(SPY) Archives - Page 67 of 69 - Mad Hedge Fund Trader

Say Goodbye to the Washington Discount

If it hasn?t happened by today, then it is no more than a week away. The deep discount suffered by American stocks is about to go away. Thanks to the manufactured uncertainty emanating from the nation?s capital created by the government shutdown, stocks have been selling at a 10% or more discount to where they should be.

As things stand, the shutdown is chopping about 1/8% a week from America?s GDP growth. If it runs for another week, it will add up to a 0.25%. What economists haven?t considered in these figures is the additional 0.25% loss that will come from a restart of the government. People are so afraid of the shocking cessation of many government services that they are cleaning out ATM?s, forcing the banks to maintain higher than normal cash levels.

The 2013 Federal budget provides for $3.8 trillion in government spending out of a $16.5 trillion GDP, some 23%. I tried to get more precise figures by clicking the link for the Department of Commerce Bureau of Economic Analysis website (http://www.bea.gov/index.htm ), and was greeted by the closest thing you can imagine for a middle fingered salute. You just don?t snap your fingers and expect a quarter of the economy to sprint out of the blocks.

There is another cost to consider. All government statistics have been rendered meaningless for the rest of the year. Even if the government restarts tomorrow, aberrations in the data will plague us well into next year, making economic forecasts more difficult and less meaningful than usual. This is when the moving averages for data series will really earn their pay.

My political theory for the past three years has been that the Tea Party wing of the Republican Party will act unimaginably stupid, dragging governance to new lows, wreaking the maximum amount of damage possible. They feel that if they can?t own the government, they must break it.

Gerrymandering means they can?t be dislodged by elections. These people are being cheered by supporters for their appalling behavior back home in the heartland of America. This will ultimately lead to the destruction of the Republican Party, and is why President Obama is quite happy to sit on his hands and do nothing. Why interfere when your opponent is committing suicide?

So far I have been right on the money. An accurate political read has been a major element in delivering my 100% gain since the end of 2010, no matter how unpopular it may be.

This analysis has the government shutdown lasting until October 17, little more than a week from today, and vastly longer than expected. That?s the day the government shutdown rolls into the debt ceiling crisis. With far more cataclysmic consequences at stake, this crisis has a greater likelihood of getting solved.

This is all spectacular news for investors, who have recently been boning up on their history. The 17 government shutdowns since 1975 have averaged six days. After each one, stock rose by an average 7.8% in the following six months, and by 13.2% over the following year. We could be in for similar returns in this round. ?It looks like its going to be off to the races once again, and my yearend target of 1,780 for the (SPY) is looking good.

The 0.5% in growth we are losing this quarter will get rolled into the next. Q1, 2014 was already setting up to be hot, thanks to a global synchronized recovery in the US, Europe, Japan, China, and even Australia. Some 60% of world GDP is now enjoying unprecedented easy money. This concentration of more growth into the next quarter could take the US GDP figure as high as an annualized 3.5%.

Portfolio managers have already figured this out, which is why they are relentlessly buying every dip, and explains the modest 3.5% drop in the S&P 500 we have seen since the shutdown began. Providing additional rocket fuel is the fact that many firms are under the gun to get new money into the market by the end of the year.

There is one certainty here. The shutdown firmly takes a taper by the Federal Reserve off the table for 2013. It turns out that Ben Bernanke correctly read that the Tea Party would drive the economy off a cliff, and that the safety net of continued monetary stimulus was needed. Nice call, Ben! This will give the bulls the fodder they need to take stock prices up all the way until next spring, when we may finally get a real taper.

I would be using the down days from here on to scale into the hottest sectors of the market, especially the 2X leveraged ETF?s. You can do this with consumer discretionary stocks with the (XLY), (UCC), industrials with (XLI), (UXI), technology with (XLK), (ROM), and with health care through the (XLV), (RXL).

This is what I really want to know. Last Sunday, the hit TV drug show, Breaking Bad, saw its series finale. The cult terrorism drama, Homeland, delivered its third season opener at the same time. The next day, the government closed.

Do you think there is a connection?

Is There a Connection?

It?s All About Larry

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When I first heard about Larry Summers decision to withdraw his name from consideration as the next Chairman of the Federal Reserve, I thought ?Whoa! ?RISK ON, here we come.? I knew immediately that global stock (SPY), bond (TLT), and commodity markets would rocket and the dollar would crash (FXA), except against the Japanese yen (FXY), (YCS). That?s what we got in spades at the Monday morning opening.

This has to be one of the greatest left-handed compliments of all time. Who knew Summers choice to remain in the private sector would add 20 points to the S&P 500 and slash 10 basis points off ten year Treasury yields? The markets are saying ?Thank you for staying away,? in the loudest possible voice. It reminds me of the huge pop in Microsoft (MSFT) stock we saw in the wake of CEO Steve Ballmer?s retirement announcement. Is Summers really that bad?

You have to wonder if the guy who got fired as the president of Harvard University for his cantankerousness was the ideal pick to build a consensus among the sitting Fed governors, a group already known for outsized egos. The financial markets were afraid that he would deep six Ben Bernanke?s quantitative easing policy because it might reignite the inflationary fires far down the road.

After all, it wasn?t his idea, and his public comments about the hyper expansionary monetary policy were neutral at best. ?Not invented here? would have been a great reason to end the stimulus once the new governor takes up his post in January. This is why I have been predicting that a Summers pick by Obama would have chopped 10% off the Dow in a matter of days.

My long time friend, Federal Reserve co-chairperson, Janet Yellen, is now the no brainer winner here. For a start, her co-chair position makes it an easy transition to the top job that will be welcomed by the markets. She is widely loved and respected at the UC Berkeley Haas School of Business, where she taught for many years, and where I also have been known to address the occasional class.

She is already viewed as an ultra dove who will keep QE initiative alive and well. Fed governors tend to be more representative of their local economy than national trends. Texas governors reflect what is happening in the oil industry. As the most populous state in the nation, California governors are a mirror image of what is going on in the housing market, the Golden State?s largest industry. Education and technology are not far behind.

That is great news for the rest of us. A housing priority means keeping interest rates lower for longer. It will not only help the real estate market, but all ?RISK ON? assets as well. It makes our jobs as traders easy. You just close your eyes and BUY. That?s why stocks are inches short of all time highs as I write this.

I have been ramping up risk in my model-trading portfolio all month, as have most other hedge fund managers. But I was doing so for different reasons. I did not believe Bernanke would taper this month, as the economic data are lukewarm, at best. I thought a taper no show would send markets soaring, and was positioned accordingly. It turns out that a Summers no show has the same effect. It?s all a classic example of ?The harder I work, the luckier I get.?

Which begs us to ask the question, ?Is Yellen really that good?? the permabulls shouldn?t get too deep over their heads here. The things that Janet looks at to track the health of business activity are starting to light up. Housing in San Francisco is up a blistering 32% YOY. And Silicon Valley is probably the only part of the country that is seeing real wage inflation. There are rampant bidding wars here for competent computer programmers and engineers. Soaring asset and wage prices are the traditional reason for the Fed to throttle back and raise interest rates. Therefore, the ultra easy monetary policy the markets expect from Yellen may, like Larry Summers, be dead on arrival.

Obama also has an opportunity here to address a frequent complaint from his base, that he hasn?t been appointing enough women in senior positions in his administration. Here is a great one all tied up with a bow and ready to go.

Janet Yellen grew up in the Bay Ridge section of Brooklyn, New York, from which the Italian branch of my OWN family originates. She graduated summa cum laude from Brown University (I thought they didn?t give grades?), and went on to get a PhD from Yale, where she rubbed shoulders with Hillary Clinton.

She started work as an economist at the Federal Reserve in 1977. Her first political appointment came in 1997 when Bill Clinton named her to the Council of Economic Advisors. From 2004-2010 she was president of the Federal Reserve Bank of San Francisco, where she was a voting member of the Federal Open Market Committee. In 2010, Obama made her vice chairperson of the Federal Reserve.

Oh, and for good measure, her husband, George Akerlof, has a Nobel Prize in economics. The kitchen talk must be fascinating.

A woman in charge of the national purse strings? Yikes! There goes my bowling allowance!

Next Up for Bernanke?s Job

My 2013 Stock Market Outlook

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It?s time to put on your buying boots and throw caution to the wind. The S&P 500 (SPY) is likely to rebound as much as 9% from the recent 1,630 low to as high as 1,780 by the end of December. What?s more, stocks could add another 10%-20% in 2014. The nimble and the aggressive here will be rewarded handsomely. Those who keep their hands in their pockets will sadly watch the train leave the station without them, and shortly be exploring career options on Craigslist.

The move will be driven by the double-barreled improvement in valuation parameters, rising earnings and expanding earnings multiples. S&P 500 earnings are likely to come in this year around $107, modestly above the New Year forecasts. An improving economy could take that number as high as $117 next year.

This is encouraging underweight investors to pay up for stocks for the first time in a very long time. Today?s (SPX) 1,660 print gives you a 15.5 multiple. Boost that to 16.5 times, and the 1,780 number is served up to you like a Christmas turkey on as silver platter. Maintain that multiple, and the (SPX) grinds up to 1,930 by the end of 2014. With earning multiples smack dab in the middle of an historic 9-22 range, this is not an outrageous expectation. This is known in trading parlance as a ?win-win,? and creates a positive hockey stick effect on your P&L.

Of course, there are still many non-believers out there. Reveal yourself as a bull in the wrong quarters, and a torrent of abuse piles upon you. The taper, Syria, the debt ceiling crisis, and another sequester will demolish the economy and send stocks tumbling. There are plenty of Dow 3,000 forecasts out there. Thank you Dr. Doom.

Here?s the wakeup call: you are reading about these risks in this newsletter, and thousands more out there. None of these risks have the ability to surprise the market, as they have been so belabored by the media. They will most likely be solved fairly quickly. Everyone is planning on using these events as a buying opportunity. They are fully priced in. That?s why stocks have failed to pull back more than 7.4% since November, when the Obama reelection shock pared 10% off share prices.

What will be the short-term triggers for the next leg up? I?ll round up the most likely suspects for you.

1) Ben Bernanke?s taper of the largest quantitative easing program in history will either come in smaller than expected, or won?t show up at all. Concerns over weak jobs progress, flaccid economic growth, Syria, zero inflation, and the debt ceiling have cut the knees out from more substantial action. Here?s some quickie math. A $10 billion a month taper leave $75 billion a month on net federal bond buying in place for at least another quarter.

2) Bonds have been falling since April, taking interest rates up. Once the taper is announced, they will rally and limit moves to a new, higher 2.50%-3% range on the ten-year Treasury (TLT).

3) Syria will go away pretty soon, peacefully or otherwise. Despite the humanitarian disaster, nobody here really cares what happens on the other side of the world.

4) The debt ceiling crisis will generate headlines and sound bites for a few weeks, and then get resolved or end with a second sequester. This year?s sequester proved highly stock market positive, as it sent the government?s budget deficit plunging at the fastest rate in history, with the first serious cuts in military spending since the end of the cold war.

5) The economic data flow from Europe is modestly improving. Crises are becoming fewer and farther between.

6) The already great data from Japan is coming in even hotter than expected.

All of this makes US equities the world?s most attractive asset class. For a listing of longer term positive factors which few in the market currently appreciate, please read my early piece (?Why US Stocks Are Dirt Cheap? by clicking here).

This is not your father?s bull market. While interest rates have been moving up at the long end, they are still half of what they were at this point in past market cycles. Five years of balance sheet repair since the financial crisis mean that corporations are carrying only half the debt and leverage seen at previous market peaks.

There will also be no new tax increases for the foreseeable future. The fiscal drag on the economy, which knocked 1% off GDP growth this year, is diminishing rapidly. Remove the dead weight, and US growth could rebound to 3.5% next year.

Dividend yields are far higher, with nearly half of the S&P 500 still yielding more than the 10-year Treasury bond. Investment in stocks, particularly large caps, is safer now than it has been at any time since the Great Depression.

Another big bullish factor could be president Obama?s decision regarding Ben Bernanke?s replacement as chairman of the Federal Reserve. Naming co-chairperson, the ultra dovish Janet Yellen, could add another 20% to the (SPX), with investor expectations of ?QE forever? taking earnings multiples even higher. If mildly hawkish Larry Summers gets the nod, it might chop 10% off the index.

Which sectors will take the lead? Technology is still the area that the world wants to own. Profits are rising faster than in the main market, and they boast large amounts of cash. Look no further than Apple?s (AAPL) $150 billion wad, a third of its total capitalization. It is selling the bottom end of its historical multiple range and at a market discount. I?m not just talking Apple (AAPL), the behemoth that could make it up to $600 next year. Cloud and mobile plays will also be highly sought after.

For those with more pedestrian tastes, you can?t go wrong with plain vanilla industrials and cyclicals, which will continue to appreciate off the back of a stronger economy. Even financials should do well, given an assist from a steepening yield curve, their traditional bread and butter.

What could pee on this parade? Washington, what else? If the government shuts down and stays closed, this could give you your long awaited 10% correction, or more. The last time they threatened this, stocks gave up 25% in just two months. Will this happen? I doubt it. But no one ever went broke underestimating stupidity in our nation?s capitol.

Caveat emptor!

Higher Prices Beckon

Battle Testing Your Portfolio

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The great thing about the sudden $5 pop is the price of oil since Monday is that it battle tests your portfolio. You really don't know what you own and the risks it entails until something like this comes along. I'll explain why.

For a start, you get a very clear idea of which of your assets are of the "RISK ON" variety, and which are of the "RISK OFF" persuasion. This is easier said than done because asset classes often change gender, flipping from "RISK ON" to "RISK OFF" without warning. Knowing which is which is crucial in hedging portfolios and measuring your risk. It is not unusual for a trader to believe he has a safe bet on, only to watch his portfolio completely blow up because the cross asset relationships have changed.

Look at Tuesday's market action. Traditional "RISK ON" assets, like stocks (SPY), got pounded. The traditional flight to safety assets, such as bonds (TLT) and gold, did well. This is where a typical balanced portfolio does well. Oil (USO) is usually a "RISK ON" asset, but not this time. Fears of a supply interruption, no matter how unfounded they may be, sent prices for Texas tea through the roof. On this round, oil clearly fell out of the "RISK ON"/"RISK OFF" model.

Not only do assets show their true colors in conditions like this. They also demonstrate their character. Look at the gold/silver ratio. Historically, silver (SLV) moves twice as fast has gold (GLD), with double the beta. Since the last low, it has doubled gold's move. When the barbarous relic gained 17% from the recent $1,175 low, silver roared some 36%. Thus the relationships have been maintained.

How did my own model trading portfolio do? I took it on the nose with my oil short, moving from a profit to a loss. But my short positions in the yen and the euro did well, nearly offsetting those losses. So overall, my 35% year to date performance has been protected, and the volatility kept down. This is whyy I always try to run a book of counterbalancing "RISK ON" and "RISK OFF" positions, or stay very small. You should do the same.

Oil Has Suddenly Become Hot

The Technical/Fundamental Tug of War: Who Will Win?

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For the last few weeks, I have had two groups of analysts screaming in my ears.

Fundamental researchers are asserting that at $105 per share in earnings, generating a price earnings multiple of 15, stocks are at the historic middle of a 10-22 range. Q2 earnings are over, and modestly outperformed on the upside, although not with the magnitude seen in recent quarters. Plus, the taper is on the table, and the Federal Reserve may deliver a surprise at its upcoming September meeting.

Furthermore, risk assets are about to enter a period of seasonal strength. If you ?sell in May and go away?, you should then ?return in September and buy, fill your boots.?

No, no, cry the technicians. Although the small caps (IWM) have been going gangbusters, the large cam Dow and S&P 500 indexes have failed to put in new highs, raising the risk of a failed double top.

What is a befuddled individual investor to make of all this? My belief is that fundamentals always win out over the long term, and that technical cues are at best, a lagging indicator. I use charts for guidelines on where to place orders on a short term basis. The longer you stretch out your time frame, the less relevant they become.

At best, technicals are right 50% of the time, right in the same league as a coin toss, and most of the brokers and investment advisors out there. How many technical analysis hedge funds are out there? None. They are all fundamentally driven. The same technicians making the incredibly bearish prognostications today were making equally convincing bearish arguments last November.

However, since we are descended from prehistoric hunter-gatherers, we are all visually oriented. We respond to stimuli we can see much more rapidly than those we can conceive. A picture truly is worth 1,000 words, and probably a lot more. That?s why so many brokerage firms use them to sell research. I employ charts to back up my fundamental arguments because they are so easy to understand, definitely not the other way around.

So I think the fundamentals will eventually win out, and that we will get the autumn rally that I have been predicting. In fact, we may be only four years into a seven year bull market that is in the process of boosting price earnings multiples from 10 to 18 or 19. The mountain of cash sitting on the sidelines, and the failure of the major indexes to pull back more than 7.5% this year are telling you as much.

Exactly when will the big move up happen? Don?t ask me. Go ask a technician.

Great Technician, Lousy Fundamantalist

More of the Same from Uncle Ben

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Ben Bernanke delivered exactly what I expected today, continuing his massively simulative monetary policy as is. The taper went missing in action, and search parties have been already sent out by the bears.

In the past this move would have triggered a massive move up in risk assets, and a collapse of the bond market, but not this time. Bernanke's news is not exactly new, and leaving things unchanged doesn't exactly prompt frenetic bouts of volatility. We are also in the summer doldrums, with much of the market liquidity now competing in company golf tournaments, gorging at clambakes, or topping up tans at the beach.

What this sets up is a rather dreary season of trading inside narrow ranges. The S&P 500 (SPY) will bounce along like a ping pong ball between 1,580 and $1,680, the ten year Treasury bond (TLT), (TBT) within 1.90%-2.40%, the yen (FXY), (YCS) inside ?98-?104, and gold (GLD) trapped inside $1,250-$1,480.

You can trade outside of these ranges with alternating call and put spreads and take in some modest returns. Or you can conclude that the risk/reward is mediocre at best, and join you friends on vacation. You don't fool me. When I send out my newsletter these days, those "Out of Office" messages are breaking out like sunburns at Coney Island, Navy Pier, and the Santa Cruz Boardwalk.

I think the markets are reserving their real fireworks for us in the coming fall. If the Federal Reserve's economic forecast is correct, we are headed towards a 2015 GDP growth rate of 2.9%-3.6%, an unemployment rate of 5.2%, and an inflation rate on only 1.6%-2.0%. That is a best case, "golden age" type scenario for the financial markets which leaves the Great Recession well in the dust of the rear view mirror.

The "Big Tell" here is the Fed's inflationary expectations rate. They are close to nil. The august government agency thinks that even a return to the long term average US economic growth rate above 3% won't ignite a wildfire of price hikes. That greenlights a continued pedal to the metal on monetary stimulus, and highlights the unemployment rate as the top priority.

These predictions would give us the launching pad for risk assets to commence a nice yearend rally. That would take the S&P 500 to $1,750, bond yield to $2.50%, the yen to ?110, and gold down to $1,100, much to the chagrin of gold bugs everywhere.

What was the biggest move today? My short position in the Japanese yen, which plunged a full 2% as Bernanke spoke. Sometimes fairy tales come true after all.

Where?s This Market Bottom?

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After yesterday?s 217 point swoon, the S&P 500 (SPX) has fallen 4.3% from its late May peak. It looks like the ?Sell in May? crowd is having the last laugh after all, of which I was one.

Is this a modest 5% correction in a continuing bull market? Or is it the beginning of a Harry Dent style crash to (SPX) 300 (click here for the interview on Hedge Fund Radio)? Let?s go to the videotape.

This was one of the most overbought stock markets in my career. I have to think back to the top of the dotcom boom in 2000 and the pinnacle of the Tokyo bubble in 1989 to recall similar levels of ebullience. In fact, two weeks ago we were at a real risk of a major melt up if we didn?t encounter some sort of pullback. So the modest selling we have seen so far has been welcome, even by the bulls.

There is still a reasonable chance the final decline will be nothing more than a pit stop on the way to new highs. Institutional weightings in equities are at a lowly 31%, compared to 50% 20 years ago. It seems that everyone in the world is overweight bonds (see yesterday?s piece on ?Welcome to the Sack of Rome?).

In recent weeks, the S&P 500 yield ratio has fallen behind that of the 10 year Treasury bond, at 2.10%, but only just. With a price/earnings multiple of 16, we are bang in the middle of a long time historic range of 10-22. Zero overnight interest rates argue that we should be at the top end of that range. The argument that the ?Buy the Dip? crowd is still lurking under the market is real, just a little further than the recent dips allowed.

So how much lower do we have to go? After the close, I enjoyed an in depth discussion with my old friend, Jim Parker, of Mad Day Trader fame about the possible permutations. The following is an itinerary of what your summer trading might look like, expressed in (SPX) terms:

6.2% - 1,605 was the Wednesday low, the 50 day moving average, and the downside of the most recent upward sloping channel on the chart below. This trifecta of support is many traders? first stop for a bounce.

5.4% - 1,590 is the first major downside Fibonacci level. We could see this as soon as the May nonfarm report payroll is announced on Friday.

6.0% - 1,580 is the old 13-year high. Markets always love to retrace to old breakout levels.

6.5% - 1,570 represents a give back of one third of the November-May 330 point rally.

8.3% - 1,540 is the double bottom off the April low.

11.1% - 1,493 is the 200-day moving average. This is the worst-case scenario. I doubt we?ll get there, unless the fundamentals change, which they always do.

Jim gave me a couple more cogent insights. The average big swing move is 100-110 points. The last 100-point move sprung off of the March nonfarm payroll report, which came out on April 5. Big swings also often start and finish around an options expiration, the next one of those is coming on June 21. So for the short term, 1580-1590 is looking good.

To confuse you even further, contemplate the concept that I refer to as the ?Lead Contract.? There is always a lead contract around, one on which all traders maintain a laser like focus, which leads every other financial product out there. It says ?Jump,? and we ask ?How High?? It is also always changing.

Right now, the Nikkei average (DXJ) is the lead contract. The Japanese yen ETF (FXY) is the close inverse. Every flight from risk during the past two weeks has been preceded by a falling Nikkei and a rising yen.
If you want to get a preview of each day?s US trading, stay up the night before and watch the action in Tokyo, as I often do.

You might even learn a word or two of Japanese, which will come in handy when ordering in the better New York sushi shops.

Looking for More Market Insights

Five Stocks to Buy for the Second Half

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Take a look at the chart below for the S&P 500, and it is clear that we are at the top, of a top, of a top. How much new stock do you want to buy here? Not much. Virtually every technical trading service I follow, including my own, is now flashing distressed warning signals. Maybe we really were supposed to ?Sell in May and go away.?

All RSI?s are through the roof. We have not had a pullback of more than 3.2% in six months, the longest in history. It has been up 19 Tuesdays in a row. Some 67% of this year?s gains have been on Tuesdays, and 83% since the 2012 low. So buying Monday afternoon and selling Tuesday afternoon is the new winning investment strategy. It?s a day trader?s paradise. The market is clearly cruising for a bruising here.

A 5%-10% correction seems imminent. After that, we will probably power on to a new high by the end of the year. The Vampire Squid, Goldman Sachs, posted a 1,750 target for (SPY). Why not? Their number seems as good as any. Who knew that the top market strategist for the year would be perma-bull Wharton business school professor, Jeremy Siegel?

The smart money is sitting on its hands here, maintaining discipline, and waiting for better opportunities. It is also pounding away at the research, building lists of stocks to pounce on during the second half. It is still early, but here is my short list of things to watch from the summer onward.

Apple (AAPL) ? Rotation into laggards will become the dominant theme for those playing catch up, and the biggest one out there is Apple. Buy the dips now for a 25% move up into yearend. An onslaught of new products and services will hit in the fall, and the company is still making $60 million an hour in net profits. Look for the iPhone 5s, Apple TV, and new generations of the iMac, iPad, and iPods. It will also make its China play, inking a deal with China Telecom (CHA). The world?s second largest company is not going to trade at half the market multiple for much longer, especially while that multiple is expanding. Technology is the last bargain left in the market. QUALCOMM (QCOM) might be a second choice here.

MSCI Spain Index Fund ETF (EWP) ? Look for the European economy to bottom out this summer and recover in the fall. In the end, the Germans will pay up to keep the European community together. The reach for yield and the global liquidity surge will drive interest rates on sovereign debt down as well, accelerating the move up. Also, the more expensive the US gets, the more you can expect other parts of the world to play catch up. Spain is the leveraged play here.

iShares FTSE 25 Index Fund ETF (FXI) ? Now that the new Chinese leadership has their feet under the desk, look for them to stimulate the economy. China will play catch up with the US, which should start topping out by yearend. It is also an indirect play on the reviving Japanese economy, the Middle Kingdom?s largest foreign investor. Japan has gotten too expensive to buy, so consider this a second derivative play.

Proshares Ultra Short 20+ Year Treasury ETF (TBT) ? The Treasury market bubble is history, and it is just a matter of time before we break down from these elevated prices. Look for the ten-year bond to probe the high end of the yield range at 2.50%. I don?t expect Treasuries to crash from here, but you might be able to squeeze another 25% from the (TBT) in the meantime.

Citicorp (C) ? Look, the financials are going to run all year. Use the summer dip to get back into this name, the most undervalued of the major banks, and a hedge fund favorite. A multidecade steepening of the yield curve is a huge plus for the industry. Now that real estate prices are rising, some of those dud loans on their books may actually be worth something.

Ben?s New Leg for the Bull Market

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I just returned from my round of monthly wine club pick-ups in California?s lush and fertile Napa Valley. I invested a half hour soaking up the breathtaking views at the hilltop Silverado winery. Duckhorn offered a lavish lunch event, which I ducked out on. The Wagner family is prospering as always, recently opening a tasting room for their spectacular Caymus private label. The trunk of my electric Tesla S-1 is brimming over with fine cabernet, merlot, pinot noir, and the odd zinfandel.

Driving through rolling hills of ripening grapevines also gave me time to digest and contemplate the implications of the dramatic events of last Friday. The Department of Labor announced a bombshell of an April nonfarm payroll, showing 165,000 in job gains in the face of dire expectations, taking the headline unemployment rate down to 7.5%, a four year low.

Far more important were the dope slapping revisions of prior months. February was taken up from a healthy 268,000 to an eye popping 332,000. As if by magic, March was boosted from a feeble 88,000 to a more robust 138,000.

I made a nice killing with my long positions in Apple (AAPL) and the S&P 500 (SPY). But I also suffered painful stop outs in my short positions in the Russell 2000 (IWM), which only had two weeks to run to expiration, sending my performance for the month down in flames. Such is the risk of betting on this notoriously volatile and always revised data point. If you play with fire, you get burned.

There were 50 data points warning that the April nonfarm payroll was going to be a disaster, the details of which you can find in my most recently posted Global Strategy Webinar. They all painted a picture of an undeniably weakening economy, paving the way for a nice ?Sell in May? and a following summer correction right on schedule.

That?s why, to a man, every hedge fund trader went into the Friday release net short. So when the announcement came, the short covering was fast and furious. And it occurred across all asset classes simultaneously. Stocks of every description and commodities (CU) soared, while the Japanese yen (FXY) (YCS) and the Treasury bond market (TLT) cratered. Only the precious metals of gold (GLD) and silver (SLV) remained moribund, still working off a long hangover.

It turns out that I was not the only one who noticed the soggy economic data. It also caught the attention of Fed governor, Ben Bernanke, ECB president, Mario Draghi, and BOJ governor, Haruhiko Kuroda, who together launched a trifecta of coordinated rescue measures designed to provide emergency life support for the flagging recovery.

In the Fed minutes released on Wednesday, Uncle Ben suggested that he might actually increase monetary easing. The European Central Bank, in a better late than never move, finally cut Euro interest rates by 25 basis points. An indiscreet minister also hinted that negative Euro interest rates might be in the cards. Of course, burning all the shorts was part and parcel of this program.

So we now have to ask, what happens next? Welcome to an S&P 500 earnings multiple of 16, a figure not seen for six years! With zero interest rates, global monetary easing still expanding, and the rest of the world tripping over each other to buy American stocks, higher multiples are in the cards. Stocks that seem richly priced to us here seem unbelievably cheap to every one else.

How high is high? One old trader?s rule of thumb says that every multiple year breakout is worth at least 10%. That takes the (SPY) up to 1,760, and the Dow average to 16,500, possibly by year end. Instead of the major 5%-10% corrections investors have been expecting all year, we may continue to get sideways time corrections before each leg up.

There also seems to be another factor at work here. Every time I take a run at a 40% return, I get thrown back. It has already happened twice this year. It?s as if 40% is an unnatural act requiring incantations in strange tongues to surpass. Black swans come out of nowhere, as do the shocks and surprises. You can do all the work in the world in these conditions, and it often ends of being for free.

That?s why in past years, when I was running my big hedge fund, I would quit for the year whenever I approached the 40% level. I then sent a letter to my investors saying I?m not working anymore until I got paid my performance bonus off of the lofty numbers. I then proceeded to take extended vacations, sending my investors postcards from exotic locales.

They all loved it.

Bring Me That 40%

The Hard Numbers Behind Selling in May

Diary, Newsletter

If I had a nickel for every time that I heard the term ?Sell in May and go away? this year, I could retire. Oops, I already am retired! In any case, I thought that I would dig out the hard numbers and see how true this old trading adage is.

It turns out that it is far more powerful than I imagined. According to the data in the Stock Trader?s Almanac, $10,000 invested at the beginning of May and sold at the end of October every year since 1950 would be showing a loss today. Amazingly, $10,000 invested on every November 1 and sold at the end of April would today be worth $702,000, giving you a compound annual return of 7.10%.

My friends at the research house, Dorsey, Wright & Associates, (click here for their site at http://www.dorseywright.com/) have parsed the data even further. Since 2000, the Dow has managed a feeble return of only 4%, while the long winter/short summer strategy generated a stunning 64%.

Of the 62 years under study, the market was down in 25 May-October periods, but negative in only 13 of the November-April periods, and down only three times in the last 20 years! There have been just three times when the "good 6 months" have lost more than 10% (1969, 1973 and 2008), but with the "bad six month" time period there have been 11 losing efforts of 10% or more.

Being a long time student of the American, and indeed, the global economy, I have long had a theory behind the regularity of this cycle. It?s enough to base a pagan religion around, like the once practicing Druids at Stonehenge.
Up until the 1920?s, we had an overwhelmingly agricultural economy. Farmers were always at maximum financial distress in the fall, when their outlays for seed, fertilizer, and labor were the greatest, but they had yet to earn any income from the sale of their crops. So they had to borrow all at once, placing a large cash call on the financial system as a whole. This is why we have seen so many stock market crashes in October. Once the system swallows this lump, it?s nothing but green lights for six months.
After the cycle was set and easily identifiable by low-end computer algorithms, the trend became a self-fulfilling prophecy. Yes, it may be disturbing to learn that we ardent stock market practitioners might in fact be the high priests of a strange set of beliefs. But hey, some people will do anything to outperform the market.

It is important to remember that this cyclicality is not 100%, and you know the one time you bet the ranch, it won?t work. But you really have to wonder what investors are expecting when they buy stocks at these elevated levels, over $159 in the S&P 500.

Will company earnings multiples further expand from 15.5 to 17 or 18? Will the GDP suddenly reaccelerate from a 2% rate to the 4% expected by share prices when the daily data flow is pointing the opposite direction?

I can?t wait to see how this one plays out.