The day I bought my second lot of shares in the internet giant on December 12 was the exact point where a year of upward momentum in this stock came to a juddering halt.
The shares have since been like an errant teenaged child who you keep giving the benefit of a doubt until he goes out and steals a car. That is show business.
The immediate cause for the selloff was a downgrade of Alibaba by an unnamed Chinese internet analyst, in which Softbank is a major shareholder. The imminent IPO of Alibaba was the whole reason for owning Softbank.
It doesn?t help that the global emerging market rout has sent traders into ?RISK OFF? mode, especially in China. The doubling of Turkish interest rates overnight focused a great giant spotlight on the problem.
When in doubt, sell, especially stocks with funny sounding foreign names. ?Brave new world? technology stocks, like Alibaba, have been put on hold. A full handle move up in the yen against the US dollar to a new high for the year was further fat on the fire.
But what really tipped me over to the sell side was to see the Nikkei Average up a robust 2.70% last night, but Softbank shares drop by -1.30%. If it can?t catch a bid with this tailwind, it?s time to get out of dodge, or in this case, Kabutocho.
You knew this eventually had to happen. Since June, my Trade Alerts have enjoyed an almost unbelievable success rate of 90%. My followers have earned a +41.15% return on their capital, a multiple of what the market did. It was just a matter of time before I got slapped across the face with a fresh piece of sushi. But the entire world had to conspire against me to do it.
If you do have to lose money, this is the way to do it. By owning shares instead of options I was able to limit my loss to 2.86% off the back of a 14.3% fall in the shares. The trade was part of the general deleveraging that I have been implementing with my trading book since the end of 2013. It?s far better to have leveraged gains and unleveraged losses than the reverse.
No doubt, everything I predicted about Alibaba and Softbank will come true, and vast fortunes will be made by shareholders. But for the time being, we will have to restrict ourselves to reading about it in the newspapers from the sidelines.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/11/SoftBank.jpg352515Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-01-30 01:05:542014-01-30 01:05:54Pulling the Ripcord on Softbank (SFTBY)
More than 51 million iPhones sold is good enough for me, 3.2 million more than they moved a year ago, and they are more expensive devices. IPads leapt from 22.9 million to 26 million, including the five high end ones I bought.
The earnings announcement wasn?t that bad, with record quarterly YOY revenues of $57.6 billion reported. Earnings per share jumped a middling 5%, from $13.81 to $14.50, partially in response to the company?s own massive buy back program. ?Gross margins came in at 37.9%, which would be gigantic if Apple were in any other industry but technology.
The dividend was nailed at $3.05 per share, setting the yield today at 2.43% annualized, a mere 30 basis points below ten-year Treasury bonds.
However, I think that traders have become so conditioned to selling on the news that the stock wasn?t going to take a dump no matter what the company said. This is why I went into the release flat on Apple this time. It?s too early in the year to lick wounds. At today?s low of $502, we were down $73 from the recent high, or 12.7%.
If you look back at the collapse after the September, 2012 $706 peak, it took two months for the shares to fall $100. For us to lose money on the Apple February, 2014 $460-$490 bull call spread, it would have to fall twice as fast as back then, and it has to do it in only 17 trading days. Sounds like a good bet to me.
We are also getting huge valuation support down here, with an ex cash multiple of 9, versus a market multiple of 16. Investors are going to hold a gun to the head of their portfolio managers to get them to average up in this neighborhood.
You also have corporate raider, green mailer, and former Manhattan neighbor of mine (activist, to be polite) Carl Icahn twittering away about how cheap the stock is, and buying another $500 million worth of shares today to cash in on the plunge. You can see him coming in every time the stock takes a run at $507. Carl was not a factor in the last melt down.
My whole theory on why Apple has disappointed continuously for the past 18 months is that the company has just gotten too big. A different sort of physics seems to apply when companies exceed $500 billion in market capitalization. The more money the company makes, the cheaper it gets. This is causing even the most seasoned value players to adopt a surly attitude, throw their handsets at their monitors, and tear out there hair, if they have any left.
Steve Jobs must be laughing from the grave.
For your edification, I have included a proprietary chart from my colleague, Mad Day Trader Jim Parker, showing huge technical support at the $470-$480 level. It is days like this that Jim is worth hit weight in gold. Too bad he isn?t heavier.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/01/S.APL-1-28-143.jpg496553Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-01-29 01:04:032014-01-29 01:04:03Apple Strikes Again
Featured Trade: (FRIDAY FEBRUARY 14 SYDNEY, AUSTRALIA STRATEGY LUNCH), (WHAT THE MARKETS ARE DOING FROM HERE), (SPY), (QQQ), (IWM), (FXY), (TLT), (TBT), (XLF), (XLY), (TURKEY IS ON THE MENU), ?(TUR), (TKC)
SPDR S&P 500 (SPY)
PowerShares QQQ (QQQ)
iShares Russell 2000 (IWM)
CurrencyShares Japanese Yen Trust (FXY)
iShares 20+ Year Treasury Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
Financial Select Sector SPDR (XLF)
Consumer Discret Select Sector SPDR (XLY)
iShares MSCI Turkey (TUR)
Turkcell Iletisim Hizmetleri AS (TKC)
For the last couple of nights, I have left my iPhone logged into the Argentina peso market, one of several troubled currencies igniting the emerging market contagion. Whenever the peso losses another handle to the US dollar, an alarm goes off. That gives me a head start on how American markets will behave the next day.
I have not been getting a lot of sleep lately. My poor phone has recently been sounding off like a winning slot machine at a Las Vegas casino.
Take a look at the long-term chart for the peso, and it?s clear that some traders have not gotten any sleep for five years, when the peso cratered 50% against the greenback. An imploding currency, soaring national debt, and sliding economy promise to send it lower.
Incompetent leadership doesn?t help either. You know that things are bad when your ships get seized by creditors when they land at foreign ports.
When I wrote my all asset class forecast for 2014, there was only one thing I knew for sure: this year would be harder than last. That has been my best prediction for 2014 so far.
The guaranteed shorts, those for the Japanese yen (FXY) and the Treasury bond market (TLT), have been rocketing to the upside since the opening bell rang on January 2. The no brainer longs, like financials (XLF) and consumer discretionaries (XLY), have been plummeting.
The heart wrenching 4.3% correction we saw for the S&P 500 (SPY), and the 5% hit for the Dow average this month, the worst weekly draw down in two years, has predictably brought the Armageddon crowd out of the closet once again. All of a sudden, a 10% correction best case, and Dow 3,000 worst case, are on the table once again. Do they have a leg to stand on?
Not really.
To achieve these big numbers on the downside, your really need a global systemic financial crisis. There isn?t one remotely on the horizon. Yes, there are difficulties in Argentina, the Ukraine, and Turkey. But they are locally confined.
Together, these countries account for less than 1% of global GDP. If they disappeared completely, they would barely make a blip in world GDP. They certainly are not important enough to panic you into emptying your ATM at the local mall on your next lunch break.
You also need excessive leverage. But that has been banned by prime brokers since the 2008 crash. An aggressive long today is 20% net long, not 200% as in the bad old days of yore. Nothing systemic there.
Sure, we aren?t getting the juice that we used to from the Federal Reserve. It is likely that they will further reduce the taper from $75 billion to $65 billion of bond buying per month at their 1:00 PM Wednesday press release.
If there were a one in a million chance that this would trigger a real market meltdown, my friend, Fed governor Janet Yellen, would run that release through the shredder as fast as you could say ?Go Bears?, sending markets flying.
Others are accusing a looming financial crisis in China as another culprit. Yes, the economic data has been soggy of late, to be sure. However, that is just the continuation of a four year old trend. You can safely forget about that one.
No country in history ever suffered a financial crisis with $4 trillion in foreign exchange reserves on hand, including over $1 trillion in US Treasury bonds close to all time highs in value. In fact many of the emerging markets said to be in trouble also boast large reserves, the product of running massive trade surpluses with a hyper consuming West for the past decade.
So if we can?t blame emerging markets or the taper for the downside, then what is causing the January swoon? You can blame it all on the hedge funds.
I have seen this time and again. Whenever too many people crowd into one end of a canoe, it rolls over. When the majority of funds have identical positions, they are guaranteed to fail. That is why we have had a looking glass market performance since the beginning of this year.
Except that this time we got a turbocharger. The peaking of concentration in the most popular trades perfectly coincided with the big New Year reallocation trade, taking prices to greater extremes. Much of the selling you are seeing down here is from latecomers who bought stock only three weeks ago and are now puking them out.
Of course, I saw all of this coming a country mile off. This is why I cut my net long from 100% 10 days ago to only 10%. It is why I am maintaining a year to date performance of +5.13%, compared to a Dow that is down -5%. It is one of my best gains relative to the index over a short period ever.
The same is true of my colleague, Mad Day Trader, Jim Parker. He is almost all in cash and is also well up on the year. He stuck his toe in the water with a small position in some calls on the (TBT) last week, but it got bit off by a shark almost immediately. So he quickly stopped out, as is his way. Of course, we have been comparing notes and sharing input throughout the selling. It appears that great minds think alike.
Jim?s proprietary in-house analysis predicts that the (SPX) will bottom out just above 1,730, the market close on the November 15 options expiration. If correct, that would give us a total start to finish correction of only 6.7%, which is in line with every other correction for the past two years. But the bottoming process could last a few weeks, and provide several more gut churning dumps. Fasten your seat belt.
When will this end? Watch for the parallel confirming cross market trends. The Treasury bond market is a big one, which appears to be peaking already, right at its 200 day moving average and the top of a six month trading range.? Announcement of the next taper could spark the selloff we need there. The Japanese yen is also important. A top here could signal a return to the carry trade and ?RISK ON?.
Since Emerging markets were the instigator of the crisis, look there as well for the first signs of a turnaround. Scrutinize the chart below, and you gain some heart.? It shows that we are a scant 70 cents from setting up a potential multiyear triple bottom at $37, and worst-case $36.
More specifically, you want to see Turkey (TUR), another instigator of this crisis, recoil from $39. Expect it to bounce hard there, as long as the world is really not ending.
Then it will be off to the races once more. I?ll be keeping my powder dry until then. Watch this space.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/01/Gunpowder-barrel.jpg382381Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-01-28 09:25:562014-01-28 09:25:56What the Markets Will Do from Here
I am building lists of emerging market ETF?s to snap up during the current sell off, and Turkey popped up on the menu.
The country is only one of two Islamic countries that I consider investment grade, (Indonesia is the other one). The 82 million people of Turkey rank 15th in the world population, and 16th with a GDP of $960 billion. Furthermore, 25% of the population is under the age of 15, giving it one of the planet?s most attractive demographic profiles.
The real driver for Turkey is a rapidly rising middle class, generating consumer spending that is growing by leaps and bounds. Its low waged labor force is also a major exporter to the modestly recovering European Community next door. The present collapse of the Turkish Lira increases that advantage.
I first trod the magnificent hand woven carpets of Istanbul?s Aga Sophia in the late sixties while on my way to visit the rubble of Troy and what remained of the trenches at Gallipoli, a bloody WWI battlefield.
Remember the cult film Midnight Express? If it weren?t for the nonstop traffic jam of vintage fifties Chevy?s on the one main road along the Bosphorus, I might as well have stepped into the Arabian Nights. They were still using the sewer system built by the Romans.
Four decades later, and I find Turkey among a handful of emerging nations on the cusp of joining the economic big league. Exports are on a tear. Prime Minister Erdogan, whose AKP party took control in 2002, implemented a series of painful economic reform measures and banking controls, which have proven hugely successful.
Foreign multinationals like General Electric, Ford, and Vodafone, have poured into the country, attracted by a decent low waged work force and a rapidly rising middle class. The Turkish Lira has long been a hedge fund favorite, attracted by high interest rates.
Still, Turkey is not without its problems. It does battle with Kurdish separatists in the east, and has suffered its share of horrific terrorist attacks. There is a risk that it gets sucked further into the Syrian civil war. Inflation at 7.4% is a worry, but that?s down from 8.88% a year ago.
The play here has long been to buy ahead of membership in the European Community, which it has been denied for four decades. Suddenly, that outsider status has morphed from a problem to an advantage.
The way to get involved here is with an ETF heavily weighted in banks and telecommunications companies, classic emerging market growth industries like (TUR). You also always want to own the local cell phone company in countries like this, which in Turkey is Turkcell (TKC). Turkey is not a riskless trade, and has already had a great run, but is well worth keeping on your radar.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/04/Istanbul.jpg270363Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-01-28 09:20:192014-01-28 09:20:19Turkey is On the Menu
Featured Trade: (FEBRUARY 12 AUCKLAND NEW ZEALND STRATEGY LUNCH) (THE PRICE OF STARDOM AT DAVOS), (WILL GOLD COINS SUFFER THE FATE OF THE $10,000 BILL), (GLD), (SIGN UP NOW FOR TEXT MESSAGING OF TRADE ALERTS)
Featured Trade: (SATURDAY FEBRUARY 22 BRISBANE AUSTRALIA STRATEGY LUNCH) (A FEW THOUGHTS ON TRADING STRATEGY), (SPY), (QQQ), (IWM), (GLD), (GDX), (ABX), (TLT), (TBT), (ANOTHER DINNER WITH ROBERT REICH)
SPDR S&P 500 (SPY)
PowerShares QQQ (QQQ)
iShares Russell 2000 (IWM)
SPDR Gold Shares (GLD)
Market Vectors Gold Miners ETF (GDX)
Barrick Gold Corporation (ABX)
iShares 20+ Year Treasury Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
After one of the wildest rides in recent memory, the stock market has ground to a complete halt. So have virtually all other asset classes as well.
You can see this in the activity of my Trade Alert service as well. After sending out Alerts as fast as I could write them for the past three months, some three or four a day, the action has slowed to a snails pace. What gives?
I think that the sudden, universal optimism we saw break out all over in November and December ended up pulling performance out of 2014 back into 2013. Traders were picking up positions not only for the yearend rally, but the January one as well.
As a result, there is nothing for us to do in January. Our New Year asset reallocation rally happened last month. The net result has been one of the most boring starts to a new year in history, with trading confined to tortuous, frustrating low volume ranges.
What have been the best performing assets so far in 2014? Gold (GLD), gold miners (GDX), (ABX), and bonds (TLT), (TBT), the worst performing ones of 2013. Don?t get your hopes up. These are only dead cat bounces prompted by short covering with broader, longer term bear markets.
In the meantime, the stars of last year have become the dogs of this year, like consumer cyclicals and banks. Suddenly, it has become an upside-down world, with the good becoming bad, and the bad good. Don?t expect this to last. It never does.
It gets worse. What if we didn?t pull forward only in January and the end of last year, but February and March as well? We could be sitting back on our haunches for quite a long time. Sounds like a good time to catch up on those old back issues of Diary of a Mad Hedge Fund Trader that we didn?t have time to read because trading was too frenetic.
As for me, I am getting an early start on my tax returns this year so I can figure out how much my Obamacare is going to cost me. Thanks to my spectacular, once in a lifetime performance in 2013, Uncle Sam and I have quite a lot to talk about. What? You mean a $2,000 bottle of wine purchased in Portofino on the Italian Riviera (the seaside resort featured in The Wolf of Wall Street) is not deductible? If it is for Morgan Stanley, why not me?
Another reason for the sudden silence is that investors have suddenly become very cautious. We have just had a run for the ages. From my June 14 low I made a staggering 41.15% profit for my followers. My last 14 consecutive Trade Alerts have been profitable, as has every one so far in 2014. Those are serious numbers. While almost no one else matched these numbers, quite a few traders did well too.
Suddenly protecting performance has become far more important than catching that next marginal trade. When everyone else is in the same boat, markets go very quiet, until the boat tips over.
Things aren?t going to remain this dead forever. It reminds me of a witticism voiced by President Nixon?s chairman of the Council of Economic Advisors, Herbert Stein: ?If something cannot go on forever, it will stop.?
When the Trade Alert traffic dies down, I get barraged by daily complaints from readers that I?ve gotten lazy, I?ve gotten too rich to focus on this anymore, and that I ought to be doing more. Can you blame them? With an 85% success rate with my Alerts, who wouldn?t want more?
One of the reasons that my success rate is one of the highest in the industry is that I know when to quit trading. Some 45 years trading the markets has taught me one thing. If you chase a trade that?s not there it?s a perfect formula for losing money. There is no law stating that you always must have a position. That?s what brokers want you to do, a mug?s game at best.
My advice to you? Go out and spend some of the hard earned money you made last year from my Trade Alert Service. I understand there are great deals to be had on large screen HD TV?s at Best Buy. Unfortunately, my hometown San Francisco 49ers blew a playoff game in the last 22 seconds, depriving me from a trip to New York for Super Bowl XLVIII. But if you?re from Seattle or Denver, you definitely have something better to do for the week leading up to February 2.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/01/Football-49er-Seahawks.jpg400388Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-01-24 01:04:402014-01-24 01:04:40A few Thoughts on Trading Strategy
I never tire of listening to economics guru, Robert Reich, speak about the economy. He was former Labor Secretary under Bill Clinton, and ran against Mitt Romney for governor of Massachusetts (he lost). He has published 13 books. Oh, and he dated our recent Secretary of State, Hillary Rodham, when they were in law school together at Yale.
I got to know Bob well when I took two of his courses at UC Berkeley, on public policy and labor statistics. His insights into the long-term evolution of the US economy are nothing less than breathtaking. New students are ordered to the bookstore to buy 400 pages of photocopied jobs data, which they must commit to memory. And he is damn funny.
Not everything Bob has to say makes pleasant listening. The central challenges for the economy are jobs and wages, not deficits or inflation. A rush to trim spending too fast unnecessarily robs the economy of growth. Look no further than Europe, where ill advised and ideologically driven austerity policies have led to near economic collapse. If similar policies are implemented here, they will no doubt bring the same result.
Past economic recoveries brought far more dramatic snap backs. After the 1929 crash, the GDP fell a staggering 28% over the following three years. Then in 1934 it bounced back by 8%, in 1935, by 8%, and 1936 by 10%. The stock market recovered two thirds of its losses. That compares to today?s tepid 2% growth rate.
Then in 1937, a rush to end stimulus prematurely sent the country into the second leg of the Great Depression. That didn?t end until 1942. Stocks fell again by half. The big question for us today is whether 2014 will be a replay of 1937.
All middle class coping mechanisms to deal with falling incomes have been exhausted. First, women entered the workforce during the seventies to offset spouses? declining wages. Then both began working longer hours. Today, Americans work 300 hours a year longer than Europeans and Japanese.
Finally, they turned to the home ATM in desperation during the nineties and 2000?s to make ends meet. Those cash machines abruptly shut down in 2008. Today, families have no resources left to maintain standards of living. This is why there has been no growth in the American median wage for 30 years. The declining consumer spending these trends inevitably produced our present slow growth economy.
There were two turbochargers that assured the downfall would be as dramatic as it has been. Globalization suddenly meant that the $75/ hour blue-collar worker was competing head to head against a $2/day Chinese wage slaves. The Internet made this face off practical.
Technology also created robots to replace workers on an enormous scale. Bob like to tell the story of an invitation he received to speak at a much-publicized factory reopening in the Midwest. When he took the tour, he found only 13 workers staring at computer screens running the place that had replaced 3,000 before them.
While we are seeing a weak recovery now, entry-level positions are paying a fraction of what they did a decade ago, not far above minimum wage. Those with only a high school education or less have taken the biggest hit, seeing unemployment rates soar to 15%. By contrast, college educated workers have an unemployment rate as low as 5%.
Of course the challenge for me has always been to translate Bob?s lofty, 30,000-foot views, steeped in millennia of history, into Trade Alerts tomorrow morning which make money for you, the reader, by Monday. That?s easier said than done.
Given my 130% net trading profit since the service started 38 months ago, I?d say so far, so good.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/04/Robert-Reich.jpg300231Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-01-24 01:03:582014-01-24 01:03:58Another Dinner With Robert Reich
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