Global Market Comments
March 19, 2013
Fiat Lux
Featured Trade:
(BUY STOCKS ON THE CYPRUS DIP), (SPX), (SPY),
(INVESTORS WILL WIN THE ETF PRICE WAR),
(BIDDING FOR THE STARTS),
(THE DEATH OF THE MUTUAL FUND)
S&P 500 Large Cap Index (SPX)
SPDR S&P 500 (SPY)
I?ll never forget the last time I was in Cyprus. I landed my twin Cessna 340 and asked for a fill up, hoping to make it back to Rome in one hop. An hour later, a truck dumped three 45-gallon drums of 100LL avgas on the tarmac with a hand pump, and asked to be paid in US dollars, cash.
When I asked how to get the fuel into the plane, the driver responded with a rotating motion with his hand, which I initially took to be an obscene gesture. In all, it took me about three hours to hand pump 135 gallons of fuel in the 90 degree heart. I vowed never to return.
I bet there were a lot of traders who wish they never heard of Cyprus this morning. Last night, news that the government there was imposing huge fees on all bank accounts to avoid a default heralded the second black swan of 2013. This triggered bank runs, caused global stock prices to collapse, sent Treasury bonds soaring, and cratered Dow futures as much as 155 points. The fees amounted to 6.75% for accounts under ?100,000, 10% on accounts from ?100,000 to ?500,000, and 15% for those over ?500,000. All of the country?s banks are closed until Thursday. Yikes!
Cyprus has long been the chancre sore of the international banking system, acting as the low-end, no questions asked, money laundering place of choice for decades. Their history of hiding assets for the Russian nobility goes back the czarist period. The money there was so dirty, I refused to accept any investors in my hedge fund with this home address. Mention a Cypriot connection with any financial transaction here in the US, and bankers have a heart attack.
Guess where the Cypriot banks invested a major portion of their deposits over the last several years? Greece, where there has been a major haircut on valuations imposed by the European Central Bank. Relations between the two countries go back 5,000 years. In fact, some of the Greeks returning from the successful sack of Troy in 800 BC were blown off course and ended up in Cyprus. Hence, the current crisis.
The is the second time this year that a foreign black swan flew over and pooped on our markets at home, first from Italy, and now Cyprus. The financial media seems to love throwing gasoline on the fire, predicting that debacles in Europe are a precursor to Armageddon at home, unless we immediately abandon our wicked socialist ways. Every dummy out there unloaded shares on these headlines, which in fact, turned out to be great long side entry points on every occasion.
The reality is that the goings on in Cyprus are so insignificant as to not even move the needle outside of their three-mile limit. Its $24.7 billion GDP ranks it smaller than any US state, and about on par with the city of San Diego, yet, they have been able to attract $65 billion in foreign bank deposits. Most of the deposits about to be assessed there belong to the Russian mafia. Other than raising goats, growing olives, and a few topless beaches, there is not a lot going on there. The bottom-line for we law abiding taxpayers here: who cares?
There is no doubt that the markets stateside were begging for a correction, and Cyprus looks like it is going to give us one. Too bad I dumped my 70% long exposure on Friday and went into Sunday night net short. But don?t expect this to last for more than a couple of days or for a couple of hundred Dow points. Buy the dip.
Guess what?s on the top of everyone?s ?BUY? list? Apple! For more on Steve Jobs? creation, click here for ?Has Apple hit Bottom?.? What are they selling to get there? Google.
My last trip to Cyprus got even worse. To enjoy the scenery, I flew across the Mediterranean at 500 feet and 220 kts. An hour out of Larnaca airport, an American F-16 fighter flew alongside of me and then edged closer, to just 10 feet off of my port wingtip. Then a second joined on the starboard side, and a third on my tail. I held up my New York Yankees baseball cap, to no avail. Finally, I hit the panic button I dialed in 122.50 MHz on the radio and put out a ?Mayday? call.
The British army base in Cyprus picked me up. He referred me to a US helicopter at an undisclosed location. Then a southern drawl came on the air and I asked what the hell was going on. Right then, through the heavy haze, I spotted the answer. A huge American aircraft carrier surrounded by 30 support ships was cruising into the wind. I had inadvertently flown a course that took me on a straight line from Lebanon, where terrorist attacks against US troops were occurring daily, to the heart of the American fleet.
?Don?t worry,? the radioman said. ?They?re just a little pissed off that you violated their restricted airspace.?
?Where is their restricted air space?? I asked.?
?That?s top secret,? he answered.
As I passed over the carrier, I saw their deck was a hive of activity, with several jets getting refueled and rearmed. My three jets peeled away and disappeared.
Like I said, I?m not going back to Cyprus anytime soon.
Many hedge fund traders are unhappy about the current near monopoly enjoyed by the top three ETF issuers, Black Rock, State Street, and Vanguard, which control 80% of the market. At last count more than 1,300 ETF?s were capitalized at more than $1.4 trillion. The result has been grasping management fees, exorbitant expense ratios, and poor structural designs, which create massive tracking error.
The good news is that new entrants are flooding into the ETF space, and the heightened competition they are bringing will help curtail the worst of these abuses. This development will accelerate the demise of the bloated and arthritic mutual fund industry, whose end has been a long time in coming. Not only will management fees and expense ratios plunge, there will be a far broader range of offerings, as new funds are launched from a diverse range of institutions coming from differing areas of expertise. Failure to enter the newly lucrative ETF market by the remaining giants sitting on the sidelines means that their existing mutual fund businesses will be cannibalized.
Look no further than bond giant PIMCO, which CAME out with a plethora of fixed income related funds, Van Eck?s expanding list of ETF?s for commodities, and the even growing list of inverse and leveraged inverse ETF?s presented by ProShares. The bottom line will be that lower costs and tighter spreads will leave more profits on the table for the rest of us.
A few years ago, I went to a charity fund raiser at San Francisco?s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5. Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area?s premier hotties, who shall remain nameless. Suffice to say, she has a sports stadium named after her.
The bids soared to $10,000, $11,000, $12,000. After all, it was for a good cause. But when it hit $12,400, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $12,000.? I said ?no thanks.? $11,000, $10,000, $9,000? I passed.
The current altitude of the stock market reminds me of that evening. If you rode gold (GLD) from $800 to $1,920, oil, from $35 to $149, and the (DIG) from $20 to $60, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it does now?
I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands. But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: ?There is a time to fish, and a time to hang your nets out to dry.?
At least then I?ll have plenty of dry powder for when the window of opportunity reopens for business. So while I?m mending my nets, I?ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again. And no, I never did find out what happened to that date.
ETF?s are much more attractive than mutual fund competitors, with their notoriously bloated expenses and spendthrift marketing costs. You can?t miss those glitzy, overproduced, big budget ads on TV for a multitude of mutual fund families. You know, the ones with the senior couple holding hands walking down the beach into the sunset, the raging bulls, etc.? You are the sucker who is paying for these. Sometimes I confuse them for Viagra commercials.
I once did a comprehensive audit on a mutual fund, and a blacker hole you never saw. There were so many conflicts of interest it would have done Bernie Madoff proud. Any trainee assistant trader can tell you that more than 90% of all mutual fund managers reliably underperform the indexes, some grotesquely so.? Published performance is bogus, they show a huge survivor bias, not including the hundreds of mutual funds that close each year. And there?s always that surprise tax bill at the end of the year.
If there was every an industry crying out for a fundamental restructuring, consolidation, price competition, and ultimately a whopping great downsizing, it is the US mutual fund industry. ETF?s may be the accelerant that ignited this epochal sea change, with the number of mutual funds recently having shrunk from 10,000 to 8,000. It?s still early days, with ETF?s only accounting for 5-6% of trading volume, even though they have been around for a decade.
Global Market Comments
March 18, 2013
Fiat Lux
Featured Trade:
(MARCH 20 GLOBAL STRATEGY WEBINAR),
(HAS APPLE BOTTOMED?), (AAPL),
(TESTIMONIAL),
(SOVEREIGN DEBT WAS A GREAT PLACE TO HIDE),
?(PCY), (LQD)
Apple Inc. (AAPL)
PowerShares Emerging Mkts Sovereign Debt (PCY)
iShares iBoxx $ Invest Grade Corp Bond (LQD)
No one has suffered more than I from my slavish devotion to Apple?s products, its performance, and, oops?. it?s stock. A long position in Steve Jobs? creation remains my only losing position of 2013 (remember the January $525-$575 call spread?).
Without the hit I took on that, my Trade Alert Service would be up 33.3% so far this year, instead of only 31%. By comparison, the average hedge fund is up a pitiful 4.5% in 2013. I can hear the pink slips flying already.
However, there seems to be a growing consensus that the long suffering stock is close to hitting bottom, and that we soon need to flip from selling rallies to buying dips. Word on the street is that some of the biggest value players are already starting to scale back in.
There is no doubt that the stock has gotten cheap, possibly becoming the least expensive issue in the entire market. Have you noticed how the number of analyst upgrades has suddenly started to keep pace with the downgrades?
The $137 billion the company carries in cash on its balance sheet is more than the entire market capitalization of rival Samsung. The market is currently putting the enterprise value of Apple at less than that of supermarket chain Safeway (SWY). What kind of crazy world is this?
As with all great trades gone awry, the reasons for Apple?s demise are screamingly obvious with the benefit of 20/20 hindsight. It was owned by just too many damn people! I should have seen the writing on the wall when my cleaning lady, Cecelia, asked me if she should buy more in the day Apple became the largest company in history.
Not only that, the stock has a long history of peaking around new product launches, as it did with the iPhone 5 in September. Compressing several product launches into a short period last fall led to a new product drought in the winter, which unjustly shined a spotlight on Samsung, and sent Apple?s shares tumbling. Blackberry?s (RIM) return from the grave was another contributing factor.
As I told my readers in my ?throw in the towel? piece in January, a different type of physics seems to apply to companies that exceed $500 billion in market capitalization. And even after being in the business for 45 years (50 years if you count the one share of IBM I bought with my paper route savings), I still make the same mistakes as a first year, wet behind the ears intern.
Using the product cycle argument again, now could be the time to buy. Apple will shortly begin gearing up for the late summer launch of its iPhone 5s. There will be other products on the way, as the company seeks to move down the value chain and exploit the market for prepaid, no contract phones, which accounts for about 70% of the global subscriber base. There is also Apple TV, which will probably deliver more hype than earnings, but will be good for the share price anyway.
Then there is the issue of what to do about that cash mountain. A partial return to shareholders could take the form of a higher dividend, a share buyback, or a surprise acquisition. Action on this could be imminent and could deliver an immediate 10% boost to the stock price.
Of course, timing is everything. Propitious may be the one year anniversary of the announcement of Apple?s first ever dividend, which is in the coming week. The last dip could come when the June guidance is doled out in April, which is expected to be horrible. That may give us our final flush. On the other hand, action on the cash surplus could be imminent cancelling out the final capitulation.
Here?s a real curve ball for you. What if a generalized market sell off in the late spring starts driving money into laggard Apple because it can?t go down any further. Could Apple become the new safety trade, the ?RISK OFF? trade? We shall see.
I am constantly asked where to find safe places to park cash by investors understandably unhappy with the risk/reward currently offered by the markets. Any reach for yield now carries substantial principal risk, the kind we saw, oh say, in the summer of 2007.
I have had great luck steering people into the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY) for the last few years, which is invested primarily in the debt of Asian and Latin American government entities, and sports a generous 4.75% % yield. This beats the daylights out of the one basis point you could earn for cash, the 2.0% yield available on 10 year Treasuries, and still exceeded the 3.84% yield on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single ?BBB?, or better, US corporates.
The big difference here is that (PCY) has a much rosier future of credit upgrades to look forward to than other alternatives. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in the region going back to 1820 is in the backs of their minds.
You would think that a sovereign debt fund would be the last place to safely park your money in the middle of a debt crisis, but you?d be wrong. (PCY) has minimal holdings in the Land of Sophocles and Plato, and very little in the other European PIIGS. In fact, the crisis has accelerated the differentiation of credit qualities, separating the wheat from the chaff, and sending bonds issues by financially responsible countries to decent premiums, while punishing the bad boys with huge discounts.? It seems this fund has a decent set of managers at the helm.
With US government bond issuance going through the roof, the shoe is now on the other foot. Even my cleaning lady, Cecelia, knows that US Treasury issuance is rocketing to unsustainable levels (she reads my letter to practice her English).
Since my initial recommendation, my total return on (PCY) has been 50%, not bad for an insurance policy. Money has poured into (PCY), the net assets under management increasing nearly tenfold. If we get a sudden sell off in Treasury bonds, a scenario that may have already started, I think it will take the rest of the fixed income universe along with it. I therefore want to take the money and run.
I lived through the Latin American debt crisis of the seventies. You know, the one that almost took Citibank down? Never in my wildest, Jack Daniels fueled dreams did I think that I?d see the day when Brazilian debt ratings might surpass American ones. Who knew I?d be trading in Marilyn Monroe for Carmen Miranda? Given the advanced age of this bond bubble, I?m now thinking of swearing off women altogether.
Global Market Comments
March 15, 2013
Fiat Lux
Featured Trade:
(TAKING PROFITS ON STOCKS), (SPY),
(TAKING A BITE OUT OF STEALTH INFLATION),
(TESTIMONIAL)
SPDR S&P 500 (SPY)
With the (SPY) approaching an all time high, there are just a few pennies to go, I am going to take the money and run on my position in the SPDR S&P 500 (SPY) April, 2013 $145-$150 deep in-the-money bull call spread. At $4.97, there is only 3 cents left in potential profit, and I would have to run the position for another month to get it. We have already captured 93% of the potential profit in this position. The risk/reward here is no longer attractive.
The market is now up ten days in a row, the most since 1996, and has gained every day in March. Will it shoot for 11? It looks like it. By freeing up cash here we gain some dry powder to use on any market dips. That is, if they haven?t made selling stocks illegal, which the market apparently thinks they have. It also means you don?t have to rush out and change your underwear every five minutes if one of my predicted black swans comes in for a landing.
There is also the matter of being up 31% so far this year, I have outperformed virtually everyone in the hedge fund industry, except for maybe David Tepper (Thanks for the heads up, David!). With this trade, I have closed out 15 consecutive profitable trades. I have another six moneymakers still on the books, taking my own hot streak up to 21. The only trade I have lost money on during 2013 is with Apple (AAPL).
That means I no longer need to swing for the fences to make my year. Instead, I can settle back into the sort of ultra cautious, scaredy cat, type of trades typical for an investor of my advanced age. That is, unless, we get a 5% dip in the market, in which case, it will be pedal to the metal once again.
