That is what the head of Greece?s opposition party said this morning in the wake of elections where voters resoundingly rejected austerity in any way, shape, or form. Ditto for France, where the Socialists rode a wave of resentment against the incumbent conservative government. Looks like I will have to pack a red scarf and schedule some time for manning the barricades during my upcoming Paris strategy luncheon. My front teeth are still kicking around somewhere on the Left Bank from the last time this happened, in 1968.
The results couldn?t have been more decisive, with president Francois Hollande capturing 51.7% compared to a stumbling 48.3% for Nicolas Sarkozy. Sarkozy conceded defeat five minutes after the polls closed, and presumably went back to the ?lys?e Palace with his fashion model wife, Carla, to start packing. After studying Carla?s picture below for a considerable amount of time, I would have to say that Sarkozy was the real winner of this election, as he now has plenty of free time to spend at home.
It turns out that I was also a winner of the French elections, as I went into them short the Russell 2000 (IWM), the Euro (FXE), Boeing (BA), Pulte Homes (PHM), and US Treasury bonds (TBT). Overnight, the S&P 500 (SPX) traded all the way down to 1,354 before rebounding during US time, putting 1,325 on the table.
Only my short in the Yen (FXY) came back to bite me, and that was just a nibble. I also used the big volatility spike last week to establish substantial short volatility positions which are doing quite well today. I think we may be able to really coin it in coming weeks with these positions, before the summer doldrums set in.
Longer term, I believe that the outcome of the weekend European elections will be a longer period of uncertainty with greater volatility for financial markets. If Europe kept you awake at nine before, now you have even more reasons to become a late nigh TV rerun addict.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/05/carla-bruni.jpg400351DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-07 23:03:552012-05-07 23:03:55Greece to Germany: Drop Dead!
All eyes are now focused on Spain, where last week?s failed bond auction took yields back over 6% for ten year paper, and the pain is clearly not confined to the plain. But longer term focused analysts are wondering if France is really the next big over ripe piece of fruit to fall in Europe. Is France really a PIIG in sheep?s clothing?
The structural economic data are not good. Public debt is now at a nosebleed 90% and rocketing. Public spending soaks up 56% of GDP, more than any other Eurozone country.? Banks are severely undercapitalized. The unemployment rate has been stuck over 7% for more than 30 years. Nor has the country had a balanced budget for three decades. Exports are feeble compared to robust Germany. When was the last time you bought a Renault, a Hermes scarf for your significant other, or an Yves Saint Laurent suit for yourself?
The presidential election, which will be held in two rounds on April 22 and May 6 is not giving investors any cause for comfort. The embattled incumbent, Nicolas Sarkozy, wants to ramp up protectionism, soak French tax exiles, restrict immigration, and withdraw from Europe?s passport free Schengen zone.
Socialist Fran?ois Hollande, who is now ahead in some polls, wants a larger government, to hire 60,000 teachers, cut the retirement age from 62 to 60, and raise the maximum tax rate to 75%. Communist Jean-Luc M?lenchon is picking up support and insists that France should withdraw from NATO, instantly raise the minimum wage by 20%, and raise the top tax rate to 100%.
Please excuse me if I sound like I am stupide, an imb?cile, or a b?te, but aren?t all of these proposals guaranteed to send French deficits soaring, requiring them to dramatically increase their international borrowing? Don?t you think the LTRO has its hands full enough bailing out Portugal, Italy, Ireland, Greece, and Spain? This would be hugely equity negative.
Is it possible that the candidates are willing to sacrifice the French stock market in order to get elected? That has already been the case in the bond market, where investors have been fleeing en masse, sending yields spiking once more. Perhaps this is in response to Moody?s yanking of the country?s AAA status earlier this year.
This all sets up the land of Gitanes and Gauloises chain smokers as an enticing short for global fund managers. The easy play for US based investors is the France iShares ETF (EWQ), which you can sell short on margin, or buy puts. Wait for a rally to get a decent entry point.
For those amphibian readers who wish to debate my long term outlook for Gaul further and perhaps throw some stale croissants and some overage camembert at me, please buy a ticket to my July 17 Paris strategy luncheon by clicking here. Hopefully, you will be over your Bastille Day hangovers by then.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/04/Gitanes.jpg164215DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-04-16 23:13:282012-04-16 23:13:28Is France the Next PIIG?
Wednesday will be all about the Euro. That is the day that the European Central Bank announces the result of the next tranche of its quantitative easing program, the LTRO, or Long Term Financial Reorganization policy.
This is the program that allows European banks to borrow unlimited funds at 1% with no questions asked. This is very important for all asset prices worldwide, since the cash pouring out of the continent has been the primary driver of asset prices skyward since December.
It is safe to say that ?500 billion is in the price. That is what the beleaguered currency?s rally from $1.26 to $1.35 has been all about. The unwind of Euro shorts in the sterling and yen crosses have also been a factor. If the ECB delivers ?1 trillion instead, the Euro will pop to $1.37 and risk assets everywhere will rally. If they don?t, expect a low volume bleed off in prices, and the long awaited correction to begin. It is a coin toss which way it will go, so I shall watch from the sidelines.
Anticipation of more sugar infusions from the government has sparked the monster rally in the sovereign debt markets that I predicted last month. Spanish ten year bonds have fallen from 5.8% to 5.5%, while similar Italian yields have made it all the way down from 6.0% to 5.4%. That is quite a long way from the 8.0% peak we saw as recently as December.
Oil has been another new assist juicing the Euro. If the Euro falls, then the local cost of fuel in Europe would rise sharply, as oil is prices in dollars. This would exacerbate the recession already in progress on the continent. These concerns could prompt ECB president Mario Draghi to delay further interest rates cuts, generating more Euro strength.
If we do get the move to $1.37, that should clean out a big chunk of the remaining shorts, which have dropped recently, but are still huge. Since January 24, total shorts have fallen to 142,000 contracts, down from the all-time high of 171,000 contracts. That works out to $17 billion of underlying remaining on the short side.
Get the Euro back up to $1.37 and it might become an attractive short again. It?s just a matter of time before the market refocuses on Europe?s underlying fundamentals, and those are dramatically worsening by the day.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-02-28 23:04:212012-02-28 23:04:21It?s All About the Euro
I am writing this report from a first class cabin on Amtrak?s California Zephyr en route from Chicago to San Francisco. The majestic snow covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sage brush and salt flats of Northern Nevada outside my window, so there is nothing else to do but to write. My apologies to readers in Wells, Elko, Battle Mountain, and Winnemucca. It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my immigrant forebears in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80.
After making the rounds with strategists, portfolio managers, and hedge fund traders, I can confirm that 2011 was the most hellacious in careers lasting 30, 40, or 50 years. With the S&P 500 up 0.4% 2011, following a roaring 0.04% decline in 2010, the average hedge fund was up a pitiful 1%, and thousands lost money.
It is said that those who ignore history are doomed to repeat it. I am sorry to tell you that we are about to endure 2011 all over again. You can count on another 12 months of high volatility, gap moves at the opening, tape bombs, a lot of buying of rumors and selling of news, promises and disappointments from governments, and American markets being held hostage to developments overseas.
If you lost money in 2011, you will probably do so again in 2012, and should consider changing your line of work. It takes a special kind of person to make money in markets like these; someone who thrives on raw data and ignores the hype and the spin, who invests based on facts and not beliefs, and who thinks all things can happen at all times.? In other words, you need somebody like me, as my 40% return last year will attest. Those who don?t think they are up to it might consider pursuing that long delayed ambition to open a trendy restaurant, the thoughtful antique store, or finally get their golf score down to 80.
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:
*Long term structural issues will overwhelm short term positives.
*Corporate profits continue to grow, but at a much slower rate, reaching diminishing returns.
*2009 stimulus spending is a distant memory, and there will be no replays.
*Bush tax cuts expire, creating a 1% drag on GDP.
*An epochal downsizing continues by state and local governments, chopping another 2-3% off of GDP.
*A recession in Europe further reduces American growth by 1%.
*Expect an actual default out of the continent in 2012, certainly from Greece, possibly also from Portugal and Ireland.
*There will be no QE3, since QE2 never filtered down to the real economy. There is little the Fed can do to help us.
*Huge demographic headwinds bring another leg down in the residential real estate market.
*The first baby boomer hit 65 last year and it is now time to pay the piper on entitlements.
*The new hot button social issue will become ?senior homelessness,? as millions retire without a cent in the bank and are unable to find jobs.
*Falling home prices bring secondary banking crisis, but this time there will be no TARP and no bail outs
*Gridlock in Washington prevents any real government solution, and there is nothing they can do anyway.
*Candidates from both parties will attempt to convince us that their opponents are crooks, thieves, idiots, or ideologues, and largely succeed. That will leave the rest of us confused and puzzled, and less likely to invest or hire.
*Unemployment remains stuck at an 8-9% level, then ratchets up to 15%. The real, U-6 rate soars to 25%.
Now let me give you a list of possible surprise positives, which may mitigate the list of negatives above.
*American multinationals continue to squeeze more blood out of a turnip and post stellar earnings increases yet again.
*China successfully slams the breaks on the real estate market without cutting the rest of the economy off at the knees and engineers a soft landing with 7%-8% GDP growth.
*Europe somehow pulls a new treaty out of its hat that addresses its structural financial and monetary shortfalls a decade ahead of schedule.
*Through some miracle, the American consumer keeps spending at the expense of a declining savings rate. There is evidence that this has been going on since October.
The Election Will Not Be Good for Risk Assets
So, let me summarize what your 2012 will look like. The ?RISK ON? trade that started on October 4 will spill into the new year, driven by value players loading up on cheap multinationals, chased by frantically short covering hedge funds, hitting a peak sometime in Q1. The S&P 500 could reach 1,350. In Q2 and Q3 traders will have to deal with flocks of black swans, giving 4-7 months of the ?RISK OFF? trade. We should rally into Q4 as markets discount the end of the election cycle. It really makes no difference who wins. The mere disappearance of electioneering will be positive for risk takers.
I Said ?Black Swans,? Not Crows!
The Thumbnail Portfolio
Equities-A ?V? shaped year, up, down, then up again Bonds-Treasuries grind towards new 60 year peaks, then an eventual collapse Currencies-dollar up and Euro and Australian, Canadian and New Zealand dollars down Commodities-Look to buy for a long term hold mid-year Precious Metals-take a longer rest, then up again Real estate-multifamily up, single family down, commercial sideways
1) The Economy-The Second Lost Decade Continues
I am sticking with a 2% growth forecast for 2012. I see the huge list of negatives above that add up to at least a 5% drag on the economy. There is only one positive that we can really count on. Corporate earnings will probably come in at $105 a share for the S&P 500 this year, a gain of 15% over the previous year, and a double off the 2008 lows. During the last three years we have seen the most dramatic increase in earnings in history, taking them to all-time highs, no matter how much management complains about over regulation.
Can the magic continue? I think not. Slowing economies in China and Europe will fail to deliver the stellar gains seen in 2011, which account for half the profits of many large multinationals.? A global economy that grew at 4.1% in 2010 and 2.5% in 2011 will probably eke out only a subdued 1.5% in 2012. A strong dollar will further eat into foreign revenues.
Cost cutting through layoffs is reaching an end as there is no one left to fire. Growing companies can?t delay new hires forever. That leaves technology as the sole remaining source of margin increases, which will continue its inexorable improvements. So corporate earnings will rise again in 2012, but possibly only by 5%-10%? to $105-$110 for the $S&P 500. Hint: technology will be the top performing sector in the market in 2012, with Apple (AAPL) taking the lead.
Deleveraging will remain a dominant factor affecting the economy for another 5-8 years. Much of the hyper growth we witnessed over the past 30 years, possibly half, was borrowed from the future through excessive credit, and it is now time to pay the piper. We are still at the beginning of a second lost decade. Don?t expect a robust GDP while governments, corporations, and individuals are sucking money out of the economy. This lines up nicely with my 2% target.
Forget about employment. The news will always be bad. I believe that the US has entered a period of long term structural unemployment similar to what Germany saw in the 1990?s. Yes, we may grind down to 8% before the election. But the next big move in this closely watched indicator is up, possible as high as 15%. Keep close tabs on the weekly jobless claims that come out at 8:30 AM Eastern every Thursday for a good read of the financial markets to head in a ?RISK ON? or ?RISK OFF? direction.
With a GDP growing at a feeble 2% in 2012, and corporate earnings topping out at $105-$110 a share, those with a traditional buy and old approach to the stock market will fare better taking this year off. While earnings are growing, multiples will shrink from 13 to 12, multiple? for the indexes unchanged. It is also possible that the economy will never meet the textbook definition of a recession, that of two back to back quarters of negative GDP numbers.? But the market will think the economy is going into recession and behave accordingly. ?Double dip? will get dusted off one again. Remember how ?Sell in May and Go Away? has worked so well for the past three years? This year you may want to sell in January.
I am looking for some new liquidity from value players and additional short covering to spill over into the New Year, possibly taking us up to 1,325-$1,350. If we get that high, take it as a gift, as the big hedge funds will be very happy to pile on the leveraged shorts at the top of a multiyear range.
A continuing stream of positive economic data will also help. Since we don?t have the ?oomph? offered by the tax compromise and QE2 a year ago, look for equities to peak much earlier than the April 29 apex we saw in 2011. The trigger for this deluge could be a sudden spike in jobless claims as the temporary Christmas hires are fired combined with economic data that cools coming off a hot Q4.
Let me tell you why the value players up here don?t get it. A 2% growth rate doesn?t justify the 10-22 price earnings multiple range that we have enjoyed during the last 30 years. At best it can support an 8-16 range, or maybe even the 6-15 range that prevailed when I first started on Wall Street 40 years ago. That makes the current 13 multiple look cheap according to old models, but expensive in the new paradigm.
When the guys in the white coats show up to drag away the value managers, they will be screaming that ?They were cheap,? all the way to the insane asylum. What these hapless souls didn?t grasp was that we are only four years into a secular, decade long downtrend in PE multiples, the bottom for which is anyone?s guess.
After that, the way should be clear for a 25% swoon down to 1,000, which will happen sometime in Q2 or Q3. That will be caused by a ton of new short selling triggered by the break of the 2011 low at 1,070, which then get stopped out on the upside. The heating up of trouble with Iran is another unpredictable variable, which is really just a pretext for attacking Syria, their only ally. How will the market decline in the face of growing earnings? That is exactly what markets did in 2011, once the fear trade was posted on the mast for all to see?
Crash, we won?t, and this is what my Armageddon friends don?t get. To break to new lows, you need sellers, and lots of them. Those were in abundance in 2008, when the bear market caught many completely by surprise, everyone was leveraged to the hilt, and risk controls provided all the security of wet tissue paper.
This time around it?s different. Prime brokers now require a pound of flesh as collateral, especially in the wake of the MF Global Bankruptcy, and leverage as almost an extinct species. In the meantime, individuals have been decamping from stocks en masse, with equity mutual fund sales over the past three year hitting $400 billion, compared to $800 billion in bond fund purchases. That will leave hedge funds the only players at an (SPX) of 1,000, who will be loath to run big shorts at multiyear bottoms. You can?t have a crash if there is no one left to sell.
That gives us the juice to rally into Q4, just as the presidential election is coming to an end. It really makes no difference who wins, as long as one doesn?t get control all three branches of government. My money is on Obama, who has the highest approval rate in history with unemployment at 8.6%. The mere fact that the election is over will lift a cloud of uncertainty overhanging risk assets. It will be a real stretch to hope that stock markets will close unchanged in 2012, as we did in 2011. My expectation is for a single digit loss for 2012.
This Could? be the Big Trade of 2012
Equities will be no place for old men
3) Bonds?? (TBT), (JNK), (PHB), (HYG), (PCY)
The single worst call by myself and the hedge fund industry at large this year was that massive borrowing by the Federal government would cause the Treasury bond market to collapse. Not only did it fail to do so, it blasted through to new 60 year highs, sending ten year yields to 1.80%, which adjusted for inflation is a real negative yield of -1.5% a year.
Investors today will get back 80 cents worth of purchasing power at maturity for every dollar they invest. But institutions and individuals will grudgingly lock in these appalling returns because they believe that the losses in any other asset class will be much greater.
What I underestimated was the absolute perniciousness of today?s deflation. The price for everything you want to sell is continuing a relentless fall, including your home and your labor.? The cost of the things you need to buy, like food, energy, health care, and education, is rocketing. Globalization is the fat on the fire. I call this ?The New Inflation?. This goes a long way in explaining the causes behind a 30 year decline in the middle class standard of living.
The other thing I miscalculated on was how rapid contagion fears spread from Europe. When the world gets into trouble, everyone picks up their marbles and goes home. For the financial markets, that translates into massive buying of the core ?flight to safety? assets of the US dollar and Treasury bonds.
While much of the current political debate centers around excessive government borrowing, the markets are telling us the exact opposite. A 1.80%, 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. Given the choice between what a politician wants me to believe and the harsh judgment of the marketplace, I will take the latter every time.
So what will 2012 bring us? More of the same. For a start, we have seen a substantial ?RISK ON? rally for the past three months where equities tacked on a virile 20% gain. Bond yields have ticked up barely 30 basis points from the lows, not believing in the longevity of this rally for one nanosecond. That tells me that the next equity sell off could see Treasury yields punch through to new lows, possibly down to 1.60%. Given even a modest recession, bond yields could touch 1%.
Surveying the rocky landscape that lies ahead of me, I expect to get five months of ?RISK ON? conditions and a turbulent and volatile seven months of ?RISK OFF?. This augers very well for a continuation of the bull market in Treasuries at least until August.
This scenario does not presage a good year for the riskiest corner of the fixed income asset class - junk bonds, whose default rates are not coming in anywhere near where they were predicted just a few months ago. Don?t get enticed by the siren song of high yields by the junk ETF?s, like (JNK), (PHB), and the (HYG). There will be better buying opportunities down the road.
As for municipal bonds, we are seeing only the opening act of a decade of fiscal woes by local government. Still, 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 muni values. The continued bull market in Treasuries will do the same.
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. Be sure to consult with a local financial advisor to max out the state, county, and city tax benefits. And thank Meredith Whitney for creating the greatest buying opportunity in history for muni bonds a year ago.
Perhaps the best place to live in bond world is in emerging market debt, where you can participate via the (PCY). At least there, you have the tailwinds of strong economies, little outstanding debt, appreciating currencies, and already high interest rates. But don?t buy here. This is something you want to pick up at the nadir of a ?RISK OFF? cycle, when the dollar and Treasury markets are peaking.
(FXC)
The Fat Lady Will Have to Wait to Sing for the Treasury Market
Any trader will tell you to never bet against the trend, and the overwhelming direction for the US dollar for the last 220 years has been down. The only question is how far, how fast. Going short the currency of the world?s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer.
But once it became every hedge fund trader?s free lunch, and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic bear market corrections, which began in March and could continue for several more months, or even years.
The big driver of the currency markets is interest rate differentials. With US interest rates safely at zero, and the rest of the world chopping theirs as fast as they can, this will provide a very strong tailwind for the greenback for much of 2012. Use rallies to sell short the Euro (FXE), (EUO), the Canadian dollar (FXC), the high beta Australian dollar (FXA), and the lagging New Zealand dollar (BNZ). Australians could see a print of 85 cents before the bloodletting is over, and should pay for their upcoming imports and foreign vacations now, while their currency is still dear.
The Euro presents a particular quandary for foreign exchange traders, with a never ending sovereign debt crisis causing its death through a thousand cuts. Just look at Greece, with a budget deficit of 13% of GDP against the 3% it promised on admission to the once exclusive club. But this is not exactly new news, and traders have already built shorts to all-time records. Still, the next crisis in confidence could easily take the Euro to $1.25, and new momentum driven shorts could take us to the $1.17?s.
As far as the Japanese yen is concerned, I am going to stay away. How the world?s worst economy has managed to maintain the planet?s strongest currency is beyond me. 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. But until someone provides me with a convincing explanation, or until the yen decisively reverses, I?ll pass. Let hedge fund manager, Kyle Bass, figure this one out.
For a sleeper, use the next plunge in emerging markets to buy the Chinese Yuan ETF (CYB) for your back book, but don?t expect more than single digit returns. The Middle Kingdom will move heaven and earth to in order to keep its appreciation modest to maintain their crucial export competitiveness.
This is my favorite asset class for the next decade, as investors increasingly catch on to the secular move out of paper assets into hard ones. Don?t buy anything that can be manufactured with a printing press. Focus instead on assets that are in short supply, are enjoying an exponential growth in demand, and take five years to bring new supply online. The Malthusian argument on population growth also applies to commodities; hyperbolic demand inevitably overwhelms linear supply growth.
Of course, we?re already nine years into what is probably a 30 year secular bull market for commodities and these things are no longer as cheap as they once were. You?ll never buy copper again at 85 cents a pound, versus today?s $3.40. You are going to have to allow these things to breathe. Ultimately, this is a demographic play that cashes in on rising standards of living in the biggest and highest growth emerging markets. You can start with the traditional base commodities of copper and iron ore.
The derivative equity plays here are Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE). Add the energies of oil (DIG), coal (KOL), uranium (NLR), and the equities Transocean (RIG), Joy Global (JOY), and Cameco (CCJ).
As much as I love the long term case for hard commodities, I am not expecting any action in the immediate future. Commodities will remain a no go area until it is clear whether China?s economy will suffer a soft or a hard landing, or continues to remain airborne. Use this year?s big ?RISK OFF? trade to acquire serious positions. If markets rally into year end, you might catch a quick 50% gain in the more volatile securities.
Oil has in fact become the new global de facto currency, and probably $30 of the current $100 price reflects monetary demand, and another $30 representing a Middle Eastern risk premium. Strip out these factors, and oil should be trading at $40.? That will help it grind to $100 sometime in early 2012, and we could spike as high as $120. After that, the ?RISK OFF? trade could take it back down to the $75 we saw in September.
Skip natural gas (UNG), 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. Major reforms are required in Washington before use of this molecule goes mainstream.
The food commodities are also a great long term Malthusian play, with corn (CORN), wheat (WEAT), and soybeans (SOYB) coming off the back of great returns in 2010. These can be played through the futures or the ETF?s (MOO) and (DBA), and the stocks Mosaic (MOS), Monsanto (MON), Potash (POT), and Agrium (AGU). The grain ETF (JJG) is another handy play. Though an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cake walk. You can participate in this most liquid of asset with the ETF?s (PHO) and (FIW).
Let?s face it, gold is not a hard asset anymore, it?s a paper one. Since hedge funds and high frequency traders moved into this space, the barbarous relic has been tracking one for one with the S&P 500 and other risk assets.
The chip shot here is $1,500 on the downside, once the remaining hedge fund redemptions and other hot money are cleared out. If we have a real recession this year, $1,050 might be doable. Remember, the speculative frenzy is as great as it was in 1979, which saw the beginning of a 75% plunge in the yellow metal.
But the long term bull case is still there. Obama has not suddenly become a paragon of fiscal restraint. Bernanke has not morphed into a tightwad. When I pull a dollar bill out of my wallet, it?s as limp as ever.
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 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. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP). But you should only go into these as part of a broader ?RISK ON? move.
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. Palladium (PALL) and platinum (PPLT), which have their own auto related long term fundamentals working on their behalf would also be something to consider on a dip.
Here?s a Nice Busted Bubble
6) Real Estate
There is no point in spending much time on this most unloved of asset classes, so I?ll keep it brief. There are only three numbers you need to know in the housing market: there are 80 million baby boomers, 65 million Generation Xer?s who follow them, and 85 million in the generation after that, the Millennials.
The boomers have been desperately trying to unload dwellings to the Gen Xer?s since prices peaked in 2007. But there are not enough of them, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. If they have prospered, banks won?t lend to them.
Now consider the coming changes that will affect this market. The home mortgage deduction is unlikely to survive any attempt to balance the budget. And why should renters be subsidizing homeowners anyway? Nor is the government likely to spend billions keeping Fannie Mae and Freddie Mac alive, which now account for 95% of home mortgages.
That means the home loan market will be privatized, leading to mortgages rates 200 basis points higher than today. If this sounds extreme, look no further than the jumbo market for proof. It is already bereft of government subsidy, and loans here are now priced at premiums of this size. This also means that the fixed rate 30 year loan will disappear, as banks seek to offload duration risk to consumers. This happened long ago in the rest of the developed world.
There is a happy ending to this story. By 2025 the Millennials will start to kick in as the dominant buyers in the market. Some 85 million Millennials will be chasing the homes of only 65 Gen Xer?s, causing housing shortages and rising prices. This will happen in the context of a labor shortfall and rising standards of living. In fact, the mid 2020?s could bring a repeat of our last golden age, the 1950?s.
The best case scenario for residential real estate is that it bounces along a bottom for another decade. The worst case is that it falls another 25% from here. Only buy a home if your wife is nagging you about living in that cardboard box under the freeway overpass. 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. Then pray that the price starts to go up in 15 years. Rent, don?t buy.
Rent, Don?t Buy
Well, that?s all for now. We?ve just passed the Pacific mothball fleet and we?re crossing the Benicia Bridge, where the Sacramento River pours into San Francisco Bay. The pressure drop caused by an 8,000 foot descent from Donner Pass has crushed my water bottle. The Golden Gate and the soaring spire of the Transamerica building are just around the next bend. So it is time for me to unglug my laptop and pack up.
I?ll shoot you a trade alert whenever I see a window open on any of the trades above. Good trading in 2012!
The coming bear trap that I warned about last week sprung this morning on the non-subscribing unwary, triggering panic buying by short sellers in all ?RISK ON? assets. Oil (USO), gold (GLD), silver (SLV), copper (CU), and foreign currencies all moved in lockstep to the upside. The trigger was news that leaked out over the weekend that the International Monetary Fund would make available several hundred billion dollars to bail out the beleaguered European ?PIIGS?.
Never mind that the IMF immediately denied any such moves from multiple offices around the world. The tipoff that something big was coming was the strong performance during Friday?s stock market opening, ostensibly off the back of healthy ?Black Friday? figures, which rapidly faded at the close. I suppose the big money was too busy fighting turkey indigestion to maintain the ephemeral gains. Once the buying started during the Sunday Asian market hours, it was all over but the crying.
With many managers poo-pooing today's move, one has to ask if this is a one day wonder, a much needed 24 hour holiday from the deluge of bad news from the Continent?
The charts below suggest that this is more than a one day wonder and that there is more juice to go. Certainly breaking the 50 day moving average at 1,205 would be a positive development. At the very least, we should take a run to the old S&P 500 support level at 1,230, which should now pose substantial resistance. Break that, and the 200 day moving average at 1,266 comes into play, close to the three month highs we saw two weeks ago.
The interesting mover today was the Euro, which hardly moved at all, the ETF (FXE) gained a scant 0.53%. You would think that the troubled European currency would be the primary beneficiary of any rescue attempts. It wasn?t. This feeble response tells me that the Euro is fundamentally flawed, is still the currency that everyone loves to hate, and is looking at more downside than upside. That is why I didn?t join the lemmings this morning scrambling to cover shorts.
The International Monetary Fund announced a new facility for members to address a short term liquidity crisis. The measure is aimed at beleaguered Europeans girding themselves for a steady worsening of their sovereign debt crisis in the hope of ?breaking the chain of contagion.?? But the measure is more of a squirt gun than a bazooka.
Specifically, the IMF has offered 6 month liquidity of up to 500% of member quotas, and 1-2 year liquidity of 1,000%. This means that governments will have more money to buy back their own bonds to support the credit markets, facilitate interbank lending, or to nationalize banks. The international agency is hoping that this strategy will help halt the decline in European lending and halt the alarming shrinkage of the money supply, all bad for an economy clearly headed into recession.
The problem is that the amounts mentioned, some $345 billion, are a mere drop in the bucket when considering the vast scale of Europe?s problems. You can?t solve a leverage problem with even more leverage. And Europe can?t count on any US participation this time around, as the American mood to bail out anyone these days is greatly diminished.
The news was enough to ignite a one cent pop in the Euro up to $1.352, when it then quickly gave back. That leaves my latest short position in the Euro grinding around slightly profitable levels. Remember, I have been dumping all over this currency since it peaked at $1.60 some 2 1/2 years ago, and again when it topped this year at $1.49.
If we get a nice little post-thanksgiving ?RISK ON? rally, as I expect, then I may have to take some heat on the position, as the Euro will almost certainly rally along with everything else. Those who missed my last trade alert should use this as another opportunity to sell, as the medium term outlook for the continental currency is grim, at best.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2011-11-23 00:13:262011-11-23 00:13:26IMF Euro Bail Out Attempt Flops
Pound away at this market all you want, and it just refuses to go down. In recent weeks we have received a torrent of bad news from Europe, including the fall of governments in Greece and Italy, and the S&P 500 index keeps migrating back to the 1,260 level, as if attracted by some supernatural, magnetic force. It is no coincidence that this is where the closely followed big cap index is dead unchanged on the year.
At this stage, both traders and markets are worn out by the contentious and eye popping moves of the past four months, so we might expect volatility to decline going into the yearend holidays. But watch out for the upside surprise. Expectations are very low here, so the slightest positive development could break the market through resistance at the 200 day moving average. Think of it as the errant child you expect an ?F? from, and he brings home a very strong ?C-?.
The November-December time frame is historically the second most profitable part of the calendar, rising 70% of the time. Only March-April are better. We have a nice year end liquidity push setting up. Every momentum indicator I follow has markets healthy until mid-December. Think of the index as a coiling spring, building up energy for one last blast to the upside.
Crude oil is also suggesting that the ?RISK ON? trade is alive and well, with $100 a barrel clearly in its sites, and after that $110. This has nothing to do with supply/demand fundamentals, or the rising consumption in China. This is purely the hedge funds and high frequency traders at work, getting a small assist from new nuclear worries over Iran and delayed production recovery in Libya. Keep relying on Texas tea for your risk direction.
Of course, you didn?t know that your job description was changed overnight to that of ?Head Italian Sovereign Debt Trader.? That is effectively what we have all become, with yield spikes for their ten year paper triggering asset fire sales in the US, only to see falling Italian interest rates send prices here soaring the next day. I think I liked Italy more when it was better known for great pasta, fine opera, and beautiful women. Keep using every Euro induced puke out to scale into long positions in American risk assets.
Ditto also for the Euro, which has become the currency everyone loves to hate. Forecasts for an end 2011 decline go all the way down to $1.29. That?s probably why it is bleeding so slowly. Any good news from Europe is prompting the European currency to rally back up to the top of a negatively sloping channel. Take these as the gifts that they are and increase shorts on the Euro through buying puts on the (FXE), or buying outright the inverse ETF (EUO). If the two charts below aren?t showing a head and shoulders downward move, then I deserve a trip to the guillotine.
If any of my three black swans decide to alight, it could be off to the races. Those include another surprise cut in European interest rates, a midnight deal by the Super committee, a sudden cut in Chinese interest rates, or all of the above.
I don?t want to confuse you here. I have not turned into a hyper bull. I just think we could get one last gasp to the top end of a multiyear range that could take us as high as 1,325 or 1,350 in the (SPX). The bill for this move won?t be due until next year. Haven?t we gotten good at kicking the can down the road? As my old friend and mentor, Barton Biggs, used to say, ?Always leave the last 10% of a move to the next guy.?
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2011-11-15 00:42:362011-11-15 00:42:36Meet the Teflon Market
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