Diary Archives

February 21, 2011 - Learning to Love Hedge Funds

Featured Trades: (LEARNING TO LOVE HEDGE FUNDS)

3) Learning to Love Hedge Funds. The Wall Street Journal has put together the best history of hedge funds I have found so far. They start with the legendary Fortune Magazine editor, Winslow Jones, who created the first fund out of a shabby office on Broadway in 1948, and generated monster returns over the next 20 years. I learned for the first time that the industry standard 20% performance bonus was borrowed from ancient Phoenician sea captains who kept a fifth of the profits from successful voyages. Jones must have had an historical bent.

They cover the second generation titans, George Soros, Julian Robertson, and Michael Steinhardt, who made their debut in the sixties. I count myself among the third generation along with Paul Tudor Jones and Louis Bacon, who launched funds in the late eighties, when there were still fewer than 200 funds and $25 million was still considered a lot of money. The really big money showed up in the nineties when the pension funds found them.

The Journal then navigates us through the big crisis that followed, including Long Term Capital, Amaranth, and Lehman Brothers. It also correctly points out that the industry's avoidance of ratings agencies kept most funds out of hot water during the financial crisis. Today there are over 10,000 hedge funds, thought to manage some $2.9 trillion which dominate all financial markets. To read the well researched article in full, please click here.

Hedge Funds Do Have Their Advantages

February 21, 2011/by Mad Hedge Fund Trader

February 18, 2011 -My Near Miss With Cisco

Diary

Featured Trades: (MY NEAR MISS WITH CISCO)

2) My Near Miss With Cisco. My predatory instinct as a scavenger and bottom feeder is coming to the fore once again. After building up expectations for a blowout quarter, Cisco Systems disappointed once again, prompting traders to trash the stock by 15% in one day. Call me greedy, but my risk averse nature prompted me to take the double that I had on by March $20-$22 bull call spread three weeks earlier. If you wonder why I am still cautious in one of the most Teflon resistant bull markets of all time, this is a good reason.

All of which sets up the exact same trade again. It was actually a decent report, as earnings came in near expectations. But in this unforgiving world analysts saw only the glass half empty and couldn't head for the door fast enough.

This is still one of the world's preeminent technology companies, and is one of the few American ones that makes stuff that people still want to buy. Some 70% of its global sales are to foreigners. Ownership of the router market is nothing to sneeze about, especially when the planet is making the leap to streaming video, causing demand for the company's products to soar tenfold in coming years.

I know CEO John Chambers personally and frequently bump into him at high end charity functions in San Francisco, and a better manager there never was. With a forward price earnings multiple of only 7, it is not often that you get to buy a growth company at a value price, and a Dow stock at that! An announcement of a new 1%-2% dividend is thought to be imminent. They will automatically suck in an entire new class of pension fund investors.

The way to play this is to wait for another haymaker to pop the stock on the nose. That could come in the form of a long awaiting market correction, which could take the broader index down 5%, and (CSCO) down more. Below that, the company's well publicized stock buyback program kicks in. Not only does Cisco benefit from a Bernanke put, it offers investors own free put as well.

I am not the only genius that has figured this out. None other than hedge fund managers George Soros, Eddie Lampert, and Whitney Tilson are similarly accumulating their own long positions in this stock. Watch this space, and I'll pop out a quick trade alert when I see a window open to get in.

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A Near Miss is Better Than No Miss At All

February 18, 2011/by Mad Hedge Fund Trader

February 17, 2011 - Global Strategy Review With OptionMonster's Pete Najarian

Diary

Featured Trades: (THE PETE NAJARIAN/JOHN THOMAS SMACKDOWN)

1) Global Strategy Review With OptionMonster's Pete Najarian. Please join John Thomas, The Mad Hedge Fund Trader, and OptionMonster's Pete Najarian for a free live webinar on Thursday, February 17 at 12:00 noon EST. It will be a no holds barred, mano a mano, smack down where we will debate the future of every major global asset class.

Is the stock market rally coming to an end, or is there more to go? Should we be buying dips or selling rallies in gold and precious metals? Is the commodities boom a yearlong or decade long phenomenon? Which sectors on the international landscape will be the winners or losers? Are the agricultural plays getting tired, or is it time for a second helping?? Will the collapse of the bond market or a spike in oil prices bring the party to an end?

Pete Najarian is a former linebacker for Tampa Bay Buccaneers and the Minnesota Vikings who graduated to the pits of Chicago's volatile, and occasionally dangerous, commodity trading pits. With his brother, Jon, he developed a proprietary computer program called Heat Seeker? which monitors no less than 180,000 trades a second to give him an early warning of moves that are about to hit the stock, options, and futures markets.

To give you an idea of how much data this is, think of downloading the entire contents of the Library of Congress, about 20 terabytes, every 33 minutes. His firm maintains a 10 gigabyte per second conduit that transfers data at 6,000 times the speed of a T-1 line, the fastest such pipe in the civilian world. Pete then distills this ocean of data into the top movers of the day, which he puts up for free on his website, and offers much more detailed analysis through a premium subscription product. 'As with the NFL,' says Pete, 'you can't defend against speed.'

The system catches big hedge funds, pension funds, and mutual funds shifting large positions, giving subscribers a peak at the bullish or bearish tilt of the market. It also offers accurate predictions of imminent moves in single stock and index volatility.

Pete still has a handshake that's like a steel vice grip, and I am still undergoing physical therapy for the last time I did so six months ago.

To participate in the webinar, please click here. For those who miss the live show, I'll try to post an MP3 file for replay on Hedge Fund Radio later in the day. To learn more about OptionMonster, please visit their site by clicking here at http://www.optionmonster.com/ .

February 17, 2011/by Mad Hedge Fund Trader

February 17, 2011 - A Rest for the Treasury Bond Sell Off

Diary

Featured Trades: (THE TREASURY BOND SELL OFF), (TBT), (TLT)

2) A Rest for the Treasury Bond Sell Off. The Great Treasury Bond Sell Off, which has been running now for nearly six months, may be about to take a rest. Take a look at the chart below put out by my friends at StockCharts.com. It shows that the iShares Barclays 20+ Year Treasury Bond ETF (TLT), the single leveraged long ETF, is bouncing off the old resistance line that we saw on the upside last April.

One of the oldest and dustiest rules in any technical analyst's handbook is that old resistance usually becomes new support. You can't see the inverse on a chart of the double short bond ETF, the (TBT), because of the distorting effects of the heavy cost of carry has on the price, nearly 1% a month.

The other interesting thing about this chart is that it shows the perfect inverse correlation between stocks and bonds that has persisted for the past year. This is important because any near term support for bonds could also signal a top for stocks and an ensuing sell off.

There are a few other canaries in the coal mine that I am carefully monitoring. The imminent break in the yen could be signaling a broader change in the global markets. A weakening yen and a strong dollar might well trigger a flight to safety that could deliver broader selling across all asset classes. In this complex and interrelated world, the blow off tops we are seeing in the cotton and sugar markets may be substituting for similar moves we say in stocks in years past.

This is why my short term trading book is the lightest that it has been in a year. I am nursing small, but so far modestly losing shorts in the S&P 500, the yen, the euro against a long position in the volatility index (VIX). The slightest weakness in stocks, and this entire book lurches into the green, big time.

It is all part of the three dimensional chess game we call 'global macro', the great 10,000 piece jigsaw puzzle. Since I have been at this for 40 years, and spent considerable time working in every major securities and commodities market on the planet, I tend to see these sea changes earlier than most. I just thought you'd like to know.

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It's Your Move, Mr. Market

February 17, 2011/by Mad Hedge Fund Trader

February 16, 2011 - The Collapse of the Yen: The Big Beak is Near

Diary

SPECIAL END OF JAPAN ISSUE

Featured Trades: (JAPANESE YEN), (FXY), (YCS)

1) The Collapse of the Yen: The Big Beak is Near. 'Oh, how I despise the yen, let me count the ways.' I'm sure Shakespeare would have come up with this line of iambic pentameter if he were a foreign exchange trader. I firmly believe that a short position in the yen (FXY) should be at the core of any hedged portfolio for the next decade.

To remind you why you should hate the Japanese currency, I'll refresh your memory with this short list:

* With the world's weakest major economy, Japan is certain to be the last country to raise interest rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world's worst demographic outlook that assures its problems will only get worse. They're not making enough Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt approaching 200% of GDP, or 100% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of a scant 1.25%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country's beleaguered exporters.

When the big turn is inevitably confirmed, we're going from today's print of ?83.80 to the initial target of ?85, then ?90, ?100, ?120, eventually ?150 (remember to think in inverse terms). That means that the 200% short play on the yen (YCS), could soar from $16.65 today to as high as $40, a potential gain of 250%. But it might take a few years to get there. The Japanese government has come on my side with this trade, not that this is any great comfort. Four intervention attempts have so been able to weaken the Japanese currency only for a few nanoseconds.

If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me, the ?83 I see on my screen today is unbelievable.? If the recent high print of ?80.20 is the top of the current move, then we have just made a neat 15 year double top on the charts, a technical analysts dream come true. Sell the yen on rallies, with a ?79.40 stop for insurance. From here on, I will be selling rallies in the yen much more aggressively.

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A 15 Year Double top on the Charts to Die For

February 16, 2011/by Mad Hedge Fund Trader

February 16, 2011 - Quote of the Day

Diary

'The jobs that we gained over the last two decades were the jobs that led to over consumption, jobs like finance, insurance, real estate, and consumer cyclicals,' said my old buddy, David Gerstenhaber, President of Argonaut Capital Management.

February 16, 2011/by Mad Hedge Fund Trader

February 15, 2011 - Orlando Strategy Luncheon Review

Diary

SPECIAL FLORIDA ISSUE

Featured Trades: (ORLANDO STRATEGY LUNCHEON REVIEW)

1) Orlando Strategy Luncheon Review. Now is the greatest time ever to buy a Caterpillar D9 heavy bulldozer. That was my conclusion after visiting Ritchie's Auctioneers, half way between Orlando and Tampa, Florida, which offers hundreds of these giant machines, along with enough steam rollers, backhoes, road graders, and dump trucks to build a small country from scratch. They were being sold off at distressed prices, pennies on the dollar, for little more than scrap metal value. Such is the bitter fruit of the worst downturn in new home construction since the Great Depression.

Driving through the forests and swamps of Florida, one finds a land dotted with giant dinosaurs, pirate ships, wizards, and assorted oversized fruit. It's like being on an LSD trip without going through the trouble of buying and ingesting the banned psychedelic substance. The wreckage of the crash cover the state like a highly contagious plague, with boarded up homes, condos, small businesses, and tourist traps around almost every corner.

After driving through hours of strip malls and dilapidated retirement communities with weed filled golf courses and kudzu choked waterways, one wonders why anyone retires here. I have never seen so many out of state license plates. But the Southern hospitality makes it all worth it, where 'Y'all' comes across as genuine and sincere, not clich??d or stereotyped. The locals are noticeably friendlier the second you get off the plane. When they say have a nice day, they really mean it. In New York it means they intend to mug you.

Diary readers and Macro Millionaires alike flocked to Orlando's exclusive University Club en masse to the best attended strategy luncheon yet. Mark from Australia won the prize for the greatest distance traveled to the event, easily beating out the runner up from Uruguay. Spend your Zimbabwean dollars wisely, Mark.

The extended discussion revolved around the issues that we are all grappling with today in the international financial markets. Followers of this letter are now faced with a dilemma everyone wishes they had. Everything they own with great fundamentals, like commodities, energy, food, precious metals, technology, rails, and short Treasury bond plays, are up 50% or more in the past five months. But what to do with new money? (Nothing). Will there be a QE3? (No.) Are muni bonds a buy here? (Yes.) Will there be more tax cuts (No). How high will oil go? (A lot). How high will interest rates go (Even more). Is it time to buy a house yet? (Rent, don't buy). Will Obama get reelected in 2012? (Yes). Will the Tampa Bay Buccaneers win the Super Bowl next year? (Not a chance).

One gentleman told me he had tracked 200 of my recommendations over the last year and had only found two losers, premature shorts on the yen and Treasury bonds which I stopped out of quickly. All I know is that the harder I work, the luckier I get.

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February 15, 2011/by Mad Hedge Fund Trader

February 15, 2011 - The San Francisco Money Show

Diary

SPECIAL FLORIDA ISSUE

Featured Trades: (WORLD MONEY SHOW)

2) The San Francisco Money Show. I attended the Woodstock of investment conferences last week, the World Money Show at the Gaylord Palms Resort near Orlando, Florida. Run with military efficiency that only General George S. Patton could have appreciated, it offered a multi ring circus of traders, foreign exchange models, options platforms, newsletters, cruises, video broadcasts, and more.

The cavernous hotel, the size of a small glassed in sports arena was absolutely bubbling with new ideas. You couldn't walk five feet without tripping over a great investment theme, and information overload was the order of the day. There was a plethora of celebrity speakers and old friends, including BMO Capital Markets,' Andrew Busch, uber bear economist, David Rosenberg, Think or Swim founder, Tom Sosnoff, the Financial Times' Gillian Tett, China Stock Digests' Jim Trippon, and fund manager Adrian Day. Forbes publisher, Steve Forbes, was there making his perennial run for the presidency.

There really is no corner of the financial markets that was not well represented by market makers, analysts, technology providers, and investors-- thousands of them. With the soaring level of US government debt scaring the daylights out of everyone, the precious metals dealers were there in force.

Of course, the hard asset crowd was everywhere, and you could not swing a dead cat without hitting a miner looking for new funding. Never mind that the barbaric relic went up for all the wrong reasons. The dollars they're making are still just as good at the bar. The only thing missing from the show was the long predicted hyperinflation. Want to prospect in the Ivory Coast? No problem.

I was pleasantly surprised by the diversity of major corporate sponsors there to promote their own shares, like Sasol, Proctor and Gamble, Petrobras, Roche, General Electric, Vale, and Lucas Energy, several of which are great investments. A variety of oil service companies were also well represented. A 'green' section offered a look at wind, solar, and geothermal energy providers. Even the US Treasury Department had its own diminutive booth, no doubt reflecting the year's coming budget cuts.

I took the opportunity to talk with companies about everything from the latest drilling costs, long term food prices, and the true cost of geothermal, to the clever play in gold coins (go for those struck at the San Francisco Mint). I was constantly amused every few minutes by attendees who, seeing my nametag, asked to have a photo taken with the one and only Mad Hedge Fund Trader, and to sign their program.

The hotel was a bit of a disappointment, which was clearly ill equipped to handle the 8,000 Money Show registrants that descended upon it. I walked out the front door and thought that I had stumbled upon a car show. Instead, it was the gridlocked valet parking, which was diverting guests to another hotel two miles away to catch a shuttle. There were lines longer than those found in nearby Disney World, and when the noontime sessions let out, the restaurants were hit with a plague of locusts, cleaning them out of all food and clean silverware.

After I make my fortune, there was even a booth extolling the virtues of retiring on the beach in Belize. It was a great opportunity to chat with the end investors who ultimately drive all these markets. All in all, it was a weekend well invested. For a calendar of future events, go to www.MoneyShow.com. You will find me at the Las Vegas Money Show during May 9-12 at Caesar's Palace Hotel, where I will be a keynote speaker with my own booth.

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February 15, 2011/by Mad Hedge Fund Trader

February 9, 2011 - The Coming Takeover Wars

Diary

Featured Trades: (THE COMING TAKEOVER WARS)

3) The Coming Takeover Wars. The spate of takeover bids we have witnessed recently, the attempted BHP Billiton (BHP)-Potash (POT) deal, the Sanofi Aventis (SNY)-Genzyme (GENZ) deal, and Intel's (INTC) acquisition of Infineon Technologies (IFX), is telling the rest of us reams about the broader market.

Virtually all of the recent bids have been made for cash. That means that the acquiring companies believe that both their own and their target's share prices are historically cheap. That may be debatable, depending on whether you think the long term US GDP growth rate is 2%, or is going back to the torrid 3.9% we saw in the last decade.

The real education here is the outing of the industries that are attracting the premium bids. Those include agriculture, energy, commodities, biotechnology, and technology, especially in cloud computing and mobile applications. BP (BP), an oil major, is said to be attracting covetous eyes while its stock is in the basement. Also notice the foreign origins of many of the targets, which underlie my theme that 90% of global earnings for the next ten years are coming from outside the US.

Regular readers of this letter will recognize these industries as part of a handful of major growth leaders for the next decade. By watching the M & A action, you are letting the giants with deep pockets needed to fund massive research efforts do your sector selection for you. Direct investment always leads activity in listed share markets, often by years. Ride on their coat tails for free.

It all reminds me of the 'Pac man' takeovers of the early eighties, when Boone Pickens said that it was cheaper to prospect on the floor of the New York Stock Exchange than in the oil patch. The 2011 iteration of that statement has to be that it is cheaper to hire people through takeovers than to hire them outright. The hard truth is the net effect of these mergers is almost always a reduction of the labor force. This is why the jobs picture has not, and will not improve. To boost your investment performance, keep close tabs on newly announced takeovers, or easier still, keep reading this letter.

Get Your Free Education Here

February 9, 2011/by Mad Hedge Fund Trader

February 8, 2011 - Reading the Nonfarm Payroll Tea Leaves

Diary

Featured Trades: (JANUARY NONFARM PAYROLL)

1) Reading the Nonfarm Payroll Tea Leaves. Lifetime followers of the monthly nonfarm payroll report were more than a little amused by the Friday numbers, which could not have been more contradictory, conflicting, and confusing. The headline figure showed a gain of a paltry 36,000, yet the unemployment rate plunged 0.6% to 9.0%, one of the sharpest drops on record. In fact, the unemployment rate has fallen nearly 1% in two months, one of the sharpest drops on record.

Sifting through the tea leaves, these numbers reveal far more than meets the eye. Here are the high points:

*The unemployment rate dropped sharply because people are giving up on looking for work. Once the jobless exhaust their full 99 weeks of unemployment insurance, they disappear completely out of the system.

*Two successive 'snowmageddons' possibly shrank employment by as much as 150,000. Construction and transportation were especially hard hit. Check out those amazing photos of cars buried by snow drifts in a Chicago traffic jam. They look like they are from a disaster movie. Those are all people not getting to work.

*The private sector gained jobs, while the public sector lost them. This is only the beginning of what I believe is 30 more years of government downsizing at the federal, state, and local levels.

*The 25 million jobs the US gave away to China and other emerging markets are never coming back, no matter how much the government spends. Unemployment is now structural and permanent. An entire generation of jobs was given away.

There is another big factor at work here that no one is discussing. I am not counted in the nonfarm payroll, as I work entirely in the cloud. Nor is anyone who works for me, be they in Washington, New Mexico, New York, or Timbuktu. We are all invisible to the Department of Labor. For all they know, we are all at home sitting on the sofa, watching TV while stuffing ourselves with bonbons, and picking the lint out of our navels.

What I'm getting at here is that the monthly nonfarm payroll is vastly underestimating the number of employed, and has been doing so for a very long time. It reminds me of another anomaly, when personal computers first came one the scene 30 years ago. The government originally treated them as consumer electronics sales, not as capital spending as it should have, similarly misleading us all.

The implication is that the economy is much stronger than we realize. The stock market correctly figured this out, eking out a 30 point gain on what were heralded as disappointing numbers. This is also how some 70% of companies have beaten conservative analyst forecasts in the current earnings season. All that is left to ask is how much of this undercover jobs boom is already priced into the market.

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Should Have Taken That Job in the Cloud!

February 8, 2011/by Mad Hedge Fund Trader

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