Some people will do anything for a good stock tip. Futures magazine, published a complimentary profile about me in their recent issue. The publication is associated with the highly educational and informative annual Hard Asset Conferences in New York, San Francisco, and soon to be Chicago, where I have been a regular keynote speaker and panelist. For a quickie update on my global views, please take a look at the piece by clicking here. You might also get a peek into my murky and mysterious past. They take nice pictures too.
There is no doubt that the recent jobs data has been absolutely blistering. On January 4, weekly jobless claims plunged by 15,000 to 372,000, well below the 400,000 that is required for a sustainable recovery. The next day, the ADP report delivered a gob smacking 325,000 in job gains for December. Then the big kahuna surprised to the upside, the December non-farm payroll, reporting 200,000 new jobs, taking the unemployment rate to a three year low at 8.5%.
Are happy days here again? Is it off to the races? More importantly, should we be adding risk positions here in expectation of a continued economic miracle?
I think not. You all know well that I am a history buff. But I know enough about history to understand that it can be a dangerous thing. Don?t let these numbers lull you into a false sense of security. Any slavish reliance on the past can cause you to become history, if you?re not careful.
There is no doubt that a seasonal surge in hiring caused by the holidays has created this spike. Normally, governments and agencies smooth these figures through a seasonal adjustment process. The problem arises when the structure of the economy is changing faster than can be reflected in these seasonal adjustments, as it is now.
A large part of our economy is moving online more rapidly than most people realize. According to comScore, a marketing data research firm, online sales leapt by 15% to $35.3 billion during the November-December holiday period, an all-time high.? I speak from a position of authority here as I happen to run one of the most successful financial sites on the Internet, which I kicked off four years ago with a $500 investment.
Much of this migration is being captured by Fedex and UPS, the nexus at which Internet commerce meets the real world. After all, virtual products require a real world delivery. This explains why the couriers are seeing a booming business in an otherwise flat economy. Fedex hired 10,000 temporary workers to deal with the Christmas surge in 2011, a gain of 18% over the same period last year. UPS added a stunning 55,000, a 10% increase.
Watch for the other shoe to drop. That will become apparent when that the newly hired become the newly fired, leading to a sudden and rapid deterioration of the jobs data. This could be the information the stock market and other risk assets need to put in a top for the year. The scary part is that this may happen sooner than you think.
Yup, I Just Got My Pink Slip Too
After pulling some strings at the Pentagon, I managed to gain access for readers of The Diary of a Mad Hedge Fund Trader to a briefing from General Douglas Fraser. He is a four star Air Force General who is the commander of US Southern Command (SOUTHCOM), one of nine unified Combatant Commands in the Department of Defense.
Its area of responsibility encompasses Central America, South America, and the Caribbean. SOUTHCOM is a joint command comprised of more than 1,200 military and civilian personnel representing the Army, Navy, Air Force, Marine Corps, Coast Guard, and other federal agencies.
General Fraser graduated from the Air Force Academy in 1974 and is fluent in Spanish. He has commanded Air Force combat units in Japan, Korea, and Germany. He was later a senior officer in the Space Operations Command. General Fraser joined SOUTHCOM in 2009 after serving as deputy commander of the Pacific Command for two years.
The event will be held on Tuesday, January 24, 2012 at 6:00 PM at the Marines Memorial Association, 609 Sutter Street, San Francisco, CA 94102. To register, please click here , check the box next to ?SOUTHCOM Commander?, then click on ?next? and complete the registration process.
This is a rare opportunity for civilians to meet one of America?s most senior military officers. Expect every retired general and admiral in the San Francisco Bay area to attend, along with many active duty members of the US Marine Corps. Absolutely no recordings of any kind are permitted. If you want to say hello, I?ll be standing next to the registration desk, wearing a blue cap with ?USS Potomac? in gold letters. Just ask for USMC Captain John Thomas.
Before I left Chicago, I managed to catch up with my old friend, David Hale, for a cup of tea at the city?s prestigious University Club. I have been using David as my de facto global macro economist for decades, and I never miss an opportunity to get his updated views. The challenge is in writing down David?s eye popping, out of consensus ideas fast enough, because he spits them out in a rapid fire succession.
Hale believes that Q4 will come in much hotter than expected, delivering US growth possibly as high as 3.5% to 4%. If the payroll tax cuts and unemployment benefits are renewed once again, these alone could be worth 1% in GDP this year. The streak could spill into Q1, 2012, staying as firm as 2%-2.5%.
After that, the sushi hits the fan, and the numbers will threaten another dip. Europe will become a major drag, which accounts for 14% of US exports. A slowing by emerging markets, led by China and India, will also take its toll. This will lead to falling private demand and weak commodity prices. But David is not predicting a crash by any means.
To keep up with trends in the Middle Kingdom, Hale confesses to reading The People?s Daily News online edition each morning. He formerly worked as chief economist for Kemper Financial Services from 1977 to 1995, and Zurich Financial Services, which he joined as chief economist in 1995. He advised the group?s fund management and insurance operations on both the economic outlook and a wide range of public policy issues until 2002, when he founded David Hale Global Economics. To visit David?s website, please click here.
Does Hale see any outstanding investment opportunities out there? He sure does. Greece, of all countries, is presenting a generational opportunity. Big, state owned monopolies are being broken up. The unions are being tamed. Banks are trading at 10% of book value. The Hellenic Stock Exchange, which has cratered 65% since March, is about to end taxes on trading. Major structural reforms are being pushed through at a breakneck pace. Tourism, its biggest industry, is ready to rocket. A plunging Euro is giving it an important cost advantage.? After a long series of violent strikes and recent horrific economic performance, the country could return to positive growth as early as 2014. We could all be dining on moussaka, gyros, and Metaxa sooner than we think.
Is This in Your Future?
Traders and investors have grown comfortable with a steady stream of corporate earnings reports. 2011 as a whole may come in as high as $15 a share for the S&P 500. But the gravy train may end starting next week.
The number of companies reducing guidance and downshifting expectations is at a three year high. Similarly, analyst earnings forecast cuts are at a ten year high. Among the 25 companies that have already reported, only 60% beat estimates, another new low.
In my own 2012 Annual Asset Class Review I predicted that S&P earnings would slow from $15 a share to only $5, and I received a lot of abuse from the hedge fund community for being that optimistic. Morgan Stanley has since joined in with its own bucket of cold water by predicting a 7% decline in the stock market this year, blaming deceleration, disfunctionality, and deleveraging, matching my own expectation.
The announcements kick off after the Monday close when aluminum (aluminium to you Brits and Ausies) producer, Alcoa (AA), reports.? Costs have been rising, sales prices have been falling, creating a squeeze on earnings. The technical picture looks particularly dire, with a double top in place and a descending triangle formation in the works. Will this be a preview of what a second ?lost decade? will look like? Has the stock market figured this out yet? Not!
Those Q4 Earnings Aren?t Going to Be So Pretty
(Note to Newsletter only subscribers: This trade alert went out to paying customers of my Trade Alert Service last Thursday morning.) I am going to start the New Year with a 25% allocation to the double leveraged short ETF (EUO). It?s time to do the hard trade, sell on weakness, and sell the breakdown. The Euro is so weak that it just won?t give new entries a decent entry point.
The really impressive thing about the way Euro traded in the closing weeks of December is how it failed to rally when all other risk assets were doing well. That ultimate arbiter of risk appetite, the S&P 500 (SPX) saw ten days of gains, posting a healthy 5.4% increase. The European currency managed no gain whatsoever. So many hedge funds are ready to add to their Euro shorts that it isn?t able to breathe at all.
I don?t know how long it will take the Euro to fall. The big 3%-4% daily declines are well behind us, occurring back when the currency was peaking in April just short of $1.50.? Existing shorts in the Euro are at all-time highs. So what we may see from here might be more of a slow grind than a sudden crash, as existing shorts increase positions and Johnny Come Latelies and neophytes join the game for the first time.
To use American football terminology, this will be a running game, not a passing one. The bigger moves won?t come until you see a broader ?RISK OFF? trade take hold in the global financial markets, where everyone runs towards the security of the greenback. That may happen sooner than you think.
Somewhere down the road, we should get a dramatic worsening in the fiscal and monetary conditions on the continent. The disagreement now is whether Europe is in a recession, where the economy is shrinking at a 1%-2% rate, or is in a full blown depression decelerating at a 5% or more rate. When the data hits the tape it is assured to trigger more selling of Euros than buying, driving the (EUO) trade in our favor.
Of course, European Central Bank president, Mario Draghi, will fight the valiant fight to slow the Euro?s decline. But at this stage, he only has words to use as weapons. Everyone knows that he is going to cut Euro interest rates by 25 basis points at the next meeting to head off the coming deflation. That will chop the interest rate differential between the Euro and the dollar in Uncle Buck?s favor, triggering further Euro selling.
My only concern here is that Europe?s long term structural problems are extremely well known, so this is not exactly a new trade. When my cleaning lady, gardener, and masseuse are already heavily short the Euro you have to beware. The smart money has been shorting Euros for the last eight months from $1.49 down, and smacking every rally. We are probably half way through a multiyear plunge in the Euro, from $1.50 to $1.10, so the risk of a snap back short covering rally will be ever present.
This is why I have chosen the leverage ETF instead of put options on the (FXE). Without time decay we can afford to wait this one out. The cost of carry is only a couple percent a year. The reduced leverage compared to an option will soften the impact on my daily P&L. And entering the New Year with a flat book, I have cash to burn.
If the Euro hits $1.20, a reasonably conservative downside target, the (EUO) should appreciate from $20.73 to $23.5. That would add 3.25% to our annual return. If we get a first class run on this despised currency and it drops to a more aggressive $1.10, the (EUO) should make it to $26.5, creating a 7% profit.
For risk control purposes, I shall use a stop on this position of $1.34 in the underlying Euro, or $19.50 in the (EUO).
This is How We Get to $1.10
?China is not going to have a hard or soft landing. It is going to keep on flying. There is a tremendous amount of momentum in the Chinese economy. There?s a lot to be done in terms of infrastructure. At the low end there is a lot to be done in housing. And it now has the largest amount of foreign exchange reserves in the world, by far,? said Mark Mobius of the Templeton Emerging Markets Group.
Anne Barnhardt was the CEO of a money manager who was forced to shut down her firm in the wake of the MF Global collapse. She is calling for a boycott of the financial markets and JP Morgan (JPM) specifically. To listen to her blistering attack in full in an interview with by Buddy, Peter Schiff, please click here. I excerpt below:
?Thank you for speaking up and calling it like it is. My father joined the Chicago Board of Trade in 1979. I joined the CBOT in 2009. We are customers of MF Global. The day they told me my money had been frozen I declared the futures industry completely dead. I grew up in the industry. I knew there were always thieves, mobsters even, in the business and I saw it from day one on the trading floor. But the depth of deceit has reached new lows.
MF Global and the CME violated the only principle that mattered in futures and anyone watching the farmers and ranchers testify yesterday should've seen that something has been broken beyond repair for them: TRUST! If the hedgers like you and your customers won't use the market then what are the speculators like me supposed to do? Well, I believe we're seeing it. The big specs have completely captured the trading venue through High Frequency Trading and are using it to fleece as many people as foolishly remain in the game where no bona fide hedgers operate anymore. The inmates not only run the asylum, they've set fire to it.?
The Inmates are Now Running the Asylum
I?ll never forgot when my friend, Don Kagin, one of the world?s top dealers in rare coins, walked into the gym one day and announced that he made $1 million that morning.? I enquired ?How is that, pray tell??
He told me that he was an investor and technical consultant to a venture hoping to discover the long lost USS Central America, which sunk in a storm off the Atlantic Coast in 1857, heavily laden with gold from the California mines (click here for the full story). He just received an excited call that the wreck had been found in deep water off the US east coast.
I learned the other day that Don had scored another bonanza in the rare coins business. He had sold his 1787 Brasher Doubloon for $7.4 million. The price was slightly short of the $7.6 million that a 1933 American $20 gold eagle sold for in 2002.
The Brasher $15 doubloon has long been considered the rarest coin in the United States. Ephraim Brasher, a New York City neighbor of George Washington, was hired to mint the first dollar denominated coins issued by the new republic.
Treasury secretary Alexander Hamilton was so impressed with his work that he appointed Brasher as the official American assayer. The coin is now so famous that it is featured in a Raymond Chandler novel where the tough private detective, Phillip Marlowe, attempts to recover the stolen coin. The book was made into a 1947 movie, ?The Brasher Doubloon,? starring George Montgomery.
This is not the first time that Don has had a profitable experience with this numismatic treasure. He originally bought it in 1989 for under $1 million, and has made several round trips since then. The real mystery is who bought it last? Don wouldn?t say, only hinting that it was a big New York hedge fund manager who adores the barbarous relic. He hopes the coin will eventually be placed in a public museum. Who says the rich aren?t getting richer?
?All of Germany is a Tea Party, and that is going to be a problem for the Euro, said Yra Harris of Praxis Trading.
