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Japan is Just Getting Started

Constantly chained to my MacBook Pro at home writing this letter, it is not often that I am in the room when a major market-moving event occurs. That is what happened at the SkyBridge Alternatives Asset Conference (SALT) in Las Vegas on Thursday (click here for the link at http://www.saltconference.com/).

I was listening to one of the legendary titans of the hedge fund industry make the case for Japan. According to the rules of engagement, I can?t tell you who he was, or I would have to kill you. I don?t want to do that because if you?re dead, you might not renew your subscription, and that would be bad for business. But I can pass on the gist of his arguments, which are already well known to the readers of this letter.

He said Japanese companies have tremendous leverage to a falling yen. The Bank of Japan was doing what was necessary to move the yen down from ?100 to ?110 to the dollar. The game changer will come when the government announces its restructuring plan in a few months.

Therefore, Japan?s TOPIX Index at a 13-14X earnings multiple looks cheap. That?s why his fund has been running a major long Japanese stock/short yen position since last year. If he is right, a Nikkei average of 20,000 is in the cards, up another 36% from last night?s close.

I was watching the Currency Shares Japanese Yen Trust (FXY) tick on my iPhone 5s as he spoke. It immediately gapped down 100 basis points. I surveyed the room and saw many heads bowed, fingers furiously typing the news to trading desks, or entering their own ?SELL? orders into online trading platforms.

That smashed the cash market through major resistance at the ?100 barrier, a new four year low. If I had been as digitally endowed, I would have sent out my own Trade Alert to dump the yen. But I?m not. By the Friday opening the next day, (FXY) had given up an additional 100 basis points.

I had been holding back on selling the yen in recent weeks for several reasons. First, we have covered a lot of ground very quickly, the beleaguered Japanese currency plunging 25% in just six months. That is prompting Japanese owners of the $2 trillion in direct and indirect foreign assets to realize some of the recent $500 billion in paper gains. That creates yen buying and downward pressure on the dollar.

Finally, my own trading gains have been so enormous this year, up some 35%, that I am becoming less inclined to stick my neck out and take inordinate risks. Trading has become more of a cherry picking game.

However, the yen?s move through ?100 has been so violent, and on such big volume, that it looks like the real deal. That means the old ?100 upside resistance level now becomes support. That equates to $101.00 in the (FXY). So my (FXY) June, 2013 $100-$103 in-the-money bear put spread actually looks pretty cautious.

This lines up nicely with my own long term downside target for the yen of ?150. This may sound like one of those outrageous predictions one finds so often on the Internet. For me it is not such a stretch. When I first arrived in Tokyo in 1974 and Nixon was taking the US off the gold standard, the yen had just devalued from the old Dodge Line of ?360 to ?305. The move I am predicting represents a give back of only a quarter of the gains since then.

If I am right, it would make my hedge fund friend?s upside predictions for the Nikkei look downright conservative. It would take the ProShares Ultra Short Yen ETF (YCS) from $68 to over $110. It would also boost the Wisdom Tree Japan Hedge Equity ETF (DXJ) from $49.67 to as high as $100.

I indicated to readers at the beginning of the year that this could be the trade that keeps on giving, like having a rich uncle. It looks like, so far, I am right.

FXY 5-10-13

YCS 5-10-13

DXJ 5-10-13

Japanese Girl Looks Like We?re Just Getting Started

New BOJ Governor Crushes the Yen

Wow! What a day! In perhaps the most dramatic policy move by any central bank, anywhere in history, the Bank of Japan pulled out all the stops to stimulate its moribund, demographically challenged economy. Japan is now lapping its competitors in Europe and the US in the international race to the bottom.

The markets certainly got the memo. Japan?s beleaguered currency collapsed nearly 4% over night, one of the biggest single day moves ever. The ten-year Japanese government bond yield plummeted to a breathtaking 44 basis points, another record low, making our own Treasuries look positively high yield. The Japanese stock market rocketed.

I was busier than the proverbial one-handed paperhanger. There?s nothing like waking up early in the morning and finding that your largest short position has just enjoyed one of the sharpest falls on record. It doesn?t get any better than that in hedge fund land.

So I shipped out the Trade Alerts as fast as I could write them, burning up the national broadband covering those shorts. I also took profits on my short in United Continental Group (UAL). I then turned around and plowed some of my profits back into an increased short position on the S&P 500 Index.

The actions on the new BOJ governor, Haruhiko Kuroda, who only moved into his office on Monday, were nothing less than mind blowing. He plans to double the money supply in two years. He broadened the range of instruments it plans to buy to cover everything from 20 year government bonds to equity ETF?s. No time wasted getting one?s feet under the desk here!

Quantitative easing will be increased to $82 billion a month, nearly the same as Ben Bernanke?s munificent efforts. Keep in mind that Japan?s economy is only one third that of the US. It is the most inflationary and currency depreciating set of policies since Indonesia?s hyperinflation of the 1960?s. All of this, just to get the country?s inflation rate back up to 2% after decades of negative real numbers.

While the yen made it back up to ?95.6 this morning, we are clearly targeting ?100 in coming months. That has the ETF (FXY) falling from today?s $101.60 to $96, and the leverage short ETF (YCS) rising from $61.4 to $67. Use every two-point rally to slam the daylights out of the yen on the short side. That has been my advice for the past six months, and I?m going to stick with it as long as it is working.

Get to 100, and the international community will rise up against Japan?s obvious efforts to grow its economy at their expense. Korean companies are getting slaughtered by the six-month, 20% devaluation of the yen against the Won, rendering their exports prices uncompetitive. China is also pretty unhappy, and could well step up their military posture as a way of expressing its displeasure. Then, watch the fur fly!

FXY 4-4-13

YCS 4-4-13

DXJ 4-4-13

BOJ Govenor I See You a Trillion and Raise You Two Trillion

Get Ready for the Next Golden Age

I believe that the global economy is setting up for a new golden age reminiscent of the one the United States enjoyed during the 1950?s, and which I still remember fondly. This is not some pie in the sky prediction. It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.

What I call ?intergenerational arbitrage? will be the principal impetus. The main reason that we are now enduring two ?lost decades? is that 80 million baby boomers are retiring to be followed by only 65 million ?Gen Xer?s?. When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and ?RISK ON? assets like equities, and more buyers of assisted living facilities, health care, and ?RISK OFF? assets like bonds. The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.

Fast forward ten years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home. That is when you have 65 million Gen Xer?s being chased by 85 million of the ?millennial? generation trying to buy their assets.

By then we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes. The middle class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990?s.

The stock market rockets in this scenario. Share prices may rise gradually for the rest of the teens as long as growth stagnates. A 5% annual gain takes the Dow to 20,000 by 2020. After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 80,000 by 2030. Emerging stock markets (EEM) with much higher growth rates do far better.

This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well. The 100-year supply of natural gas (UNG) we have recently discovered through the new ?fracking? technology will finally make it to end users, replacing coal (KOL) and oil (USO). Fracking applied to oilfields is also unlocking vast new supplies. That?s why oil is now $70 a barrel in North Dakota versus $95 in Oklahoma 1,000 miles to the South.

Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC?s share of global reserves is collapsing. This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.? Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years. Total gasoline consumption is now at a five year low.

OPEC Share of World Crude Oil Reserves 2010

Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation. I now have an all electric garage, with a Nissan Leaf (NSANY) for local errands and a Tesla S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. The net result of all of this is lower energy prices for everyone.

It will also flip the US from a net importer to an exporter of energy, with hugely positive implications for America?s balance of payments. Eliminating our largest import and adding an important export is very dollar bullish for the long term. That sets up a multiyear short for the world?s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.

Accelerating technology will bring another continuing positive. Of course, it?s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos. But at the enterprise level this is enabling speedy improvements in productivity that is filtering down to every business in the US.

This is why corporate earnings have been outperforming the economy as a whole by a large margin. Profit margins are at an all time high. Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development. When the winners emerge they will have a big cross-leveraged effect on economy.

New health care breakthroughs will make serious disease a thing of the past, which are also being spearheaded in the San Francisco Bay area. This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented. It raised $3 billion through a bond issue to fund its own research, even though it couldn?t afford it.

I tell my kids they will never be afflicted by my maladies. When they get cancer in 40 years they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday. What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver?s seat on these innovations? The USA.

There is a political element to the new Golden Age as well. Gridlock in Washington can?t last forever. Eventually, one side or another will prevail with a clear majority. This will allow them to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for. That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don?t need the $30,156 annual supplement. Nor do I.

The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cuts defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.

I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up. A Pax Americana would ensue. That means China will have to defend its own oil supply, instead of relying on us to do it for them. That?s why they?re in the market for a second used aircraft carrier.

Medicare also needs to be reformed. How is it that the world?s most efficient economy has the least efficient health care system? This is going to be a decade long workout and I can?t guess how it will end. Raise the growth rate and trim back the government?s participation in the credit markets, and you make the numerous miracles above more likely.

The national debt comes under control, and we don?t end up like Greece. The long awaited Treasury bond (TLT) crash never happens. Ben Bernanke has already told us as much by indicating that the Federal Reserve may never unwind its massive $3.5 trillion in bond holdings.

Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won?t kick in for another decade. But some individual industries and companies will start to discount this rosy scenario now. Perhaps this is what the nonstop rally in stocks since November has been trying to tell us.

Dow Average 1970-2012

Dow Average 1970-2012

US Profit Margin 1929 - Q2 2012

'57 T-Bird

Is Another American Golden Age Coming?

New BOJ Governor Craters Yen

At long last, Japanese Prime Minister, Shinzo Abe, has appointed a new governor to the Bank of Japan, Haruhiko Kuroda.

The foreign currency markets responded immediately, taking the Japanese yen down to ?94.60, a new three year low. It also broke new ground in a range of currency crosses, including Euro/Yen, Ausie/Yen, and Kiwi/Yen. It even weakened against that other despised asset class, gold, plunging to ?152,500. No surprise there.

I have known the good Mr. Kuroda for years, back when he was the Ministry of Finance official responsible for monetary affairs. He has a keen wit and a decent sense of humor that is rare for a Japanese government bureaucrat.

Most recently, I have bumped into him at various international economic forums in his capacity as president of the Asian Development Bank. Our running inside joke is that I go there to obtain English lessons from him, his being so incredibly fluent. That?s what a Master?s in Philosophy from Oxford University will do for you.

Kuroda?s language talents could well come into heavy demand in the coming months and years. He will have to explain to other developed nations why Japan has no choice but to collapse their currency to rescue its economy, at their expense. I believe the yen could fall to as low as ?150 in the years to come. You start hitting international political resistance at ?100.

So it is likely to be a long and drawn out battle. Expect to see a lot of dire headlines from the US government owned auto industry, and their for-hire congressional representatives. I saw this entire movie play out during the early 1980?s with the predictable end result that Japanese language ability is now a great advantage when looking for a blue-collar job in Ohio, Tennessee, Indiana, and Kentucky.

Kuroda?s appointment is a clear signal to the rest of us that the Abe government will be as aggressive as humanly possible in their yen weakening efforts. For those of us who trade, it means selling the current Berlusconi inspired rally in the yen, which may prove to be ephemeral, and buying the dip in the leveraged short yen ETF (YCS). The starting gun has been fired, and the leg to ?96 has begun.

FXY 2-25-13

YCS 2-25-13

Gun

Time to Start Selling Yen Rallies Again

Rumblings in Tokyo

I spent ten years of my life tramping in and out of Japan?s Ministry of Finance headquarters in Tokyo?s Kasumigaseki district. It was a dreadful reinforced steel and concrete affair with a dull grey tile siding that was so solidly built that it was one of the few structures in the city to survive WWII. But the building offered spacious prewar dimensions, with lovely high ceilings, and I never tired of walking its worn hardwood floors. I was there so often that some government officials thought I worked there, and they did eventually give me an office, the first ever granted to a foreign correspondent.

So to get an update on the Land of the Rising Sun I called a senior official whose father I knew well as a Deputy Minister of Finance for International Affairs during the 1970?s. I was a regular at his apartment in Shinjuku on Saturday nights, where we spent endless hours alternately playing chess and Scrabble over a bottle of Johnny Walker Red and smoking acrid Mild Sevens. We did everything we could to expand each other?s? Japanese and English vocabularies with the words not found in dictionaries. When the bottle was almost finished and his face was beet red, the Elvis impersonations would start.

My friend told me that the ongoing strength of the yen is rapidly becoming a major political issue in Japan. The spot market is threatened an all-time high only three months ago, and on a trade-weighted basis it was already at a new peak. Exporters were getting destroyed by the strong yen, which was making their goods increasingly expensive in a cost cutting competitive world.

This was forcing them to accelerate a 20-year effort by corporations to offshore production to China, which was ?hollowing out? Japan, and causing economic growth to bleed away, and unemployment to rocket. The situation was getting so bad that American companies that offshored jobs to Japan years ago, like Caterpillar (CAT), were taking them back home because labor costs are so high. His fears were confirmed by a Japanese GDP that shrank in Q4, 2012.

His masters have made repeated comments in the Diet, the Japanese Parliament, made comments in the Diet this week about his concern over yen strength. More specifically, the road is now clear is seeking approval for a much more aggressive stance to pursue Bernanke style quantitative easing to knock the stuffing out of the yen and stimulate the economy.
This time, the ministry has much more ammunition to work with. Japan has been running its first trade deficit in 30 years. This may not be an anomaly. In response to the tsunami induced melt down at the Fukushima plant, Japan is permanently shutting down a large part of its nuclear power generating capacity. At its peak, nuclear accounted for 25% of the country?s electric power supply. That is forcing a huge surge in oil imports from the Middle East that has greatly tipped Japan?s balance of trade against it. Crude?s recent surge from $84/barrel to as high as $98 has only made matters worse.

He then told me that, he too, was now learning to play Scrabble and asked me for my list of words where the letter ?Q? is not followed by a ?U?. I said that I was not inclined to disclose America?s most valuable trade secrets to a foreign competitor. However, in deference to his late father, he couldn?t go wrong starting with ?Qi?, ?Qabala?, ?Qadi?, ?Qaid?, ?Qat? and ?Qanat?. I hung up the phone and immediately sold more yen against the dollar.

FXY 2-20-13

YCS 2-20-13

Scrabble

Look at That Yen!

All of those years spent living in rabbit hutch sized apartments, getting hand packed by white gloved railway men into rush hour train cars, and learning an impossible language, are finally paying off.

I have to tell you, I really have to think hard to recall a plunge in a major currency that has been as dramatic as the yen?s over the past two months. Since the Mid-November route began in earnest, the cash market has collapsed from ?76.80 to ?92.60 to the dollar. That has taken the ETF (FXY) down from $126.30 to an eye popping $105.50. The double leveraged short ETF (YCS) soared from $42 to $57.93. It?s a good thing that I was short the entire time.

In fact, I have devoted 20% of my entire capital to short yen plays since the beginning of the year. Newly elected Prime Minister, Shinzo Abe, was my willing coconspirator this week, announcing one of the most ambitious, expansionary budgets in history. The vice governor of the Bank of Japan chipped in, suggesting that the yen had more room to fall. Another senior government official suggested that ?100 to the dollar might be a reasonable target. It seems that any time someone in Tokyo says ?boo?, another round of yen selling by traders ensues.

But like all good things, this trade is getting rather long in the tooth. I?ll tell you how this is going to end. When the cash market declines to ?96 to the dollar, the grumblings about unfair import competition by the US car industry will escalate to an uproar. At ?100 to the dollar it will balloon into a full blown trade dispute. So get ready to start hearing a lot about Japan?s unfair manipulation of their currency to undervalued levels, especially from congressmen from Midwest states with large car plants.

The yen will probably fall short of that. The last time this happened, in the early 1990?s, the US was afraid that Japan was taking over the world. Our country was recoiling from a Japanese share of the American car market that had ratcheted up from 1% to 43% in just 20 years. Remember the tome ?Japan is Number One?? You have to laugh now.

Those fears abated long ago. A Japanese collapse on the scale of an IMF bailout is now much more likely than Japanese dominance. It?s tough to smack down an international competitor that is trying to claw its way up after 20 years on the mat. One complicating factor this time is that the principal lobbyist against a stronger yen is now US government owned, General Motors (GM).

I get emails every day from readers asking if they should initiate, double up, or triple up their short positions in the yen. As of today, I am saying no more. My best-case scenario had Japan?s beleaguered currency plunging to ?92 over the course of the next several months. Here we are over that figure in just ten weeks. So at best, a short yen position is a ?HOLD? here. Don?t chase it any more. Remember, hogs get fed, but pigs get slaughtered.

Japan is not an entirely bad place. Certainly the world would be a duller, more boring place without sushi, sake, hot tubs, and karaoke. And I never heard anyone complain about those coed public baths. Too bad I could never find a pair of sandals that fit.

FXY 2-1-13Six Month Chart

FXY 5YRFive Year Chart

YCS 2-1-13

Harakiri - Femail

Why the Yen Will Never Recover

If anyone is expecting the Japanese yen to take back the losses it has suffered over the last two months, you can forget about it happening anytime soon, eventually, or in your lifetime.

Naysayers have been pointing to this week?s policy meeting at the Bank of Japan as proof that the yen has stumbled in the international race to the bottom, and that it is running up the white flag of surrender in the currency wars. They point to the rise in the beleaguered currency from a ?90.16 to the dollar Friday low, back to ?88.4 in the cash market, and a gain in the (FXY) from $108.20 to $110.70. The inverse ETF (YCS) has backed off from $55 to $52.60.

There were several reasons for the pause. BOJ governor, Masaaki Shirakawa, said he would delay any substantial monetary easing until 2014. Hold the presses! Prime Minister Shinzo Abe indicated that if the yen fall became too severe, it might have to be slowed. The US government started carping that the weak yen was giving Japan?s car exports an unfair advantage.

That all-electric Nissan Leaf that cost $38,000 in November can now be sold for $31,000, once the recent currency depreciation is factored in. That is a big difference, and was a cause of frequent trade wars in decades past. How do you think we ended up with a Corolla factory in Fremont, California?

There is something much more fundamental afoot. Japan has been far and away the world?s largest international direct investor for the last 20 years. Trillions of dollars have poured out of the country, snapping up energy resources, commodities, manufacturing facilities, commercial real estate, and yes, lots of golf courses.

When the interest and dividends thrown off by these holdings were brought back to Japan, dollars were sold and yen bought, some $100 billion worth a year. On top of this, you can add $40 billion in interest payments earned on $800 billion in US Treasury bonds held by the Japanese government. Total it all up, and it is not only enough to support the yen, but to send it to new highs continuously for the past two decades, no matter how dire the worsening fundamentals of the domestic Japanese economy.

So what happens next? Think of the Nissan Leaf trade in reverse. That American factory that cost $1 billion in 2012 will now set a Japanese investor back $1.2 billion. Ditto for the government?s purchase of US Treasuries. The Japanese won?t stop their foreign investment completely, but they are now being priced out of the market in many transactions, and it will slow appreciably. So does that repatriated interest and dividends. This will feed into a weaker yen over the long term.

Given more time, Japan?s other awful fundamentals will start to kick in as well. Those include a deplorable demographic outlook, a debt/GDP ratio of 240%, the hollowing out of Japanese industry as it decamped for China, and the new cold war with the Middle Kingdom.

I?ll tell you how recent developments will end. Prime Minister Abe will fire the BOJ governor Shirakawa or he will wait a couple of months for him to retire. That will be consistent with his pedal to the metal strategy for reviving the Japanese economy. Then, the aggressive monetary easing he campaigned and won the election on, will get moved from 2014 back up to 2013–early 2013. Like, tomorrow. Then it will be back to free-fall for the yen.

Use this temporary and long overdue weakness to add short positions in the Japanese yen. You can also pick up more of the short yen ETF here, the (YCS).

FXY 1-23-13

YCS 1-23-13

Shinzo Abe

Take Away the Meatball and What Are You Left With?

The Debt Ceiling Crisis is Cancelled

I am sitting here in front of a crackling hot fire at my lakeshore estate in Nevada?s Incline Village. It is a brilliantly clear day, with mallard ducks skimming the surface of Lake Tahoe, and the Canadian geese flying in formation overhead. Snow covered Mount Tallac, some 30 miles to the South, looks so close I feel I can almost grab it and take out a bite.

I am on my way to Washington DC for the inauguration, and had the jet touch down in nearby Truckee for a day of reading and rest. My staff greeted me like I was some kind of conquering hero. One of the perks of working for me is that they get a free subscription to my newsletter, and they all invest their 401k?s, IRA,?s pensions, and profit sharing plans accordingly. When they?re doing well, I feel it. My performance shows in those little chocolate truffles that get placed on my pillow at night.

In fact, it has been the hottest start to a year for me in a long time. The model- trading portfolio is up 8% so far in 2013, which is more than half of what I made during all of last year. With the way my positions are currently structured, I stand to make an additional 50 basis points a day until the next options expiration on February 15. All the market has to do until then is to trade up, sideways, or down small,and I get to keep it all. Right now, that is looking like a pretty good bet.

I completely nailed everything. On day one, I went aggressively long the S&P 500 (SPY) and the Russell 2000 (IWM). I averaged up with more equity positions, a financial, American Insurance Group (AIG), and copper producer Freeport McMoRan (FCX) as a China play. Sensing that it was pedal to the metal for a falling yen (FXY), (YCS), I put a major chink of the portfolio into a short position there. In effect, I am long US equities in Japanese yen.

On top of that, I have a massively short volatility position embedded in all of this, not a bad thing to have when the Volatility Index (VIX) is plumbing new six year lows at the 12% handle. Since then, the data has been released showing that the biggest cash flows into equity mutual in a decade came hot on the heels of my Trade Alerts. Things only went awry with Apple (AAPL), which continued to weaken beyond all belief, as if to prove that I was only human.

It looks like my numbers are going to get a further boost this week from no less a fan than the Republican Party. Former vice presidential candidate, Paul Ryan, from Wisconsin, has indicated that the coming debt ceiling crisis, due on March 31, will be postponed for three months.

Having covered Washington politics for 40 years, I can tell you that he is speaking in code. For ?postponed?, read ?cancelled?. I think they figured out it was a lame idea anyway. Certainly, the markets came to the conclusion two months ago that all of these media constructed ?crises? were a bunch of baloney. That is why I have been pounding the table with readers to pile on the long positions, and ?go commando? on their short positions. Risk markets can only go ballistic in response to this ?aha? moment.

All of this encourages me to stick with the strategy outlined in my 2013 Annual Asset Class Review (click here). Look for a hot first quarter, to be followed by two scary ones, and then a strong finish. This means that all good things will be coming to an end in the not too distant future. In fact, we have probably already started some sort of topping process in the markets that will take a couple of months to unfold. Then look out below.

I just got a call from the airport that the flight plan has been filed, clearance obtained, and the jet is fueled up. Got to go.

Life is good.

SPY 1-18-13

Nice Long!

FXY 1-18-13

Nice Short!

AAPL 1-18-13

Party Pooper!

Tahoe Dock

Life is Good!

The Fed Says No QE3

As I expected, the wildly optimistic expectations for further quantitative easing by the Federal Reserve at yesterday?s Open Market Committee meeting were not matched with substance. All we got was a continuation of existing modest programs and some minor tweaking of language.

Bernanke only managed to say that, ?further stimulus will be provided as needed.? The Fed left unchanged its statement that economic conditions would likely warrant holding the benchmark Fed funds rate near zero ?at least through late 2014.? It also said it would continue swapping $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action intended to lower long-term interest rates known as Operation Twist.

Apparently, the slowdown in GDP growth from 2% in Q1 to 1.5% in Q2 was not enough to spur the Fed to action. Nor was a slowdown in jobs growth from an average 226,000 jobs per month to 75,000. The earliest the Fed can now take further accommodative action is at their next meeting on September 12-13, just seven weeks before the presidential election.

The dollar rose smartly against the yen and the Euro. Equities closed at their lows for the day. They could have fallen dramatically further. But I think that traders are holding fire until their learn the results of the ECB meeting on Thursday. If we get more rhetoric instead of action, and the Friday nonfarm payroll continues weak, then we will have a hat trick of disappointments that could trigger a more gut wrench plunge in the indexes going into next week.

At the very least, we should challenge the bottom the of recent upward channel, taking us down 50 points from here. That should double the value of my existing position in the (SPY) puts.

 

 

 

 

Ben, Where Were You?

How the Fed Will Trigger the Next Crash

Over the last two months, I have witnessed one of the least convincing rallies in the US stock market in recent memory. Looking at the chart for the S&P 500 below you can clearly see a modest, low conviction, declining volume rally in an ever-narrowing channel. This is further confirmed by the chart of the NYSE advance/decline ratio that is failing at the March support level, which has now become resistance.

Look at any other asset class and it is flashing warning lights. Ten year Treasury bonds are within a hair?s breadth of blasting through to an all time low yield below 1.42%. We all know from hard earned experience that stocks and bonds never go up together for more than short periods, and that it is almost always the debt markets that get the longer-term trend right.

That flight to safety currency, the Japanese yen, is also screaming at us that trouble is just around the corner. It made it to the ? 77 handle, or over $125.00 in the (FXY) in recent days. People are certainly not buying the Japanese currency because they like Japan?s long-term fundamentals and demographics, which are the worst in the world. Nor are they buying for the yield, which is zero.

It appears that stocks have rallied because traders believe that the Federal Reserve will launch QE3 at its upcoming August 1 meeting. Bonds have been rallying because they think it won?t. Only one of these markets is right. That means the Fed won?t be able to take further easing action until early next year, well after the presidential election. By then, it will have every reason in the world to launch QE3, with the ?fiscal cliff? at the top of the list. That?s why Ben Bernanke is not inclined to waste ammo now.

In the meantime, The US, China, and Japan are all slowing and Europe is falling off a cliff. I was speaking to a hedge fund friend of mine this morning who told me the German paper he read said that they were abandoning Greece. I replied, ?That?s funny, the German paper I read said that they were abandoning Spain.? What ECB rescue funds that are in place are being challenged in the German Supreme Court, creating further uncertainty.

Travel around European main streets, as I have done for the last 10 days, and the ?FOR SALE? signs are everywhere. These are not a signal that I should rush out and buy equities right now, no matter how high the dividends are. They will be higher still, later.

All of this is setting up for an August that could be grizzly. A Fed disappointment will lead to a rapid unwind of the recent stock market rally, and could take us down to the 2012 low at 1,266 pronto, or more. A pop to a 1.25% yield in the ten-year Treasury is a chip shot.

 

 

 

 

Sign of the August to Come?