Global Market Comments
March 11, 2015
Fiat Lux
Featured Trade:
(WHAT ALMONDS SAY ABOUT THE GLOBAL ECONOMY),
(BE CAREFUL WHO YOU SNITCH ON),
(COULD YOU QUALIFY TO BECOME A US CITIZEN?)
Yes, that?s right, you read it correctly, almonds.
By now, many of you have figured out that I like calling my paid subscribers to find out how they find the service. I always ask for suggestion for improvements. Then I ask what they do besides trade the markets.
I get an amazing array of answers. One reader flew helicopters in Alaska to inspect oil pipelines, executing trades on his cell phone in between flights. Another ran a Russian hedge fund in Moscow.
The sheep farmer in Australia relied on me as his connection with the rest of the world. The family office in Spain valued my American view of the world.
Then I called Brad in Modesto, California, who said he was in the Almond business. My interest piqued, I proceeded to grill him. And with that, I obtained a fascinating insight into an obscure corner of the global economy.
If you thought marijuana, estimated by the DEA at $6 billion a year, was California?s largest cash crop, you?d be wrong. Grapes used to be our largest legal crop, at $5 billion a year. But almonds will beat all this year, possibly reaching as high at $8 billion.
You can blame the California drought, now in its fourth year. It has only rained once in the Golden State so far in 2015. This has driven the price of almonds from $1/pound a few years ago to as much as $4/pound today.
The price spike has ignited fierce water wars across the state, with increasingly desperate farmers battling over an ever-diminishing commodity. Those located in the eastern half of the Central Valley (which you will remember from your freshman English class in The Grapes of Wrath) are sitting pretty.
They have long term contracts to buy water from federal public works projects at subsidized prices that date back to the Great Depression. These rights can make or break the value of a farm, and are passed down from one generation to the next.
The Western half of the valley is another story. When construction of Interstate 5 was completed in 1979, most of it was still barren desert, a rain shadow effect of the state?s coastal mountain range.
Only the oil industry was there in force, especially around the Elk Hills oil find (watch the Daniel Day Lewis movie, There Will Be Blood). I know because my grandfather worked there for Standard Oil during the 1920?s.
So when large scale farming developed there during the eighties, they had to buy water on the spot market. The problem is that during a draught, there is very little water for sale. So parched farmers have turned to drilling to irrigate their fields.
This has lead to an even bigger headache. In the 19th century, you could drill 100 feet and find all the water you wanted. Today, they have to go as deep as 1,200 feet, and even these ancient deep aquifers are drying up. And that?s assuming you have the $1 million it costs to drill such a well.
Indeed, the elevation of the Central Valley has fallen by ten feet over the past century because of the underground water that has been withdrawn so far. Destruction of rural buildings through catastrophic subsidence is becoming widespread.
The only alternative is to let your crops die. You see this in abundance while making the drive from San Francisco to Las Angeles, withered trees frozen in tortured, grotesque death throes. Also plentiful are irate billboards attacking the government for depriving local farmers of their cheap water.
Even if you have plenty of water, it is still not smooth sailing in the almond business these days. China is the world?s largest buyer of almonds. The demand there has been so great that the Chinese have become major buyers of almond farms throughout the state, at premium prices.
However, the Middle Kingdom?s recent anti corruption campaign is starting to take a big bite out of sales.
In years past, individuals would buy dozens of boxes of almond cookies to pass out to friends, customers, employers, government officials and regulators during the Lunar New Year celebrations. Not so today. The difference has lead to the cancellation of a few shiploads of the prized nuts.
Brad kindly invited me to tour his roasting and packaging facilities the next time I was in the neighborhood.
I was left thinking, this really is a global economy that is so integrated that, when a butterfly flaps its wings in Brazil, it causes a typhoon in Japan. It is also a great example of how information about one asset class can provide insights about all the others.
With that, I opened a fresh can of Blue Diamond almonds that I picked up at Costco and grabbed a handful.
Another Batch for China
?If you can?t beat your Chinese competitor in China and win there, you will lose all the markets your like,? said David Cote, CEO of Honeywell.
?
Global Market Comments
March 10, 2015
Fiat Lux
Featured Trade:
(WHY I WENT TO 100% CASH),
(HEDJ), (SPY), (FXE), (GLD), (TLT)
(THE SOLAR ROAD REVISTED),
(AAPL), (GOOG), (TESLA), (FB), (TWTR)
WisdomTree Europe Hedged Equity ETF (HEDJ)
SPDR S&P 500 ETF (SPY)
CurrencyShares Euro ETF (FXE)
SPDR Gold Shares (GLD)
iShares 20+ Year Treasury Bond (TLT)
Apple Inc. (AAPL)
Google Inc. (GOOG)
Tesla Motors, Inc. (TSLA)
Facebook, Inc. (FB)
Twitter, Inc. (TWTR)
I am sitting here in the balcony seats at the Napa City Winery. Somehow, my peripatetic social life has dragged me down here to listen to a Hispanic rap group. That?s right, you heard it correctly. A Hispanic rap group.
It is midnight.
The sound is so loud that it is vibrating through my chest. So I have withdrawn into my own inner silence to contemplate what the hell happened in the financial markets on Friday.
Most modern hedge funds are constructed using a series of complex correlations between asset classes which are back tested years, if not decades.
When stocks go up (SPY), bonds (TLT) are supposed to go down, as corporate America profits from the lower cost of money. When stocks go down, gold (GLD) is supposed to rally, as traders flee from risk. When bonds collapse, the dollar is weak, as foreign investors repatriate the proceeds of their sales.
And so on, and so on.
Except on Friday, none of this worked. Everything went down in unison. Only the dollar rose. It was that simple. You could hear the models blowing up like fireworks on the Fourth of July (or Guy Fawkes Day, whatever your persuasion).
To see the market trade this badly on such great news as the blockbuster February nonfarm payroll of 395,000 was really quite amazing. It makes no sense, but it is there, and therefore, I am gone.
Whenever I don?t understand what is going on, I get out. You should too.
I was never one to argue with Mr. Market. So I have moved to a 100% cash position, a circumstance, which for me, is as rare as a dodo bird.
Did the world go mad when I wasn?t looking?
Which leaves us to contemplate what the markets are trying to tell us deaf traders.
When you see illogical, irrational, unpredictable market behavior like this, it is evidence that the market is changing. But in which way? Let us consider five possibilities.
1) The Fed is Raising Rates in June. It is amazing how much complacency there is out there about the coming hike in interest rates, the first in a decade. The talking heads will tell you that it is well telegraphed, fully discounted, and in the market. But when the momentous event actually occurs, just watch. Traders will run around like chicks with their heads cut off.
It is not in the market.
2) The market is topping out. This is the most frightening prospect for most investors, as the memories of the Great Crash are so recent. Unfortunately, it has also been predicted annually for the last seven years. If anything, the global economy is getting stronger, not weaker, now that Euro QE is finally kicking in.
This new virility will enable Europe, China, and Japan to rejoin the global economy after a prolonged period of absence. US economic growth should catapult from 2.5% to 3% this year. That?s what Friday?s 5.5% headline unemployment rate was shouting at us, the closest to full employment that we have been since 2005.
3) Money is Shifting Out of the US and into Europe. It is only natural that investors want to reallocate capital out of markets where QE is ending, like the US, and into markets where it is beginning, such as Europe. Those who have been mercilessly beaten for diversifying internationally for the last seven years, are now, at long last, getting rewarded. Suddenly, learning all those exotic foreign languages and strange customs is getting you more than a nice table at an ethnic restaurant.
The markets certainly believe this, with the Wisdom Tree International Hedged Equity ETF (HEDJ) up an impressive 20% in 2015, compared to a feeble 0% for the S&P 500 (SPY). Nothing persuades like performance.
4) The Seasonal Period of Equity Strength is Ending. Remember ?Sell in May, and go away?? That looming deadline is only two months off. Some four of the six months of seasonal equity strength is behind us.
5) The Strong Dollar is Finally Starting to Hurt. After a 34% depreciation of the Euro against the US dollar over the past seven years, the deflationary impacts are finally taking their toll. Global multinationals are feeling the heat the most, mid caps less so. At last, I can afford my extravagant European vacations!
If the dollar is the driver, can we expect any respite? Only if the Federal Reserve cancels all interest rate hikes for the foreseeable future. In other words, fat chance.
Parity against the Euro, here we come!
All of this inspires me to exercise greater than usual amounts of self-discipline and risk control. With any luck, I?ll be all cash going into the next meltdown. That is worth paying a premium for in terms of opportunity cost.
Hey, even a broken clock is right twice a day, occasionally a blind squirrel finds an acorn and if you fire buckshot long enough, eventually you are going to hit a barn.
Well, the band has just completed its grand finale, wading into the middle of the crowd for a giant selfy. My ears will be ringing for days.
Now, for my next newsletter?
Global Market Comments
March 9, 2015
Fiat Lux
Featured Trade:
(WATCH OUT FOR APPLE IN THE DOW),
(AAPL), (T), (MSFT), (CSCO), (INTC),
(A COW BASED ECONOMICS LESSON)
Apple Inc. (AAPL)
AT&T, Inc. (T)
Microsoft Corporation (MSFT)
Cisco Systems, Inc. (CSCO)
Intel Corporation (INTC)
?No one is line dancing over the fact that the market is at 1,940. No one feels good about it. The market likes to climb a wall of worry, and the stonemason has been hard at work. So I think we continue to grind higher,? said Jason Trennert, chief investment strategist at Strategas Research Partners.
Global Market Comments
March 6, 2015
Fiat Lux
Featured Trade:
(THE MAD HEDGE FUND TRADER?S SEVENTH ANNIVERSARY ISSUE)
(FRIDAY, APRIL 17 INCLINE VILLAGE, NEVADA STRATEGY LUNCHEON)
Yes, it seems like it was only yesterday. But as of February 1 the Diary of a Mad Hedge Fund Trader has been going out to idea hungry investors now for seven long years.
And what a seven years it has been!
So I will take the opportunity to explain the murky history of this august publication, which is now visited by thousands of readers every day from 135 countries around the world.
I am weak in Mali and North Korea, but am working on that, as soon as they get electricity.
Way back in mid 2007, I was toying with the idea of launching another hedge fund, and started emailing global macro ideas to a list of potential investors. This grew into a daily commentary.
However, I was soon to discover that the regulatory and legal costs of launching a new fund had risen astronomically since the last time I did this in 1989.
The competitive environment had also changed dramatically. When I first started, there were only 20 hedge funds. Now there were 10,000, many with marketing teams in the dozens targeting large institutional clients.
The bottom line was that it would cost a minimum of $10 million to get started, and I needed to raise at least $500 million in assets just to break even.
In other words, it was a young man?s game.
So I decided to post my comments on the Internet and see what happened.
Something happened.
First, I had to come up with a name. A quick search at the US Copyright Office records revealed that every possible combination of ?trading?, ?hedge fund?, ?macro?, and ?research? was already taken.
So, I modified the name of an obscure and long forgotten 1970 Alice Cooper movie, ?Diary of a Mad Housewife?. My friends liked it, so I ran with that.
Then, I had to build a website. After obtaining offers from professional website developers to do this for hundreds of thousands of dollars, I decided to try it myself. With teenagers accomplishing this, how hard could it be?
So I spent $5 and bought a used copy of Website for Dummies from Amazon. My goal was to see if I could launch a profitable Internet business for free.
Months of laborious programming followed, where I literally constructed the site on a trial and error basis. Another $5 investment bought a copy of Online Commerce for Dummies. That got me into the arcane world of merchant accounts, search engine optimization and SSL certificates.
I almost pulled it off. My total up front costs for the launch of the Diary of a Mad Hedge Fund Trader came to $500.
Finally, I put the letter up for sale on February 1, 2008 for $29 a month. I sold one subscription. I thought ?This was the height of hubris for me to think that someone would pay me money for my ideas on the Internet.?
Then a funny thing happened.
Other financial newsletters started stealing my stories. So I developed a business model that encouraged stealing. I started posting pieces on sites that then linked back to my own website, like Seeking Alpha, Business Times, Huffington Post, and Zero Hedge.
It also helped that I got a hold of Google?s 50 page long patent for their search engine, and figured out how to make my site unusually sticky and discoverable by searches.
Traffic started to build.
Then in 2010, I decided to enhance the product. Readers were raving about my trading recommendations, so I decided to create a premium Trade Alert service for $2,000 a year. This was quite a leap of faith, as the Diary price then was $799 a year.
This would give followers the exact details they needed to execute on my ideas, including price, number of contracts, ticker symbols and potential P&L?s.
The idea was to make subscribers feel like they were sitting at the desk of a top hedge fund trader. We launched the product on November 1, 2010.
I was thinking that I might sell a dozen subscriptions by the end of the year. So I didn?t bother to build an online store, expecting to create one when the traffic grew.
I asked buyers to send checks instead. Oops!
A week later, I happened to be driving by the post office, so I thought I would stop and pick up the mail. The postal clerk asked me to bring my truck around the back. I said I didn?t have a truck.
Some five minutes later, three out of shape postal workers were dragging a 50-pound mail sack across the floor. It was all for me.
I couldn?t believe it.
To make a long story short, we took in 6,000 checks for $2,000 each over the following three months. It was one of the greatest Internet marketing miracles in history. My $500 investment had suddenly turned into $12 million. Overnight, I become a part of Internet lore.
My entire family spent their Christmas vacation opening up letters and manually entering names and email addresses onto an excel spreadsheet.
Then something even more amazing happened. Many checks came with effusive letters of thanks. Much to my amazement, readers had been making hundreds of millions of dollars in profits trading off of my advice.
I had no idea.
I learned of college educations I had funded, mortgages paid off, parents retired early and uninsured chemotherapy treatments for kids paid off.
Some letters brought tears to your eyes, others laughs. I particularly remember the guy who thanked me for his new Toyota Tundra pickup truck, the luxury trailer that slept eight, the camos and the AR-15. He was going to visit me on his first cross-country trip.
He did, and I still live to tell about it.
The problem then arose of what to do with the checks. My main bank was then in Las Vegas. So I stuffed $12 million in checks into a backpack and headed for the airport.
Standing in line, I wondered if the metallic strips on the checks would set off the metal detectors. What was my explanation to Homeland Security going to be as to why I was carrying $12 million? Was this all some kind of elaborate money laundering operation? Was I a mafia courier headed for Vegas?
In then end, nothing happened. False alarm.
Once in Sin City, I took a taxi straight for the bank. No, I was not tempted to head for a casino.
I dropped the backpack at the teller?s window and said ?Please deposit these, I?ll be back.? They said ?Oh no, you can?t go anywhere. You have to stand here and watch us individually deposit each and every single check.?
They put two clerks on it, and it took eight hours. Minutes before closing, they handed me back a fist full of checks, that were unsigned, undated, or made out to me personally. I closed my account there shortly thereafter.
We have since used every opportunity to add services and functionality for subscribers. It?s all about getting you, the customer, to make more money.
I added staff around the world. The text alert service, although expensive, accelerated the Trade Alerts to the speed of light, globally. Hedge Fund Radio made its debut.
Mad Day Trader Jim Parker joined us with his excellent service in 2013. The travel videos came last summer, followed by training videos in the fall. You may have also noticed a massive upgrade of our website around then.
We are still growing, and looking for new ways to grow. I am always looking for ways to improve the product. Here next to Silicon Valley they like to say that ?As soon as you think you?re finished, you?re finished?.
So true, so true.
To click
on the first ever published Diary of a Mad Hedge Fund Trader newsletter, please click here. You will be quite amused by the commentary a full year before the stock market crash finally ended.
I strongly recommended that everyone protect their assets by piling into gold (GLD) at $900 an ounce (it went to $1,927). I also suggested traders sell short the dollar against the Euro at $1.40 (it went to $1.60).
There is also mention of Microsoft?s bid for Yahoo at $31/share. Jerry Yang later turned down the offer, and the stock plunged to $8, vaporizing $22 billion of market capitalization. It was one of the worst business decisions in history.
Does the quality of any of these tips sound familiar?
Finally, I want to thank the thousands of subscribers who have supported my research over the years and supported a lifestyle that would make Jay Gatsby envious.
Regards,
John Thomas
The Mad Hedge Fund Trader
Thanks to You!
Global Market Comments
March 5, 2015
Fiat Lux
Featured Trade:
(GET READY FOR THE COMING GOLDEN AGE),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)
SPDR S&P 500 (SPY)
Dow Jones Industrial Average (^DJI)
CurrencyShares Euro Trust (FXE)
CurrencyShares Japanese Yen Trust (FXY)
United States Natural Gas (UNG)
iShares MSCI Emerging Markets (EEM)
United States Oil (USO)
iShares 20+ Year Treasury Bond (TLT)
Nissan Motor Co. Ltd. (NSANY)
Tesla Motors, Inc. (TSLA)