(IWM) Archives - Page 11 of 11 - Mad Hedge Fund Trader

Economist David Hale Says the Action will be in Southeast Asia

I have been relying on David Hale as my de facto global macro economist for decades, and I never miss an opportunity to get his updated views. The challenge is in writing down David?s eye popping, out of consensus ideas fast enough, because he spits them out in such a rapid-fire succession.

Since David is an independent economic advisor to many of the world's government?s, largest banks, and investment firms, I thought his views would be of riveting interest. It was with great pleasure that I joined him for lunch at the Federal Reserve Bank of San Francisco to discuss the outlook for Asia.

David sees the US economy growing by 2.5% in 2013, China by 8.5%, but for much of Europe to remain in recession. He sees the best growth opportunities in Southeast Asia, which delivered stellar results last year.

The Philippines grew by 6.6% and has the best long-term outlook of all. Some 600,000 now work there in the call center and support business, and the industry is growing at a breakneck pace. Personal consumption is flying, and the government is about to launch a major infrastructure program. Heaven knows they need it, as I recall the roads there are absolutely deplorable. The ETF (EPHE) was on fire last year, up some 56%, making it one of the best performing single country funds.

Indonesia (IDX) expanded by 6.1% in 2012, making a killing on energy and commodity exports to China and Japan. Its ETF was unchanged last year, but could be ready for take off. Thailand (THD) scored a 5.5% gain in its GDP, boosted by flood reconstruction, taking its ETF northward by 38%. Malaysia?s economy (EWM) expanded by 5.3%.

David has seen the same dramatic improvement that I have in the economic data from China over the last three months. This is in response to a moderate stimulus budget which they started to implement in the summer. Residential housing, which has been a major drag on the economy for the past year, is now starting to trend up. Liberalization of real estate lending is in the cards.

While the Middle Kingdom lost 20 million jobs during the 2008 crash, almost none disappeared in the latest slowdown. This year, Chinese consumption will exceed that of the US for the first time in history, at $470 billion compared to $403 billion.

The fight against corruption has emerged as a major domestic issue. Some 25% of all the luxury spending in China is though to be for gifts (bribes) to government officials. Mid level Mandarins caught wearing $50,000 watches are now getting fired.

David made some far out predictions that were real zingers. Population growth is grinding to a halt throughout Asia. It is already well below the replacement rate in Japan and South Korea, which will soon be joined by China. This will eventually lead to labor shortages in Asia, and bring to an end the cheap labor regime, which has driven their economies for the past 100 years. The Chinese work force will shrink from five times ours to only three times.

Their cost advantage then goes out the window. The upshot for us is that perhaps half of the 6 million jobs that America lost to China over the last 20 years will come back. Many items can now be bought cheaper in Chicago than they can in Shanghai.

China will still become far and away the world?s largest economy in our lifetimes. In 1700, Asia accounted for 58% of world GDP. Some 250 years of wars pulled that figure down to 15% by 1950. It is on track to recover to 50% by 2050.

To learn more about David Hale and the extensive list of services he offers, please visit the site of David Hale Global Economics at http://www.davidhaleweb.com.

Mr. Mario?s Big Bluff

Newsletter

A couple of alleged Tweets, a few rumored phone calls, and what have we got? $2 trillion in new global stock market capitalization in hours. That was the bottom line after the purported communication between the staffs of Germany?s Angela Merkel, France?s Jean Francois Hollande, and ECB president Mario Draghi. But is the creation of this immense new wealth, which would alone rank as 10th in terms of GDP after France, justified?

If the intention was to punish hedge funds, the goal was certainly accomplished. The plaintive bleatings in email and text messages I received from hedge fund friends back home has been overwhelming. It was clear from the price action, straight line moves with no pullbacks, that the pain trade was definitely on. Pre-Thursday, the consensus wisdom was that market would crash into the August doldrums in the face of global economic data that was deteriorating by the day. Such is the price of betting against central banks that I highlighted in my recent trope ?Why Ben Bernanke Hates Me? (click here at http://madhedgefundradio.com).

Leading research houses seemed to be in an arms race with government institutions to see who could cut growth forecasts the fastest. They were all egged on by US Q2 corporate earnings reports, that were highly fudged and indifferent at best, with the most honest wisdom provided by the shocker from Apple (AAPL).

However, in the financial markets that are more often driven by emotion than information, politics trump fundamentals every day. With the street heavily positioned on the short side, the conditions for a snap back rally were ripe. This is why I had no positions at all for 10 days, and no equity holdings for over a month. Rather than chase the market on the downside, I waited for it to come to me, which is usually the best thing to do.

I have always believed that Europe has the ability and the resources to solve its problems at any time. To read my advice to the German government in detail, please refer to my report from Frankfurt, which I will write in the next couple of days, when I get some time.

All that is required is for Europe to make some unpleasant admissions of truths, and adopt some policies and institutions that have already been proven to work in the US. These are hard things to do politically, but that can be done. Make the politicians earn their pay for a change, I say. This is what makes the short game in Europe so risky, and why I have recently been so wimpy on my short Euro (FXE), (EUO) recommendations (in the reports, but without trade alerts).

Words are cheap, and their true value will become apparent when it comes time for Mario Draghi to deliver. If he does so quickly, we could see a ?RISK ON?, rally that could last until the end of the year and possibly take the S&P 500 up to 1,500. If he doesn?t, the August crash scenario down to 1,200 is back on the table, but no more. That table loses another leg if Ben Bernanke fails to deliver QE3 on Wednesday.

If all of this leaves you confused and befuddled, then welcome to the club. There are times when markets are just not forecastable, when the number of large variables and unknowns are too great to even make an intelligent guess at outcomes, and this is one of them. That?s why I am still 70% in cash, limiting my ?RISK ON? exposure to small, profitable positions in short Treasury and short yen call spreads. That?s down from 100% I had just last Wednesday.

I think I?ll go climb that Alp over there.

The Pain Trade is on for Hedge Funds

This Party is About to End

Newsletter

They are really rocking the market today, with the Dow up nearly 200 points off the back of a non-disastrous Chinese GDP growth figure of 7.7%. However, there is a serious disconnect going on in our markets which suggests to me that our own party may be about to end.

Yesterday?s blockbuster weekly jobless claim took applications for unemployment benefits down to a four-year low of 350,000. But if you ignore this, you have an unending series of data reports that shows an economy clearly decelerating to a growth rate of 1% per annum or less. That is one-seventh China?s rate.

And yet, you have an S&P 500 with a top end range that is a mere 3% within the high for the year. You don?t need a PhD in math from MIT to understand that rising stock prices and falling growth are an anomaly that can?t last and can only end in tears.

I think this is happening for a couple of reasons. Many traders are awaiting Q2, 2012 earnings reports and are willing to give companies the benefit of the doubt until they are out. Stocks are at the historic low end of valuation ranges. Many institutions are still underweight, and willing to use dips to pick up some bargains. This is why this summer has been a short seller?s nightmare, volatility has fallen through the floor, and many hedge funds have bailed for the duration.

I also think that many institutions are waiting for the Federal Reserve to announce QE III at their end of July meeting, thus powering the market to new yearly highs. I?m betting that they will be sorely disappointed. Ben Bernanke has so few bullets left to protect the economy that he will wait until the Indians are circling the wagons and unleashing a barrage of arrows, before he takes action. Quantitative easing is meant to be a safety net, not a stepladder from which to boost ever-higher asset prices. The Fed?s failure to deliver could give us the trigger we need to break to new lows in August.

Take a look at the charts below to see how clearly defined the recent channels and ranges are. Next time the SPX approaches 1,370, I might think about going short, taking out some downside insurance, selling out of the money calls, and generally getting yourself into a risk off posture. If you don?t, your summer could turn into a giant rainstorm.

This Party is Nearly Over

Check Out These Interesting Charts

Newsletter

I ran through a number of charts provided by my friends at Stockcharts.com, and as a person who has been piling on the shorts for the past two weeks I was greatly encouraged. Almost every single one was pregnant with gloomy implications. This is all happening a mere 12 days before the Great Escape in May commences. Virtually every technical indicator I follow is now flashing warning signs and ringing alarm bells.

Here is my own personal interpretation. The Russell 2000 (IWM) could potentially be setting up a head own shoulder top targeting $75 on the downside. My short here is one of my biggest positions. The Consumer Discretionary Select SPDR (XLY) is pulling away from the absolute top end of its upward channel and is ripe for a 10% pullback. Ditto for the Technology Select Sector SPDR (XLK), which could give back 15%. The Financials Select Sector SPDR (XLF), one of the hottest areas this year, could actually be setting up a new downtrend. The same is true for the Materials Select Sector SPDR (XLB). And tell me that is not a double top in the Industrials Select Sector SPDR (XLI).

This all suggests that 1,325 for the S&P 500 is a chip shot on the downside, and maybe more. I have a feeling that killings are about to me made on the short side.

Where to Play From the Short Side

Newsletter

This time I am going to start with the fundamental argument first, then follow up with the Trade Alert.

We are getting perilously close to a substantial pull back in global risk assets. While this has already started in commodities, the ags, oil, copper, and precious metals, we have yet to see the whites of their eyes in equities. I believe at these levels stocks are the planet?s most overvalued assets, at least on a short term trading basis. So I have begun more aggressively searching for plays that would benefit from substantial moves southward.

My personal preference is to gain downside exposure on small capitalization stocks. You can achieve this through buying put options on the Russell 2000 iShares ETF (IWM).

You have several things going for you in falling markets with this ETF. Small stocks are illiquid and therefore suffer the biggest pullback during market corrections. If Heaven forbid, double dip fears return this summer, small caps will fall the farthest and the fastest. They are most dependent on outside financing which rapidly dries up during times of economic distress.

You can see this clearly during last year?s summer swoon. The last time we thought the world was going to end, the (SPX) fell by 20% while the (IWM) plunged by 29.5%. This means that small cap stocks are likely to deliver 150% of the downside compared to big cap stocks. Making money then with shorts in the (IWM) was like shooting fish in a barrel.

You see this on the upside as well. Since the October, 2011 lows, the (SPX) leapt by 30% compared to a much more virile 38% move by (IWM). The (IWM) really does present the scenario where the smaller (or higher) they are, the harder they fall.

If you go into the options market you get this extra volatility at a discount. June at-the-money puts for the (SPY) carry an implied volatility of 15%, compared to 20% for the (IWM) puts. That means you get 50% more anticipated movement in the index for a premium of only 33%.

For those who wish to avoid options, you can buy the inverse ETF on the sector, the (RWM). But the liquidity for this instrument is a mere shadow of its upside cousin, the (IWM). You are better off shorting the (IWM) than buying the (RWM).

These Look Pretty Interesting

Bear Trap Sprung

Diary

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.

Cover Those Shorts!

Tag Archive for: (IWM)