?We should thank Meredith Whitney for creating a buying opportunity in municipal bonds,? said Aaron Gurwitz, CIO and chief strategist at Barclays? Wealth Management.
I have to tell you that I am not feeling the love from my silver position. I hung on faithfully for a month while the (SLV) churned around the 50 day moving average, building a base for a possible upside breakout. It was not to be. With another ?RISK OFF? day on our plate this morning it is clearly time to pull the ripcord on this unloved metal.
Let me tell you what I missed. Silver is still one of the few profitable positions owned by hedge funds, as it is up around 10% year to date. As we plow into the yearend book closing, hedgies have been booking profits in the white metal to offset their abundant losses in other holdings, such as in financials and their short positions in Treasury bonds.
This was offset by panic buying of precious metals in Europe until last week. Progress on a solution of the sovereign debt crisis has cooled demand from this source, taking the knees out from under the entire precious metals space.
Gold (GLD) has already broken its two month support with its $50 plunge today. I won?t wait for silver (SLV) to do the same. The damage is also evident with the other precious metals, including platinum (PPLT) and palladium (PALL).
On top of this, we only have one month of life left in the January options, and from here on, accelerated time decay kicks in. I?m sure silver will see $37, $42, and even $50 or higher someday, just not in the next five weeks.
Whenever I take a loss like this I tell people that this is proof that the track record is real. The fake ones never lose money. It just illustrates the value of using an options strategy during these volatile, unpredictable, and tumultuous times. I never risked more than 5% of my capital. I never lost sleep over the position. I took a 4.27% hit, even though silver fell 12%. I never doubled up on the downside, which the silver permabulls begged me to. Being able to walk away from a position if it turns bad is a great luxury, but it still costs money.
I live to fight another day.
Pulling the Ripcord on Silver
With the onset of the 2012 elections in a few weeks, the class warfare against the millionaires is about to start in earnest. In California, the issue has already been decided, and the millionaires have definitely lost.
On the November ballot will be no less than five measures to raise taxes on high income earners, primarily to fund the state?s increasingly impoverished education system. Deficits have forced public schools to lay off teachers and replace them with inexperienced temps without benefits, shrink the school year, cancel electives, increase class sizes, and end sports and music programs. Many teaches are now paying for class supplies out of their own pockets
Why should you care, comfortably resident in one of the other 49 states? Because the Golden State often initiates social and economic measures which are then adopted by the rest of the country and the world. Take a careful look at your catalytic converters, seat belts in cars, ceilings on car emissions, caps on real estate taxes, smoking bans in bars and airplanes, recycling program, and environmental controls.? They all carry a ?Made in California? stamp on them.
The revenue raising efforts are aimed at heading off a state budget shortfall that is expected to top $13 billion in 2012. The current top California income tax rate is already a hefty 9.3%.
To give you a preview of what is headed your way, below is a listed of the proposed levies:
*Governor Jerry Brown is proposing a 1% surtax on those making more than $250,000, and a 2% tax over $500,000. Everyone else gets hit with a half cent rise in state sales taxes.
*Billionaire investor Nicolas Berggruen has teamed up with Google?s Eric Schmidt and retired real estate magnate, Eli Broad, to back a 1% surtax on income of over $1 million, to be partially offset by a reduction in corporate income taxes from 8.84% to 7%. There will be a new sales tax on services of 5% which are currently tax free. These would raise $10 billion a year.
* Berkshire Hathaway trust fund kid Molly Munger is trying to push through a $27,266 wealth tax on couples earning more than $1.5 million that would raise $10 billion.
*San Francisco hedge fund manager Tom Steyer would tax corporations nationally on their California based income, potentially raising $1 billion.
*The California Federation of Teachers wants to raise taxes on incomes over $1 million by 3%, raising $6 billion.
Tax opponents and libertarians are hoping that by having such a profusion of measures on the ballot, they will split the vote with then end result that none pass. And while many of the state?s ideas are later adopted elsewhere, sometimes they don?t work out so well. California?s 1920?s eugenics policies and racial laws were later used by Adolph Hitler as the legal foundation for Germany?s holocaust.
Be careful what you wish for, and expect a rising tide of tax refugees looking for new homes in your state.
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No, the important economic event of the week was not the snail like progress towards solution of the European debt debacle. It was the weekly jobless claims announced on Thursday that plunged 23,000 to 381,000, a six month low. That puts it well below the 400,000 level where the economy is generally thought to be expanding.
Yes, you can argue that there are all kinds of temporary, one off hires in these numbers, as retailers step on the gas going into the Christmas season with temp hiring. But there seems to be a lot more than that going on here.
More confirming data came out the next day showing that December consumer sentiment leapt to a surprising 67.7, from 64.1. I think that one big factor in consumers? more positive feelings derive from the fact that the stock market that is no longer crashing, and double dip fears for the economy are now but distant and fading summer memories.
And you can?t view the reports in isolation. They are only the latest in a long stream of modestly improving economic reports which occasionally blow out to the upside.
The news may be enough the enable the S&P 500 (SPX) to tack on another 25 to 50 points by year end. All Europe has to do is to shut up for a few weeks and the US markets will rise. Given that this is the last real working week of the year, that is a distinct possibility.
I am going to use this strength to unload my remaining ?RISK ON? positions in silver (SLV) and the (TBT) so I can go into the New Year fresh, with a flat book. Keep in mind, also, that this is a lousy place to buy. As my friend and former mentor, Barton Biggs, always used to tell me, always leave the last 10% of a move to the next guy.
Having the flu during the holidays is the pits. This weekend, I blew my nose at the Cirque du Soliel so loudly that is perilously distracted some of the high wire acrobats. I coughed and hacked my way through the San Francisco Ballet?s Nutcracker Suite. Even the eggnog is utterly tasteless, no matter how much Myers Rum I pour in it. I am writing this piece with a fever and chills through a haze induced by Robitussin, Dayquil, and Tylenol PM.
Nevertheless, I did manage to get a dozen calls through to an assortment of European bankers, hedge fund managers, central bank officials, and finance ministry staffers this weekend to get a read on the true meaning of the Friday ministers summit agreement.
Don?t kid yourself. The deal that they cobbled together with spit, duct tape, and bailing wire was no panacea. It was just enough to keep the Euro (FXE) from collapsing, but lacked the oomph to send it off to the races. And there was some serious kicking of the can forward, with a March deadline set for the most important elements.
However, it had the juice to send US stocks soaring and European sovereign bond interest rates plunging. After a marathon, ten hour negotiating session that ended at 5:00 am local time, a deal was hammered out that includes:
*Automatic sanctions for violators of the 3% of GDP debt ceiling.
* Brussels (read Berlin) has the power to veto national budgets.
*?200 billion was chipped into the IMF to help troubled countries like Greece.
*Added with other bailout measures, the value of the safety net rises to ?700 billion, or nearly $1 trillion.
While a good start, this is by no means a grand solution. No mention was made of the $100 billion needed to recapitalize European banks, or where it is going to come from. Deleveraging will be decade long process in Europe and be a drag on asset prices worldwide.
Sovereign rating downgrades are a certainty and will trigger a bad day for the markets when they are announced. However, the bond markets won?t crash as yields are already at levels that attract serious buyers. Witness the George Soros move to buy MF Global?s distressed $2 billion portfolio of European paper and the continued purchases by a dollar diversifying Chinese government.
Mario Draghi?s European Central Bank has, in fact, done more on its own to rescue the economy that the political leaders. It cut Euro interest rates by an additional 25 basis points, the second in sext weeks. It eased collateral requirements, extended reserve ratio cuts, and permitted longer term repo agreements
Despite all of this, there was not much of a recovery in the Euro, which ticked as high as $134.20. Maybe it is heavy, or just plain tired. In any case, if we somehow get a rally as high as $1.36, take it as a gift, and sell it short one more time. Parity is still on the long term horizon.
?I don?t know where the next 1,000 points is coming from, but I know where the next 10,000 points is coming from,? said Sir John Templeton, when he was playing chess with me at his home at Lyford Cay in the Bahamas many years ago.
Given the failure of the ?RISK OFF? trade to develop any serious downside momentum this week, I am using the dip this morning to take a small profit on my S&P 500 ETF (SPY) puts.
We had every reason to go down, given the Standard and Poor?s threatened European debt downgrade on Monday night. If this despised and deeply flawed ratings agency had made this announcement in September or October it would have been worth at least ten (SPY) points to the downside.
But they didn?t announce it then, they announced it now, and in the post Armageddon world this gets you only a modest two point dip. It?s an old trader?s adage that if you throw bad news on a market and it doesn?t go down, then you buy it. The risks have just risen that the Santa Claus rally continues for a few more weeks. Plus, if I can duck a major headline risk this weekend and still keep some change in my pocket, like the European ministers meeting, I am going to take it.
As it is way too late to buy, this means cover your shorts. This is doubly true for options holders who have a heavy price to pay in time decay and falling volatility over the holidays.
On top of this, we are looking at retail holiday sales that are coming in better than expected and a seasonal liquidity push to year end. Although consumers are depressed about the outlook for the economy in 2012, they are apparently dealing with their sorrows through buying a big screen TV, an Apple iPad, an Xbox 360, or a Snuggie.
There is another factor at work here. Any hedge fund manager who has had a great 2011 tends to step out of the market now and go flat. This locks in their gains until their 20% performance bonuses are paid out in January. Any profits in hand now get paid out in cash in 30 days. With a 42% year to date return, I certainly fall into that category.
My profit on this trade came to (9 contracts X 100 X $.32) = $288. For the model $100,000 virtual portfolio this adds 29 basis points to the total return. It?s better than a poke in the eye than a sharp stock, and will afford me some silver eagles to toss in the Salvation Army pot next time I go to the mall.
For those who wish to participate in my Trade Alert Service, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Trade Alert Service? in the subject line, as we are getting buried in emails.
I am pulling the plug on my short position in the Euro here, selling my Euro ETF (FXE) January, 2012 $134 puts at cost.
It?s not that I have suddenly fallen in love with the beer drinkers and the garlic eaters. This is an option driven decision. With market volatility falling across all asset classes, the short dated options are eroding away faster than the underlying is moving in my favor.
Time decay is also taking its toll, accelerating into the January 19, 2012 expiration. This continues even while the markets are closed over the holidays. In fact, Christmas and New Years are the best time of the year to run a volatility short. So while I managed to catch a two cent move down in the (FXE) since I added this position on November 18, the options are trading at my cost. There is nothing worse than being right and not getting rewarded for it. All work and no pay makes the Mad Hedge Fund Trader an irritable boy.
On my last four trade alerts the options quickly rose substantially, only to give back all the profits within days. That happened with Jeffries (JEF), the Euro (FXE), silver (SLV), and the S&P 500 (SPY). The time frame that markets allow traders to make money has suddenly shortened. The lesson here is to take the money and run.
By going neutral on the Euro here, I now have dry powder to sell it again on the next short lived ?feel good? rally to $1.3550 or higher. The headline risk going into this weekend is also large. I can roll into the next strike in February to partially sidestep the holiday time decay. With the (FXE) bang in the middle of its recent $1.3180-$1.3550 range, this is no time to let positions grow hair on them.
Live on the fight another day.
?Europe is in the terminal phase of its life,? said David Murrin of Emergent Asset Management.
