?The time to worry about the Fed is not when they go from accommodative to neutral, it is when they go from neutral to tight,? said Bill Miller the legendary former chairman and CIO of Legg Mason Capital Management.
Global Market Comments
March 21, 2016
Fiat Lux
Featured Trade:
(APRIL 21 BOSTON GLOBAL STRATEGY LUNCHEON),
(THE DEATH OF THE HEDGE FUND),
(SPY), (VRX), (USO),
(CHINA?S COMING DEMOGRAPHIC NIGHTMARE),
(FXI)
SPDR S&P 500 ETF (SPY)
Valeant Pharmaceuticals International, Inc. (VRX)
United States Oil (USO)
iShares China Large-Cap (FXI)
Without question, this has been the quarter from hell for the hedge fund industry.
It hasn?t helped that the big cap S&P 500 Index (SPY), has cratered by 14% and then immediately rocketed by 14% three times in the last 18 months, with NO net movement overall.
The latest rally has seen the biggest move up in stock prices since Franklin Delano Roosevelt was first sworn in as president in 1933. I remember it like it was yesterday.
This is your worst trading nightmare.
Such is the price of saying bon viage to America?s aggressive monetary policy of quantitative easing.
Speaking to managers and traders around the globe, my compatriots are either having a terrible time, or they are going out of business. I am one of a hand full eking out a small gain in 2016.
See?. after a half century, this business starts to get easy.
According to Hedge Fund Research, a commercial database, last year was the worst for hedge fund liquidations since 2009. Some 979 funds ran up the white flag, compared to 864 in 2014.
New hedge funds are coming to the fore at a declining rate. Only 183 started up during the fourth quarter, versus 269 in Q3. And they are raising smaller amounts of money with tighter terms.
In January alone total hedge fund assets under management shrank by $64.7 Billion, thanks to redemptions and market losses. They fell again in February to $2.95 billion, the lowest since May, 2014, according to eVestment, another research firm.
Hedge funds are not only the victims of the recent extreme market volatility; they are the cause. Far and away the best performing stocks in 2016 are those with the greatest hedge fund short positions.
Those would include holdings in the energy, commodities, industrial, retailing, and precious metals industries.
Of course, everyone in the know was aware that the market was heading for a pasting at the beginning of the year. That's why I started buying naked puts in the S&P 500 (SPY) for the first time in ages.
The problem is that many hedge funds have grown so large that it takes months to shift a position with any decent weighting. They have in effect become victims of their own success.
Activist hedge funds have in particular become the subject of grief. Pershing Square, run by the controversial boy trader Bill Ackman, has seen one of its largest positions, Valeant Pharmaceuticals (VRX) crash by a gut churning 73% this year. This is on top of an eye popping 61.5% plunge in 2015.
With 100 analysts on board they could see this coming. Go figure. The problem is that at least a half dozen other funds have been riding on Ackman?s coattails and are suffering similar grief.
Hedge funds deliver mediocre high single digit, low double digit gains over the long term in exchange for minimizing or eliminating any downside. So far this year, they have overwhelmingly failed to deliver.
As a result, investors are clamoring for their money back. Easier said than done. Many funds, like Pershing Square limit their partners from withdrawing capital to as many as eight consecutive quarters, with long advance notice periods.
It doesn?t help that we have all be forced into becoming oil traders (USO), with no particular advantage.
After a grinding 82.6% decline from the 2011 peak to a subterranean $26, oil nearly doubled to $42, a 61% pop. Not even career traders in the oil patch saw this coming.
What oil does from here is anyone?s guess. My bet is that we retrace to $30 during the spring refinery maintenance period to make a secondary bottom, wiping out all the newfound bulls.
Long-term Trade Alert followers have noticed that I stop out of losers quicker than usual in this kind of environment. That?s because one bad trade can wipe out the profits of three good ones.
Over time, I try to break even when I?m wrong and make a fortune when I?m right. Most investors will take those kinds of returns all day long.
When I joined a tiny hedge fund industry during the late 1980?s, it gave you a license to print money, and we did so by the millions.
Now it sounds more like a club I wouldn?t want to? to join because it has me as a member.
It Takes A Real Einstein To Figure Out This Market
?We?re in a secular bull market for the dollar. ?A strong dollar is a natural consequence of America emerging from a liquidity trap, while Europe and Japan are still stuck in one. The dollar is a growth stock, and growth stocks over time outperform utilities,? said Paul McCulley, formerly the chief economist at bond giant PIMCO.
Global Market Comments
March 18, 2016
Fiat Lux
Featured Trade:
(APRIL 20 WASHINGTON DC GLOBAL STRATEGY LUNCHEON),
(JANET CUTS THE KNEES OUT FROM UNDER THE DOLLAR),
(SPY), (FXY), (FXE), (UUP), (GLD), (GDX), (SLV), (SIL),
(TEN TIPS FOR SURVIVING A DAY OFF WITH ME)
SPDR S&P 500 ETF (SPY)
CurrencyShares Japanese Yen ETF (FXY)
CurrencyShares Euro ETF (FXE)
PowerShares DB US Dollar Bullish ETF (UUP)
SPDR Gold Shares (GLD)
Market Vectors Gold Miners ETF (GDX)
iShares Silver Trust (SLV)
Global X Silver Miners ETF (SIL)
Her action was as certain as it was swift.
Federal Reserve chairman Janet Yellen suddenly ratcheted down interest rate expectations from four-quarter point rises to only one in 2016. And that one rate rise may not come until December.
Foreign exchange traders all share one unique characteristic. You have to SHOW THEM THE MONEY. No interest rate increases mean no more money and they summon the urge to dump the offending currency.
In other words, GOOD BYE US DOLLAR.
Once again, my call that there would be NO rate rises has been vindicated, as elucidated in my 2016 Annual Asset Class Review (click here).
Traders lulled into an always-fatal sense of complacency were taken out to the woodshed and severely spanked.
The message was clear. Never underestimate the dovishness of my former Berkeley economics professor, Janet Yellen.
The Fed has in effect changed policy direction three times in three months, generating some of the most violent market moves in history. If you can survive this, you can survive anything!
Do you know who the longest living subgroup of people in Japan are? Hiroshima atomic bomb survivors. Welcome to the club.
Almost every major hedge fund short play out there rocketed. The Euro (FXE) and the Japanese yen (FXY) soared. Stocks added double-digit gains. Oil (USO) gained a new lease on life. Indeed, the entire weak dollar (UUP) space was off to the races.
Gold (GLD), silver (SLV), and the miners (GDX), (SIL) especially like the outbreak of cautiousness at the Fed.
The barbarous relic made back its entire recent $50 correction in minutes, and then some. Gold sparkles because low rates mean that the opportunity cost of owning it has been pushed back to near zero. Oh, and it?s a weak dollar play too.
I was seconds away from getting executed on another call spread for all of you, but prices moved too far, too fast before we could get the Trade Alert out.
Welcome to show business.
Clearly, international concerns were at the forefront. Janet has, in effect, become the central banker to the world. If Europe, Japan, and China are all weak, it is not time to raise American interest rates.
It doesn?t help that US corporate earnings growth barely has a pulse. Janet?s worst nightmare is that the US goes into the next recession with interest rates at zero, dooming us to a liquidity trap like the one that has mired the Japanese economy for the past two decades.
The Fed action on Wednesday sent a generalized green flag out to all ?RISK ON? assets. The problem is that it comes right on top of one of the steepest moves UP in share prices in market history.
So, after flushing out a few stubborn, last stand shorts, I think the market will be RIPE for a correction, possibly a big one. We are not blasting through to new all time highs any time soon, and probably not until yearend.
You saw it here first.
And Janet, thanks again for that A+ in economics, and you owe me a phone call.
No Interest Rate Rises Here!
?Betting on Janet Yellen is about as likely as Donald Trump being civil" said Boris Schlossberg, managing director of BK Asset Management.
Global Market Comments
March 17, 2016
Fiat Lux
Featured Trade:
(APRIL 19 ATLANTA GLOBAL STRATEGY LUNCHEON),
(AMERICA?S NATIVE INDIAN ECONOMY),
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD),
(AAPL)
Apple Inc. (AAPL)
Global Market Comments
March 16, 2016
Fiat Lux
Featured Trade:
(APRIL 18 MIAMI GLOBAL STRATEGY LUNCHEON)
(TEN REASONS WHY STOCKS BOUNCED BACK SO HARD),
(SPY), (TLT), (FXY), (FXE),
(AAPL), (IBM), (XOM), (WFC), (INTC), (AIG),
(THE BLOCKBUSTER READ IN THE HEDGE FUND COMMUNITY)
SPDR S&P 500 ETF (SPY)
iShares 20+ Year Treasury Bond (TLT)
CurrencyShares Japanese Yen ETF (FXY)
CurrencyShares Euro ETF (FXE)
Apple Inc. (AAPL)
International Business Machines Corporation (IBM)
Exxon Mobil Corporation (XOM)
Wells Fargo & Company (WFC)
Intel Corporation (INTC)
American International Group, Inc. (AIG)
While driving back from Lake Tahoe last weekend, I received a call from a dear friend who was in a very foul mood.
Following the advice of another newsletter that I won?t mention, he bailed out of all his stocks at the February 11 bottom. After all, wasn?t the Dow Average headed straight to 3,000?
Despite market volatility doubling, multinationals getting crushed by the weak euro, and the Federal Reserve now on a rate rising path, here we are with the major stock indexes just short of all time highs.
Why the hell are stocks still going up?
I paused for a moment as a kid driving a souped up Honda weaved into my lane on Interstate 80, cutting me off. Then I gave my friend my response, which I summarize below:
1) There is nothing else to buy. Complain all you want, but US equities are now one of the world?s highest yielding securities, with a lofty 2% dividend. A staggering 50% of S&P 500 stocks now yield more than US Treasury bonds (TLT). That compares to two thirds of all developed world debt offering negative rates and US Treasuries at 1.90%.
2) Oil prices have bottomed, but remain incredibly low, and the windfall cost savings are only just being felt around the world.
3) While the weak euro (FXE) is definitely eating into large multinational earnings, we are probably approaching the end of the move. The cure for a weak euro is a weak euro. The worst may be behind for US exporters.
4) What follows a collapse in European economic growth? A European recovery, powered by a weak currency. European quantitative easing is working.
5) What follows a Japanese economic collapse? A recovery there too, as hyper accelerating QE feeds into the main economy. Japanese stocks are now among the world?s cheapest. The Japanese yen (FXY) will probably FALL for the rest of the year, adding more fuel to the fire.
6) While the next move in interest rates will certainly be up, it is not going to move the needle on corporate P&Ls for a very long time. We might see a ?% hike and then done, and that probably won?t happen until the second half of 2016. In a deflationary world, there is no room for more. At least, that?s what my friend Janet tells me.
This will make absolutely no difference to the large number of high growth corporations, like technology firms, that don?t borrow at all.
7) Technology everywhere is accelerating at an immeasurable pace, causing profits to do likewise. You see this in biotech, where blockbuster new drugs are being announced almost weekly.
See the new Alzheimer?s cure? It involves extracting the cells from the brains of alert 95 year olds, cloning them, and then injecting them into early stage Alzheimer?s patients. The success rate has been 70%. That one alone could be worth $5 billion. I might be a user of this cure myself someday.
8) US companies are still massive buyers of their own stock, over $200 billion worth in 2015. This has created a free put option for investors for the most aggressive companies, like Apple (AAPL), IBM (IBM), Exxon (XOM), Wells Fargo (WFC), and Intel (INTC), the top five repurchasers. They have nothing else to buy either. American International Group, Inc. (AIG) has mandated the repurchase of an amazing 25% of its outstanding float.
They are jacking up dividend payouts at a frenetic pace as well, and are expected to return more than $430 billion in payouts this year.
9) Oil has bottomed, making the entire energy sector the ?BUY? of the century, dragging the indexes up as well, even though it now accounts for only 5% of total market capitalization. This is why I made energy my number one performing pick this year.
10) Ditto for the banks, which were dragged down by falling interest rates for most of 2015. Reverse that trend this year, and you have another major impetus to drive stock indexes higher.
My friend was somewhat taken back, dazzled, and nonplussed by my out of consensus comments. He asked me if I could think of anything that might trigger a new bear market, or at least a major correction.
The traditional causes of recessions, oil price and interest rate spikes, are nowhere on the horizon. In fact, the prices for these two commodities, energy and money, are near all time lows.
Then I thought of one big one. Donald Trump could get elected president in November.
With that, I told my friend I had to hang up, as another kid driving a souped up Shelby Cobra GT 500, obviously stolen, was weaving back an forth in front of me requiring my attention.
Where is a cop when you need them?
