'Long term, the pressure on commodity prices is only one way, and that is up, said Doug Oberhelman, CEO of Caterpillar (CAT).
Featured Trades: (HOW TO BUILD A TOP), (QQQ), (XLF), (SPX)
2) How to Build a Top. Yes, we are all in the instant gratification business. We all want to ride an uptrend for nine months, sell at the top tick, and stay short for the entire four month selloff that ensues. In real life, it really only happens in the movies. If someone tells you they actually did this, you want to run a mile. I carry around in my wallet a tattered and dog eared SELL ticket for Nikkei futures that I wrote in 1989 at ?38,800, right next to my spare condom. It has been 21 years since I came that close.
The reality is that putting in a market top is a choppy, bloody, stop and start affair, a lot like giving birth. A short term breakdown is followed by a medium term breakdown and then a long term breakdown, with a lot of confusion and contradictory indicators in between. They never do an on the dime, 180 degree turn.
Currently, the S&P 500 remains in a long term, or more than six month uptrend, a medium term uptrend of two to six months, and a short term uptrend of one to eight weeks. Last week's gut wrenching selloff is now threatening the short term uptrend. If it breaks, then the medium and long term trends will be at risk. To see this most clearly, look at the chart below for the PowerShares QQQ Trust (QQQ) for technology shares, which often leads the (SPX). Broken resistance now turns into support at 58.
Now examine the chart for another sector that leads the market, the financials (XLF), which is clearly in a downtrend that shows no sign of stopping. There is now way the (SPX) can make substantial headway from here carrying the deadweight of the financials, which carry a heavy weight in the index.
The bottom line here is that the next step in the formation of this top could be either a double top at in the (SPX) at 1,376, or a marginal new high at 1,400. In either case I expect one or the other to fail. So I have my stops for my current short positions in the (SPX) that I slapped on last week above 1400.
Since I am short through a risk limiting put option accounting for only a small part of my portfolio, I don't mind taking a little pain on the way up. You can never top tick these things, only scale in through increments. At the first sign of weakness, I want to double up my short position to take advantage of a definitive break of the short and medium term trends.
If I am right in my assumption that a slowing economy will lead to a broader and more prolonged 'RISK OFF' trade, then further weakness in stock markets is a sure thing.
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Yep, Sold the Top Tick and Bought the Bottom Tic
Featured Trades: (FROM BAD TO WORSE FOR THE EURO), (FXE), (EUO), (UUP)
3) From Bad to Worse for the Euro. I am going to take a profit here in my short position in the euro by selling my (FXE) September, 2011 $145 puts. I don't double my capital in two days very often. When I do, I am inclined to grab it by the lapels and shake it until its gold teeth come clattering down on the ground. I don't care about the fundamentals. I don't care about the technicals. A double is the easiest thing in the world to understand. I don't even need a calculator to figure it out.
I managed to pick up these puppies in the greatest of all possible rushes at $3.50. By selling my full 5% weighting at the $7.10 I see on my screen now, I will reap a profit of 103%. For my notional $100,000 portfolio, that brings in a net profit of $5,142, or a 5.14% return, not a bad piece of change for 48 hours' worth of work. For some hedge funds, this is considered a modest year.
Normally I like to keep a position like this for a couple of months, so I don't wear out my fingertips mouse clicking my way through too many short term trades. But the truth is that we have had three months of volatility crammed into two eye popping days. That is normally how long it takes the euro to move eight cents against the dollar. The precipitous decline we saw from $1.49 to $1.42 has in fact been the sharpest fall in the European currency in many years.
By coming out of my short position here, I am also gaining a tactical advantage. If we get a snap back rally, or if Ben Bernanke can somehow keep the party going a little longer, you can sell into another rally in the euro. Initial support at the 50 day moving average can be expected. To mix up a few metaphors (editor please ignore), dry powder here is worth its weight in gold. It also makes sense to roll down the strike as a risk control measure.
If You Miss the Train, Another One Always Comes Along
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'Bond people are half-empty people and equity people are half-full people. It's like the pessimist versus the optimist; the cold front and the warm front rotating. You get thunderstorms,' said Bill Gross, managing director at bond giant, PIMCO.
Featured Trades: (LUNCH WITH DOW JONES)
1) Lunch With Leslie Hinton of Dow Jones. I managed to catch a lunch with Leslie Hinton, the CEO of Dow, Jones, Inc. as he swung through San Francisco to meet with major advertisers. Hinton was installed in the top job by Rupert Murdoch after his $5 billion takeover of the family owned paper on the eve of the financial crash in 2007. The deal was a controversial one, as some 123 journalists have since left the Journal, populating competitors far and wide.
A 40 year veteran of News Corp, Les dates back to a long passed era of London's Fleet Street, back when papers were staffed with enormous teams of intrepid journalists, were printed with cold rolled type, and the Times was called the 'Thunderer' because its presses ran so loud. I might point out that I am another such dinosaur. Chatting with Les was a visit to a previous lifetime for me. During the seventies, when I was based in Tokyo, I was a regular contributor to the Asian Wall Street Journal, and occasionally, the mainland edition would pick up my pieces.
Hinton has much to be happy about these days. With a daily circulation of 2.1 million, the Wall Street Journal is now the top newspaper in the US, surpassing USA Today at 1.8 million and the New York Times at 900,000. While many of the paper's big ticket advertisers fled or went bankrupt during the Great Recession of 2008, much of the loss was offset by great strides made with new online products.
Les has a great perch from which he can watch the increasingly accelerating changes going on in the media. Not only does he have at hand the massive research resources of the Dow Jones organization, he has the firm's own halting, trial and error forays in the online world to learn from.
Les has the opinion that the Internet is throwing up information faster than we can digest it. Last year, more information was posted online than was accumulated during the previous 100 centuries of human history. If you printed out all of this on paper it would amount to a staggering 40 tonnes for every person on the planet.
While the personal computer opened the door to the web, the tablet is taking us further down the road. Mobile is changing everything, and some believe that by 2015, more will be accessing the Internet through their hand held telephones than by computers. However, Les disagreed with me that the online juggernaut is so unstoppable that it will wipe out print newspapers within five years.
Les listened intently while I detailed The Diary of the Mad Hedge Fund Trader's own online strategy. In two years, I took a second hand PC that I bought at a garage sale for $10, and used it to build a site that is now drawing 30,000 visitors? a day. My total investment in this business has only been $500 for hosting fees. I spent nothing for advertising, and did all the website development myself. Here, the business model is 'the gross is the net'.
For me, the challenge was to see how much I could build out of nothing. Apparently, the answer is quite a lot. Do a Google search on Mad Hedge Fund Trader in China, and you get two million hits. Les admitted that blogs terrified him, as everyone has such a low cost entry. Les has to cut down a forest to print a single issue. I just click a mouse and send out a few trillion bytes for free. He was somewhat amazed by my numbers, and responded with a 'good for you.'
We spent the rest of our time together reminiscing about old friends, the many who died, either from incoming artillery rounds or chronic alcoholism. The early days at the Australian, the 1981 London Times strike, the challenges of filing with teletype tape, and our late mutual friend, Murray Sayle, all came up (click here for my obituary of the great man).
When the discussion came to modern day ethics in journalism, or the lack thereof, Less revealed a decision he once agonized over. As the editor of another paper he had to decide whether to run a photo of Lady Diana Spencer in the back seat of her Mercedes after her fatal car crash in Paris. If she were dying it would have been appropriate to run the picture, but if she were already dead it would have violated taboos. Since it wasn't clear what state she was in, he spiked it.
I pointed out that while Murdoch paid $5 billion for Dow Jones and achieved a Google rank of eight, my $500 investment earned me a ranking of six. That means that in terms of online presence, my investment was 100,000 times more profitable than Rupert's and has no overhead. Less laughed. Welcome to the world of Internet economics.
Dow Jones Has Much to be Happy About These Days
Featured Trades: (APRIL NON FARM PAYROLL)
2) Finally, a Decent Number. The April nonfarm payroll showed a gain of? 244,000 on Friday, exceeding expectations for the first time in many months. A statistical aberration took the headline unemployment rate back up from 8.9% to 9.0%. February and March were revised up an additional 46,000 jobs.
There were substantial employment gains across all fronts. Retail gained 57,000 jobs, business, 51,000, and manufacturing 29,000, taking new private sector jobs to 268,000. Only government employment failed to deliver, falling 24,000, the continuation of what I believe is a new decade long trend. This will get worse as already pink slipped teachers fail to get rehired this fall.
While this is a passable number, it clearly is not good enough. At this point in the economic cycle, we should be clocking 450,000 jobs a month, not half that. It gives more credence to my theory that the US is returning to a 2% growth rate, not the heady 3.9% seen in the decade past.
The financial markets seemed to agree with my assessment. Despite the best possible news, the Dow only gained a measly 54 points. Bonds fell, but only modestly, taking the ten year Treasury yield from 3.17% to 3.20%. The euro, crude, and gold, which all should have risen on this report, fell instead.
Was this a classic 'but the rumor, sell the news' reaction? Or is there too much good news already priced into the market? You would be forgiven for thinking so after looking at the chart of new stocks hitting new highs the week before, and what usually follows.
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Featured Trades: (CHINESE NUCLEAR POWER)
3) It's Full Speed Ahead for China's Nuclear Program. To say that the partial meltdown at Tokyo Electric Power's Fukushima plant has put a chill on the global nuclear industry would be a vast understatement. Lead stock Cameco (CCJ) has cratered by 40%, while the ETF (NLR) has taken a 30% hickey. Is the disaster creating a buying opportunity?
To find out, I stayed up late one night to call a friend at China Guangdong Nuclear Power. While a crash safety review of all designs, both under construction and pending, is underway, there has been no slowdown in the People's Republic's plans whatsoever. The Soviet era designs that led to the Chernobyl disaster were discontinued many years ago. The advanced 'small nuclear' and thorium designs on drawing boards in the US are far beyond Chinese capabilities.
China has far and away the world's most ambitious nuclear program, with 100 plants on order over the next decade. The goal is to raise total generation from 10.8 gigawatts to 80 gigawatts by 2020. That will raise nuclear's share of the country's total power mix from 2% to 5%.
China has very little choice in the matter. Its demand for new sources of electric power is voracious. Any cut back in the nuclear program would have to be met with stepped supplies from other sources. Oil fired plants would increase the need for more expensive oil imports, which have already thrown the country into a trade deficit for the first time in years. More coal plants would lead to increased international complaints about China's contribution to global warming. Solar is growing rapidly, but is too small to make an impact. Hydroelectric power is already tapped out after the three Gorges Dam. If the industry is unable to generate sufficient power, economic growth will slow, and political instability will rise.
This all suggests that there is a buying opportunity setting up in the nuclear space. What goes on in the US or Japan is largely irrelevant, as they are such a small factor in today's market. This is preeminently a Chinese story. But when the sector will bottom out and resume its upward ascent is impossible to predict. This has become a highly emotional trade. My guess is that nuclear will come to the fore once again after a generalized 'RISK OFF' asset class sell off takes everything else down several notches.
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Is This a BUY Signal?
Featured Trades: (MY VICTORY ROLL)
2) My Victory Roll. I am writing this letter at 5:00 AM, holed up in a luxury suite at the Bellagio Hotel in Las Vegas'?still on 'stock market time,' or up four hours earlier than the rest of the country, while everyone else here is sleeping off hangovers.
It is a tradition among old traders to perform some ceremony when good fortune smiled upon them. At Morgan Stanley, the head trader in Tokyo used to take his team to a Shinto shrine and pray to the gods whenever they bagged something big, like eight digits. It is all a way of reminding oneself of the transitory nature of life and to reinforce humility.
Whenever I have an unusually hot hand, I do what I usually do, and jump into the cockpit of a souped up plane and execute some daredevil aerobatic maneuvers over the Grand Canyon in Arizona. I flew out to the Western section of the park, where no one ever goes, and executed my ritual loops, barrel rolls, whip stalls, and Immelman turns, using the stunned river rafters on the Colorado River below as my point of orientation.
Air traffic control called me a view times to ask if everything was alright. In the end, the heat waves radiating off the black basalt mountains nearby caused such severe turbulence that just keeping my craft straight and level required some serious aerobatic talent.
To get there I had to fly commercial to Las Vegas. I dropped a quarter in a slot machine on the way to pick up my baggage and hit the jackpot. When I'm hot, I'm hot, and I mean sizzling!
I picked up my usual local intelligence from my friend, the black jack dealer at the Bellagio. The crepes for breakfast at the Paris, France Hotel were perfect, as always. I took The Babe to see the Cirque du Soleil show, 'O'. Warning: do not sit in the front row! At the Bellagio the guests don't throw up in the swimming pool like they do at the Aria. They just spill their drinks.
To wind up the weekend, I bungee jumped off the 108th floor of the Stratosphere. To watch the video, please click here at http://www.stratospherehotel.com/Tower/Rides/SkyJump ., I can't help it, but every now and then I need a shot of adrenaline to remind me that I am still alive.
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It's Not the Falling that Hurts, But the Stopping
Featured Trades: (TAKING ANOTHER SHORT AT THE GARLIC EATERS)
3) Taking Another Shot at the Garlic Eaters. If you have to name one beneficiary of QE2, the collapse of the dollar, and a seemingly never ending 'RISK ON' trade, it has got to be the euro.
All of this strength has come from an interest rate differential of a measly 25 basis points over the dollar, the result of a modest snugging the European Central Bank executed a month ago.
Never mind that outside of Germany much of Europe is bankrupt, their banks are engaging in accounting acrobatics to obscure their negative net worth, and there is a giant crisis brewing in the widespread crossholding of sovereign debt. Did I mention that the EC may split into rich and poor halves?
So I am going to start taking shots at the euro from the short side once again. The markets are much more extended than they were before, so this time it should work.
If you can't do options, you might consider going short the (FXE). If you can't, or don't want to go short, you might consider the (EUO), a 2X short euro ETF. A lower risk option would be to buy the (UUP), a non-leveraged long of the dollar against a basket of foreign currencies. Look at the chart below and you will want to salivate. The initial target should be the old break out level of $1.425.
UPDATE: Since I wrote this piece just two days ago, a lot has happened. The ECB did not raise interest rates as expected, Greece threatened to withdraw from the euro, and the 'RISK OFF' trade found the euro with a vengeance. The European currency collapsed from $1.49 to $1.42 in a heartbeat. We are now overdue for a snap back rally.
I would sell into this. I think that the low for the year is in for the dollar. The change in market sentiment is that the Europeans have quit raising rates and will hold them level, while the US will continue doing the same. This has broken the euro's upward momentum and is hugely dollar bullish.
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Featured Trades: (MORE PROOF THAT THE MARJET IS TOPPING)
2) More Proof That the Stock Market is Topping. If you are looking for more proof that the markets are topping, take a look at the two sector charts of industry leaders below.
The SPDR (XLE) energy ETF has been one of the bull market's leaders, but has a clear double top developing. Close a few more cents lower, and a major break down will be at hand, potentially taking the rest of the market with it.
The oil service holders ETF (OIH) looks even more precarious. It is showing a distinct head and shoulders orientation demonstrating that the top is already in. that is where the severity of this week's down move is coming from.
If just these two charts were ominous, I normally wouldn't care. However, you can look across an entire range of assets classes in oil, gold, silver, commodities, foreign currencies, and other industrial sectors and find similarly grim formations. That, I am more than happy to bet against.
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Is This Another Top?