You couldn?t mistake the meaning of the cries of topless female protesters as they flung themselves at police guarding Italian polling stations on Monday. Basta! Basta! Enough! Enough! The purpose of their demonstration was visibly scrawled in large letters across their nubile bodies in black ink for all to see. Mille grazieProfesoressaFrancesca for being my Rosetta Stone!
Global equity investors could well be screaming enough, enough as well. Right when it became clear that the Italian election was not going according to script, the major indexes rolled over from substantial gains to even more impressive losses. The Volatility Index (VIX) blasted 35% to the upside, the biggest move since November, 2011, the last time the Land of Julius Caesar threatened a meltdown. The Italian Index ETF (EWI) really got decimated, posting an intraday fall of 18%, while the Euro (FXE), (EUO) took a two and a half cent dive against the greenback.
Up until today, the smart money was betting on a win by socialist Pier Luigi Bersani and some continuation of the recent reformist policies. What we got was a much stronger than expected showing by Silvio Berlusconi, who is using his billions of Euros to get elected to avoid going to prison. His platform is to undo all of the reforms of recent years, and basically send Europe back to the crisis days of 2010, when the European currency traded as low as the $1.17 handle. Note to self: the smart money isn?t always right.
Of course, I have been warning anyone who would listen that something like this was headed our way (click here for ?Is the Party Over? ). I was even so precise in my predictions that I said the trigger might come from the next leg of the European financial crisis.
To see the exact levels where major support kicks in on the charts for this selloff, please follow the link above. For the Legions who follow my market beating Trade Alert Service, take solace in the fact that our entire portfolio expires in just 13 trading days, and these levels only need to hold until then. After that, we want everything to go to zero, where we can buy them cheap.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/Black-Swan.jpg444587Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-02-26 09:59:322013-02-26 09:59:32Suddenly Those Italian Lessons Are Paying Off
The universal question in the market today was ?Why is it down? when all the news was good? The weekly jobless claims dropped 5,000 to 366,000, near a five-year low, confirming that the jobs recovery is still on track. Activist shareholder, David Einkorn?s, lawsuit against Apple (AAPL) to unfreeze its cash mountain should have boosted the market?s major buzz kill.
Sure, ECB president said that European growth would continue to slow. No news there, and certainly not enough to prompt a triple digit decline in the Dow.
The harsh truth is that after the near parabolic move we have seen since the beginning of the year, you don?t need a news event to trigger a market sell off. The mere altitude of the (SPX) at 1,515 should, alone, be enough to do it, a mere 3.8% off the all time high.
The fact is that almost every manager has seen the best start to his track record in decades. Prudence requires that one book some profit, deleverage, reduce risk, and take some money off the table at these euphoric highs.
That especially applies to myself. If I make any more than the 22% I have clocked so far in 2013, nobody will believe it anyway. So why risk everything I?ve made just to make another 20%. Who wants to start over again if the wheels suddenly fall off the market?
That is what prompted my flurry of Trade Alerts at the Thursday morning opening, which saw me bail on my most aggressive positions in the (SPY) and the (IWM), taking profits on my nearest money strikes. I did maintain the bulk of my portfolio, which is still in much farther out-of-the-money strikes, and in short positions in the Japanese yen. I also added to my short positions, buying out-of-the-money bear put spreads on the (SPY), betting that even if we continue up, it won?t be in the ballistic, devil may care fashion that we saw in January.
There are, in fact, real reasons out there for the market to fall. You need look no further than the calendar, which I eloquently outlined the dangers of, in my piece ?February is the Cruelest Month? (click here).
On March 1, the sequestration cuts hit. The 2% increase in payroll taxes has yet to be reflected in slower consumer spending. Federal income taxes have already gone up on those earning over $450,000 a year. This is important, as the top 20% of income earnings account for 40% of consumer spending, and consumer spending delivers 70% of all consumption.
Although it has been postponed by three months, we have a debt ceiling crisis looming that will have to result in spending cuts across the board. My favorite stealth drag on the economy, the paring back of major tax deductions, will be the next big issue to be fought over publicly (the oil depletion allowance versus alternative energy tax credits, and so on, and so on).
All of this adds up to a 1.5% reduction in US GDP growth this year. When you are starting with a feeble, tepid, and flaccid 2% rate, that does not leave much for us to live on. This is how disappointments turn into recession. IT is no empty threat, as many US corporations are seeing earnings slow, and could well disappoint with the next quarter?s results.
This is why I predicted an ?M? shaped year in my ?2013 Annual Asset Class Review? which I am still standing by (click here). We are already well into the heady run up to construct the left leg of the ?M?. Next comes the heart rending ?V? in the middle. Some analysts are amazed that we have gone this far in front of such daunting challenges and haven?t already collapsed. I think that is going to be April or May business, given the humongous cash flows we have witnessed.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/Bull.jpg293419Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-02-08 09:45:152013-02-08 09:45:15How This Bull Market Will Die
Does it get any better than this? First, the hometown San Francisco Giants win the World Series in a four game sweep. Then the San Francisco 49er?s play in the Super Bowl. Finally, I win the World Series/Super Bowl of investing by capturing an absolutely pyrotechnic 21% year to date performance, boosting me once again the top ranks of the hedge fund industry. Hey, two out of three is not bad. 31-34, ouch! Life is good.
Back in the real world, traders were humming the rhythms of Lauren Hill?s Doo Wop on Friday, the top selling hit of 1998. That was the last time that a January posted such a virile stock market performance. In London they were humming Donna Summer?s This Time I Know It?s for Real, who led the charts with this tune in 1989, the previous time the FTSE 100 delivered such robust numbers.
No, this is not a compilation of Golden Oldies. Not too hot, not too cold. That was the conclusion of the equity markets on Friday when the Dow blasted over 14,000 for the first time in 5 years. With many researchers expecting a January nonfarm payroll over 200,000, you would think traders would have dumped shares on a 157,000 print. The headline unemployment rate remained etched in stone at 7.9%. Instead, stocks gapped up at the opening and never looked back, closing at the highs, up 147.
The phone lines between Wall street and San Francisco burned up with portfolio managers and investment advisors trying to figure out why. It appears that the number was strong enough to maintain a tepid 2% GDP growth rate. But is was not so expansionary as to prompt the Federal Reserve to abandon is quantitative easing policy any time soon, on which risk assets everywhere have been richly feasting.
I can see a particular psychology taking hold on Wall Street. Good data is proof that our buying of shares with reckless abandon is justified. Bad data is written off as a backward looking, one time only, statistical anomaly, as we saw with the incredibly weak Q4, 2012 GDP report of -0.1%.
In this scenario, the market either goes up, or goes up more. A new, all time high for the Dow this week looks like a done deal. We could hit my 2013 target of a Standard and Poor?s (SPX) of 1,600 by March. Like my friend, hedge fund giant, David Tepper, says ?When there?s a bubble, act bubbly.?
Our Course, I warned you all this was coming as far back as October (click here for ?My 2012-2013 Stock Market Forecast? ). I followed up with my ambitious ?Why My Shorts are Missing? in December, pressing the point home (click here ). Then, I really went out on a limb in my ?2013 Annual Asset Review? (click here), arguing that we would see an unprecedented market multiple expansion in the face of weak earnings growth. That is exactly what we got.
It is a good thing that I put my money where my mouth was. That has earned followers of my Trade Alert Service a blistering year to date performance of 21%. If the latecomers, short coverers, and lemmings keep pouring into this market, I could double that by April.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/ISCA1-28-13.jpg484591Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-02-04 09:37:322013-02-04 09:37:32Goldilocks Delivers a Nonfarm Payroll
That was the questions traders were scratching their heads and asking this morning in the wake of this morning?s shocking Q4, 2012 GDP figure.
While most analysis were expecting the government to report a more robust 1%-2% number we got negative -0.1%, the worst since 2009. With growth flipping from a positive 3.1% figure in Q3 many thought that a Dow down 500 points was in the cards. Instead we pared back a modest 44 points. What gives?
Ahhh, the devil is in the details. The main culprit was in defense spending, down a mind numbing 22.2%, the worst since the wind down of the Vietnam War in 1972. I remember it like it was yesterday. In fact, government spending was weak across the board as a quasi shut down in advance of the fiscal cliff brought spending to a grinding halt.
In the end, the fiscal cliff never happened. But the downshift shows you how severe such a slowdown would be, if we ever go over the cliff sometime in the future.
There were other one off factors. Hurricane Sandy put a dent into the economies of the US east coast, especially in the transportation sector. The effects of last summer?s drought, which triggered a serious shrinkage in a broad swath of the agricultural sector, were also felt.
What traders instead decided to focus on were the impressive strength of the private sector. Business investment rocketed 8.4%, while consumer spending jumped by 2.2%. It all confirms my theory that the passage of the presidential election broke the dam for private economy, and got people off their behinds once all the negativity and uncertainty was gone. Businesses suddenly began investing and hiring, while consumers stepped up consuming.
What this data tells us is that there will be a sizable postponement of growth from Q4 into Q1, 2013. The Pentagon will ramp up spending once again in the knowledge their budget is secure, at least for the time being. In the meantime, the private sector continues on fire. Q1 could well turn out to be a monster quarter. This is what the unremitting rise in share prices is shouting at us.
In the end, traders don?t really care what the GDP is. In fact, most can?t even spell it. The focus of the street is on the future, not the past. And the data promises to improve.
This morning we saw private sector job growth of 182,000 from the ADP. If Thursday morning delivers another five year low in jobless claims, the market will be primed for a hot January nonfarm payroll on Friday. It?s become ?a glass is half full, glass three quarters full? kind of market. Is either goes up, or up more.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/01/Headline.jpg336281Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-01-31 09:45:372013-01-31 09:45:37Where?s the Crash?
Take a look at the chart below for the S&P 500, and it is clear that we are gunning for an all time high between 1,550 and 1,600. With the debt ceiling crisis now cancelled, you really have to look hard to find any near term reasons to sell stocks, so we could hit those lofty numbers as early as March.
A perusal of the short-term charts certainly demands one to conclude that we are overbought. The Relative Strength Indicator has just hit 70%, normally a signal that we are reaching an interim top. However, the RSI can stay elevated for an extended period of time and trade as high as 80 before the downside risks show their ugly face. That could be months off.
In the meantime, we could see some sort of correction. But it is more likely to be a time correction, not a price one. That has the market moving sideways in an agonizing, tortuous, narrowing range on declining volume for a while before launching on another leg up.
This year?s rally occurred so quickly that a lot of money was left on the sidelines, especially with the largest managers. That is why we have seen no meaningful corrections so far. This condition could remain all the way out until April.
It is likely that traders are going to keep ramping up this market until the January month end book closing. That sets up a quiet February. The deep-in-the-money options that I have been recommending to readers are ideally suited for this falling volatility environment. They reach their maximum point of profitability, whether the market goes up, sideways, or down small.
You see confirmation of this analysis everywhere you look. Treasury bonds (TLT) can?t catch a bid, and are clearly threatening to break out above the 1.90% yield band that has prevailed for the past year. The Volatility Index (VIX) hit another new five year low today at $12.40. Oil (USO) just hit a multi month high. It all points to stock prices that will remain on an upward path for the foreseeable future.
I think I?ll buy more stocks and then go drive my new Tesla around the mountain.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/01/TESLA.jpg398588Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-01-24 09:28:322013-01-24 09:28:32SPX 1,600, Here We Come!
I?ll give myself a ?B? on this one. Sure, with the Trade Alert Service generating a 14.87% net profit for the year, I was able to bring in double the Dow average, and triple what most hedge funds delivered, including some of the biggest ones.
But for once, I did not achieve true greatness. I feel that, given the amount of work I did, I should have done much better. I issued 230 Trade Alerts in rapid-fire succession with a ?to die for? success rate of 70%.
I managed to capture these gains with half the market volatility of 2011. While the Volatility Index (VIX) reached the lofty height of 49% in 2011, in 2012 we managed to eke out a peak of only 27%, and that was only for a few nanoseconds. In fact, volatility was down for almost the entire year, save for a brief spike in May, and some yearend short covering.
In 2011, I had a much higher range in the market to work with, the high for the Dow coming in at 12,850 and the low at 10,400, for a total range of 2,450 points. In 2012, the range was only 1,630 points, making it a much more difficult market to work with. This meant shifting from outright call and put option positions to spreads, in order to keep the dosh reliably rolling in.
Nevertheless, I made some serious money in 2012. The best trade of the year was a call spread in the S&P 500, which nicely caught the yearend rally in equities, producing a 4.75% profit for the notional $100,000 portfolio. The worst was a short position in Boeing (BA), which cost me a gut wrenching 8.70%.
In terms of asset classes, foreign exchange trading was far and away my biggest earner, adding 11.85% in positive performance. This was because I shorted volatility in the Japanese yen (FXY), (YCS) for the first three quarters of the year when it flat lined, and then went aggressively short when the big break to the downside came. Thank you Mr. Shinzo Abe, Japan?s new prime minister, who championed the beleaguered country?s assertive weak yen policy during the December elections! Shorts in the Euro (FXE), (EUO) also chipped in.
Gold (GLD) was my second income producer, taking in 6.40%. I timed the summer rally in the barbarous relic perfectly, and shook it by the lapels until its gold teeth came chattering out. I would have made more, but the yellow metal then died on the announcement of Ben Bernanke?s QE3, much to everyone?s surprise.
My five years spent drilling for oil and gas in West Texas came in handy once again, netting 4.75% in gains. This was entirely made on the short side. Friends calling me from the Lone Star State with tales of endless oil gluts gushing forth from North Dakota encouraged me to be more bold in selling the (USO) than I might have otherwise.
I was also a fairly nimble bond trader in 2012 (TLT), (TBT), harvesting another 1.62% in profits. I correctly called the top in prices/bottom in yields in August, but failed to capitalize with bigger short positions. This could be a big trade in 2013.
Ah, now for the hard part. Not every trade was a winner in 2012, although many of the losers were hedges for long side plays that ultimately made money. Trading in the index ETF options for the S&P 500 (SPY) and the Russell 200 (IWM) lost -1.30%. An early long position in the volatility Index (VXX) eroded -3.42% from the performance. Fortunately, I bailed from that strategy quickly.
Options positions in individual equities bled me by another -9.54%. Almost the entire loss came from one stock, Apple (AAPL), which is still perplexing the street. I managed the first $150 decline in the stock admirably. After that, it was a bloodbath. Never have I seen a share price divorce itself so dramatically from the underlying fundamentals. Either something terrible is about to happen to Steve Jobs? creation, or the stock market has got it all wrong.
This was one tricky year to trade. I started off all right, clocking gains in January and February. I correctly anticipated another ?Sell in May, and go away? year. But I underestimated the extent that volatility would fall. Melting option premiums absolutely took me to the cleaners in March and April.
When I realized the problem, I switched from outright options to spreads, which included a short volatility element to every single position. That launched a white-hot run of 25 consecutive profitable trades from April to September.
Then Ben Bernanke caught me by surprise, launching QE3 sooner than expected, just before the presidential election. That forced me to stop out of positions that turned good only days later. I correctly called the outcome of the election in all 50 states. But the big Obama win caught many portfolio managers by surprise, who responded by dumping positions to realize capital gains and beat expected tax increases. That took the (SPX) down 10%, leaving the market unchanged on the year by mid November. This cost me more money.
I redeemed myself by accurately calling the yearend rally and going aggressively long. In the end, the ?Fiscal Cliff? that was supposed to crash the market was little more than a media invention. Stocks closed on their highs.
It was one of the tougher years in my career, so I was quite happy to deliver double-digit profits for my readers. It was also a learning experience. After slogging through 45 years in this business, I still occasionally commit the same blunders as a first year trainee. Don?t we all.
Hopefully, you learned something too from my outpouring of 400,000 words in the 250 daily letters that I penned during the year analyzing every investment theme under the sun. You should have also gained some insight from the 22 biweekly webinars I produced. You also had a chance to expand your horizons at by 26 strategy luncheons and speaking engagements held around the world.
2013 will be better, as our blistering gains so far testify.
The Dow in 2011
The Dow in 2012
The Volatility Index in 2012
Good Luck and Good Trading
John Thomas
The Mad Hedge Fund Trader
Welcome to the ?Heads I win, tails you lose? market. The prospect of imminent quantitative easing by the US, Europe, China, and even Japan is supporting asset prices globally. The worse the economic data reports, the greater the likelihood of such action, and the higher prices can rise. In this topsy turvey world, bad becomes good, and worse is even better.
The only reason for the central banks not to act is if the economy starts to reaccelerate on its own without outside intervention. So the choices presented to investors are really quite limited: you either buy, or you buy. This is the twisted logic that has allowed traders to run the markets up to within 2% of the four year highs on incredibly small volume.
There is only one problem with this approach to the market. It requires mental gymnastics that would earn a gold medal at the London Olympics.
The harsh reality is that this impressive gain in the market has occurred in the face of decidedly deteriorating fundamentals. American companies managed to eke out a 5% gain in earnings in Q2, down from a 15% increase a year ago. Adjust for inflation and this growth rate approaches zero in real terms.
What is particularly disturbing is that they achieved these scanty results in the face of falling revenues. They did this by cutting costs, primarily through the firing of workers. This is why the unemployment rate remains at a stubbornly high 8.3%, despite some of the most impressive stimulus measures in history. Companies are burning the candle at both ends to gin up extremely modest positive results. They are literally eating their seed corn.
Needless to say, this does not support any kind of thesis for long term investment. All it does is move us from the bottom to the top of a six month range. I can?t imagine that you are going to see many aggressive buyers higher than here. Edge up from here, and you might witness the disgusting sight of traders throwing up on their shoes as they rush to cover premature shorts.
That is when you want to hold your nose and establish your shorts. Even the most bullish forecasts have the S&P 500 going up only 5% from here to 1,475, before it heads back down again.
This is not the first time that the market action has divorced itself from the fundamentals. I watched the Japanese stock market go from strength to strength for ten years before it knocked itself out crashing into the ceiling at ?39,000. Last night it closed at ?8,978, some 22 years later. Those analysts at Morgan Stanley obsessed with fundamentals only during the 1980?s saw their offices moved next to the elevator, then the men?s bathroom, the one with the big punching bag hanging from the ceiling, and finally, out of the building completely.
At this point you have to ask how much of QE3 is already priced into the market. If the Federal Reserve instituted this aggressive monetary expansion policy two months ago, they might have been able to engineer a 200 point move in the (SPX) or 2,000 points in the Dow. If they do it today, they might get only 50 (SPX) points, 500 Dow points, and perhaps none at all, followed by a sharp drop.
Lighten up your book, take short-term profits, sell short-dated-out-of- the-money calls, and meaningfully reduce your risk. Find something else to trade besides stocks. That is unless you have the luxury of staying out completely. The traders who don?t remember to sit down when the music stops playing will get burned badly.
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.pngDougD2012-08-09 23:04:212012-08-09 23:04:21When Bad Becomes Good and Worse is Even Better
Remember the $2 trillion US corporate cash mountain that you have heard so much about? Well, it is finally starting to shrink. Have they started reinvesting profits in America? Are they hiring more people? Did they finally get those tax breaks they were begging for? Have they dramatically increased dividends and share buy backs or returned to acquisitions to boost earnings?
Well, not exactly. The cash mountain is shrinking, but for all the wrong reasons. They are just not earning as much money as they used to. According to data released by S&P Capital IQ, US corporate cash flow turned negative in Q1, 2012 for the first time since 2008. It almost certainly worsened in Q2.
The harsh truth is that earnings are falling because of collapsing revenues, which at the rate reported so far in this season look to come in at about 1% YOY. Adjust for inflation, and these figures turn negative. This means that the 5.4% YOY earnings growth we are seeing, which I predicted all the way back in my January annual asset revue, are being achieved through aggressive cost cutting.
Managers aren?t hiring more, they?re firing more, which explains our stubbornly high headline 8.2% unemployment rate. This can?t last. You can only eat your seed corn for so long before you go hungry.
This deterioration, which has been under reported and unappreciated, has economists slashing their forecasts for US GDP growth. It is clear that consumers are returning to their bomb shelters. I recently chopped my own forecast from 2% to 1.5%, and even that could start to look high in a matter of weeks. All of this sets up the scenario which I have been pounding the table about in my strategy seminars in Chicago, New York, London, Paris, Frankfurt, and Zermatt, which I have entitled ?The Crash of 2013?.
None of this makes a convincing case for buying equities right now. It makes the current 14 multiple for the S&P 500 look positively pricey. If there was ever a case for selling rips in the indexes it is now. Keep your fastest finger on your mouse ready to buy puts on the (SPX), (IWM), and (QQQ), and the bear ETF (SDS), and (SH).
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.pngDougD2012-07-24 23:03:052012-07-24 23:03:05US Earnings Are Headed Down the Drain
For the past two years, I have maintained a GDP growth forecast for the US of 2% a year. I have not stuck with this figure because I am stubborn, obstinate, or too lazy to update my analysis of the future of the world?s largest economy. I have kept this number nailed to the mast because it has been right.
I have watched other far more august institution with vastly more resources than I gradually ratchet down their own numbers towards mine, such as Goldman Sachs (GS) and the Federal Reserve. So I feel vindicated. But now that they are coming in line with my own subpar, lukewarm, flaccid 2% prediction, I am downsizing my forecast further to 1.5%. This is not good for risk assets anywhere, and may be what the markets are shouting at us with their recent hair raising behavior.
I am not toning down my future expectation because I am a party pooper or curmudgeon, although I have frequently been called this in the past. After all, hedge fund managers are the asset jockeys that everyone loves to hate. My more sobering outlook comes from a variety of fundamental changes that are now working their way through the system.
First, let me start with the positives, because it is such a short list. The work week is now the longest since 1945, no doubt being helped by onshoring triggered by rising Chinese wages. The car industry is in amazingly good shape, although the vehicles they are selling in larger numbers are much smaller than the behemoths of the past, with thinner profit margins. Credit is expanding, if you can get it. The housing market has finally stopped crashing and might actually add 0.3% to GDP this year.
Now for the deficit side of the balance sheet. The $4 trillion in wealth destruction created by the housing crash is still gone, and will remain missing in action for at least another decade. The home ATM is long gone. Income growth at 1.7% is still the slowest since the Great Depression, and is far below the historic 3% annual rate. Not only do people work longer hours, they get paid much less money for it.
Home mortgages rationed to only the highest credit borrowers has cut housing turnover off at the knees. This means fewer buyers of appliances and other things you need to remodel a new home purchase. It also kills job mobility, trapping worker where the jobs aren?t. Notice that vast suburbs remain abandoned in Las Vegas and Phoenix, while thousands live in impromptu RV camps in booming North Dakota.
If you want to understand the implications of the fiscal cliff at year end, watch the cult film, Thelma and Louise, one more time.? That?s where the heroines deliberately go plunging into the Grand Canyon in a classic Ford Thunderbird. The noise surrounding the presidential election is going settle ones nerves about as much as scratching one?s fingernails on a chalkboard.
The global situation looks far worse than our own. This is not good, as foreign sources account for 50% of S&P 500 earnings, and as much as 80% for many individual companies. To understand how wide the contagion has spread, look at the numbers put out on a recent JP Morgan forecast.
The European impact on our economy is about as welcome as the 1918 Spanish flu, when million died. (JPM) cut their expectation of growth there from -0.1% to -0.5%. Italy is shrinking at a -2.2% rate. Their prediction for growth in Latin America has been chopped -0.5% to 3.3%, while China has been pared by -0.5% to 7.7%. Japan is enjoying a rare 0.5% pop to 2.5%, but that is expected to fade once a massive round of tsunami reconstruction spending is done. Overall, global growth is decelerating from 4.5% to only 2%, with 82% of that growth coming from emerging markets. The last time a global slowdown was this synchronized was in 2008. Remember what stock markets did then?
All of this may be why hedge funds are fleeing this market in droves as fast as they can, including myself. Many of the small and medium sized funds I know are now 100% cash, and the big ones are only staying because they are trapped by their size. There are few good longs out there for the moment and fewer shorts. Prices are gyrating on a daily basis, triggered by overseas headlines where every else seems to have an unfair head start.
Suddenly the yacht at Cannes, the beach at the Hamptons, and the golf course at Pebble Beach seem much more alluring. Yes, clients dislike it when their managers are flat because they are getting paid for doing nothing. But they hate losing money even more.
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.pngDougD2012-06-24 23:03:552012-06-24 23:03:55Why I Am Chopping My US GDP Forecast to 1.5%
The easy money has been made on the short side this year for a whole range of asset classes. While we will probably see lower lows from here, the risk/reward ratio for taking short positions in (SPX), (IWM), (FXE), (FXY), (GLD), (SLV), (USO), and (CU) are less favorable than they were two months ago.
Of course, the ultimate arbiter will be the news play and the economic data releases. It they continue to worsen as they have done, you can expect a brief rally in the (SPX) up to the 1,340-1,360 range before the downtrend resumes. First, we will revisit the old low for the move at 1,290. Then 1,250 cries out for attention, which would leave us dead unchanged on the year. Lining up next in the sites is 1,200. But to get that low, probably by August, we would need to see something dramatic out of Europe, which we may well get. For the Russell 2000, look to sell it at the old support range of $78-80, which now becomes overhead resistance, to target $72 on the downside.
Don?t underestimate the devastating impact the Facebook (FB) debacle will have on the overall market. Retail investors lost $6 billion on the deal after institutional investors were given the heads up on the impending disaster and stayed away in droves. The media has plenty of blood on its hands on this one. The day before the pricing, one noted Cable TV network reported that the deal was oversubscribed in Asia by 30:1. Morgan Stanley reached for the extra dollars, increasing the size, and boosting the price by 15%. It all came to tears.
Expect investigations, subpoenas, congressional hearings, prosecutions, multi million out of court settlements, thousands of lawsuits, and many careers ended ?to spend more time with families.? Horrible thought of the day: Apply Apple?s (AAPL) 8X multiple, which is growing at 100% a year, to Facebook, which is not, and you get a (FB) share price of $5. None of this exactly inspires confidence in the stock market.
Notice that emerging markets have really been sucking hind teat this year, dragged down by falling commodity prices, a slowing China, and a general ?RISK OFF? mood. This is probably the first sector you want to go back in at the summer bottom to take advantages of their higher upside betas.
The Euro went through the old 2012 low at $1.260 like a hot knife through butter. On the breach, a lot of momentum programs automatically kicked in and doubled up their short positions. That is what has taken us all the way down to the high $124 handle in the cash. Let?s see how the market digests this breakdown. The commitment of traders report out on Friday should be exciting, as we already have all-time highs in short positions in the beleaguered European currency.
The problem is that any good news whispers or accidental tweets on the sovereign debt crisis could trigger ferocious short covering and gap openings which the continental traders will get a head start on. So again, this is not the low risk trade that it was months ago.
Still, the 2010 lows at $1.18 are now on the menu. I would sell all the ?good news? rallies from here two cents higher. Aggressive traders might consider selling penny rallies, like the one we got today. Notice that the Euro is rallying into the US close every day. This is caused by American traders covering shorts, not wishing to run them into any overnight surprises.
The Japanese yen seems to be stagnating here once again, now that the Bank of Japan has passed on another opportunity to exercise more much needed quantitative easing. Therefore, I will use the next dip to get out of my September put options at a small loss. There is a better use of capital and bigger fish to fry these days.
The Australian dollar has been far and away the world?s worst major currency this year, falling from $110 all the way down to $94 on a spike. It now languishes at $97. I long ago stopped singing ?Waltzing Matilda? in the shower. I hope all my Ausie friends took my advice at the beginning of the year and paid for their European and American vacations while their currency was still dear. We could see as low as $90 in the months to come.
Gold (GLD) and silver (SLV) still look week, as this week?s failed rally attests. The strength of the Indian rupee still has the barbarous relic high priced for the world?s largest buyer, and this will continue to weigh on dollar based owners. But we are also reaching the tag ends of this move down from $1,922. Speculative short positions are at a multi-year low. It would take something pretty dramatic to get me to sell short gold again. For the time being, I am targeting gold at $1,500 on the downside, $1,450 in an extreme case, and $25 in silver.
We are well into the move south for oil, which peaked just at the March 1 Iranian elections just short of $110/barrel. The market now seems to be targeting $87 for the short term. The global economic slowdown is the clear culprit here. But in the US, we are starting to see a clear drag on oil prices caused by the insanely low price of natural gas. You can see this clearly on the charts below where gas has been rising while Texas tea has been plunging. Utilities and industry are switching over to the cleaner burning ultra cheap fuel source as fast as they can. As a result, greenhouse gas emissions are falling faster in the US than any other developed country, according to the Paris based International Energy Agency. Sell any $4 rally in crude and keep a tight stop.
When China catches cold, copper gets pneumonia. So does Australia (FXA), (EWA), for that matter. The China slowdown will most likely continue on into the summer, knocking the wind out of the red metal. If copper manages to rally back up to $3.60, grab it with both hands and throw it out the window. Cover when you hear a loud splat. That works out to about $26.50 in the ETF (CU).
It all points to a highly choppy and volatile ?RISK ON? rally that could last a week or two. It will be a time when you wish you took your mother in law?s advice to get a real job by becoming a cardiologist or plastic surgeon. Do you want to know when I want to reestablish my shorts? If you get a modestly positive nonfarm payroll on at 8:30 am on Friday, June 1, that could deliver a nice two day rally that would be ideal to sell into.
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.pngDougD2012-05-24 23:03:212012-05-24 23:03:21My Tactical View of the Market
Legal Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.
Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.
Essential Website Cookies
These cookies are strictly necessary to provide you with services available through our website and to use some of its features.
Because these cookies are strictly necessary to deliver the website, refuseing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.
We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.
We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.
Google Analytics Cookies
These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.
If you do not want that we track your visist to our site you can disable tracking in your browser here:
Other external services
We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.