervasive through all industries, either directly, or indirectly.
3) This amounts to a $1.1 trillion stimulus package for the US economy, larger than the one we got in 2009. Think of it as a QE 4.
I rest my case.
Watch the Signs (My Infrared Picture)
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This is a bet that the S&P 500 does not climb to a new all time high by the November 21 expiration in 24 trading days.
I think that we need to chop around here a bit and consolidate within a wide range before the (SPY) starts its New Year run to all time highs.
Not wanting to leave a single penny on the table, I want to profit from this likely outcome. Therefore, I am adding a short position in the S&P 500 (SPY) November, 2014 $197-$202 out-of-the-money vertical call spread this morning.
The maximum profit point for this short position is anywhere below $197 in the (SPY), which is above the 50 day moving average. That is 5.7% above the Friday close.
When you sell short a security, your broker places the cash proceeds in your account, and leaves it there as collateral for the position. You give it back when you come out of the position at a later date, hopefully a lesser amount when the trade is profitable.
As long as the (SPY) doesn?t close above $197, you will be able to keep the entire $0.49 premium that you received in cash on the short sale. This cash you receive will be immediately credited to your account and left there until the options expire.
The upside breakeven point for the position is $197.49 (The $197 strike, plus the $0.49 premium you took in on the initial sale).
You can sell short this vertical call spread anywhere in a $0.40-$0.60 range and have a reasonable expectation of making money on this trade.
This is a new kind of position for my Trade Alert followers. It has exactly the same risk profile and margin requirement as buying an S&P 500 (SPY) November, 2014 $197-$202 deep in-the-money vertical put spread.
It does also give us some downside protection with which we can protect our existing long positions in case the market decides to take another swoon. We are just one US Ebola case from the next 300 point plunge in the Dow Average, and there are certain to be more. There is no shortage of morons on this earth.
If the (SPY) has already put in its final bottom and continues to appreciate, you will think you have died and gone to heaven, because your remaining substantial long positions in (BAC), (SPY), and short in the (FXE) will cause your P&L to soar.
You might then take a small loss on your short (SPY) call spread. But then, nobody complains when they buy fire insurance and their house doesn?t burn down. In the meantime, you get the benefit from time decay on this position.
Why am I doing this, other than to educate you on some new tricks of the trade?
Liquidity for deep out of the money puts has become so poor, and the market dislocations so great, that I can actually make more money now on shorting call spreads than buying put spreads, even though they are mirror images of each other.
If you don?t believe me, then try pricing out the (SPY) November $197-$202 deep in-the-money vertical bear put spread and see what you get. Mathematically, they should be the same. But the bid and offered spreads on the puts are wide enough to drive a Ferrari F-50 through.
It's the market makers way of reaching into your pocket and lifting out your wallet.
If all of this sounds too complicated, then just stand aside and watch how this position plays out. Then, maybe you can do it the next time, if conditions permit.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/Headlines-e1413842059856.jpg328400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-21 01:04:372014-10-21 01:04:37How to Sell Short a Call Spread
I have an arrangement with several large hedge funds where they pay me a small fortune every month for the privilege of calling me one day a year.
Wednesday was that day.
It was a day when the $20 billion hedge fund waited on hold while I got off the phone with the $100 billion hedge fund. And that?s not including urgent calls from the White House, the office of the Joint Chiefs, and the Federal Reserve.
Of course, no one needs to tell these guys how to chew gum. They were interested to know if they were missing anything.
The advice I gave them was very short and simple: ?Keep your eye on the economic data, and ignore everything else.?
You can palpably feel the tension when enduring crisis like these. The Internet noticeably slows down. Transatlantic and Transpacific phone lines get clogged up. Traffic on our website, www.madhedgefundtrader.com, rises tenfold.
So do plaintive emails from followers, everyone of which I attempt to answer quickly. To save time, I will give a generic answer to all of you in advance: ?No, it is not time to stop out of your ProShares Ultra Short 20+ Treasury Bond ETF (TBT) position at the $46 handle.? We are at a multiyear peak in bonds, and this is absolutely not the place to puke out. That?s why I always keep my positions small.
You have to allow room for markets to breathe and still be able to hang on when it goes against you. It is also nice to have the dry powder to double up.
I know some of you are suffering from sleepless nights, so I?ll make it easy for you. We have hit bottom for the year. This is the best time in three years to buy stocks, just in case you forgot to load up at any time since 2011. Ditto for bonds on the sell side.
Earnings started coming out last week, and many companies have been delivering blockbuster reports, as I expected. Over all, I think we can expect total S&P 500 earnings to rise by $11.
This means that, given the market?s recent 10% plunge, stocks are now selling at 12.5 X 2015 earnings. That is a rare bargain. It is a chance to buy shares at 2011 valuations. Don?t blink and miss it.
The big driver hasn?t been the Ebola virus, the risk of which has been wildly exaggerated by the media, but the collapse of the price of oil.
I think we got very close to a bottom of the entire move this morning when we tickled $80. I take North Dakota fracking pioneer John Hamm?s view: If this isn?t the bottom, it is close, and wherever the bottom, we will race right back up to $100 sometime next year on China?s insatiable demand.
That means you buy stocks right now.
For a fuller explanation of the fundamentally bullish argument for the stock market, please click here?10 Reasons Why the Bull Market is Still Alive?.
Now Is the Time to Have a Gunslinger Working on Your Behalf
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