(YCS) Archives - Page 3 of 5 - Mad Hedge Fund Trader

She Speaks!

Like a deer frozen in a car?s onrushing headlights, markets have been comatose awaiting Federal Reserve governor Janet Yellen?s decision on monetary policy and interest rates.

Interest rates are unchanged. Quantitative easing gets cut by $15 billion next month, and then goes to zero. Most importantly the key ?considerable period? language stayed in the FOMC statements, meaning that interest rates are staying lower for longer.

Personally, I don?t think she?s raising interest rates until 2016. The number of dissenters increased from one to two, but then both of them (Fisher and Plosser) are lame ducks. And, oh yes, the composition of the 2015 Fed will be the most dovish in history.

The latest data points made this a no brainer, what with the August nonfarm payroll coming in at a weak 142,000, and this morning?s CPI plunging to a deflationary -0.20% for the first time since the crash.

Of course, you already knew all of this if you have been reading the Mad Hedge Fund Trader. You knew it three months ago, six months ago, and even a year ago, before Janet Yellen was appointed as America?s chief central banker. Such is the benefit of lunching with her for five years while she was president of the San Francisco Fed.

The markets reacted predictably, with the Euro (FXE), (EUO), and the yen (FXY), (YCS) hitting new multiyear lows, Treasury bonds (TLT), (TBT) breaking down, and precious metals (GLD), (SLV) taking it on the kisser.

What Janet did not do was give us an entry point for an equity Trade Alert (SPY), with the indexes close to unchanged on the day. The high frequency trader?s front ran the entire move yesterday.

Virtually all asset classes are now sitting at the end of extreme moves, up for the dollar (UUP) and stocks, and down for the euro, yen, gold, silver, the ags, bonds and oil. It?s not a good place to dabble.

Putting on a trade here is a coin toss. And when you?re up 30.36% on the year, you don?t do coin tosses. At this time of the year, protecting gains is more important than chasing marginal gains, which people probably won?t believe anyway.

If you want to understand my uncharacteristic cautiousness, take a look at the chart below sent by a hedge fund buddy of mine. It shows that investor credit at all time highs are pushing to nosebleed altitudes. Not good, not good. Oops! Did somebody just say ?Flash Crash??

This is not to say that I?m bearish, I?m just looking for a better entry point, especially as the Q????????? 3 quarter end looms. I?ve gotten spoiled this year. Maybe the Scottish election results, the Alibaba IPO, or the midterm congressional elections will give us one. Buying here at a new all time high doesn?t qualify.

It?s time to maintain your discipline.

Sorry, no more pearls of wisdom today. I?ve come down with the flu.

Apparently, this year?s flu shot doesn?t cover the virulent Portland, Oregon variety. Was it the designer coffee that did it, the vintage clothes, or those giant doughnuts dripping with sugar?

Back to the aspirin, the antibiotics, the vitamin ?C?, and a chant taught to me by a Cherokee medicine man.

The Party is Just Getting Started With the Japanese Yen

Diary, Free Research, Newsletter

?Oh, how I despise the yen, let me count the ways.? I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.

To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:

* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 240% of GDP, or 120% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of only 1%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.

When the big turn inevitably comes, we?re going to ?110, then ?120, then ?150. That works out to a price of $200 for the (YCS), which last traded at $62. But it might take a few years to get there.

If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?83 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.

It?s All Over For the Yen

Is the Turnaround at Hand, and Ten Stocks to Buy at the Bottom?

Newsletter, Research

War threatens in the Ukraine. Iraq is blowing up. Rebels are turning our own, highly advanced weapons against us. Israel invades Gaza. Ebola virus has hit the US. Oh, and two hurricanes are hitting Hawaii for the first time in 22 years.

Should I panic and sell everything I own? Is it time to stockpile canned food, water and ammo? Is the world about to end?

I think not.

In fact the opposite is coming true. The best entry point for risk assets in a year is setting up. If you missed 2014 so far, here is a chance to do it all over again.

It is an old trading nostrum that you should buy when there is blood in the streets. I had a friend who reliably bought every coup d? etat in Thailand during the seventies and eighties, and he made a fortune, retiring to one of the country?s idyllic islands off the coast of Phuket. In fact, I think he bought the whole island.

Now we have blood in multiple streets in multiple places, thankfully, this time, it is not ours.

I had Mad Day Trader, Jim Parker, do some technical work for me. He tracked the S&P 500/30 year Treasury spread for the past 30 years and produced the charts below. This is an indicator of overboughtness of one market compared to another that reliably peaks every decade.

And guess what? It is peaking. This tells you that any mean reversion is about to unleash an onslaught of bond selling and stock buying.

There is a whole raft of other positive things going on. Several good stocks have double bottomed off of ?stupid cheap? levels, like IBM (IBM), Ebay (EBAY), General Motors (GM), Tupperware (TUP), and Yum Brands (YUM). Both the Russian ruble and stock market are bouncing hard today.

There is another fascinating thing happening in the oil markets. This is the first time in history where a new Middle Eastern war caused oil price to collapse instead of skyrocket. This is all a testament to the new American independence in energy.

Hint: this is great news for US stocks.

If you asked me a month ago what would be my dream scenario for the rest of the year, I would have said an 8% correction in August to load the boat for a big yearend rally. Heavens to Betsy and wholly moley, but that appears to be what we are getting.

It puts followers of my Trade Alert service in a particularly strong position. As of today, they are up 24% during 2014 in a market that is down -0.3%. Replay the year again, and that gets followers up 50% or more by the end of December.

Here is my own shopping list of what to buy when we hit the final bottom, which is probably only a few percent away:

Longs

JP Morgan (JPM)
Apple (AAPL)
Google (GOOG)
General Motors (GM)
Freeport McMoRan (FCX)
Corn (CORN)
Russell 2000 (IWM)
S&P 500 (SPY)

Shorts

Euro (FXE), (EUO)
Yen (FXE), (YCS)

No, Not This Time

BOJ Bombshell Hits Yen Sellers in the Shorts

Newsletter

It was little after midnight west coast time when the Bank of Japan dropped its bombshell. It said it would refrain from stimulating the economy further to offset the deflationary effects of the VAT tax increase from 5% to 8%, which took effect on April 1.

Within seconds, the Japanese yen rocketed and never looked back. The Nikkei stock average crashed. Traders were stunned by the BOJ?s ill-timed move, as many GDP forecasts for the current quarter hover around the negative -1% level.

I held back on covering my yen short, waiting for a pullback. It was not to be, and I had to stop out with a small loss. Given the heightened level of anxiety in the markets since last week, I don?t have to be told twice to unload a ?RISK ON? position.

I am in the fortunate position in that I can offset this loss with the major gains I made on my short S&P 500 (SPY) and Russell 2000 (IWM) positions. This is why the word ?Hedge? is in the name ?Mad Hedge Fund Trader.?

However, the central bank said it would stick with its current plan to increase the money supply by 60-70 trillion yen per year for the next two years. One of Japan?s confidence indicators fell to the lowest level since 2011. The government is said to be mulling over a further VAT tax hike to 10%. So don?t count on the central bank to stick to the hard line for very long.

Many think that this is just a speed bump on Japan?s road to economic recovery, and that more stimulus is on its way in July, once the magnitude of the current slowdown is indisputable. This could just be another case of central banks slow to adapt to reality, as they are often wont to do.

?Oh, how I despise the yen, let me count the ways.? I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.

To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:

* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 240% of GDP, or 120% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of only 0.61%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.

When the big turn inevitably comes, we?re going to ?110, then ?120, then ?150. That works out to a price of $200 for the (YCS), which last traded at $65. But it might take a few years to get there.

If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?83 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.

It?s All Over For the Yen

That Other ?Great Reallocation? Out of the Yen

Newsletter

The big talk in the financial markets this year was of the ?Great Reallocation? out of bonds and into stocks.? The problem is that it was just that: talk. While redemptions of retail bond mutual funds have topped $147 billion since June, the big money has yet to move in size.

However, there is a great reallocation that is already well under way. In fact, it already completed its first leg earlier this year, and has just begun the second. That is the ?Great Reallocation? out of yen (FXY), (YCS) and into the dollar. It is being executed not only by Japanese institutional investors, but foreign ones as well.

Take a look at the chart below, and you will see that the beleaguered Japanese currency broke to a new four year low this morning. Nothing like a jolt of fresh (FXY) to wake you up first thing in the day, and clear out those cobwebs.

This freefall was on the heels of my doubling up of my yen short positions for my model-trading portfolio with my Trade Alert on Black Friday. The (FXY), now trading at $94.80, is clearly targeting the $90 low set in 2008 for the short term, and after that, the $81 low last seen in 2007.

To understand why this is happening, take a look at this from the point of view of the Japanese money manager, who is running the world?s second largest pool of investable assets, after the US. After a 23-year performance drought, you have just had one of your best years in history.

The Nikkei rocketed by 48%. Better yet, the yen has fallen by 16% against the dollar, which directly translates into an equivalent increase on your foreign investments.

Why not visit the well a second time? Why wait until 2014, when everyone else is going to do the same thing again? In fact, why not drink twice as much this time, as the water is so sweet? What is the conclusion of all of this? Sell more yen, and lots of them. That was what I clearly saw unfolding a month ago. This is why you are making so much money now.

This explains why I have been running big shorts in the yen for almost all of the last two years, doubling up, taking profits, and then doubling up again. I have no doubt that when I total up my numbers for 2014, the yen will pop out as my most profitable trade. Domo Arigato Abe-san!

For readers who need to bone up on the fundamental case against the Land of the Rising Sun, and the trigger for the latest collapse, please click here for ?Selling the Yen, Again? , ?Doubling Up On My Yen Shorts?, and ?The Party is Just Getting Started With the Japanese Yen?.

As for the original ?Great Reallocation? from bonds to stocks, take a look at the chart of Treasury bond futures below lifted from the Gartman Report, reproduced from my friend, Dennis Gartman. Veteran traders will immediately recognize the ?head and shoulders top? that is unfolding in the US Treasury bond market. This is the chart that promises of great things to come in the bond market in 2014?.on the downside.

Look Out Below for the (TLT)

New Lows for the Yen

Taking Profits on the Yen?.Again!

Diary, Newsletter

This is my 14^th consecutive closing Trade Alert, and the 20^th including my remaining profitable open positions. I have only six more to go until a break my previous record of 25. It doesn?t get any better than this.

The yen is now in free fall, and the Japanese stock market is going ballistic, as I expected. Both the ProShares Ultra Short Yen double short ETF (YCS) and the Wisdom Tree Japan Hedged Equity ETF (DXJ) have pierced new five-month highs, and loftier levels beckon.

The immediate trigger was a meeting at the Bank of Japan, where the governors voted to maintain their ultra low, 0.1% discount rate. They also reiterated their commitment to growing the money supply by a blistering $600-$700 billion a year, or nearly triple the US monetary easing rate on a per capita GDP basis.

On the same day, we received month old Fed minutes showing a definite lean towards tapering our own quantitative easing. When this eventually does happen, the interest rate differential for dollar/ yen will rise dramatically. Needless to say, this is all terrible news for Japan?s beleaguered currency, as interest rate differentials are the primary drivers of foreign exchange markets.

Given all this, I am going to take profits on my existing short position in the yen through the Currency Shares Japanese Yen Trust (FXY) December, 2013 $101-$104 in-the-money bear put spread. At this mornings shockingly high prices for the spread, we can harvest 83% of the potential profit with one full month still to run to the December 20 expiration.

The outlook for the yen is no so bleak that I want to have plenty of cash to reload on the short side during the slightest recovery. I will move to closer strikes and more distant maturities to maximize your profits. It is now looking like we will soon challenge the 2013 low for the (FXY) of $94.80 and the $72 high for the (YCS).

We have a lot of new readers on board now, as my white-hot performance has become a talking point in the hedge fund community. So for the newbies to familiarize themselves with the basic structural flaws in the yen, please click here http://madhedgefundradio.com/rumblings-in-tokyo-2/, here http://madhedgefundradio.com/new-boj-governor-craters-yen/, and finally here http://madhedgefundradio.com/new-boj-governor-crushes-the-yen/.

The Final Act for the Yen Is Just Beginning

The Yen is Dead Meat

Newsletter

Last week, I begged you, pleaded with you, and even pounded the table to get you to increase your shorts in the Japanese yen (FXY), (YCS), and longs in the Japanese stock market (DXJ). I was certain that Japan?s beleaguered currency was about to break out of its tedious six month trading range and plumb new lows.

I turned out to be dead right.

My argument was that with the economy slowing, and Prime Minister Shinso Abe?s ?third arrow? economic reforms mired in the political muck, the Bank of Japan would have little choice but to accelerate its quantitative easing program. This would be terrible news for the yen and great news for stocks (DXJ), not just in Japan, but everywhere.

It turns out that while politicians are dithering, the central bank has little choice but to over stimulate on the monetary side to compensate. Haven?t I heard this story somewhere else before?

Take a look at the charts below, put together by my friends at Stockcharts.com. The (FXY)/(DXJ) inverse relationship is almost perfect. This is because a falling yen causes the profits of Japanese exports to rocket when they are translated back into their home currency. Look no further that Toyota?s (TM) fabulous 70% YOY profit gain.

Both charts are showing a major breakout for extended continuation triangles. The yen is telling you to load up on stocks, while stocks are telling you to sell the hell out of the yen. I say do both. In the global macro world it doesn?t get any easier than this.

If you want to peruse these matters in the depth they deserve, please click here for ?Doubling Up On My Yen Shorts? and ?The Party is Just Getting Started With the Japanese Yen?.

However, regarding the Currency Shares Japanese Yen Trust (FXY) December, 2013 $102-$105 in-the-money bear put spread we already have on board, we have already sucked this position dry. At today?s prices, we can realize 87% of its maximum potential profit, and that is still with more than a month to go to expiration. The risk/reward has swung against us, and it is not worth hanging on for the extra 13%.

Give me a yen rally to sell into, and I will be back into this position in a heartbeat, as I have already done with bonds (TLT).

The Yen is Dead Meat

Doubling Up On My Yen Shorts

Newsletter

My bet that the Japanese yen (FXY) would weaken against the dollar has paid off handsomely. I am now so confident that we are finally breaking out of a six month trading range to the downside that I am more than happy to double my short position in the yen.

I am therefore taking on the Currency Shares Japanese Yen Trust (FXY) December, 2013 $101-$104 in-the-money bear put spread, moving $1 down in the strikes, but keeping an ever shortening December 20 expiration. The other nice thing about this position is that we will benefit greatly from time decay going into the volatility sapping Thanksgiving and Christmas holidays.

The official reason for the weakness is that the shockingly strong October nonfarm payroll released on Friday will prompt the Federal Reserve to taper its quantitative easing program sooner than later, possibly as early as the December meeting. That would raise interest rates for the greenback while yen interest rates will remain nailed to zero for years to come. This is important, as interest rate differentials are the primary driver in the foreign exchange markets.

The real reason is that traders expect the Bank of Japan to become more aggressive in its campaign to weak the yen and further stimulate economic growth. Japanese companies are now reporting blockbuster earnings, thanks to a falling yen, and the central bank would like to see more of the same.

With the Japanese government actively seeking to cut the knees out from under their own currency, while the Fed will soon take moves to strengthen theirs, a short yen/long dollar trade here a no brainer.

The Tokyo stock market is certainly a believer. Last night, the Nikkei average soared by 2.2%, the biggest move in three months. That?s why I have also been recommending the Wisdom Tree Japan Hedged Equity ETF (DXJ) for longer-term investors, a long stock/short yen ETF.

For more probing and illuminating depth on why the Japanese yen is about to crater, please read ?The Party is Just Getting Started With the Japanese Yen?.

It?s All Over for the Yen

Selling the Yen, Again

Newsletter

The Bank of Japan released the minutes of its previous meeting last night, so we now officially know what?s bothering them.

While the inflation rate has edged up to 0.7%, it is still miles (kilometers) away from its two year target of 2.0%. The 100% growth in the money supply promised by the end of 2014 is arriving on schedule. Since October, 2012, the central bank?s balance sheet has ballooned by an awesome 45%.

However, the desired effects on the economy are starting to fade. Real wages are still falling in September for a hair raising 16 months in a row, creating a deflationary effect on the economy that is huge. Prime Minister, Shinso Abe, is also shooting himself in the foot by raising taxes next April, and again in 2015.

It is a problem that is all too familiar to those of us here in the US. The BOJ can step on the accelerator all it wants. But as long as the Diet (their parliament) applies the brakes at the same time to keep the deficit hawks happy, the economy will go nowhere. Indeed, the recent data releases from Japan, white hot in the first half of the year, are starting to cool.

So the BOJ will do exactly as Ben Bernanke has done and throw more gasoline on the fire in the form of further, aggressive monetary stimulus. In layman?s terms this means it?s time to speed up the yen printing presses. That is the only way the central bank can offset the fiscal drag coming out of Tokyo. This is terrible news for the Japanese yen.

The BOJ is certainly going to pursue what is working. By engineering a collapse of the yen in the first half of 2013, they delivered a windfall profit for Japanese exporters. Dollar sales, when brought home are now worth a quarter more. That?s how Toyota was able to announce yesterday blockbuster earnings up 70% YOY.

Rising sales in an appreciating currency deliver a hockey stick effect on profits. The BOJ will take more of that, thank you very much.

This means that it is time to sell short the Japanese yen once again. When we peaked in March around the ?100 level in the cash markets, I thought that we could enter a sideways consolidation that could last as long as six months, since the recent move down had been one of the sharpest in foreign exchange history. That is exactly what we got. In recent months, the currency has almost been nailed to the 50 day moving average.

So I am taking this opportunity to return to a short position in the Japanese yen, the currency that everyone loves to hate. The December 20 expiration gives us a nice ?RISK ON? position in the run up to the yearend, which should be the correct way to lean. It also gives us a December position we can carry after our five November positions expire deep in the money next week.

I have written endlessly on the fundamental case for a weak yen for the past two years (for a link why you should sell short the yen, please click ?Rumblings in Tokyo?, here ?New BOJ Governor Craters Yen? , and finally here ?New BOJ Governor Crushes the Yen?.

From a technical point of view, what is unfolding here is classic chart reading 101. When you get a huge move over a short period of time, such as the 25% collapse in the yen that started in November, 2012, the consolidation and digestion period that follows can be very long. A rapidly declining 200 day moving average, now at $102 in the (FXY) should cap any short covering rallies.

Japanese portfolio managers and corporations have now had half a year to realize their windfall profits on their foreign investments in dollar denominated assets. That was generating hundreds of billions of dollar selling and yen buying that was supporting the beleaguered Japanese currency, no matter how lousy the fundamentals.

Thanks to the BOJ minutes, that support is about to end. Whoever has not sold their yen by now is in for the duration, or at least until the next 10% drop, which may be upon us. A breakdown to new lows could take us as far as ?110 in the cash market, or $88 in the (FXY).

For those who can?t play the options markets, better to just buy outright the ETF (YCS).

Back Into the Short Side

Going Back Into Japan

Newsletter

The smart people I know believe that prime minister Shinzo Abe?s plans to revive the Japanese economy will succeed, paving the way for a decade long bull market that will take the Nikkei Index ($NIKK) up to new highs. The dumb people I know argue vociferously and passionately that Abe will fail miserably, and that the economy and stocks will crash and burn as early as next year.

I think I?ll go with the smart people.

Last night, we learned that Japan?s Government Pension Investment Fund (GPIF) is going to carry out a massive reallocation out of domestic government bonds and into risk assets. The move not only sent Japanese shares flying, it has major implications for US and European markets as well.

The GPIF is the world?s largest pension investor, with a staggering $1.23 trillion in assets. It will boost its allocation to domestic shares from 11% to 12%, unleashing $12 billion in net stock buying. A far more impressive $37 billion has been earmarked for foreign stock markets. This will come at the expense of bonds, which will see their share cut back from 67% to 60%.

The move was triggered by the terrible performance of the Japanese government bond market this year, which has seen prices plunge and yields soar. Since the 2012 lows, the ten-year JGB yield has ratcheted up from an unbelievably low 0.39% to as high as 1.20%, a threefold increase. This dragged down the overall return on investment for the GPIF to the lowest levels in history. Since the demands by Japan?s retirees are expected to skyrocket from here, the fund had little choice but to move out substantially on the risk spectrum.

This is most likely only the opening salvo of the multiyear Great Rotation by the GPIF out of bonds and into stocks globally. The GPIF is not only attracted by the far higher dividend yields and capital gains offered by foreign stocks. A weakening Japanese yen will also juice profits when translated back to the home currency.

In the meantime, it is pedal to the metal for Mr. Shinzo Abe, whose late father, Shintaro, I knew well. He is betting the future of the country on a potent, and unprecedented, mix of fiscal stimulus, monetary easing and deregulation. The Bank of Japan has been leading the charge here, targeting a 2% inflation rate in two years, and promising to double the money supply. My own forecast is that this package will eventually take the Japanese yen down from today?s ?99 to ?150 to the dollar.

If you are an old fart like me you will recognize this approach. President Ronald Reagan employed a similar strategy to get the US economy off the mat in the wake of the 1974 and 1980 oil crisis and the stagflation that followed. This paved the way for a move in the Dow Average from 600 to 15,000. Nope, newbies, that is not typo. It really happened. If nothing else, the Japanese are great students of history, perhaps better than we are.

The other incentive to make a move on the (DXJ) here is that a further move down in the Japanese yen (FXY), (YCS) is imminent. It has been hovering just below ?100 for six months now, and is on the verge of launching into a new leg down. All that has been missing until now has been the trigger for the break. The GPIF move could be it.

I have written endlessly on the fundamental case for a weak yen for the past two years (for a link why you should sell short the yen, please click here http://madhedgefundradio.com/rumblings-in-tokyo-2/, ?and here http://madhedgefundradio.com/new-boj-governor-craters-yen/, and finally one more http://madhedgefundradio.com/new-boj-governor-crushes-the-yen/.