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Mad Hedge Fund Trader

2019 Annual Asset Class Review: A Global Vision

Diary, Newsletter, Research

I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.

By day, I have two comfortable seats facing each other next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini could get to navigate it.

I am not Houdini, so I go downstairs to use the larger public hot showers. They are divine.

We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.

I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.

I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure and to keep me up to date with the onboard gossip.

The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.


As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way to Google search obscure data points and download the latest charts.

You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.

Who knew that 95% of America is off the grid? That explains so much about our country today.

I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 10x.

After making the rounds with strategists, portfolio managers, and hedge fund traders in the run-up to this trip, I can confirm that 2018 was one of the most brutal to trade for careers lasting 30, 40, or 50 years. This was the year that EVERYTHING went down, the first time that has happened since 1972. Comparisons with 1929, 1987, and 2008 were frequently made.

While my own 23.56% return for last year is the most modest in a decade, it beats the pants off of the Dow Average plunge of 8% and 99.9% of the other managers out there. That is a mere shadow of the spectacular 57.91% profit I took in during 2017. This keeps my ten-year average annualized return at 34.20%.

Our entire fourth-quarter loss came from a single trade, a far too early bet that the Volatility Index would fall from the high of the year at $30.

For a decade, all you had to do was throw a dart at the stock page of the Wall Street Journal and you made money, as long as it didn’t end on retail. No more.

For the first time in years, the passive index funds lost out to the better active managers. The Golden Age of the active manager is over. Most hedge funds did horribly, leveraged long technology stocks and oil and short bonds. None of it worked.

If you think I spend too much time absorbing conspiracy theories from the Internet, let me give you a list of the challenges I see financial markets facing in the coming year:


The Nine Key Variables for 2019

1) Will the Fed raise rates one, two, or three times, or not at all?
2) Will there be a recession this year or will we have to wait for 2020?
3) Is the tax bill fully priced into the economy or is there more stimulus to come?
4) Will the Middle East drag us into a new war?
5) Will technology stocks regain market leadership or will it be replaced by other sectors?
6) Will gold and other commodities finally make a long-awaited comeback?
7) Will rising interest rates (positive) or deficits (negative) drive the US dollar this year?
8) Will oil prices recover in 2019?
9) Will bitcoin ever recover?

Here are your answers to the above: 1) Two, 2) 2020, 3) Yes, 4) No, 5) Both, 6) Yes, 7) Yes, 8) Yes, 9) No.

There you go! That’s all the research you have to do for the coming year. Everything else is a piece of cake. You can go back to your vacation.


 

The Twelve Highlights of 2018

1) Stocks will finish lower in 2019. However, we aren’t going to collapse from here. We will take one more rush at the all-time highs that will take us up 10% to 15% from current levels, and then fail. That will set up the perfect “head and shoulders” top on the long-term charts that will finally bring to an end this ten-year bull market. This is when you want to sell everything. The May 10, 2019 end to the bull market forecast I made a year ago is looking pretty good.

I think there is a lot to learn from the 1987 example when stocks crashed 20% in a single day, and 42% from their 1987 high, and then rallied for 28 more months until the next S&L crisis-induced recession in 1991.

Investors have just been put through a meat grinder. From here on, its all about trying to get out at a better price, except for the longest-term investors.

2) Stocks will rally from here because they are STILL receiving the greatest amount of stimulus in history. Energy prices have dropped by half, taxes are low, inflation is non-existent, and interest rates are still well below long term averages.

Corporate earnings will grow at a 6% rate, not the 26% we saw in 2018. But growing they are. At current prices, the stock market is assuming that companies will generate big losses in 2019, which they won’t. Just try to find a parking space at a shopping mall anywhere and you’ll see what I mean.

3) Technology stocks will lead any recovery. Love them or hate them, big tech accounts for 25% of stock market capitalization but 50% of US profits. That is where the money is. However, in 2019 they will be joined by biotech and health care companies as market leaders.

4) The next big rally in the market will be triggered by the end of the trade war with China. Don’t expect the US to get much out of the deal. It turns out that the Chinese can handle a 20% plunge in the stock market much better than we can.

5) The Treasury bond market will finally get the next leg down in its new 10-year bear market, but don’t expect Armageddon. The ten-year Treasury yield should hit at least 3.50%, and possibly 4.0%.

6) With slowing, US interest rate rises, the US dollar will have the wind knocked out of it. It’s already begun. The Euro and the Japanese yen will both gain about 10% against the greenback.  

7) Political instability is a new unknown factor in making market predictions which most of us have not had to deal with since the Watergate crisis in 1974. It’s hard to imagine the upcoming Mueller Report not generating a large market impact, and presidential tweets are already giving us Dow 1,000-point range days. These are all out of the blue and totally unpredictable.

8) Oil at $42.50 a barrel has also fully discounted a full-on recession. So, if the economic slowdown doesn’t show, we can make it back up to $64 quickly, a 50% gain.

9) Gold continues its slow-motion bull market, gaining another 10% since the August low. It barely delivered in 2018 as a bear market hedge. But once inflation starts to pick up a head of steam, so should the price of the barbarous relic.

10) Commodities had a horrific year, pulled under by the trade war, rising rates, and strong dollar. Reverse all that and they should do better.

11) Residential real estate has been in a bear market since March. You’ll find out for sure if you try to sell your home. Rising interest rates and a slowing economy are not what housing bull markets are made of. However, prices will drop only slightly, like 10%, as there is still a structural shortage of housing in the US.

12) The new tax bill came and went with barely an impact on the economy. At best we got two-quarters of above-average growth and slightly higher capital spending before it returned to a 2%-2.5% mean. Unfortunately, it will cost us $4 trillion in new government debt to achieve this. It was probably the worst value for money spent in American history.

Dow Average 1987-90


 

The Thumbnail Portfolio

Equities - Go Long. The tenth year of the bull market takes the S&P 500 up 13% from $2,500 to $2,800 during the first half, and then down by more than that in the second half. This sets up the perfect “head and shoulders” top to the entire decade-long move that I have been talking about since the summer.

Technology, Pharmaceuticals, Healthcare, and Biotech will lead on the up moves and now is a great entry point for all of these. Buy low, sell high. Everyone talks about it but few ever actually execute like this.

Bonds - Sell Short. Down for the entire year big time. Sell short every five-point rally in the ten-year Treasury bond. Did I mention that bonds have just had a ten-point rally? That’s why I am doubled up on the short side.

Foreign Currencies - Buy. The US dollar has just ended its five-year bull trend. Any pause in the Fed’s rate rising schedule will send the buck on a swan dive, and it’s looking like we may be about to get a six-month break.

Commodities - Go Long. Global synchronized recovery continues the new bull market.

Precious Metals - Buy. Emerging market central bank demand, accelerating inflation, and a pause in interest rate rises will keep the yellow slowly rising.

Real Estate – Stand Aside. Prices are falling but not enough to make it worth selling your home and buying one back later. A multi-decade demographic tailwind is just starting, and it is just a matter of time before prices come roaring back.

1) The Economy-Slowing

A major $1.5 trillion fiscal stimulus was a terrible idea in the ninth year of an economic recovery with employment at a decade high. Nevertheless, that’s what we got.

The certainty going forward is that the gains provided by lower taxes will be entirely offset by higher interest rates, higher labor costs, and rising commodity and oil prices.

Since most of the benefits accrued to the top 1% of income earners, the proceeds of these breaks entirely ended up share buybacks and the bond market. This is why interest rates are still so incredibly low, even though the Fed has been tightening for 4 ½ years (remember the 2014 taper tantrum?) and raising rates for three years.

And every corporate management views these cuts as temporary so don’t expect any major capital investment or hiring binges based on them.

The trade wars have shifted the global economy from a synchronized recovery to a US only recovery, to a globally-showing one. It turns out that damaging the economies of your biggest economies is bad for your own business. They are also a major weight on US growth. CEOs would rather wait to see how things play out before making ANY long-term decisions.

As a result, I expect real US economic growth will retreat from the 3.0% level of 2018 to a much more modest 1.5%-2.0% range in 2019.

The government shutdown, now in its third week (and second year), will also start to impact 2019 growth estimates. For every two weeks of closure, you can subtract 0.1% in annual growth.

Twenty weeks would cut a full 1%. And if you only have 2% growth to start with that means you don’t have much to throw away until you end up in a full-on recession.

Hyper-accelerating and cross-fertilizing technology will remain a long term and underestimated positive. But you have to live here next to Silicon Valley to realize that.

S&P 500 earnings will grow from the current $170 to $180 at a price earnings multiple at the current 14X, a gain of 6%. Unfortunately, these will start to fade in the second half from the weight of rising interest rates, inflation, and political certainty. Loss of confidence will be a big influence in valuing shares in 2019.

Whatever happened to the $2.5 trillion in offshore funds held by American companies expected to be repatriated back to the US? That was supposed to be a huge market stimulus last year. It’s still sitting out there. It turns out companies still won’t bring the money home even with a lowly 10% tax rate. They’d rather keep it abroad to finance growth there or borrow against it in the US.

Here is the one big impact of the tax bill that everyone is still missing. The 57% of the home-owning population are about to find out how much their loss of local tax deductions and mortgage deductions is going to cost them when they file their 2018 returns in April. They happen to be the country’s biggest spenders. That’s another immeasurable negative for the economy.

Take money out of the pockets of the spenders and give it to the savers and you can’t have anything but a weakening on the economy.

All in all, it will be one of the worst years of the decade for the economy. Maybe that’s what the nightmarish fourth quarter crash was trying to tell us.

A Rocky Mountain Moose Family

 

2) Equities  (SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC)

The final move of a decade long bull market is upon us.

Corporate earnings are at record levels and are climbing at 6% a year. Cash on the balance sheet is at an all-time high as are profit margins. Interest rates are still near historic lows.

Yet, there is not a whiff of inflation anywhere except in now fading home costs and paper asset prices. Almost all other asset classes offer pitiful alternatives.

The golden age of passive index investing is over. This year, portfolio managers are going to have to earn their crust of bread through perfect market timing, sector selection, and individual name-picking. Good luck with that. But then, that’s why you read this newsletter.

I expect an inverse “V”, or Greek lambda type of year. Stocks will rally first, driven by delayed rate rises, a China war settlement, and the end of the government shut down. That will give the Fed the confidence to start raising rates again by mid-year because inflation is finally starting to show. This will deliver another gut-punching market selloff in the second half giving us a negative stock market return for the second year in a row. That hasn’t happened since the Dotcom Bust of 2001-2002.

How much money will I make this year? A lot more than last year’s middling 23.56% because now we have some reliable short selling opportunities for the first time in a decade. Short positions performed dreadfully when global liquidity is expanding. They do much better when it is shrinking, as it is now.

 

 

 

Frozen Headwaters of the Colorado River

3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)

Amtrak needs to fill every seat in the dining car to get everyone fed, so you never know who you will share a table with for breakfast, lunch, and dinner.

There was the Vietnam vet Phantom jet pilot who now refused to fly because he was treated so badly at airports. A young couple desperate fleeing Omaha could only afford seats as far as Salt Lake City, sitting up all night. I paid for their breakfast.

A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites returning home by train because their religion forbade automobiles or airplanes.

This year is simply a numbers game for the bond market. The budget deficit should come in at a record $1.2 trillion. The Fed will take out another $600 billion through quantitative tightening. Some $1.8 trillion will be far too much for the bond market to soak up, meaning prices can only fall.

Except that this year is different for the following reasons.

1) The US government is now at war with the world’s largest bond buyer, the Chinese government.

2) A declining US dollar will frighten off foreign buyers to a large degree.

3) The tax cuts have come and gone with no real net benefit to the average American. Probably half of the country saw an actual tax increase from this tax cut, especially me.

All are HUGELY bond negative.

It all adds up to a massive crowding out of individual and corporate borrowers by the federal government, which will be forced to bid up for funds. You are already seeing this in exploding credit spreads. This will be a global problem. There are going to be a heck of a lot of government bonds out there for sale.

That 2.54% yield for the ten-year Treasury bond you saw on your screen in early January? You will laugh at that figure in a year as it hits 3.50% to 4.0%.

Bond investors today get an unbelievably bad deal. If they hang on to the longer maturities, they will get back only 90 cents worth of purchasing power at maturity for every dollar they invest a decade down the road at best.

The only short-term positive for bonds was Fed governor Jay Powell’s statement last week that our central bank will be sensitive to the level of the stock market when considering rate rises. That translates into the reality that rates won’t go up AT ALL as long as markets are in crash mode.

It all means that we are now only two and a half years into a bear market that could last for ten or twenty years.

The IShares 20+ Year Treasury Bond ETF (TLT) trading today at $123 could drop below $100. The 2X ProShares 20+ Short Treasury Bond Fund (TBT) now at $31 is headed for $50 or more.

Junk Bonds (HYG) are already reading the writing on the wall taking a shellacking during the Q4 stock market meltdown. This lackluster return ALWAYS presages an inverted yield curve by a year where short term interest rates are higher than long term ones. This in turn reliably predicts a full-scale recession by 2020 at the latest.

 

 

 

A Visit to the 19th Century

4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)

I have pounded away at you for years that interest rate differentials are far and away the biggest decider of the direction in currencies.

This year will prove that concept once again.

With overnight rates now at 2.50% and ten-year Treasury bonds at 2.54%, the US now has the highest interest rates of any major industrialized economy.

However, pause interest rate rises for six months or a year and the dollar loses its mojo very quickly.

Compounding the problem is that a weak dollar begets selling from foreign investors. They are in a mood to do so anyway, as they see rising political instability in the US a burgeoning threat to the value of the greenback.

So the dollar will turn weak against all major currencies, especially the Japanese yen (FXY), and the Australian (FXA) and Canadian (FXC) dollars.

You can take that to the bank.

 

 

 

5) Commodities (FCX), (VALE), (MOO), (DBA), (MOS), (MON), (AGU), (POT), (PHO), (FIW), (CORN), (WEAT), (SOYB), (JJG)

A global synchronized economic slowdown can mean only one thing and that is sustainably lower commodity prices.

Industrial commodities, like copper, iron ore, performed abysmally in 2018, dope slapped by the twin evils of a strong dollar and the China trade war.

We aren’t returning to the heady days of the last commodity bubble top anytime soon. Investors are already front running that move now.

However, once this sector gets the whiff of a weak dollar or higher inflation, it will take off like a scalded chimp.

Now that their infrastructure is largely built out, the Middle Kingdom will change drivers of its economy. This is world-changing.

The shift will be from foreign exports to domestic consumption. This will be a multi-decade process, and they have $3.1 trillion in foreign exchange reserves to finance it.

It will still demand prodigious amounts of imported commodities but not as much as in the past.

This trend ran head-on into a decade-long expansion of capacity by the commodities industry, delivering the five-year bear market that we are only just crawling out of.

The derivative equity plays here, Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE) have all been some of the best-performing assets of 2017.

 

 

Snow Angel on the Continental Divide

6) Energy (DIG), (RIG), (USO), (DUG), (DIG), (UNG), (USO), (OXY), (XLE), (X)

If you expect a trade war-induced global economic slowdown, the last thing in the world you want to own is an energy investment.

And so it was in Q4 when the price of oil got hammered doing a swan dive from $68 to $42 a barrel, an incredible 38% hickey.

All eyes will be focused on OPEC production looking for new evidence of quota cheating which is slated to expire at the end of 2018. Their latest production cut looked great on paper but proved awful in practice. Welcome to the Middle East.

The only saving grace is that with crude at these subterranean levels, new investment in fracking production has virtually ceased. No matter, US pipelines are operating at full capacity anyway.

OPEC production versus American frackers will create the constant tension in the marketplace for all of 2019.

My argument in favor of commodities and emerging markets applies to Texas tea as well. A weaker US dollar, trade war end, interest rate halt are all big positives for any oil investment. The cure for low oil prices is low prices.

That makes energy Master Limited Partnerships, now yielding 6-10%, especially interesting in this low yield world. Since no one in the industry knows which issuers are going bankrupt, you have to take a basket approach and buy all of them.

The Alerian MLP ETF (AMLP) does this for you in an ETF format.

Our train has moved over to a siding to permit a freight train to pass, as it has priority on the Amtrak system.

Three Burlington Northern engines are heaving to pull over 100 black, spanking brand new tank cars, each carrying 30,000 gallons of oil from the fracking fields in North Dakota.

There is another tank car train right behind it. No wonder Warren Buffett tap dances to work every day as he owns the railroad.

We are also seeing relentless improvements on the energy conservation front with more electric vehicles, high mileage conventional cars, and newly efficient building.

Anyone of these inputs is miniscule on its own. But add them all together and you have a game changer.

As is always the case, the cure for low prices is low prices. But we may never see $100/barrel crude again. In fact, the coming peak in oil prices may be the last one we ever see. The word is that leasing companies will stop offering five-year leases in five years because cars with internal combustion engines will become worthless in ten.

Add to your long-term portfolio (DIG), ExxonMobile (XOM), Cheniere Energy (LNG), the energy sector ETF (XLE), Conoco Phillips (COP), and Occidental Petroleum (OXY). But date these stocks, don’t marry them.

Skip natural gas (UNG) price plays and only go after volume plays because the discovery of a new 100-year supply from “fracking” and horizontal drilling in shale formations is going to overhang this subsector for a very long time, like the rest of our lives.

It is a basic law of economics that cheaper prices bring greater demand and growing volumes which have to be transported. Any increase in fracking creates more supply of natural gas.

 

 

 

 

7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)

The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.

On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.

The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a train over on to its side.

In the snow-filled canyons, we sight a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.

We also see countless abandoned 19th century gold mines and the broken-down wooden trestles leading to them, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.

Gold (GLD) lost money in 2018, off 2.4%. More volatile silver (SLV) shed 12%.

This was expected, as non-yielding assets like precious metals do terribly during times of rising interest rates.

In 2019, gold will finally be coming out of a long dark age. As long as the world was clamoring for paper assets like stocks, gold was just another shiny rock. After all, who needs an insurance policy if you are going to live forever?

But the long-term bull case is still there. Gold is not dead; it is just resting.

If you forgot to buy gold at $35, $300, or $800, another entry point here up for those who, so far, have missed the gravy train.

To a certain extent, the belief that high-interest rates are bad for gold is a myth. Wealth creation is a far bigger driver. To see what I mean, take a look at a gold chart for the 1970s when interest rates were rising sharply.

Remember, this is the asset class that takes the escalator up and the elevator down, and sometimes the window. 

If the institutional world devotes just 5% of their assets to a weighting in gold, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation-adjusted all-time high, or more.

This is why emerging market central banks step in as large buyers every time we probe lower prices. China and India emerged as major buyers of gold in the final quarters of 2018.

They were joined by Russia which was looking for non-dollar investments to dodge US economic and banking sanctions.

That means it’s just a matter of time before gold breaks out to a new multiyear high above $1,300 an ounce. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP).
 
I would also be using the next bout of weakness to pick up the high beta, more volatile precious metal, silver (SLV) which I think could rise from the present $14 and hit $50 once more, and eventually $100.

The turbocharger for gold will hit sometime in 2019 with the return of inflation. Hello stagflation, it’s been a long time.

 

 

 

Would You Believe This is a Purple State?

8) Real Estate (ITB), (LEN),

The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write. 

My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.

It is a route long traversed by roving bands of Indians, itinerant fur traders, the Pony Express, my own immigrant forebears in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80.

Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.

There is no doubt a long-term bull market in real estate is taking a major break. If you didn’t sell your house by March last year you’re screwed and stuck for the duration.

And you’re doubly screwed if you’re trying to sell your home now during the government shutdown. With the IRS closed, tax return transcripts are unobtainable making any loan approval impossible. And no one at Fannie Mae or Freddie Mac, the ultimate buyers of 70% of US home loans, has answered their phone this year.

The good news is that we will not see a 2008 repeat when home values cratered by 50%-70%. There is just not enough leverage in the system to do any real damage. That has gone elsewhere, like in exchange-traded funds. You can thank Dodd/Frank for that which imposed capital rules so strict that it is almost impossible for banks to commit suicide.

And no matter how dire conditions may appear now, you are not going to see serious damage in a market where there is a generational structural shortage of supply.

We are probably seven years into a 17-year run at the next peak in 2028. What we are suffering now is a brief two-year pause to catch our breath. Those bidding wars were getting tiresome anyway.

There are only three numbers you need to know in the housing market for the next 20 years: there are 80 million baby boomers, 65 million Generation Xers who follow them, and 86 million in the generation after that, the Millennials.

The boomers have been unloading dwellings to the Gen Xers since prices peaked in 2007. But there is not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis.

If they have prospered, banks won’t lend to them. Brokers used to say that their market was all about “location, location, location.” Now it is “financing, financing, financing.” Imminent deregulation is about to deep-six that problem.

There is a happy ending to this story.

Millennials now aged 23-38 are already starting to kick in as the dominant buyers in the market. They are just starting to transition from 30% to 70% of all new buyers in this market.

The Great Millennial Migration to the suburbs has just begun.

As a result, the price of single-family homes should rocket tenfold during the 2020s as they did during the 1970s and the 1990s when similar demographic forces were at play.

This will happen in the context of a coming labor shortfall, soaring wages,  and rising standards of living.

Rising rents are accelerating this trend. Renters now pay 35% of the gross income, compared to only 18% for owners, and less when multiple deductions and tax subsidies are taken into account.

Remember too that, by then, the US will not have built any new houses in large numbers in 12 years.

We are still operating at only a half of the peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.

That makes a home purchase now particularly attractive for the long term, to live in, and not to speculate with. And now that it is temporarily a buyer’s market, it is a good time to step in for investment purposes.

You will boast to your grandchildren how little you paid for your house as my grandparents once did to me ($3,000 for a four-bedroom brownstone in Brooklyn in 1922), or I do to my kids ($180,000 for an Upper East Side high rise in 1983).

That means the major homebuilders like Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH) may finally be a buy on the dip.

Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now.

If you borrow at a 4% 5/1 ARM rate, and the long-term inflation rate is 3%, then over time you will get your house nearly for free.

How hard is that to figure out?

 

 

 

Crossing the Bridge to Home Sweet Home

9) Postscript

We have pulled into the station at Truckee in the midst of a howling blizzard.

My loyal staff has made the ten-mile treck from my beachfront estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.

After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.

Well, that’s all for now. We’ve just passed the Pacific mothball fleet moored near the Benicia Bridge. The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my water bottle.

The Golden Gate Bridge and the soaring spire of Salesforce Tower are just around the next bend across San Francisco Bay.

A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my MacBook Pro and iPhone X, pick up my various adapters, and pack up.

We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak and still get home in time to watch the ball drop in New York’s Times Square.

I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.

I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above.

Good trading in 2019!

John Thomas
The Mad Hedge Fund Trader

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 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 Trader2019-01-09 01:05:052019-01-08 21:01:382019 Annual Asset Class Review: A Global Vision
Mad Hedge Fund Trader

2016 Annual Asset Class Review

Diary, Newsletter

I am once again writing this report from a first class sleeping cabin on Amtrak?s California Zephyr.

By day, I have two comfortable seats facing each other next to a panoramic window. At night, they fold into bunk beds, a single and a double. There is a shower, but only Houdini could get in and out of it.

I am not Houdini, so I go downstairs to use the larger public showers.

Zephyr

We are now pulling away from Chicago?s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American accomplishment.

I am headed for Emeryville, California, just across the bay from San Francisco. That gives me only 56 hours to complete this report.

I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure, and to keep me up to date with the onboard gossip.

The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Spellchecker can catch most of the mistakes, but not all of them.

Thank goodness for small algorithms.

station

As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied searches during stops at major stations along the way to chase down data points.

You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.

Who knew that 95% of America is off the grid? That explains a lot about our country today. I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 6.

After making the rounds with strategists, portfolio managers, and hedge fund traders, I can confirm that 2015 was one of the toughest to trade for careers lasting 30, 40, or 50 years. Even the stay-at-home index players had their heads handed to them.

With the Dow gaining 3.1% in 2015, and S&P 500 almost dead unchanged, this was a year of endless frustration. Volatility fell to the floor, staying at a monotonous 12% for eight boring consecutive months before spiking repeatedly many times to as high as 52%. Most hedge funds lagged the index by miles.

My Trade Alert Service, hauled in an astounding 38.8% profit, at the high was up 48.7%, and has become the talk of the hedge fund industry.

If you think I spend too much time absorbing conspiracy theories from the Internet, let me give you a list of the challenges I see financial markets facing in the coming year:

JT & conductor

The Four Key Variables for 2016

1) Will the Fed raise interest rates more or not?
2) Will China?s emerging economy see a hard or soft landing?
3) Will Japanese and European quantitative easing increase, or remain the same?
4) Will oil bottom and stay low, or bounce hard?

Here are your answers to the above: no, soft, more later, bounce hard later.

There you go! That?s all the research you have to do for the coming year. Everything else is a piece of cake.

The Ten Highlights of 2015

1) Stocks will finish higher in 2016, almost certainly more than the previous year, somewhere in the 5% range and 7% with dividends. Cheap energy, a recovering global economy, and 2-3% GDP growth, will be the drivers. However, this year we have a headwind of rising interest rates and falling multiples.

2) Expect stocks to take a 15% dive. That gives us a -15% to +5% trading range for the year. Volatility will remain permanently higher, with several large spikes up. That means you are going to have to pedal harder to earn your crust of bread in 2016.

3) The Treasury bond market will modestly grind down, anticipating the next 25 basis point rate rise from the Federal Reserve, and then the next one after that.

4) The yen will lose another 5% against the dollar.

5) The Euro will fall another 5%, doing its best to hit parity with the greenback, with the assistance of beleaguered continental governments.

6) Oil stays in a $30-$60 range, showering the economy with hundreds of billions of dollars worth of de facto tax cuts.

7) Gold finally bottoms at $1,000 after one more final flush, then rallies $250. (My jeweler was right, again).

8) Commodities finally bottom out, thanks to new found strength in the global economy, and begin a modest recovery.

9) Residential real estate has made its big recovery, and will grind up slowly from here for years.

10) The 2016 presidential election will eat up immense amounts of media and research time, but will have absolutely no impact on financial markets. Give your money to charity instead.windmills

The Thumbnail Portfolio

Equities - Long. A rising but high volatility year takes the S&P 500 up to 2,200. Technology, biotech, energy, solar, consumer discretionary, and financials lead. Energy should find its bottom, but later than sooner.

Bonds - Short. Down for the entire year, but not by much, with long periods of stagnation.

Foreign Currencies - Short. The US dollar maintains its bull trend, especially against the Yen and the Euro, but won't gain nearly as much as in 2015.

Commodities - Long. A China recovery takes them up eventually.

Precious Metals - Buy as close to $1,000 as you can. We are overdue for a trading rally.

Agriculture - Long. El Nino in the north and droughts in Latin American should add up to higher prices.

Real estate - Long. Multifamily up, commercial up, single family homes up small.

farmland

1) The Economy - Fortress America

I think real US economic growth will come in at the 2.5%-3% range.

With a generational demographic drag continuing for five more years, don?t expect more than that. Big spenders, those in the 46-50 age group, don?t return in larger numbers until 2022.

But this negative will be offset by a plethora of positives, like hyper-accelerating technology, global expansion, and the lingering effects of the Fed?s massive five year quantitative easing.

US corporate profits will keep pushing to new all time highs. But this year we won?t be held back by the collapsing economies of Europe, China, and Japan, which subtracted about 0.5% from American economic growth, nor weak energy.

US Corporate earnings will probably come in at $130 a share for the S&P 500, a gain of 10% over the previous year. During the last six years, we have seen the most dramatic increase in earnings in history, taking them to all-time highs.

Technology and dramatically lower energy costs are the principal sources of profit increases, which will continue their inexorable improvements. Think of more machines and software replacing people.

You know all of those hundreds of billions raised from technology IPO?s in 2015? Most of that is getting plowed right back into new start ups, increasing the rate of technology improvements even further, and the productivity gains that come with it.

We no longer have the free lunch of zero interest rates. But the cost of money will rise so slowly that it will barely impact profits. Deflation is here to stay. Watch the headline jobless rate fall below 5% to a full employment economy.

Keep close tabs on the weekly jobless claims that come out at 8:30 AM Eastern every Thursday for a good read as to whether the financial markets will head in a ?RISK ON? or ?RISK OFF? direction.

Moose on Snowy MountainA Rocky Mountain Moose Family

2) Equities (SPX), (QQQ), (AAPL), (XLF), (BAC), (EEM),(EWZ), (RSX), (PIN), (FXI), (TUR), (EWY), (EWT), (IDX)

For the first time in seven years, earnings multiples are going to fall, but not by much. That is the only possible outcome in a world with rising interest rates, however modestly.

If multiples fall by 5%, from the current 18X to 17.1X, profits increase by 10%, and you throw in a 2% dividend, you should net out a 7% return by the end of the year.

S&P 500 earnings fell by 6% in 2015, but take out oil and they grew by 5.6%. In 2016, energy will be a lesser drag, or not at all. That makes my 10% target doable.

That is not much of a return with which to take on a lot of risk. But remember, in a near zero interest rate world, there is nothing else to buy.

This is not an outrageous expectation, given the 10-22 earnings multiple range that we have enjoyed during the last 30 years.

The market currently trades around fair value, and no market in history ever peaked out here. An overshoot to the upside, often a big one, is mandatory. Yet, that is years off.

After all, my friend, Janet Yellen, is paying you to buy stock with cheap money, so why not? Borrowing money at close to zero and investing in 2% dividend paying stocks has become the world?s largest carry trade.

Rising interest rates will have one additional worrying impact on stock prices. They will pare back mergers and acquisitions and corporate buy backs in 2016.

Together these were the sources of all new net buying of stocks in 2015, some $5.5 trillion worth. Call it financial engineering, but the market loves it.

Although energy looks terrible now, it could well be the top-performing sector by the end of the year, to be followed by commodities.

Certainly, every hedge fund and activist investor out there is undergoing a crash course on oil fundamentals. After a 13-year expansion of leverage in the industry, it is ripe for a cleanout.

Solar stocks will continue on a tear, now that the 30% federal investment tax subsidy has been extended by five more years. Look at Solar City (SCTY), First Solar (FSLR), and the solar basket ETF (TAN). Revenues are rocketing and costs are falling.

After spending a year in the penalty box, look for small cap stocks to outperform. These are the biggest beneficiaries of cheap energy and low interest rates.

Share prices will deliver anything but a straight-line move. Expect a couple more 10% plus corrections in 2015, and for the Volatility Index (VIX) to revisit $30 multiple times. The higher prices rise, the more common these will become.

SPX 12-31-15

QQQ 12-31-15

IWM 12-31-15

snowy hillsFrozen Headwaters of the Colorado River

3) Bonds ?(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP), (KMP), (LINE)

Amtrak needs to fill every seat in the dining car, so you never know who you will get paired with for breakfast, lunch, and dinner.

There was the Vietnam vet Phantom jet pilot who now refused to fly because he was treated so badly at airports. A young couple desperate to get out of Omaha could only afford seats as far as Salt Lake City, sitting up all night. I paid for their breakfast.

A retired British couple was circumnavigating the entire US in a month on a ?See America Pass.? Mennonites returning home by train because their religion forbade airplanes.

I have to confess that I am leaning towards the ?one and done? school of thought with regards to the Fed?s interest rate policy. We may see a second 25 basis point rise in June, but only if the economy takes off like a rocket and international concerns disappear, an unlikely probability.

If you told me that US GDP growth was 2.5%, unemployment was at a ten year low at 5.0%, and energy prices had just plunged by 68%, I would have pegged the ten-year Treasury bond yield at 6.0%. Yet here we are at 2.25%.

We clearly are seeing a brave new world.

Global QE added to a US profit glut has created more money than the fixed income markets can absorb.

Virtually every hedge fund manager and institutional investor got bonds wrong last year, expecting rates to rise. I was among them, but that is no excuse.

Fixed income turned out to be a winner for me in 2015, as I sold short every bond price spike from the summer onward. It worked like a charm.

You might as well take your traditional economic books and throw them in the trash. Apologies to John Maynard Keynes, John Kenneth Galbraith, and Paul Samuelson.

The reasons for the debacle are myriad, but global deflation is the big one. With ten year German bunds yielding a paltry 62 basis points, and Japanese bonds paying a paltry 26 basis points, US Treasuries are looking like a steal.

To this, you can add the greater institutional bond holding requirements of Dodd-Frank, a balancing US budget deficit, a virile US dollar, the commodity price collapse, and an enormous embedded preference for investors to keep buying whatever worked yesterday.

For more depth on the perennial strength of bonds, please click here for ?Ten Reasons Why I?m Wrong on Bonds?.

Bond investors today get an unbelievable bad deal. If they hang on to the longer maturities, they will get back only 80 cents worth of purchasing power at maturity for every dollar they invest a decade down the road.

But institutions and individuals will grudgingly lock in these appalling returns because they believe that the potential losses in any other asset class will be worse.

The problem is that driving eighty miles per hour while only looking in the rear view mirror can be hazardous to your financial health.

While much of the current political debate centers around excessive government borrowing, the markets are telling us the exact opposite.

A 2% handle on the ten-year yield is proof to me that there is a Treasury bond shortage, and that the government is not borrowing too much money, but not enough.

There is another factor supporting bonds that no one is looking at. The concentration of wealth with the 1% has a side effect of pouring money into bonds and keeping it there. Their goal is asset protection and nothing else.

These people never sell for tax reasons, so the money stays there for generations. It is not recycled into the rest of the economy, as conservative economists insist. As this class controls the bulk of investable assets, this forestalls any real bond market crash, at lest for the near term.

So what will 2016 bring us? I think that the erroneous forecast of higher yields I made last year will finally occur this year, and we will start to chip away at the bond market bubble?s granite edifice.

I am not looking for a free fall in price and a spike up in rates, just a move to a new higher trading range.

We could ratchet back up to a 3% yield, but not much higher than that. This would enable the inverse Treasury bond bear ETF (TBT) to reverse its dismal 2015 performance, taking it from $46 back up to $60.

You might have to wait for your grandchildren to start trading before we see a return of 12% Treasuries, last seen in the early eighties. I probably won?t live that long.

Reaching for yield suddenly went out of fashion for many investors, which is typical at market tops. As a result, junk bonds (JNK) and (HYG), REITS (HCP), and master limited partnerships (AMLP) are showing their first value in five years.

There is also emerging market sovereign debt to consider (PCY). If oil and commodities finally bottom, these high yielding bonds should take off on a tear.

This asset class was hammered last year, so we are now facing a rare entry point.

There is a good case for sticking with munis. No matter what anyone says, taxes are going up, and when they do, this will increase tax-free muni values.

The collapse of the junk bond market suddenly made credit quality a big deal last year. What is better than lending to the government, unless you happen to live in Puerto Rico or Illinois.

So if you hate paying taxes, go ahead and buy this exempt paper, but only with the expectation of holding it to maturity. Liquidity could get pretty thin along the way, and mark to markets could be shocking.

Be sure to consult with a local financial advisor to max out the state, county, and city tax benefits.

One question I always get asked at lunches, conferences, and lectures is what is going to happen to the budget deficit?

The short answer is that it disappears in 2018 with no change in current law, thanks to steady growth in tax revenues and no big new wars.

And Social Security? It will be fully funded by 2030, thanks to a huge demographic tailwind provided by the addition of 86 million Millennials to the tax rolls.

A bump up in US GDP growth from 2% to 4% during the 2020?s will also be a huge help, again, provided we don?t start any more wars.

It looks like I am going to be able to collect after all.

TLT 12-31-15

TBT 12-31-15

MennonitesA Visit to the 19th Century

4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)

Without much movement in interest rates in 2016, you can expect the same for foreign currencies.

Last year, we saw never ending expectations of aggressive quantitative easing by foreign central banks, which never really showed. What we did get, was always disappointing.

The decade long bull market in the greenback continues, but not by much. You can forget about those dramatic double digit gains the dollar made against the Euro at the beginning of last year, which we absolutely nailed.

The fundamental play for the Japanese yen is still from the short side. But don?t expect movement until we see another new leg of quantitative easing from the Bank of Japan. It could be a long wait.

The problems in the Land of the Rising Sun are almost too numerous to count: the world?s highest debt to GDP ratio, a horrific demographic problem, flagging export competitiveness against neighboring China and South Korea, and the world?s lowest developed country economic growth rate.

The dramatic sell off we saw in the Japanese currency since December, 2012 is the beginning of what I believe will be a multi decade, move down. Look for ?130 to the dollar sometime in 2016, and ?150 further down the road.

I have many friends in Japan looking for an overshoot to ?200. Take every 3% pullback in the greenback as a gift to sell again.

With the US having the world?s strongest major economy, its central bank is, therefore, most likely to continue raising rates the fastest.

That translates into a strong dollar, as interest rate differentials are far and away the biggest decider of the direction in currencies. So the dollar will remain strong against the Australian and Canadian dollars as well.

For a sleeper, use the next plunge in emerging markets to buy the Chinese Yuan ETF (CYB) for your back book. Now that the Yuan is an IMF reserve currency, it has attained new respectability.

But don?t expect more than single digit returns. The Middle Kingdom will move heaven and earth in order to keep its appreciation modest to maintain their crucial export competitiveness.

FXE 12-31-15

FXY 12-31-15

mountains

5) Commodities (FCX), (VALE), (MOO), (DBA), (MOS), (MON), (AGU), (POT), (PHO), (FIW), (CORN), (WEAT), (SOYB), (JJG)

There isn?t a strategist out there not giving thanks for not loading up on commodities in 2015, the preeminent investment disaster of the year. Those who did are now looking for jobs on Craig?s List.

It was another year of overwhelming supply meeting flagging demand, both in Europe and Asia. Blame China, the one big swing factor in the global commodity.

The Middle Kingdom is currently changing drivers of its economy, from foreign exports to domestic consumption. This will be a multi decade process, and they have $3.5 trillion in reserves to finance it.

It will still demand prodigious amounts of imported commodities, especially, oil, copper, iron ore, and coal, all of which we sell. But not as much as in the past. This trend ran head on into a decade long expansion of capacity by the industry.

The derivative equity plays here, Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE), have all taken an absolute pasting.

The food commodities were certainly the asset class to forget about in 2015, as perfect weather conditions and over planting produced record crops for the second year in a row, demolishing prices. The associated equity plays took the swan dive with them.

Not even the arrival of one of the biggest El Nino events in history could bail them out.

However, the ags are still a tremendous long term Malthusian play. The harsh reality here is that the world is making people faster than the food to feed them, the global population jumping from 7 billion to 9 billion by 2050.

Half of that increase comes in countries unable to feed themselves today, largely in the Middle East. The idea here is to use any substantial weakness, as we are seeing now, to build long positions that will double again if global warming returns in the summer, or if the Chinese get hungry.

The easy entry points here are with the corn (CORN), wheat (WEAT), and soybean (SOYB) ETF?s. You can also play through (MOO) and (DBA), and the stocks Mosaic (MOS), Monsanto (MON), Potash (POT), and Agrium (AGU).

The grain ETF (JJG) is another handy fund. Though an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cakewalk. You can participate in this most liquid of assets with the ETF?s (PHO) and (FIW).

CORN 12-31-15

DBA 12-31-15

PHO 12-31-15

JT snow angelSnow Angel on the Continental Divide

6) Energy (DIG), (RIG), (USO), (DUG), (DIG), (UNG), (USO), (OXY), (XLE), (X)

You are now an oil trader, even if you didn?t realize it. Yikes!

The short-term direction of the price of Texas tea will be the principal driver for the prices of all asset classes, as it was for the 2015.

The smartest thing I did in 2015 was to ignore the professional traders, who called the bottom in oil monthly, based on key technical levels.

Instead, I hung on every word uttered by my old drilling buddies in the Barnett Shale, who only saw endless supply.

Guess whom I?ll be paying attention to this year?

I expect oil to bottom in 2016, and then launch a ferocious short covering rally. But when and where is anyone?s guess.

If energy legends John Hamm, John Arnold, and T. Boone Pickens have no idea where the absolute low will be, who am I to second-guess them?

When that happens, a trillion dollars will pour out of the sidelines into this troubled sector. Energy shares should be top-performers in 2016.

That makes energy Master Limited Partnerships, now yielding 10%-15%, especially interesting in this low yield world. Since no one in the industry knows which issuers are going bankrupt, you have to take a basket approach and buy all of them.

The Alerian MLP ETF (AMLP) does this for you in an ETF format (click here for details). At its low this fund was down by 41% this year. The last printed annualized yield I saw was 10%. That kind of return will cover up a lot of sins.

Our train has moved over to a siding to permit a freight train to pass, as it has priority on the Amtrak system. Three Burlington Northern engines are heaving to pull over 100 black, brand new tank cars, each carrying 30,000 gallons of oil from the fracking fields in North Dakota.

There is another tank car train right behind it. No wonder Warren Buffet tap dances to work every day, as he owns the railroad.

Who knew that a new, younger Saudi king would ramp up production to once unimaginable levels and crush prices, turning the energy world upside down?

They aren?t targeting American frackers, who at 1 million barrels a day in a 92 million barrel a day demand world barely move the needle. Their goal is to destroy the economies of enemies Iran, Yemen, Russia, and of course ISIS, which need high prices to stay in business.

So far, so good.

Cheaper energy will bestow new found competitiveness on US companies that will enable them to claw back millions of jobs from China in dozens of industries.

At current prices, the energy savings works out to an eye popping $550 per American driver per year!

This will end our structural unemployment faster than demographic realities would otherwise permit.

We have a major new factor this year in considering the price of energy. The nuclear deal with Iran promises to add 500,000 to 1 million barrels a day to an already glutted global market. Iraq is ramping up production as well.

We are also seeing relentless improvements on the energy conservation front with more electric vehicles, high mileage conventional cars, and newly efficient building. Anyone of these inputs is miniscule on its own. But add them all together and you have a game changer.

Enjoy cheap oil while it lasts because it won?t last forever. American rig counts are already falling off a cliff and will eventually engineer a price recovery.

As is always the case, the cure for low prices is low prices. But we may never see $100/barrel crude again.

Add to your long term portfolio (DIG), Exxon Mobil (XOM), Cheniere Energy (LNG), the energy sector ETF (XLE), Conoco Phillips (COP), and Occidental Petroleum (OXY).

Skip natural gas (UNG) price plays and only go after volume plays, because the discovery of a new 100-year supply from ?fracking? and horizontal drilling in shale formations is going to overhang this subsector for a very long time.

It is a basic law of economics that cheaper prices bring greater demand and growing volumes, which have to be transported. However, major reforms are required in Washington before use of this molecule goes mainstream.

These could be your big trades of 2016, but expect to endure some pain first, nor to get much sleep at night.

WTIC 12-31-15

NATGAS 12-31-15

AMLP 12-31-15

Train

7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)

The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.

On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders. The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a train over on to its side.

In the snow filled canyons we sight a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It?s a good omen for the coming year.

We also see countless abandoned 19th century gold mines and the broken down wooden trestles leading to them, relics of previous precious metals busts. So it is timely here to speak about precious metals.

As long as the world is clamoring for paper assets like stocks and bonds, gold is just another shiny rock. After all, who needs an insurance policy if you are going to live forever?

We have already broken $1,040 once, and a test of $1,000 seems in the cards before a turnaround ensues. There are more hedge fund redemptions and stop losses to go. The bear case has the barbarous relic plunging all the way down to $700.

But the long-term bull case is still there. Gold is not dead; it is just resting.

If you forgot to buy gold at $35, $300, or $800, another entry point is setting up for those who, so far, have missed the gravy train. The precious metals have to work off a severely, decade old overbought condition before we make substantial new highs.

Remember, this is the asset class that takes the escalator up and the elevator down, and sometimes the window.

If the institutional world devotes just 5% of their assets to a weighting in gold, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation adjusted all-time high, or more.

This is why emerging market central banks step in as large buyers every time we probe lower prices. China and India emerged as major buyers of gold in the final quarter of 2015.

They were joined by Russia, which was looking for non-dollar investments to dodge US economic and banking sanctions.

For me, that pegs the range for 2016 at $1,000-$1,250. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP).

I would also be using the next bout of weakness to pick up the high beta, more volatile precious metal, silver (SLV), which I think could hit $50 once more, and eventually $100.

What will be the metals to own in 2015? Palladium (PALL) and platinum (PPLT), which have their own auto related long term fundamentals working on their behalf, would be something to consider on a dip.

With US auto production at 18 million units a year and climbing, up from a 9 million low in 2009, any inventory problems will easily get sorted out.

GOLD 12-31-15

SILVER 12-31-15

sunsetWould You Believe This is a Blue State?

8) Real Estate (ITB)

The majestic snow covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write.

My apologies to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.

It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my own immigrant forebears in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80.

There is no doubt that there is a long-term recovery in real estate underway. We are probably 5 years into a 17-year run at the next peak in 2028.

But the big money has been made here over the past two years, with some red hot markets, like San Francisco, soaring. If you live within commuting distance of Apple (AAPL), Google (GOOG), or Facebook (FB) headquarters in California, you are looking at multiple offers, bidding wars, and prices at all time highs.

While the sales figures have recently been weak, it is a shortage of supply that is the cause. You can?t sell what you don?t have, at least in the real estate business.

From here on, I expect a slow grind up well into the 2020?s. If you live in the rest of the country, we are talking about small, single digit gains. The consequence of pernicious deflation is that home prices appreciate at a glacial pace.

At least, it has stopped going down, which has been great news for the financial industry.

There are only three numbers you need to know in the housing market for the next 20 years: there are 80 million baby boomers, 65 million Generation Xer?s who follow them, and 86 million in the generation after that, the Millennials.

The boomers have been unloading dwellings to the Gen Xer?s since prices peaked in 2007. But there are not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That's what caused the financial crisis.

If they have prospered, banks won?t lend to them. Brokers used to say that their market was all about ?location, location, location?. Now it is ?financing, financing, financing?.

Banks have gone back to the old standard of only lending money to people who don?t need it. But expect to put up your first-born child as collateral, and bring in your entire extended family in as cosigners if you want to get a bank loan.?

There is a happy ending to this story. Millennials, now aged 21-37 are already starting to kick in as the dominant buyers in the market. They are just starting to transition from 30% to 70% of all new buyers in this market. The Great Millennial Migration to the suburbs has begun.

As a result, the price of single family homes should rocket tenfold during the 2020?s, as they did during the 1970?s and the 1990?s, when similar demographic influences were at play.

This will happen in the context of a coming labor shortfall and rising standards of living. Inflation returns.

Rising rents are accelerating this trend. Renters now pay 35% of the gross income, compared to only 18% for owners, and less when multiple deductions and tax subsidies are taken into account.

Remember too, that by then, the US will not have built any new houses in large numbers in 10 years. We are still operating at only a quarter of the peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.

That makes a home purchase now particularly attractive for the long term, to live in, and not to speculate with.

You will boast to your grandchildren how little you paid for your house, as my grandparents once did to me ($18,000 for a four bedroom brownstone in Brooklyn in 1922).

Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now.

If you borrow at a 3% 5/1 ARM rate, and the long-term inflation rate is 3%, then over time you will get your house for free.

How hard is that to figure out?

Case Shiller

ITB 12-31-15

BridgeCrossing the Bridge to Home Sweet Home

9) Postscript

We have pulled into the station at Truckee in the midst of a howling blizzard.

My loyal staff have made the 20 mile trek from my beachfront estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.

After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.

Well, that?s all for now. We?ve just passed the Pacific mothball fleet moored in the Sacramento River Delta and we?re crossing the Benicia Bridge. The pressure increase caused by an 8,200 foot descent from Donner Pass has crushed my water bottle.

The Golden Gate Bridge and the soaring spire of the Transamerica Building are just around the next bend across San Francisco Bay.

A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my Macbook Pro and iPhone 6, pick up my various adapters, and pack up.

We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten mile night hike up Grizzly Peak and still get home in time to watch the opener for Downton Abbey's final season.

I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.

I?ll shoot you a Trade Alert whenever I see a window open on any of the trades above.

Good trading in 2016!

John Thomas
The Mad Hedge Fund Trader

JT at workThe Omens Are Good for 2016!

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Mad Hedge Fund Trader

Three Cheers for Germany

Diary, Newsletter

I noticed last week that Angela Merkel, the Chancellor of Germany, was picked by the editors of Time Magazine as their ?Person of the Year.?

This is creating an outstanding investment opportunity, a real game changer. As a result, Germany?s economy could grow by an extra 1% a year. But more on that later.

She received the accolade for convincing her country to accept 1 million refugees from the Middle East. They will be plopped down in the middle of a population of 80.6 million, so it is a very big deal.

That is like the US taking in 4 million refugees with no notice. The most we took in after the collapse of Vietnam was 125,000.

In addition, she talked her electorate into bailing out Greece, not once, but twice.

I SAY ?THREE CHEERS? FOR GERMANY.

History has really come full circle. After bearing the cross for the holocaust for seven decades, the country carries out one of the greatest humanitarian acts of all time.

I know the Germans well.

I lived in West Berlin during the 1960?s with a former Nazi family. Needless to say, the dinner conversations were interesting. But they loved Americans, for it was we who rescued them from the Russians and Bolshevism in 1945.

I spent my weekends smuggling western newspapers and US dollars into East Berlin to the underground across Checkpoint Charlie. I was too young and dumb to know any better.

When I got caught, I spent a night in a communist jail cell. To this day, the words ?Das ist Verboten? still send a chill down my back. The East German Volkspolizei were not very nice guys.

If you want to see a close approximation of that prison, go watch the just released Stephen Spielberg movie ?Bridge of Spies,? about the Gary Powers exchange. They really nailed the Cold War atmosphere of Berlin during the sixties.

Yes, when I was 16, I used to listen to machine guns mow down fleeing refugees at night. Every time a guard hit someone, they were awarded a gold watch. I lived in Tiergarten, within easy earshot of the Berlin Wall at Brandenburg Gate. And you wonder why I?m such a tough guy.

Angela Merkel has always been an enigma to me. Those of us who know the old East Germany well, find it difficult to imagine anyone intelligent or useful coming from there. To see her leading an essentially conservative country is positively mind blowing.

She is clearly brilliant, with a PhD in physics. She is fluent in Russian, and is in close communication with Vladimir Putin on a regular basis in his own language. She entered politics as soon as the wall came down in 1989, signing up with the conservative Christian Democratic Union.

Today, she is widely considered the de facto leader of Europe. She is also regarded as the most powerful woman in history (at least for another year).

Full Disclosure: During my annual European sojourns, I always spend a day briefing Merkel?s staff in Berlin about the current state of the world. I also attempt to decode the American political scene, which Europeans find an indecipherable mystery, but which has enormous implications for them.

?The Person of the Year? can be a dubious honor, and is defined as the person who most influenced history that year. Aviation pioneer Charles Lindbergh, who first soloed the Atlantic Ocean, was originally picked by Time in 1927.

Adolph Hitler was named in 1938 for peacefully redrawing the map of Europe. The only other Germans so named were Konrad Adenauer in 1953, the country?s postwar leader, and Willy Brandt in 1970, noted for normalizing relations with the Soviet Union and Eastern Europe.

To say that Germany is overwhelmed by the immigrant crisis would be a severe understatement.

Almost every high school gym in the country has been converted to emergency housing. There are shortages of everything, from blankets to clothing and translators.

Medieval Afghan men are showing up with 13-year old brides. The backlash is that the Nazi party is experiencing a resurgence of popularity, not only in Germany, also in the Netherlands, France, and Sweden.

If it weren?t for the commitments of this newsletter, I would be back in Berlin in a heartbeat volunteering my services.

Needless to say, the bill for all of this will be enormous. Germany is really the only country that could afford dispensing so much aid.

One of the reasons it can do so is that it happens to have a spare country at hand. Much of the old East Germany is still empty, its cities depopulated. This is where the new immigrants will eventually be settled.

It is perhaps because Angela is a mathematician that she understands there is an enormous long-term dividend that the country will reap.

Look at the economic growth rates of the US and Europe for the past 50 years, and the continent has always lagged the US by 1% per annum. By opening up the gates to a flood of immigration, Germany can make up this difference. So can the rest of Europe.

The great thing for Germany is that these are not your ordinary political or economic refugees. Much of the Syrian middle class has decamped, bringing their educational and professional skills with them. For the Germans, it is a win-win.

This is not a long-term thing. German GDP growth recently and unexpectedly surged, from a 0.3% to a +1.5% annual rate. Some of this is no doubt due to the European Central Bank?s newly aggressive policy of monetary easing. Massive spending on social services has to also be a factor.

European stocks are already poised to outperform American ones by two to one in 2016, thanks to quantitative easing, the postponement of the Greek crisis, and a generation low in asset prices there. Immigrants could pour the economic gasoline to the fire.

Clearly German stocks are a prime target here, which you can buy through the iShares Germany Fund (EWG), as is Europe in general, with the Wisdom Tree European Hedged Equity Fund (HEDJ). But make sure you hedge out your European currency risk for the short term, as the (HEDJ) does.

A revival of the continental economy will also eventually engineer a recovery in the Euro (FXE), (EUO) against the dollar. Don?t press those shorts too aggressively down here.

The great irony here is that this is all unfolding in Germany while mosque burning and bombing are taking place across the US, and there is talk of closing its border on religious grounds.

It is the sort of thing that happened in Germany in 1938, as my former Berlin hosts would have reminded me.

History is coming full circle a second time.

HEDJ 12-11-15

EWG 12-11-15

Angela MerkelGood for You Angela

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Mad Hedge Fund Trader

Mr. Mario?s Big Surprise

Diary, Newsletter

ECB president Mario Draghi certainly let go of a lead balloon today.

Instead of announcing a 20 basis point cut in Euro interest rates, we only got 10.

The world blew apart.

The Euro rocketed against the dollar some 3.5% in minutes, the best gain since 2009, and one of the top ten moves of all time for the beleaguered continental currency.

US Treasury bonds crashed, giving up $3, and popping yields from 2.18% to 2.32%. Stocks fell to pieces globally. The Volatility Index (VIX) went through he roof.

Never mind that Draghi announced an extension of European quantitative easing by six more months to March 2017, or that the number of qualified securities for the central bank could buy was expanded.

All traders wanted was one more rally before yearend into which they could unload their sizable Euro shorts. When they didn?t get it, they panicked and stampeded for the exits.

It was your classic flash fire in the movie theater.

This is what happens when positioning in financial markets gets too one-sided. Risk managers talk about too many passengers in one side of the canoe. Everyone gets to go swimming.

That is why I quit rolling down the strikes on my Euro shorts three weeks ago, loathe to sell to much at the bottom. My one remaining short Euro position successfully weathered today?s spike, is still in the money, and only has ten trading until expiration.

The important takeaway here is that today?s moves were entirely technical, and had nothing to do with fundamentals, which always win out over time.

The meteoric move in the Euro did not occur because of a sudden burst of strength in the European economy. It didn?t take place because the ECB is raising rates.

So, I think this entire move is bogus. It is a typical December event, where all of the hot money wants to get out of the market within the next four weeks so they can close their books and start over again next year.

It is also a great lesson on what happens when you have too many hedge fund chasing the same few trades. It always ends in tears.

Which leads me to believe that the dramatic moves we saw today will reverse themselves shortly. Stocks (SPY) will soar, bonds (TLT) will rise modestly, and the Euro (FXE), (EUO) will take the express train downtown. The (VIX) will fade, again.

These gyrations could possibly take place as soon as Friday?s November nonfarm payroll report. All we need is a number north of 200,000, and it will be off to the raises once again.

I am so convinced of my convictions that I bought the Velocity Shares Daily Inverse VIX ETF (XIV) 30 minutes before the close (that?s the latest I can send out a Trade Alert and expect readers to have time to open and execute).

USE THE HEDGE FUNDS? PAIN FOR YOUR GAIN!

If you still hold a Euro short, keep it.

If you are underweight stocks, here is another fine entry point.

This is especially true for hedged European stocks (HEDJ), which have just opened an excellent entry point.

The (SPY) is only down 2.1% from its recent high, and off 3.7% from its all time high, hardly the stuff of bear markets, or even corrections.

XIV 12-3-15

VIX 12-3-15

XEU 12-3-15

TNX 12-3-15

SPX 12-3-15

HEDJ 12-3-15

MarioSurprise!

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Mad Hedge Fund Trader

Why Are the Markets Going Crazy?

Diary, Newsletter, Research

You would think that with US interest rates spiking up, as they have done for the past month, the US dollar would be strong. After all, interest rate differentials are the principal driver of foreign exchange rates.

But you would be wrong. The greenback has in fact pared 12% off its value against the Euro (FXE) during this period.

You also could be forgiven for thinking that weak economic growth, like the kind just confirmed by poor data in Q1, would deliver to us a rocketing bond market (TLT) and falling yields.

But you would be wrong again.

The harsh reality is that an entire range of financial markets have been trading the opposite of their fundamentals since April.

Have markets lost their moorings? Do fundamentals no longer account for anything?

Have the markets gone crazy?

It?s a little more complicated than that, as much as we would like to blame Mr. Market for all our failings.

Fundamentals are always the driver of assets prices over the long term. By this, I mean the earnings of companies, the GDP growth rates for the economies that back currencies, and the supply and demand for money in the bond market.

Geopolitics can have an influence as well, but only to the extent that they affect fundamentals. Usually, their impact is only psychological and brief (ISIS, the Ukraine, Syria, Libya, and Afghanistan).

However, and this is the big however, repositioning by big traders can overwhelm fundamentals and drive asset prices anywhere from seconds to months.

This is one of those times.

You see this in the simultaneous unwind of enormous one-way bets, that for a time, looked like everyone?s free lunch and rich uncle.

I?m talking about the historic longs accumulated in the bond markets over decades, not only in the US, but in Europe, Japan and emerging markets as well.

Treasury bonds have been going up for so long, some three decades, that the vast majority of bond portfolio managers and traders have never seen them go down.

A frighteningly vast number of investment strategies are based on the assumption that prices never fall for more than a few months at a time.

This is a problem, because bond prices can fall for more than a few months at a time, as they did like a lead balloon during the high inflation days from 1974 to 1982.

I traded Eurobonds during this time, and the free lunch then was to be short US Treasuries up the wazoo, especially low coupon paper. That trade will return someday, although not necessarily now.

What is making the price action even more dramatic this time around is the structural decline in market liquidity, which I out lined in glorious detail in my letter last week (The Liquidity Crisis Coming to a Market Near You).
You are seeing exactly the same type of repositioning moves occurring right now in the Euro/dollar trade.

I have been playing the Euro from the side for the past seven years, when it briefly touched $1.60.

All you had to do was spend time on the continent, and it was grotesquely obvious that the currency was wildly overvalued relative to the state of its horrendously weak currency.

Unfortunately, it took the European Central Bank nearly a decade to get the memo that the only way out of their economic problems was to collapse the value of the Euro with an aggressive program of quantitative easing.

This they figured out only last summer. By then, the Euro had already fallen to $1.40. After that, it quickly becomes a one-way bet, as every junior trader started unloading Euros with both hands. The result was to compress five years worth of depreciation into seven months.

Extreme moves in asset prices are always followed by long periods of digestion, or boring narrow range trading.

This is what you are getting now with the Euro. This is why I covered all my Euro shorts in April and went long, much to the satisfaction of my readers (click here for the Trade Alert). I have since taken profits on those longs, and am now short again (click here for that Trade Alert).

I think it could take six months of consolidation, or more, until we take another run at parity for the greenback.

The rally in the continental currency is taking place not because the economic fundamentals have improved, although they have modestly done so.

It has transpired because traders are taking profits on aged short positions, or stopping out of new positions at a loss because they were put on too late.

The Euro will remain strong only until this repositioning finishes, and the short term money is either flat on the Euro, or is long.

It will only be then that the fundamentals kick in, and we resume the downside once again.

I think it could take six months of consolidation, or more, until we take another run at parity for the greenback.

As I used to tell me staff at my hedge fund, if this were easy, everyone would be doing it, and it would pay peanuts. So quit complaining and get used to it.

FXE 5-15-15

FXE2 5-15-15

TLT 5-15-15

Whining Plaque

 

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Mad Hedge Fund Trader Hits 10% Profit in 2015

Diary, Newsletter

I am sitting here at the Lone Eagle Grill in Incline Village, Nevada, enjoying a rare solo lunch. No one is asking me about the future of interest rates, if there is any gold inside Fort Knox or if the aliens really landed at Roswell, New Mexico.

My table overlooks majestic Lake Tahoe, and a brace of mallard ducks has just skidded across the smooth surface for a landing.

My big score last night was coming across a wild bobcat, the first I had ever seen in the Sierras. After cautiously studying me for a minute with his bright yellow glowing eyes, he scampered up the mountain.

My pastrami sandwich is cooked to perfection, and would give Manhattan?s best culinary effort a run for its money. In fact, I have enough food here for two entire meals. Bring on the doggie bag!

After surviving a meat grinder of a January, putting the pedal to the metal in February, and dodging the raindrops of March, the model-trading portfolio of the Mad Hedge Fund Trader has posted a year-to-date gain of 10%.

We have generated profits for followers every month this year, and are now a mere 4.75% short of a new all time performance high.

Mad Day Trader, Jim Parker, and myself have performed like tag team wrestlers, delivering winners for our paid subscribers one right after the other. Some 12 out of my last 14 Trade Alerts have been profitable.

I managed to nail the collapse in the euro (FXE), (EUO) big time, backing that up with profitable long positions in the S&P 500 (SPY), the Russell 2000, and Gilead Sciences (GILD).

When the markets turned jittery, I coined it with short positions in Alcoa (AA), QUALCOM (QCOM) and AT&T (T).

Only a premature long in oil (LINE) and a short in Treasuries (TBT) have scarred my numbers so far this year.

Jim has been on an absolute hot streak in 2015, shaking the Bull Run in biotechs for all it is worth (ZIOP), (THRX), (ZTS) and executing some perfectly times shorts in oil (USO).

This is compared to the miserable performance of the Dow Average, which is up a pitiful +2% during the same period.

The nearly four and a half year return of my Trade Alert service is now at an amazing 162.4%, compared to a far more modest increase for the Dow Average during the same period of only 51%.

That brings my averaged annualized return up to 38.2%. Not bad in this zero interest rate world. It appears better to take on some risk and reach for capital gains and trading profits, than surrender to the paltry fixed income yields out there.

This has been the profit since my groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud.

What saved my bacon this month was my instant and accurate decoding of Fed chairman Janet Yellen?s cryptic comments on the future of possible interest rate hikes, or the lack thereof.

We got to eat our ?patience? and have it too.

Wall Street gets so greedy, and takes out so much money for itself, there is now nothing left for the individual investor any more. They literally kill the goose that lays the golden egg.

The Mad Hedge Fund Trader seeks to address this imbalance and level the playing field for the average Joe. Looking at the testimonials that come in every day, I?d say we?ve accomplished that goal.

It has all been a vindication of the trading and investment strategy that I have been preaching to followers for the past seven years.

Quite a few followers were able to move fast enough to cash in on my trading recommendations. To read the plaudits yourself, please go to my testimonials page by clicking here.

Watch this space, because the crack team at Mad Hedge Fund Trader has more new products and services cooking in the oven. You?ll hear about them as soon as they are out of beta testing.

Our business is booming, so I am plowing profits back in to enhance our added value for you.

The coming year promises to deliver a harvest of new trading opportunities. The big driver will be a global synchronized recovery that promises to drive markets into the stratosphere by the end of 2015.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, and 67.45% in 2013, and 30.3% in 2014.

Our flagship product,?Mad Hedge Fund Trader PRO, costs $4,500 a year. It includes?Global Trading Dispatch(my trade alert service and daily newsletter). You get a real-time trading portfolio, an enormous research database and live biweekly strategy webinars. You also get Jim Parker?s?Mad Day Trader?service and?The Opening Bell with Jim Parker.

To subscribe, please go to my website, ?www.madhedgefundtrader.com, click on the ?Memberships? located on the second row of tabs.

 

By the way, those of you who ran up huge profits with your euro shorts in January and February, and the overnight killing I scored with the Russell 2000 (IWM) this week, you all owe me new testimonials.

Ship em in!

Oh, and buy the way, there is no gold in Fort Knox. That is why Nixon took us off the gold standard in 1973. And the aliens did land at Roswell. Where do you think my iPhone and Tesla came from?

TA Performance

INDU 3-20-15

John ThomasLooking for the Next Great Trade

https://www.madhedgefundtrader.com/wp-content/uploads/2015/03/John-Thomas5.jpg 398 393 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2015-03-23 01:03:592015-03-23 01:03:59Mad Hedge Fund Trader Hits 10% Profit in 2015
Mad Hedge Fund Trader

Taking Profits on the Euro

Diary, Newsletter, Research

Occasionally the consensus is right.

Since the start of the year, it seems that everyone and his brother, sister and cleaning lady has been selling short the euro.

As a result, the beleaguered continental currency has suffered one of the sharpest falls in the history of the foreign exchange markets.

I have to think back three decades to recall something similar, when the Plaza Accord ignited a dramatic collapse in the US dollar against the Japanese yen, then trading at Y270.

Or you can recall back to January, when my friends at the Swiss National Bank engineered an overnight depreciation of the euro against the Swiss franc of 20%.

Those who followed my advice to sell short the euro last July have profited mightily. The (FXE) has plunged by 26% since then. Those who picked up the ProShares Ultra Short Euro 2X bear ETF (EUO) that I pleaded with you to buy did even better, capturing an eye popping 75% profit.

To read my prescient predictions about the imminent demise of the European currency, please click here for my 2015 Annual Asset Class Review.

With spectacular results like this, one has to ask whether we are seeing too much of a good thing, if this trade is getting rather long in the tooth, and if it is time to get while the getting is good.

The technical analysts certainly think so. The greenback is currently overbought and the euro oversold in the extreme, with RSI?s and momentum indicators off the charts.

For the statisticians out there, the euro?s move is 3.5 standard deviations away from the mean, something that is only supposed to happen every 100 years. And as we all know, mean reversion can be a real bitch.

On top of that, long-term market veterans will tell you that markets of all kinds naturally gravitate towards large round numbers. With the euro trading yesterday at the $1.03 handle, spitting distance from parity at $1.00, this is about as large of a round number that you will find anywhere.

So trying to catch the last three cents of a move from $1.40 to $1.00 is an awful trading idea, as the risk/reward is so poor.

My guess is that we will take a brief, peripatetic run at the $1.01 handle, and then develop a sudden case of acrophobia, or fear of heights. There will just be too many traders out there with enormous unrealized gains, begging to be exited.

I have not suddenly fallen in love with the euro. The pit from which its economy must extricate itself is deep, foreboding, and structural. But it is time to face facts. The only reason to add new euro positions here is to believe that it is going to 88 cents to the US dollar, and fast.

It could well do that. But the probability is much lower than we saw with the moves from $1.60 to $1.40 or from $1.40 to $1.03.

However, get me a decent price to sell at, like $1.08 or $1.10, and I?ll be back there again on the short side in a heartbeat.

You also must understand that the cure for a cheap euro is a cheap euro. Big continental exporters, like Daimler Benz, BMW and Volkswagen, are licking their chops at the prospects of booming sales, thanks to a newly devalued currency. Sooner or later, this will turn into robust economic growth.

If nothing else, you need to look at the Wisdom Tree Germany Hedged Equity Fund (DXGE), which will profit from this new business activity, and has already tacked on an impressive 24% in 2015. The Wisdom Tree International Hedged Equity Fund (HEDG) also looks pretty good.

As for me, I have already started planning my discount summer vacation in Europe in earnest.

Cappuccino, please!

EUO 3-12-15

USD 3-10-15

USDb 3-10-15

XJY 3-11-15

ChartI Remember it like it was Yesterday

 

Best 6 year Performance S&P

DXGE 3-12-15

John Thomas - beerThe Cheap Euro Works for Me

https://www.madhedgefundtrader.com/wp-content/uploads/2015/03/John-Thomas-beer.jpg 339 382 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2015-03-13 09:55:182015-03-13 09:55:18Taking Profits on the Euro
Mad Hedge Fund Trader

The Year of the Black Swan

Diary, Newsletter, Research

I?ve just spent the entire morning on the phone, and it?s clear that thousands of individuals, hedge funds and brokers have just been wiped out as a result of The Swiss National Bank?s surprise move to remove its cap against the Euro.

This is a black swan on steroids.

And it hasn?t just been Swiss franc positions that have been bedeviling traders. You can add to the list bonds, energy, and this week, financial stocks as well. All of a sudden, the world seems to have gone mad.

The great flaw in the management of big brokers and hedge funds is that they base their risk models on historic data. It is rare to see a foreign currency move more than 1% against the US dollar in a day. You might see that one-day a year.

Risk models, and margin requirements, are therefore based on this assumption. To bomb proof themselves, margin departments might require clients to post collateral assuming that a 2% or even a 3% move in a currency will happen tomorrow.

Even with an ultra conservative 3% margin requirement, a house would only be protected by a move in the underlying of 33%. Any move greater than that, the customer account is completely wiped out, leaving the broker on the hook for the balance of the loss if they can?t get clients to pony up more money.

Of course, US based brokers can always sue their former clients and get their money back that way. But that is a three-year process. Just ask anyone who went through the whole MF Global disaster.

As a former broker myself, I can tell you that clients wiped out by margin calls have a bad habit of disappearing, changing their names and moving to unpronounceable countries to bury the paper trail, or move beyond the reach of extradition treaties. So good luck with that one.

After speaking to several foreign exchange traders, it seems that the first tick after the SNB?s announcement was up a staggering 40% from the last print. The world had stop loss orders to sell Euros as market, and this was the fill they got.

It gets worse. Some brokers, particularly small, undercapitalized foreign ones, were only demanding 0.5% margin or less. These guys are toast, but it may take weeks to find out exactly who.

The news services this morning are ablaze with such losses. Citibank (C) has admitted to a $150 million hickey. Very conservative Interactive Brokers has fessed up to a $120 million hit. FXCM is thought to be out $225 million. All of a sudden, foreign exchange brokers everywhere are for sale at fire sale prices.

These aren?t just some interesting, entertaining and colorful market anecdotes that I?m providing you. The debacle is so severe that it has cast a black cloud over all asset classes.

You see this in the sharply diminished trading volumes in all instruments, from stocks, to options, to futures contracts and exchange traded funds.

If you have just heard of a colleague or a counterparty who has just gone under, trading any of the recent straight line one way moves, guess what? You don?t go out and bet the ranch.

Your risk appetite has been diminished for weeks, if not months. In fact, you may not want to trade at all. This is not good for markets of any description.

I have been through many of these. The best thing to do is to shrink your book, hedge up what?s left, and put your more aggressive tendencies on hold. You may have noticed that the model portfolio for my Trade Alert service has just done exactly that.

Come back only when it?s safe to play, and the markets gets easy again.

FXF 1-16-15

FXE 1-16-15

EUO 1-16-15

John Thoms - Black SwansWatch Out, They Can Bite

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Mad Hedge Fund Trader

Swiss Surprise Rattles Markets

Diary, Newsletter, Research

It was one of those moves that appeared so gigantic and so unreal that you had to blink, while checking the cables on the back of your computer and your broadband connection.

The Swiss franc has just skyrocketed by 17% against the dollar in one tick.

First the bad news: the rent on my summer chalet in Zermatt, Switzerland had just risen by 17%.

And the good news? Holders of the ProShares Ultra Short Euro ETF (EUO), which I have been pounding the table on for the past seven months, just instantly appreciated by nearly 10%.

In a market that rarely sees moves of more than 1% a day, 17% is positively earth shaking, if not unbelievable.

A quick scan of my Bloomberg revealed that the Swiss National Bank had eliminated its cap against the Euro. Until now, the central bank had been buying Euros and selling Swiss francs to keep its own currency from appreciating.

This was to subsidize domestic exports of machinery, watches, cheese, and chocolate with an artificially undervalued currency.

The SNB?s move essentially converts the country to a free float with its currency, hence the sudden revaluation. Switzerland has thus run up the white flag in the currency wars, the inevitable outcome for small countries in this game.

One wonders why the Swiss made the move. Their emergency action immediately knocked 10% off the value of the Swiss stock market (which is 40% banks), and 20% off some single names.

I was kind of pissed when I heard the news. Usually I get a heads up from someone in a remote mountain phone booth when something is up in Switzerland. Not this time. There wasn?t even any indication that they were thinking of such a desperate act. Even IMF Director, Christine Lagarde, confessed a total absence of advance notice.

Apparently, the Swiss knew that eliminating the cap would have such an enormous market impact that they could not risk any leaks whatsoever.

This removes the world?s largest buyer of Euro?s (FXE) from the market, so the beleaguered currency immediately went into free fall. The last time I checked, the (FXE) had hit a 12 year low at $114, and the (EUO) was pawing at an all time high.

My prediction of parity for the Euro against the greenback, made only a few weeks ago in my 2015 Annual Asset Review (click here) were greeted as the ravings of a Mad man. Now it looks entirely doable, sooner than later.

The Germans have to be thinking ?There but for the grace of God go I?. If the European Community?s largest member exited the Euro, which has been widely speculated, the new Deutschmark would instantly get hit with a 20% appreciation, then another, and another.

Your low end, entry level Mercedes would see its price jump from $40,000 to $80,000. Kiss the German economy goodbye. Political extremism to follow.

There was another big beneficiary of the Swiss action today. Gold (GLD) had its best day in years, at one point popping a gob smacking $40. After losing its way for years, the flight to safety bid finally found the barbarous relic.

It seems there is nowhere else to hide.

By the way, the rent on my Swiss chalet may not be going up that much. My landlord has already emailed me that whatever increase I suffer in the currency will be offset by a decline in the cost in local currency terms.

It seems that the almost complete disappearance of Russians from the European tourism market during the coming summer, thanks to the oil induced collapse of their economy, is emerging as a major drag on Alpine luxury rentals.

That?s the way it is in the currency world. What you make in one pocket, gets picked out of the other.

 

FXF 1-15-15

FXE 1-15-15

EUO 1-15-15

GLD 1-15-15

John Thomas - SwitzerlandThat Bratwurst is Suddenly More Expensive

https://www.madhedgefundtrader.com/wp-content/uploads/2015/01/John-Thomas-Switzerland.jpg 391 291 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2015-01-16 01:04:172015-01-16 01:04:17Swiss Surprise Rattles Markets
Mad Hedge Fund Trader

2014 Trade Alert Review

Diary, Free Research, Newsletter

When is the Mad Hedge Fund Trader a genius, and when is he a complete moron?

That is the question readers have to ask themselves whenever their smart phones ping, and a new Trade Alert appears on their screens.

I have to confess that I wonder myself sometimes.

So I thought I would run my 2014 numbers to find out when I was a hero, and when I was a goat.

The good news is that I was a hero most of the time, and a goat only occasionally. Here is the cumulative profit and loss for the 75 Trade Alerts that I closed during calendar 2014, listed by asset class.

Profit by Asset Class

Foreign Exchange 15.12%
Equities 12.52%
Fixed Income 7.28%
Energy 1.4%
Volatility -1.68%

Total 37.64%

Foreign exchange trading was my big winner for 2014, accounting for nearly half of my profits. My most successful trade of the year was in my short position in the Euro (FXE), (EUO).

I piled on a double position at the end of July, just as it became apparent that the beleaguered European currency was about to break out of a multi month sideway move into a pronounced new downtrend.

I then kept rolling the strikes down every month. Those who bought the short Euro 2X ETF (EUO) made even more.

The fundamentals for the Euro were bad and steadily worsening. It helped that I was there for two months during the summer and could clearly see how grotesquely overvalued the currency was. $20 for a cappuccino? Mama mia!

Nothing beats on the ground, first hand research.

Stocks generated another third of my profits last year and also accounted for my largest number of Trade Alerts.

I correctly identified technology and biotech as the lead sectors for the year, weaving in and out of Apple (AAPL) and Gilead Sciences (GILD) on many occasions. I also nailed the recovery of the US auto industry (GM), (F).

I safely stayed away from the energy sector until the very end of the year, when oil hit the $50 handle. I also prudently avoided commodities like the plague.

Unfortunately, I was wrong on the bond market for the entire year. That didn?t stop me from making money on the short side on price spikes, with fixed income chipping a healthy 7.28% into the kitty.

It was only at the end of the year, when the prices accelerated their northward trend that they started to cost me money. My saving grace was that I kept positions small throughout, doubling up on a single occasion and then coming right back out.

My one trade in the energy sector for the year was on the short side, in natural gas (UNG), selling the simple molecule at the $5.50 level. With gas now plumbing the depths at $2.90, I should have followed up with more Trade Alerts. But hey, a 1.4% gain is better than a poke in the eye with a sharp stick.

In which asset class was I wrong every single time? Both of the volatility (VIX) trades I did in 2014 lost money, for a total of -1.68%. I got caught in one of many downdrafts that saw volatility hugging the floor for most of the year, giving it to me in the shorts with the (VXX).

All in all, it was a pretty good year.

What was my best trade of 2014? I made 2.75% with a short position in the S&P 500 in July, during one of the market?s periodic 5% corrections.

And my worst trade of 2014? I got hit with a 6.63% speeding ticket with a long position in the same index. But I lived to fight another day.

After a rocky start, 2015 promises to be another great year. That is, provided you ignore my advice on volatility.

FXE 12-31-14

SPY 12-31-14

TLT 12-31-14

WTIC 12-31-14

VIX 12-31-14

Here is a complete list of every trade I closed last year, sorted by asset class, from best to worse.

Date

Position

Asset Class

Long/short

?

?

?

?

?

?

7/25/14

(SPY) 8/$202.50 - $202.50 put spread

equities

long

?

?

?

?

?

2.75%

10/16/14

(GILD) 11/$80-$85 call spread

equities

long

?

?

?

?

?

2.57%

5/19/14

(TLT) 7/$116-$119 put spread

fixed income

long

?

?

?

?

?

2.48%

4/4/14

(IWM) 8/$113 puts

equities

long

?

?

?

?

?

2.38%

7/10/14

(AAPL) 8/$85-$90 call spread

equities

long

?

?

?

?

?

2.30%

2/3/14

(TLT) 6/$106 puts

equities

long

?

?

?

?

?

2.27%

9/19/14

(IWM) 11/$117-$120 put spread

equities

long

?

?

?

?

?

2.26%

10/7/14

(FXE) 11/$127-$129 put spread

foreign exchange

long

?

?

?

?

?

2.22%

9/26/14

(IWM) 11/$116-$119 put spread

equities

long

?

?

?

?

?

2.21%

4/17/14

(TLT) 5/$114-$117 put spread

fixed income

long

?

?

?

?

?

2.10%

8/7/14

(FXE) 9/$133-$135 put spread

foreign exchange

long

?

?

?

?

?

2.07%

10/2/14

(BAC) 11/$15-$16 call spread

equities

long

?

?

?

?

?

2.04%

4/9/14

(SPY) 5/$191-$194 put spread

equities

long

?

?

?

?

?

2.02%

10/15/14

(DAL) 11/$25-$27 call spread

equities

long

?

?

?

?

?

1.89%

9/25/14

(FXE) 11/$128-$130 put spread

foreign exchange

long

?

?

?

?

?

1.86%

6/6/14

(JPM) 7/$52.50-$55.00 call spread

equities

long

?

?

?

?

?

1.81%

4/4/14

(SPY) 5/$193-$196 put spread

equities

long

?

?

?

?

?

1.81%

3/14/14

(TLT) 4/$111-$114 put spread

fixed income

long

?

?

?

?

?

1.68%

10/17/14

(AAPL) 11/$87.50-$92.50 call spread

equities

long

?

?

?

?

?

1.56%

10/15/14

(SPY) 11/$168-$173 call spread

equities

long

?

?

?

?

?

1.51%

7/3/14

(FXE) 8/$138 put spread

foreign exchange

long

?

?

?

?

?

1.51%

10/9/14

(FXE) 11/$128-$130 put spread

foreign exchange

long

?

?

?

?

?

1.48%

9/19/14

(FXE) 10/$128-$130 put spread

foreign exchange

long

?

?

?

?

?

1.45%

10/22/14

(SPY) 11/$179-$183 call spread

equities

long

?

?

?

?

?

1.44%

5/29/14

(TLT) 7/$118-$121 put spread

fixed income

long

?

?

?

?

?

1.44%

2/24/14

(UNG) 7/$26 puts

energy

long

?

?

?

?

?

1.40%

2/24/14

(BAC) 3/$15-$16 call spread

equities

long

?

?

?

?

?

1.39%

6/23/14

(SPY) 7/$202 put spread

equities

long

?

?

?

?

?

1.37%

9/29/14

(SPY) 10/$202-$205 Put spread

equities

long

?

?

?

?

?

1.29%

5/20/14

(AAPL) 7/$540 $570 call spread

equities

long

?

?

?

?

?

1.22%

9/26/14

(SPY) 10/$202-$205 Put spread

equities

long

?

?

?

?

?

1.22%

5/22/14

(GOOGL) 7/$480-$520 call spread

equities

long

?

?

?

?

?

1.16%

5/19/14

(FXY) 7/$98-$101 put spread

foreign exchange

long

?

?

?

?

?

1.14%

1/15/14

(T) 2/$35-$37 put spread

equities

long

?

?

?

?

?

1.08%

3/3/14

(TLT) 3/$111-$114 put spread

fixed income

long

?

?

?

?

?

1.07%

1/28/14

(AAPL) 2/$460-$490 call spread

equities

long

?

?

?

?

?

1.06%

4/24/14

(SPY) 5/$192-$195 put spread

equities

long

?

?

?

?

?

1.05%

6/6/14

(CAT) 7/$97.50-$100 call spread

equities

long

?

?

?

?

?

1.04%

7/23/14

(FXE) 8/$134-$136 put spread

foreign exchange

long

?

?

?

?

?

0.99%

8/18/14

(FXE) 9/$133-$135 put spread

foreign exchange

long

?

?

?

?

?

0.94%

11/4/14

(BAC) 12/$15-$16 call spread

equities

long

?

?

?

?

?

0.88%

4/9/14

(SPY) 6/$193-$196 put spread

equities

long

?

?

?

?

?

0.88%

7/25/14

(SPY) 8/$202.50 -205 put spread

equities

long

?

?

?

?

?

0.88%

6/6/14

(MSFT) 7/$38-$40 call spread

equities

long

?

?

?

?

?

0.87%

10/23/14

(FXY) 11/$92-$95 puts spread

foreign exchange

long

?

?

?

?

?

0.86%

7/23/14

(TLT) 8/$117-$120 put spread

fixed income

long

?

?

?

?

?

0.81%

3/5/14

(DAL) 4/$30-$32 Call spread

equities

long

?

?

?

?

?

0.76%

4/10/14

(VXX) long volatility ETN

equities

long

?

?

?

?

?

0.76%

1/30/14

(UNG) 7/$23 puts

equities

long

?

?

?

?

?

0.66%

4/1/14

(FXY) 5/$96-$99 put spread

foreign currency

long

?

?

?

?

?

0.60%

1/15/14

(TLT) 2/$108-$111 put spread

equities

long

?

?

?

?

?

0.47%

3/6/14

(EBAY) 4/$52.50- $55 call spread

equities

long

?

?

?

?

?

0.24%

10/14/14

(TBT) short Treasury Bond ETF

fixed income

long

?

?

?

?

?

0.22%

3/28/14

(VXX) long volatility ETN

equities

long

?

?

?

?

?

0.20%

7/17/14

(TBT) short Treasury Bond ETF

fixed income

long

?

?

?

?

?

0.08%

3/26/14

(VXX) long volatility ETN

equities

long

?

?

?

?

?

0.06%

7/8/14

(TLT) 8/$115-$118 put spread

fixed income

long

?

?

?

?

?

-0.18%

4/28/14

(SPY) 5/$189-$192 put spread

equities

long

?

?

?

?

?

-0.45%

3/5/14

(GE) 4/$24-$25 call spread

equities

long

?

?

?

?

?

-0.73%

4/28/14

(VXX) long volatility ETN

volatility

long

?

?

?

?

?

-0.81%

4/24/14

(TLT) 5/$113-$116 put spread

fixed income

long

?

?

?

?

?

-0.87%

4/28/14

(VXX) long volatility ETN

volatility

long

?

?

?

?

?

-0.87%

6/6/14

(IBM) 7/$180-$185 call spread

equities

long

?

?

?

?

?

-1.27%

9/30/14

(SPY) 11/$185-$190 call spread

equities

long

?

?

?

?

?

-1.51%

10/9/14

(TLT) 11/$122-$125 put spread

fixed income

long

?

?

?

?

?

-1.55%

9/24/14

(TSLA) 11/$200 call spread

equities

long

?

?

?

?

?

-1.62%

2/27/14

(SPY) 3/$189-$192 put spread

equities

long

?

?

?

?

?

-1.67%

3/6/14

(BAC) 4/$16 calls

equities

long

?

?

?

?

?

-2.01%

10/14/14

(SPY) 10/$180-$184 call spread

equities

short

?

?

?

?

?

-2.13%

11/14/14

(BABA) 12/$100-$105 call spread

equities

short

?

?

?

?

?

-2.38%

10/20/14

(SPY) 11/$197-$202 call spread

equities

short

?

?

?

?

?

-2.72%

7/3/14

(GM) 8/$33-$35 call spread

equities

long

?

?

?

?

?

-2.91%

3/7/14

(GM) 4/$34-$36 call spread

equities

long

?

?

?

?

?

-2.96%

11/25/14

(SCTY) 12/47.50-$52.50 call spread

equities

long

?

?

?

?

?

-3.63%

10/20/14

(SPY) 11/$197-$202 call spread

equities

short

?

?

?

?

?

-4.22%

4/14/14

(SPY) 5/$188-$191 put spread

equities

long

?

?

?

?

?

-6.63%

 

John Thomas - BeachWhat a Year!

https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/John-Thomas-Beach-e1416856744606.png 400 276 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2015-01-15 09:01:572015-01-15 09:01:572014 Trade Alert Review
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