?Europe is in the terminal phase of its life,? said David Murrin of Emergent Asset Management.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
Take a look at the charts below, and you will see what prompted me to knock out some shorts on the S&P 500 (SPY) on Friday. The longer the current trading range in the index works, the more traders pile into it, confining it to an ever narrowing range.
I am even hearing that fundamental managers who normally shun charts and technical analysis as a pagan religion are starting to track such alien indicators as Bollinger bands, relative strength indicators, and stochastics. The 200 day average presents such formidable upside resistance that it will take spectacularly good news to close substantially above it on big volume. A little bit of ?kiss and make up? in Europe just isn?t going to cut it, especially when they continue to bad mouth each other among their close friends in private.
Since I am such an inveterate seeker of cross market correlations, I always like to refer to the Volatility Index before taking decisive action on a trade. And guess what? Just as stocks are bumping up against resistance, the (VIX) is bouncing along support at its 200 day moving average. This further reinforces my belief that the indexes are ripe to give back a chunk of their recent gains.
Watch your news service headlines. This contest will ultimately be determined by what does, or does not happen in Europe. And once again, thank you Standard and Poor?s for another belated downgrade of European debt!
Yes! Technical Analysis Can Work!
I heard the magic words today from German chancellor Angela Merkel and French president Nicolas Sarkozy: ?treaty changes?. That will be the gist of their joint proposal at the European summit this coming Friday to deal with the sovereign debt crisis.
To me, this means that the two besieged leaders are finally biting the bullet and laying the groundwork for the sweeping changes needed to solve their formidable financial challenges.
The plan will implement greater budget discipline with automatic sanctions for budget busters like Greece, who exceed the 3% of GDP deficit guidelines. Expect the European Financial Stability Council (EFSF) to move into action next year to help keep Greece in the monetary union.
You can also expect the European Central Bank to launch some fireworks this week. Among them will be:
1) ECB president Mario Draghi will cut interest rates by 25-50 basis points.
2) The ECB will relax collateral rules for borrowing banks.
3) It could also increase sovereign debt purchases of paper from the weaker countries, like Italy and Spain, from last week?s feeble $3.5 billion to as much as $20 billion a week.
The bottom line here is to expect a lot of ?feel good? news flashes in coming days, which could cause the Euro to edge back up to the top of its current trading range at $1.3550.
But don?t hold your breath for any panaceas. The European treaty includes 27 members, with 17 employing the Euro as a common currency, and all have to agree to any changes. Substantial modifications will require national referendums. On top of that, Sarkozy is still blocking pan Eurobonds advocated by Merkel, which is the only supra national fund raising mechanism that can possibly work.
The reality here is that Germany is imposing austerity and fiscal discipline on the rest of Europe, and non-Germans may not necessarily like it. So the next wave of optimism is likely to once again bear the bitter fruit of disappointment, taking the beleaguered European currency down to $1.29 in Q1, 2012.
For those of you who have followed my advice to sell short the euro, there is an 800 pound gorilla in the room to deal with. The trading community is now short over 100,000 contracts in the futures market, an all-time high, matching the peak seen in the spring of last year, when the Euro just fell short of $1.60. The risk of a snap back rally going into the coming European love fest is high.
I have noticed that in recent weeks, the market is allowing the nimble ever smaller profits from their quick in and out trades. This may be a function of the declining volatility going into the holidays and the year end. So those with itchy trigger fingers may want to take profits sooner than they usually might and celebrate Christmas early. The value of dry powder is rising.
A One Night Stand or a Long Term Relationship?
?Bull markets don?t die, they are killed by central bankers,? said JJ Burns of JJ Burns & Co., an investment advisor.
Last week marked the one year anniversary of my Trade Alert Service, and subscribers could not be happier with the results. The first year return came in at 42.2%, putting us in the top one tenth of one percent of all hedge fund managers. By comparison, the S&P 500 Index came in wheezing with a moribund 1.3% gain during the same time period, which is hardly worth getting out of bed for.
It was off to the races on day one of my innovative online trade mentoring program. The strategies employed generated positive returns for my model portfolio all year, producing a continuous, stair stepping performance illustrated on the chart below that so many managers would kill for. I was able to generate this track record during one of the most volatile and difficult markets in history, when the indexes ratcheted up, down, and sideways in the most unpredictable and hair tearing manner possible. At the high for the year in early November, I was up over 47%.
My home run trade for the year was a short position in the Swiss franc (FXF) in September, initiated just before the central bank devalued their currency and pegged it to a collapsing Euro, which brought in a welcome 9.07%. A call spread in Bank of America (BAC) that I strapped on right after the launch of QE2 and last year?s tax compromise made me 8.93%. A short position in the Euro (FXE) during the spring, right when the sovereign debt crisis exploded, seized a profit of 5.14%. I caught the Euro once again on the short side in the autumn melt down for another 5.35% profit.
It hasn?t all been fun and games. The bane of my existence in 2011 has been the (TBT), an ill-considered bet that long dated Treasury bonds will fall. While I made good money betting on rising bonds in the first half of the year, my failure to observe my own stop loss rules cost me 6.93% in the (TBT) in the second half. The Federal Reserve?s ?twist? policy certainly didn?t help, which my contacts there failed to warn me of in advance, probably because they opposed it. I also lost 4.96% with a long position in the S&P 500 right when the market was topping in July. Wasn?t it Shakespeare that said ?To err is human.?
For those who wish to participate in my Trade Alert Service, my highly innovative and successful online mentoring program, email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Trade Alert Service? in the subject line, as we are getting buried in emails. Hurry up, because our software limits the number of subscribers, and we are running out of places.
What a Year It?s Been!
The November nonfarm payroll came in at 120,000, better than the consensus. The unemployment rate plunged an eye popping 0.5% to 8.6%, the lowest level in 32 months and one of the sharpest contractions on record.
Some 140,000 private jobs were added, bringing the 32 month total to an even 3 million, an impressive feat given the arthritic pace of the growth in the US economy. Governments lost 20,000 jobs, a continuation of what I will believe will be a decade long trend of a shrinking public sector at the federal, state, and municipal levels.
Hiring by retailers was up 50,000, clearly gearing up for the Christmas season. Professional and business services gained 33,000 jobs, leisure and hospitality 23,000, and health care 17,000. As usual, construction led the losers, dropping 12,000 jobs.
There are now 13.3 million unemployed, down an amazing 594,000 from the previous month, with 5.7 million jobless for 6 months or longer. The numbers were boosted by a 300,000 drop in the job force as many simply gave up looking for work, thus artificially skewing the headline unemployment rate to the downside. The broader U-6 number shrank from 16.2 million to 15.6 million, putting the true unemployment rate at 10.1%.
The real news was hidden behind the headlines. The shocker here is that September and October were revised up for a total of 72,000, providing further proof that the September stock market swoon was discounting a double dip recession that was never there. Such is the value of tracking the raw economic data and ignoring the blabbering talking heads on TV who appear to sift all news through a political filter. It seems that when the job figures are bad, they believe them, and when they are good, they are rigged.
For some real insight on the long term trends driving the global economy, take a look at the chart below showing ?Percent Job Losses in Post WWII Recessions?.? It demonstrates that the current employment recovery is lagging past ones by about 5%. That works out to 7.5 million jobs. These were the jobs that were exported to China over the past decade and are never coming back, no matter how many promises are made by our political and business leaders.
The bottom line here is that you should expect our unemployment to remain structurally high for at least another decade, as it did in Germany during the eighties and nineties. After that, we will flip from a surplus to a shortage of workers as more favorable demographic trends finally start to kick in. So work those assumptions into your long term forecasting models.
?If you measure the stock market not in dollars, but in gold, it is down 80% since 1999. I no longer regard the US dollar as a valid unit of account. People shouldn't value their wealth in dollars because one day, everyone will be billionaires,? said ultra-bear, Marc Faber, of the Gloom, Boom, and Doom Report.
Much of the fury in yesterday?s nearly 500 point ?melt up? in the Dow was generated by hedge funds panicking to cover shorts. Convinced of the imminent collapse of Europe, the impotence of governments, and the death spiral in sovereign bonds, many managers were running a maximum short position at the Monday opening, and for the umpteenth time, were forced to cover at a loss. Meet the new dumb money: hedge funds.
When I first started on Wall Street in the seventies, you heard a lot about the ?dumb money.? This was a referral to the low end retail investors who bought the research, hook-line-and-sinker, loyally subscribed to every IPO, religiously bought every top, and sold every bottom.
Needless to say, such clients didn?t survive very long, and retail stock brokerage evolved into a volume business, endlessly seeking to replace outgoing suckers with new ones. When one asked ?Where are the customers? yachts?, everyone in the industry new the grim answer.
Since the popping of the dot-com boom in 2000, the individual investor has finally started to smarten up. They bailed en masse from equities, seeking to plow their fortunes into real estate, which everyone knew never went down. Since 2008, the exit from equities has accelerated. There have been over $400 billion in redemptions of equity mutual funds, compared to $800 billion in purchases of bond funds.
Although I don?t have the hard data to back it, I bet the average individual investor is outperforming the average hedge fund in 2011. With such heavy weightings of bonds and cash, how could it be otherwise. While the current yields are miniscule, the capital gains have to be humongous this year, with yields plunging from 4% to 2%.
This takes me back to the Golden Age of hedge funds during the 1980?s. For a start, you could count the number of active funds on your fingers and toes, and we all knew each other. The usual suspects included the owl like Soros, the bombastic Robertson, steely cool Tudor-Jones, the nefarious Bacon, the complicated Steinhart, of course, myself, and a handful of others.
The traditional Wall Street establishment viewed us as outlaws, and believed that if the trades we were doing weren?t illegal, they should be, like short selling. Investigations and audits were a daily fact of life. It wasn?t easy being green.
It was worth it, because in those days, if you did copious research and engaged in enough out of the box thinking, you could bring in enormous profits with almost no risk. I used to call these ?free money? trades. To be taken seriously as a manager by the small community of hedge fund investors you had to earn 40% a year, or you weren?t worth the perceived risk. Annual gains of 100% were not unheard of.
Let me give you an example. In 1989, you could buy a warrant on a Japanese stock near parity, for $100 that gave you the right to own $500 worth of stock. You bought the warrant and sold short the underlying stock. Overnight yen yields then were at 6%, so 500% X 6% = 30% a year, your risk free return. If the stock then fell, you also made money on your short stock position. This was not a bad portfolio to have in 1990, when the Nikkei stock index plunged from ?39,000 to ?20,000 in three months, and some individual shares dropped by 80%.
Trades like this were possible because only a smaller number of mathematicians and computer geeks, like me, were on the hunt, and collectively, we amounted to no more than a flea on an elephant?s back. Today, there are over 10,000 hedge funds managing $2.2 trillion, accounting for anywhere from 50% to 70% of the daily volume.
Many of the strategies now can only be executed by multimillion dollar mainframe computers collocated next to the stock exchange floor. Winning or losing trades are often determined by the speed of light. And as the numbers have expanded exponentially from dozens to hundreds of thousands, the quality of the players has gone down dramatically, with copycats and ?wanabees? crowding the field.
The problem is that hedge funds are no longer peripheral to the market. They are the market, and therein lies the headache. How are you supposed to outperform the market when it means beating yourself? As a result, hedge fund managers have replaced the individual as the new ?dumb money, buying tops and selling bottoms, only to cover at a loss, as we witnessed on Monday.
The big, momentum breakout never happens anymore. This is seen in hedge fund returns that have been declining for a decade. The average hedge fund return this year is a scant 1%. Make 10% now and you are a hero, especially if you are a big fund. That hardly justifies the 2%/20% fee structure that is still common in the industry.
When markets disintegrate into a few big hedge funds slugging it out against each other, no one makes any money. I saw this happen in Tokyo in the 1990?s, when hedge funds took over the bulk of trading. Volumes shrank to a shadow of their former selves, and today, Japan has fallen so far off the radar that no one cares what goes on there. Japanese equity warrants ceased trading by 1995.
How does this end? We have already seen the outcome; that investors flee markets run by hedge funds and migrate to those where they have less of an impact. That explains the meteoric rise of trading volumes of other assets classes, like bonds, foreign exchange, gold, silver, and other hard assets.
Hedge funds are left on their own to play in the mud of the equity markets as they may. This will continue until hedge fund investors start departing in large numbers and taking their capital with them. The December redemption notices show this is already underway. Just ask John Paulson.
Oops! That Wasn?t in the Game Plan
-
How About 2% and 20%?
?Don?t get greedy. Don?t expect much. This is a single and double type of market. You?ve got to play it this way,? said Jeffrey Kleintop, a market strategist at LPL Financial.
