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Mad Hedge Fund Trader

My End 2014 Stock Market Forecast

Newsletter, Research

If anyone had any doubts about the future direction of stocks this year, you better take a look at the chart below for the S&P 500.

It shows a very convincing trend upward at almost a perfect 45-degree angle going back for the past year. The range is 100 points wide. It?s almost as if an architect drew it with drafting tools.

To take maximum advantage of this trend, you have to buy every 80 dip, as the floor is constantly rising. It?s as simple as that. Think of Trading 101 for Dummies.

We have had a host of challenges that threatened to knock us out of this channel for the past year.

A second Cold War with Russia? Wake me up when it?s over.

The ongoing collapse of Iraq? Snore?

The suspension of oil exports from Libya barely elicited a blip on your screen, as did the horrific civil war in Syria, a replay of the Middle Ages.

China slowdown? Pshaw! ?Sell in May and Go Away?? Cancelled!

Subpar American economic growth? No problemo.

All of these problems the market has weathered nicely, much like a wet dog shakes off water.

In fact, it has been three years since we endured the distress of a 10% correction, the self-inflicted wound triggered by the government?s hand wringing debt ceiling crisis.

In the end, it amounted to nothing, and was the last decent buying opportunity traders have seen. It has all be one giant ?chase? for performance and reach for yield since then.

The lesson of all of this is that what counts is the good old USA. That is what really is driving markets. All of those foreign distractions are just so much noise. At the end of the day, only the health of the American economy is what matters.

That?s all great news, because our economy is looking pretty darn muscular. Just last week, we saw the Markit August Purchasing Managers Index rocket from 55.8 to 58.0. Weekly jobless claims, the most accurate predictor of true business activity in this cycle, is plumbing seven-year lows. Housing data has just engineered a dramatic turnaround.

It gets better. The upshot of last week?s gathering of Federal Reserve officials at Jackson Hole, Wyoming is that ?normalization? is the new word du jour. What does this mean to us plebeians?

That the economy is so healthy that the government is actually thinking of raising interest rates sometime in the far future, possibly at the end of 2015, and then only by a little bit. That would bring to an end eight years of zero interest rate policy.

Until then, you have a government issued license to print free money. Buy the dips and sell the rallies, and work the 100-point range. If we continue ascending as we have done, the (SPX) should reach 2,100 by December, which happens to be my long held yearend target.

My bet is this could run all the way until April, when the next round of seasonal weakness kicks in again. If there is a risk of anything, it is that the buyers start to panic over missing the move and the (SPY) melts up, possibly as high as 2,200 by January, and 2,300 by March.

Of course, it?s always useful to engage in what my role model, Albert Einstein, called ?thought experiments? and consider what might cause the wheels to fall off of the bull market. To consider that in depth, please read ?What Could Derail the Coming Golden Age? by clicking here.

So what individual sectors should you focus on now? I hate to sound redundant and repetitive. As you may have noticed, ?boring? is not in my DNA (sending Trade Alerts on my iPhone while hanging by ropes from a cliff in the Swiss Alps during a ferocious storm?).

However, I?ll hark back to my favorite three legs for the economy, technology, energy, and health care. Biotechnology continues to sizzle, as do the car companies. And if bonds are peaking, as I believe, the entire financial sector is a screaming buy here.

One unknown is how the markets will take the Alibaba IPO in September, with an expected $150-$200 billion valuation, the largest in history. If institutions have to unload their existing holdings to make room for the new issues, it could trigger our next 4% correction. If that happens, buy the dip with both hands.

By the way, now that the summer is ending, subscription renewals are coming, so don?t forget to ?re-up? if you want to continue with your 41% average annualized returns.

Hey, the house is starting to shake. I think it?s an earthquake, a big one. Better get this out before the broadband goes down?

S&P 500

Jobless Claims 8-21-14

Uncle Sam - FistUncle Sam is Looking Pretty Muscular These Days

0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2014-08-25 09:39:332014-08-25 09:39:33My End 2014 Stock Market Forecast
Mad Hedge Fund Trader

Why US Stocks Are Dirt Cheap

Newsletter, Research

Many commentators are warning of a top, a bubble and Armageddon to come in the stock market. There has not been a 10% correction in the indexes since the debt ceiling crisis three years ago.

But I think that we are just getting started.

Share prices have the rocket fuel for the Dow average to make it to 18,000 by the end of 2014, and possibly 100,000 by 2025. To understand why, you have to focus on major long-term structural changes occurring in the global economy which at this point only a handful for strategists can see, and then, only faintly.

The evidence couldn?t be more undeniable. The major stock indexes have repeatedly broken out to new all time highs in 2014. The more volatile and economically sensitive Russell 2000 small cap index has left it in the big caps dust.

Inflows to equity mutual funds have been the most prolific since 2008. It all paints a picture of a run up (SPX) to and of 2,100 by year-end, which by the way, has been my own forecast all year. Perma bears be damned!

Betting on the Federal Reserve?s fears of a replay of 1937, when premature tightening tipped the US economy into the second leg of the Great Depression, has been a huge winner for me for years now. It means that it is willing to err on the side of over stimulation, by a lot.

With wages growth stagnant for decades, and many commodity prices and precious metals down 30% or more year to date, the Fed certainly has a free pass on the inflation front to do so. Corporate earnings are also helping, consistently surprising to the upside.

However, I think the market is trying to tell us infinitely more than what appeared in yesterday?s headlines, or what flew by in the last tweet or text. There is something deeper going on here beyond the noise of the daily data releases. Asset prices are acting like there is a major structural change underway in the world economy, which so far has remained invisible to all except the market.

Yes, there are a few professionals out there who can see imminent momentous change within their own narrow industries. But no one has yet aggregated all these changes together, so I?ll take a whack at it.

Here are ten theories for you to contemplate.

1) There is more Peace Dividend to Pay - Is it possible that the markets have not yet fully discounted America?s victory in the Cold War? That the payout was interrupted by the dotcom and housing crashes, and that it is now resuming?

Yes, we priced in a chunk with the run up in the Dow average from 2,500 to 11,000 during the 1990?s. But could there be more to go? After all, 22 years since the fall of the Soviet Union and the US still faces no industrial strength enemy, and there are none on the horizon either.

At the very least, this reality should be enough to chop our current defense spending by half, and eliminate most of our budget deficit. Much of the defense establishment agrees with me. They?d rather be spending money on inexpensive, high value, targeted programs, like cyber warfare and drones, rather than the costly, politically inspired, heavy metal weapons systems of old.

2) Obama Care Works ? With the House of Representatives voting to repeal the President?s health care plan for the 50th time, and closing down the government for 16 days in protest, conservative antipathy towards Obamacare couldn?t be more clear. But what if, instead of doubling health care costs as the right has claimed, it drops them by half? What if the plan does add 0.5% to annual GDP and creates 2 million jobs?

This, after all, was the original plan. Health care is expensive in the US because of the lack of competition, and Obamacare delivers that in spades for the first time. Of course there were going to be teething problems. After all, the government is trying to create 50 Amazons overnight at once. It took 20 years for my former Morgan Stanley colleague, Jeff Bezos, to create just one.

The early evidence shows that the competitive health insurance exchanges the plan sets up are delivering price reductions of 30% to 50% in New York and California. I walked into Costco the other day and was offered a plan for $235 a month with an $8,000 deductable, just so I could avoid the penalties for the uninsured. The best offer I previously received from Blue Cross of California was $3,500 a month, typical for an elderly white male like myself.

If this, in turn, solves the health care and Social Security crisis, it will do a lot to wipe out that ?uncertainty? you hear so much about. The predictions of the eventual insolvency of the United States, a perennial Internet conspiracy favorite, also go down the drain.

3) Another Technology Revolution ? Are we on the verge of another great technology breakthrough like the one we saw during the dotcom boom, when PC?s, the Internet, and the World Wide Web simultaneously came together to supercharge corporate earnings for a decade? What if the cost of treating cancer drops from $100,000 to $200, as my friend, Dr. Michio Kaku, believes. What if new Apples and Googles (GOOG) continue to appear out of nowhere?

If you lived in San Francisco and were barraged by venture capital pitches on a daily basis, as I am, you would think this new Golden Age is going to start any minute. There are a thousand innovations percolating out there.

The only question is whether the lead industry will be communications, health care, energy, or all three. Ride your bike south of Market Street someday and see how much research capacity is being built now, the size of a small city. It is awe-inspiring.

4) The Real Cost of Energy Collapses ? We all know about the new 100-year supply of natural gas discovered under our feet that will turn us into Saudi America. But there are 100 additional ways that energy supply is improving and demand is falling.

Conservation will be huge, as will grid and utility modernization. What if Tesla?s (TSLA) Elon Musk is able to deliver a $40,000 electric car with a 300-mile range in three years, as he has promised? This will be a game changer. His track record so far is pretty good.

This is the man so brimming with confidence that he just bought James Bond?s submarine car for $1 million (see the cool modified Lotus in The Spy Who Loved Me). Falling energy costs mean that the profitability of virtually every listed company goes through the roof.

It is likely that if Iran ever does make good on its threat to close the Straights of Hormuz, no one will care. Some 80% of that oil, and soon to be 100%, goes to China, and that will be their problem, not ours.

5) Productivity Accelerates ? By relentlessly introducing new technologies and cutting costs, corporate profitability has soared for the past 30 years. Pessimists now say things can?t get any better. But what if they do?

As I tell guests at my strategy luncheons, this is not a mean reverting data series. Having invested in the machine that took your labor force from 1,000 to 100, what if the next one brings it to 10? Guess which country is about to lose millions of jobs from offshoring and new technology? China. Just talk to any European CEO about their new ?American Strategy.?

6) Interest Rates Stay Low for Another Decade ? If wages stay in check, oil prices fall, and commodity places stay low, then the Fed has absolutely no reason to substantially raise interest rates for another ten years, no matter what the economy does. The next demographic push that creates a worker shortage and higher wages doesn?t start until the early 2020?s.

Sure, the Fed will probably normalize overnight rates back to 2% by next year, as the safety net for the economy is no longer needed. But rates could remain historically very low for quite a long time. This savings immediately drops to the bottom line of any borrower, be they individual, corporate, or government.

In fact, looking at the main causes of the recessions for the last 50 years?a spike in interest rates or a sudden cut off in oil supplies, and absolutely none are visible on the horizon, for now.

7) Shinzo Abe Saves Japan ? The conventional wisdom is that the new government in Japan is resorting to a last desperate act to save their economy that will fail, and that a complete collapse of their over leveraged financial system will result.

But what if Abe gets his necessary reforms through and the country regains its powerhouse status. If Japan?s $6 trillion economy, the world?s third largest, bounces back from a 1% to a 4% GDP growth rate, there will be positive implications for all of us.

8) Europe Gets Its Act Together ? It seems that all we ever hear about from the continent is debt crisis and stagnation and a political system so fragmented that no one can do anything about it. But what if new leadership emerges and takes the initiative to coalesce and solidify Europe?

That would involve creating a single Ministry of Finance, issuing pan Euro bonds, and a European Central Bank with teeth and courage. Their economic problems would disappear and growth would double. As part of my consulting arrangements with governments there, I have been recommending these measures for years, and everyone agrees. All that is missing is the political will to carry them out.

9) The Dollar Stays Strong ? With America?s debt to GDP now over 100% and rising, many analysts believe it is just a matter of time before we see a major crash in the dollar. This is only the continuation of a 220-year-old trend.

What if it goes up instead? Energy independence means we will no longer ship $250 billion a year to the Middle East to pay for oil imports. CEO?s in Europe and Asia are stumbling over each other to find ways to get capital into the US to take advantage of a stronger economy. Higher growth rates mean the feared American deficits start shrinking on their own, with no action from congress whatsoever. This is all long-term dollar positive.

10) Multiples Keep Expanding ? Most strategists believe that the S&P 500 is fairly valued at 1,983 with a price earnings multiple of 15 times, dead in the middle of its historic 9-22 range. But if any of my theories above unfold, then much higher multiples are justified. If they all unfold, then investors wouldn?t hesitate to pay a 25 multiple for American stocks, as their future outlook is so unremittingly positive.

You may say this sounds crazy, and you?d be right. But remember, twice in the last 25 years we have seen market multiples skyrocket to 100. Japanese share valuations reached that nosebleed summit in 1989, and American Dotcom stocks did so in 2000. And they reached those numbers with fundamentals far less substantial than we are facing now. Just take multiples on today?s market up from 15X to 20X, and the Dow should be worth 26,000.

Sure, all of the above represents a pie in the sky best-case scenario. Some, or none, of them may actually play out in the real world. But the ones that do occur will have a super-leveraged effect on each other. The net impact will be US GDP growth easily leaps back from today?s feeble 2% to the virile 4% or more that we grew comfortable with during the fifties, sixties, and eighties.

That growth rate will solve America?s Social Security, Medicare, and deficit problems in fairly short order, without any action by the government.

Needless to say, all of the above is hugely positive for the stock market. It brings forecasts for a Dow 18,000 by the end of 2014, and 100,000 by 2025 out of the realm of fantasy. It kind of makes today?s stock prices look dirt-cheap.

Maybe that?s what the market is trying to tell us, if we only had the patience and the foresight to listen.

This doesn?t mean that you need to rush out and buy more stocks today. Some of these trends will take a decade or more to play out. Better entry points will no doubt present themselves. But the writing is on the wall for higher equity prices, not just in the US, but globally.

I can tell you from the vast expanse of my own 45 years in the prediction business, I have learned one thing. All that is forecast never happens, and all that happens was never forecast.

I?m still waiting for my flying car, although the Tesla S-1 comes close.

INDU 8-20-14
IWM 8-20-14

JT with TeslaMy Tesla S-1

https://www.madhedgefundtrader.com/wp-content/uploads/2013/05/JT-with-Tesla-e1427723768460.jpg 227 400 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2014-08-21 01:03:432014-08-21 01:03:43Why US Stocks Are Dirt Cheap
Mad Hedge Fund Trader

The Euro Breaks Down

Newsletter, Research

You usually don?t expect US housing data to cause the collapse of a foreign currency. But that is exactly what happened this morning.

The announcement by the Census Bureau that new home stats for July came in at a breathtaking 1.09 million, up 15.7%, blew away even the optimistic forecasts. Earlier figures for June were revised up substantially.

New building permits for July came in at a robust 1.1 million. Perma bears on the housing market were sent scampering to lick their wounds.

The real shocker was that the Euro promptly dropped 50 basis points, piercing a major support level on the long term charts. The short Euro ETF (EUO), which I have been recommending since the spring for my non-option clients skyrocketed. That clears the way for a run in the (FXE) down to $127.

The (FXE) wasn?t the only asset that saw a kneejerk reaction. The Treasury bond market (TLT) dove by 1 ? points. It is now 2 ? points off the short squeeze high last Friday, when false rumors of a Russian invasion of the Ukraine caused traders to panic. This sent the ProShares Ultra Short 20+ Year Treasury ETF (TBT) soaring, which I am also long.

You can come up with a nice academic theory as to why there is a connection between American housing data and the beleaguered continental currency. Stronger housing means a better economy and higher dollar interest rates, sooner.

As interest rates differentials are the primary driver of foreign exchange markets, this is great news for the greenback and terrible news for the Euro.

The truth is a little more complicated than that. The outlook for the European economy is now so poor, thanks to the sanctions against Russia, that traders and investors have been desperate to add to their short positions. After the prolonged, one-way move down we saw this summer, the Euro managed barely a one-cent short covering rally in the past week.

There is another factor that no one else is talking about. Scotland is about to hold a referendum on whether it should break away from the United Kingdom. Scottish nationalists are hoping for the best.

If successful, it could spur other independence movements across Europe. Catalonia is having a similar vote to break away from Spain in November, with some separatists avid followers of this letter (yes, that?s you, Joan!). The Basque region is not far behind. If this trend ripples across the continent, it would be hugely Euro negative.

The European Central Bank is almost certain to lower Euro interest rates and expand quantitative easing at a September or October meeting. This will weaken the Euro further, paving the way for a move to $127, and eventually $120.

That?s why I am doubling my shorts in the (FXE) today, even though we are at the low for the year. Non-options players should buy more of the ProShares Ultra Short Euro ETF (EUO).

FXE 8-19-14

EUO 8-19-14

TLT 8-19-14

TBT 8-19-14

Mario DraghiThe Euro is Not Looking So Hot

https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/Mario-Draghi.jpg 269 401 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2014-08-20 08:50:102014-08-20 08:50:10The Euro Breaks Down
Mad Hedge Fund Trader

Bonds or Stocks: Who?s Right?

Newsletter, Research

Treasury bonds spike to new one year highs, closing at a 2.40% yield, and trading as low as a 2.30% yield in the overnight market at one point last week. Clearly, serious deflation is continuing for the indefinite future.

Buy more bonds!

US corporate profits are at all time highs, just closing one of the strongest reporting periods in history. What?s more, the outlook they painted for the rest of the year is rosy. With dividend yields for many shares in excess of interest rates paid by government bonds, the bull market is alive and well.

Buy more stocks!

Stocks! Bonds! Stocks! Bonds! Which group of talking heads is right? The stock bulls or the bond bulls?

Yikes! What is a poor money manager to do?

Here is the certain answer to your plaintive question: They are both right.

So how does one deal with this dilemma? It?s easy. You buy everything, both stocks and bonds. That has been the judgment of the markets, which have sent both bonds and stocks flying in tandem for most of 2014.

How is this possible? Doesn?t this violate Economics 101? Should I take my copies of Paul Samuelson and Graham & Dodd and sell them on Ebay?

Not really.

Here is the explanation for it all. The world is now facing a cash glut unprecedented in history. There is so much money chasing everything these days, it is truly unbelievable for those of us rather long in the tooth. Prices can only go northward, whatever they are for.

Take a look at the U.S. government?s accounts, and you get a partial explanation. Over the past four years, the budget deficit has nearly vaporized, from a stratospheric $1.6 trillion to only $600 billion. Next year, $300 billion is in the cards.

This has caused the Treasury to massively cut back on new issuance. In fact, some recent government bond auctions have faced an outright shortage of bonds, prompting bid prices to spike.

The incredible thing is that this has been happening in the face of the Federal Reserve?s winding down of quantitative easing. By October, it will have removed $80 billion a month in bond buying to zero. Imagine how low rates would be by now if my friend, Fed governor Janet Yellen, had kept it going.

This is why virtually everyone in the world got the bond market wrong this year, calling for a swan dive, except for bond maven and hedge fund guru, Jeffrey Gundlach. I include myself in this category of errant prognosticators.

However, I still have a chance to be right. I expect bonds to give up all of their gains going into yearend, ending dead unchanged on the year with 10 year Treasuries showing a 3.0% yield. Improving US growth prospects is the reason.

In my New Year forecast (click here for my ?2014 Annual Asset Review?)
I expected bonds to be weak, but not fall below a 3.50% yield. I was in a small minority of strategists who called for such a small decline in Treasuries. If I am right, and yields retrace to 3.0%, I will only be 50 basis points off my target, which is better than most.

But that is not to say that 10-year yields won?t first spike to 2.25% first, which happens to be Gundlach?s personal target.

I am a guy who puts his money where his mouth is, who eats his own cooking, and wears his opinions on his sleeve. So, I have been shorting bonds for all of this year.

But my trading approach is so forgiving, using price spikes to buy out of the money-put-spreads, that my followers have had more than adequate room to get profitably in and out.

Every single trade was either a winner, or broke even, except for one, adding an eye popping 10.61% to my 28% profit for 2014. It has been my most profitable trade this year.

While I have been dead wrong with the trend, I have been erring so slowly that we were able to coin it almost every month. Such is the forgiveness of the options spread strategy.

Physicists like ?unified theories? that explain everything, be they the movement of single electrons around nuclei, or galaxies in the universe. Here is a nice unified theory of everything for your investments: technology is curing all.

Hyper accelerating technology means that the price of things is falling faster than anyone believes. That means inflation stays at bay forever, which is great for bonds.

Technology is also reducing the cost, and even the need for labor by business. That is also disinflationary, and helps generate ever rising corporate profits, which is wonderful for stocks.

It all sounds like a ?buy stocks and bonds? explanation to me.

It reinforces the ?Golden Age? scenario for the 2020?s that I have been harping about all year, when the last impediment for growth, demographics, shifts from a headwind to a tailwind. That is when risk assets really go ballistic.

Maybe Google?s Ray Kurzweil is right? (click here for ?Peeking into the Future with Ray Kurzweil).

TLT 8-14-14

TNX 8-14-14

SPX 8-14-14

Wrong-Right  Sign

https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/Wrong-Right-Sign.jpg 351 355 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2014-08-15 08:48:432014-08-15 08:48:43Bonds or Stocks: Who?s Right?
Mad Hedge Fund Trader

How the Ukraine Crisis Will Play Out

Newsletter, Research

I can tell you exactly how the crisis in the Ukraine is going to play out. This has major implications for the global economy, financial markets and your personal portfolio, so listen up!

The key to deciphering this puzzle is oil, far and away Russia?s largest export. At 10 million barrels a day, the country is taking in $360 billion a year in revenues from oil shipments.

You can analyze Russia all day long, and come up with bullish arguments for the country, like the emerging middle class, its huge hoard of basic commodities, and substantial wheat exports. But Texas tea (Russian tea?) overwhelms everything else in its impact on the national accounts.

The bottom line is that Russia is basically a call option on oil. This is why I never buy the Market Vectors ETF Trust (RSX). Look at the charts below for oil, and it is clear that it almost trades tick for tick with the (RSX).

If I?m bullish on oil, I go straight to the end commodity, and not the intermediary, where price earnings multiples are permanently low, corruption is rampant and the rule of law is absent.

And therein lies the problem for Vladimir Putin.

Any chink in the global growth picture flows straight into the price of oil. Slower growth brings lower oil prices and therefore smaller incomes for the Russians. And guess who the principal threat to global growth is? Vladimir Putin and his attempt to take over the Ukraine by force.

So far, crude has dropped by 10% from the May peak of $107.60. That may not sound like a lot. But this is not your father?s Russian oil industry.

Back in the old days, when my friend, Occidental Petroleum?s (OXY) Dr. Armand Hammer and Fred Koch were the only Americans running around the Caucasus, oil there was incredibly cheap. There, technology was 50 years old and labor was virtually free. Slave labor is great for profit margins. If you don?t believe me, just ask Wal-Mart (WMT) and Apple (AAPL).

The fall of the Berlin Wall and the end of the Soviet Union brought many far-reaching, unintended consequences. A big one is that Russia?s dependence on international trade grew tremendously. The country was also able to modernize its oil industry with extensive American assistance.

Russian oil production exploded, as did the cost of production. In my lifetime, expenses have soared from $5 to $70 a barrel. So when oil dips by 10% on the international markets, Russian incomes plunge by 25%. The Russian oil industry has become a highly leveraged affair.

This is why such relatively minor price declines brought apparently desperate actions by the Russian authorities to prop up the economy. They have imposed a 3% emergency VAT, or sales tax. While I was in Europe, four Russian tour companies were driven into bankruptcy by the banking sanctions, stranding some 10,000 tourists on Mediterranean beaches.

Now there is a ban on food imports from Europe, stranding thousands of trucks at the Russian borders. Russia doesn?t grow much food, thanks to their horrendous winters and short growing seasons. Essentially, it?s just wheat and potatoes.

Everything else has to be imported. Some of the lost food can be made up with new imports from emerging, non sanctioning economies, but not much. In the meantime, some 350 McDonald?s franchises in Russia are trying to figure out how to make Big Macs purely from domestic supplies. Good luck to that!

The thing that really struck me speaking to Russians in Europe this summer was Putin?s unbelievably high 85% approval rating (our congress is at 14%!). They trotted out the most incredible conspiracy theories which painted them as the injured party. (The Ukraine was trying to assassinate Putin when it shot down Malaysian Air 17, and then blamed it on Russia).

It almost reminded me of home. The Russians are calling their opponents ?fascists.? This is a people who act like WWII ended last week.

Which leads me to believe that Putin?s popularity is peaking. The sanctions coupled with falling oil revenues are starting to have a severe impact on Russian standards of living. It is a matter of time before this feeds into poor election results for Putin. Nationalism is great, but who wants to live on canned food left over from the Soviet Union (yuck!).

Putin knows this. So to head off the riot, he is going to declare victory in the Ukraine fairly soon, and then take his troops home. This will enable the Ukraine to snuff out the separatists and return to an uneasy peace. We might even luck out and get a written treaty.

If that is a case, you can expect global financial markets to rocket. There would me a massive shift of capital out the risk spectrum, out of bonds and into stocks. This would give the green light for my scenario where S&P 500 adds 10% from last week?s low to end of 2014.

Maybe this is what stocks are trying to tell us by refusing to go down more that 5% this summer and the face of a host of geopolitical disasters.

As for the exact timing for all of this, just watch the price of oil. The lower it goes, the sooner we will get a favorable resolution. The charts are hinting that another $5-$10 break to the downside is imminent.

The last Cold War drove the Soviet Union broke and Putin definitely has no interest in repeating the exercise.

WTIC 8-13-14

USO 8-13-14

McDonalds RussiaNot Until the Sanctions Are Over

 

https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/McDonalds-Russia.jpg 321 337 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2014-08-14 09:32:162014-08-14 09:32:16How the Ukraine Crisis Will Play Out
Mad Hedge Fund Trader

Is the Turnaround at Hand, and Ten Stocks to Buy at the Bottom?

Newsletter, Research

War threatens in the Ukraine. Iraq is blowing up. Rebels are turning our own, highly advanced weapons against us. Israel invades Gaza. Ebola virus has hit the US. Oh, and two hurricanes are hitting Hawaii for the first time in 22 years.

Should I panic and sell everything I own? Is it time to stockpile canned food, water and ammo? Is the world about to end?

I think not.

In fact the opposite is coming true. The best entry point for risk assets in a year is setting up. If you missed 2014 so far, here is a chance to do it all over again.

It is an old trading nostrum that you should buy when there is blood in the streets. I had a friend who reliably bought every coup d? etat in Thailand during the seventies and eighties, and he made a fortune, retiring to one of the country?s idyllic islands off the coast of Phuket. In fact, I think he bought the whole island.

Now we have blood in multiple streets in multiple places, thankfully, this time, it is not ours.

I had Mad Day Trader, Jim Parker, do some technical work for me. He tracked the S&P 500/30 year Treasury spread for the past 30 years and produced the charts below. This is an indicator of overboughtness of one market compared to another that reliably peaks every decade.

And guess what? It is peaking. This tells you that any mean reversion is about to unleash an onslaught of bond selling and stock buying.

There is a whole raft of other positive things going on. Several good stocks have double bottomed off of ?stupid cheap? levels, like IBM (IBM), Ebay (EBAY), General Motors (GM), Tupperware (TUP), and Yum Brands (YUM). Both the Russian ruble and stock market are bouncing hard today.

There is another fascinating thing happening in the oil markets. This is the first time in history where a new Middle Eastern war caused oil price to collapse instead of skyrocket. This is all a testament to the new American independence in energy.

Hint: this is great news for US stocks.

If you asked me a month ago what would be my dream scenario for the rest of the year, I would have said an 8% correction in August to load the boat for a big yearend rally. Heavens to Betsy and wholly moley, but that appears to be what we are getting.

It puts followers of my Trade Alert service in a particularly strong position. As of today, they are up 24% during 2014 in a market that is down -0.3%. Replay the year again, and that gets followers up 50% or more by the end of December.

Here is my own shopping list of what to buy when we hit the final bottom, which is probably only a few percent away:

Longs

JP Morgan (JPM)
Apple (AAPL)
Google (GOOG)
General Motors (GM)
Freeport McMoRan (FCX)
Corn (CORN)
Russell 2000 (IWM)
S&P 500 (SPY)

Shorts

Euro (FXE), (EUO)
Yen (FXE), (YCS)

S&P 500 Future

S&P Weekly

RSX 8-8-14

GM 8-8-14

IBM 8-8-14

Bullets

Gun-Ammunition-War RoomNo, Not This Time

https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/Gun-Ammunition-War-Room.jpg 280 438 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2014-08-11 01:05:382014-08-11 01:05:38Is the Turnaround at Hand, and Ten Stocks to Buy at the Bottom?
Mad Hedge Fund Trader

Why I?m Covering My Stock Shorts

Newsletter, Research

I?ll take the home run, thank you very much. Ten handles in the (SPY) on the downside in ten days totally works for me. We have milked this trade for all it?s worth, so it?s hasta la vista baby! Thank you Vladimir Putin!

This is not a bad place to de-risk on the short side in stocks. Take a look at the charts below, and you will see a convergence of 100 day and 200 day support levels across several asset classes.

Check out the rock solid support level in the (SPY) at $191, and all of a sudden, buying back shorts here at $191.50 looks like a stroke of brilliance.

It is also interesting to see the suddenly despised junk bond ETF (HYG) hold at the 200 day moving average. Stocks and junk bond price movements are very highly correlated. It makes sense that after showing the most bubbleicious price action, high yield corporate debt led the change on the downside.

By the way, this could also mean that Treasury bonds are about to take a big dump off this morning?s 2.43% yield for the ten year, which is why I?m hanging on to all my short positions there.
We could still see more pain in risk assets. My favorite downside target in the (SPY) is the 200 day moving average at $186. That would give us a top to bottom correction of 6.5% in this cycle, in line with the pullback we saw earlier this year.

That?s where you want to load the boat one more time. When the BSD?s come back from their summer vacations in the Hamptons, Cannes or Portofino, they are going to quickly realize that stocks have been falling, while earnings have been rising.

That means they are going to be cheaper than they have been at any time in 2014. In a world where there is little else to buy, that is a big deal.

We have just entered a period when the seasonals strongly favor investment in equities. That sets up a yearend rally in the indexes that will not be as big as the melt up we saw in 2013, but will be just as welcome. My 2014 (SPY) target of $210, or $2,100 in the (SPX), may not be so Mad after all.

Yes, I know that geopolitics is still a factor. But it looks like both sides in the Gaza conflict have depleted their stockpiles of stupidity for the time being, so things are about to go quiet there.

Vladimir Putin is also likely to back down in the Ukraine because of that throbbing he is increasingly feeling in his pocketbook. The growing leverage and rising costs in the Russian oil industry mean that the recent $11, or 10%, drop in the price of crude cuts Russia?s revenues by 25%. The recession this will eventually bring could be bad enough to lose a future election.

In the end, that is what this is really all about.

I am already starting to draw up short lists to buy on the next turnaround. I?ll shoot out the Trade Alerts when I think the time is right.

Jim Parker! Get your ass back from Rome, per favore! The gelato can?t be that good!

RUT 8-6-14

HYG 8-6-14

SPX 8-6-14

PutinThank You Mr. Putin

https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/Putin.jpg 297 323 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2014-08-07 01:04:462014-08-07 01:04:46Why I?m Covering My Stock Shorts
Mad Hedge Fund Trader

What Could Derail the Coming Golden Age?

Newsletter, Research

Regular readers of this letter are well familiar with my ?Golden Age? scenario for the decade starting in 2020. That?s when US economic growth, assisted by a huge demographic tailwind, doubles from 2% to 4% a year, sending all asset prices soaring.

Is this a sure thing? A done deal? Should I be betting the ranch now on such an outcome, even though it is still five years off? Most importantly, what could derail this hyper bullish scenario? What would cause the wheels to fall off?

What makes this a particularly vexing question now is that the traditional causes of recessions are nowhere on the horizon. With technological innovation accelerating, the chances are that wage growth remains low to non-existent, possibly for the rest of this century.

The 19th century was another one of those zero inflation centuries. That is when the Industrial Revolution unleashed a technology explosion that kept inflation perennially low.

I know because I like to collect 19th century defaulted bonds (especially those with really cool graphics). You know? Those issued by the Russian Trans Siberian and Chinese railroads?

What stands out is how universally low the coupons are on these bonds, often 3% or 4%, even for high-risk junk American railroad bonds (not sovereign backed). Remember, that Downton Abbey?s patriarch, the Earl of Grantham, lost the family fortune in a supposedly ?safe? investment in the shares of a Canadian railroad!

The other major cause of recessions for the past 60 years has been oil shocks. However, with America about to become a net energy exporter, it is likely that we will benefit from the next disruption in global supplies, not suffer.

It could well set up a trade where US suppliers sell outrageously expensive energy to Europe and Asia, both huge importers, while their domestic costs remain unchanged, or even fall.

This is a dream scenario for the domestic American energy industry, as it would lead to a massive increase in both volumes and margins. This may be why their shares have been one of the top performers this year.

Indeed, the first exports of distillates in nearly 50 years left the US for South Korea just last week.

That still leaves us with the conundrum of what will cause rain to fall on the parade expected for the next decade.

1) A Global Pandemic

As a former scientist, I can put a global pandemic right at the top of the list of potential threats to our prosperity. If 2% of the world?s population suddenly die in a flu epidemic, as happened in 1918 (I lost two great aunts), you can quickly consign any optimistic scenario to the graveyard.

International travel and trade would grind to a halt as nations seek to protect their populations from serious infection. Asset prices would crash.

Scientists in several countries now are computer modeling potential future mutations of the flu virus, trying to anticipate the next new super bug. They are then synthesizing antidotes in advance.

The problem with this strategy is what happens if these laboratories made viruses escape? To produce enough vaccine to protect a population takes a year. If you want to see what this would be like in practice, watch the well thought out and researched science fiction movie 2011 Contagion.

For more depth on this topic, please refer to my recent piece ?Will Synbio Save or Destroy the World??.?

2) The Internet Goes Down

There is another possible cause of economic collapse that has recently gained media attention.

Computer power is doubling every year, meaning that your laptop (if they still exist) and cell phone will have 2,048 times more power than they do today, and probably will be available at a tenth of the current price. This is happening globally, with an exponentially growing number of machines.

What happens if the Internet becomes so sophisticated that it develops an opinion? It could just simply go on strike or shut down. Or it could selectively close certain industries it deems unnecessary, such as politics or financial services.

We have already become so dependent on the net that losing it, even for a few minutes, can be catastrophic. ATM?s would run out of cash, the food supply would grind to a halt, and water would no longer come out of your tap. This does not exactly auger well for assets of any type.

You may think these are way out there, far in the future risks. They were 30 years ago, but they?re not now. No lesser minds than those of Tesla founder, Elon Musk, and Google Head of Engineering, Ray Kurzweil, have been publicly warning of such a potential outcome.

They are proposing the creation of new types of antivirus software and other safeguards to head off just such a digital apocalypse. For more background on this issue, please read ?Peaking into the Future with Ray Kurzweil?.

There is an offshoot to this category of threat. What if a hacker, either an individual or a nationally sponsored team is able to take down the Internet and hold it for ransom? If China could selectively close down the US military or the entire US, while leaving allies or the rest of the world online, would they do it?

In a heartbeat. This is why the Joint Chiefs of Staff are waging a campaign in Washington to boost budgets for cyber warfare at the expense of Cold War, heavy metal, useless ones.

For more flavor on what this may look like, I again refer you to Hollywood. Take a look at the recently released flick, Transcendence, where Johnny Depp migrates on to the net, a Kurzweil favorite (but not until 2100). And then there are the cult favorites, Terminators I, II, and III. (I dated the stunt double for Kristanna Loken, the robot terminatrix in III).

3) Politics

There is a third way in which the prospects for an endless bull market in the 2020?s get utterly smashed. Politicians get involved.

Let?s say that someone gets elected President of the United States who launches discretionary wars around the world. Ideologically committed to cutting taxes, the US Treasury borrows the money from China and Japan. The economic collapse these policies bring cause financial assets to crater.

Do you think this is more science fiction? That is exactly what happened in the last decade, when the Dow plunged 50% and NASDAQ 60%.

Fortunately, this prospect is more unlikely than it was in the past. First, we have our own recent, hard earned experience to go by. America has lost its taste for war and debt.

In any case, the Chinese and Japanese are no longer willing to lend us any more money, not at these subterranean interest rates.

Hillary Clinton is the overwhelming favorite for president until she reaches the end of her second term in 2024, and she is clearly headed in the opposite direction in regards to foreign policy. She is so far ahead in the polls that no Democratic Party challenger has come forward, because they are unable to raise any money.

But after that, you can?t rule out debt-financed wars as an impediment for investment.

Americans will have to decide whether they prefer the prosperity that a Golden Age can then bring, or otherwise. Personally, I prefer the former.

Of course, all three of these scenarios are unlikely outliers, possibly extreme ones. But it is a useful ?thought experiment,? as Albert Einstein would call it. There isn?t a financial advisor out there who isn?t constantly asked by his clients, ?What could go wrong??

When they do, just refer them to this piece.

Pandemic - BurialsWill it be This?

 

TerminatorOr This?

 

Hillary ClintonOr This?

https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/Terminator.jpg 281 373 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2014-08-06 01:04:382014-08-06 01:04:38What Could Derail the Coming Golden Age?
Mad Hedge Fund Trader

Russian Sanctions Crush European Yields

Newsletter, Research

When a rogue element of Ukrainian separatists used a heavy antiaircraft battery supplied by the Russians to shoot down Malaysian Airlines flight 17, who knew that it would send the European bond market into turmoil?

Yet, that is exactly what happened.

German and French ten-year bond yields have hit 300 year lows at around 1.12% and 1.50%. They achieved 500-year lows in the Netherlands, only because it has the longest record for publicly trading debt (the Dutch East India Company was a big borrower to colonize Asia).

Spanish government debt is now trading at higher prices than equivalent US debt. Perish the thought! Weren?t they supposed to be bankrupt?

Yet, the ultra low Japanese levels of interest rates now found on the continent are justified by the new pall cast upon the European economy.

The first round of sanctions imposed by the European Community on Russia a few months ago were little more than symbolic gestures. Close friends of Putin saw bank accounts frozen, and invitations to international gatherings rescinded. Putin could easily afford to laugh them off.

Not so with the second round, which officials have dubbed ?Sanctions 2.5?. The Europeans are taking the Malaysian Air incident personally, as the great majority of the 295 victims were theirs, primarily from Holland. Restricting access to the crash site has only made the pain greater and Russian obtuseness more offensive.

Russian banks have been barred from the European capital markets, greatly increasing their cost of funds. There is a new ban on military contracts, although existing deals are grandfathered, such as France?s sale of two ultra modern helicopter carriers for $4 billion.

Sitting in Europe as I write this, I am inundated by news of the adverse effects of the New Cold War on the European economy. Germany, alone, has 300,000 jobs dependent on trade with Russia, which is a major buyer of industrial machinery and automobiles.

Unfortunately, the timing for all of this couldn?t be worse. It is happening just as the economic data was showing glimmers of a nascent, but sustainable recovery. Look no further than the Euro (FXE), (EUO) which has greatly accelerated its collapse against the US dollar.

Europe has also become hugely dependent on Russia for energy, particularly natural gas. Putin has already used his energy weapon on the Europeans over a contract dispute, arbitrarily cutting off supplies during one of the coldest winters on record.

The problem is that this is not a challenge that can be dealt with easily. On paper, the US could supply a substantial portion of Europe?s energy needs with its newfound windfall from fracked natural gas (UNG).

However, anyone in the energy industry will tell you that installing the needed infrastructure is at least a 20-year job, and maybe ten years if you put it on a military footing.

The new sanctions were instrumental in the announcement of a major expansion of fracking in Europe, which until now has been held back by environmental concerns. The coal bearing areas of Germany, Poland, and France have the perfect geology for fracking, which will enable the continent to become energy independent.

But again, we are talking about very long timelines. This is another reason why US fracking stocks, like USA Compression Partners (USAS), Nuverra Environmental Solutions (NES), and US Silica Holdings (SLCA), have been on a tear.

The late President Ronald Reagan must be laughing in his grave. When I was a young White House correspondent, his administration fought the energy deals Europe was negotiating with Russia tooth and nail.

In the end, the Europeans ignored the ?Gipper,? wary of his conservative, saber rattling, Cold War rhetoric. The headache is that the EC is now in so deep with Russia, recently describing it as a ?strategic partner,? that it can only extricate itself at great cost.

The US cannot just sit back and laugh this off with a giant ?I told you so.? The collapse in bond yields has been a global affair, dragging our interest rates down to one year lows at 2.45% for ten year Treasury bonds, and 3.24% for the 30 year.

At the very least, it postpones a major switch by American investors out of bonds and into stocks that was imminent. It also hits American companies, that until recently have been cashing in on new trade with Russia. Who is the biggest casualty? Exxon (XOM), which has several ongoing projects to modernize Russian oil production.

Sanctions 3.0 could be worse, if Putin doesn?t get the message. The US Treasury is prepared to ban Russia from global US dollar clearing if it doesn?t back off from the Ukraine. Trying selling 10.5 million barrels a day of oil without using the greenback.

What could they accept in return other than the buck? Gold? North Korean Won? Chinese Renminbi? The collapse of the Russian economy would be total and absolute, not that anyone cares. Its GDP is only $2 trillion, 3% of the world total, and they have an even smaller share of international trade.

Fortunately, I have been able to dance between the raindrops with my Trade Alert service. I have been marginally caught out by premature short positions in the Treasury bond market (TLT), (TBT).

But so far, these losses have been offset by my aggressive shorts in the Euro, which has been cratering, thanks to ECB president Mario Draghi?s new found belief in quantitative easing. Breaking even when a flock of ?black swans? descends upon you is a ?win? in my book.

It?s a classic example of, ?The harder I work, the luckier I get.?

FXE 7-29-14

EUO 7-29-14

HEDJ 7-29-14TankerGrandfathered

 

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