Free Research Archives

The 1% and the Bond Market

With the bond market confounding forecasters and prognosticators once again, I thought I?d delve into one of the more mysterious reasons why the bond market keeps going from strength to strength.

To a man, hedge fund traders expected bond prices to take a dive in 2014 and 2015 and for yields to soar. Isn?t that what?s supposed to happen in recovering economies?

Instead, we got the opposite, and yields have plunged, from 3.05% for the ten-year Treasury to as low as 2.80% this week.

There are many important lessons to be learned here. This is not your father?s bond market.

The internal dynamics of the fixed income markets have changed so much in the last three decades that it has become unrecognizable to long term practitioners, like myself.

A big factor has been the takeover of the bond market by the 1%, the richest segment of the US population and, indeed, the global economy. As wealth concentrates at the top, its character changes.

Let me stop here and tell you that the ultra rich are different from you and me, and not just because they have more money.

I have learned this after nearly half-century-long relationships with the planet?s wealthiest families, including the Rockefellers, Rothschilds, DuPonts, Morgans, and Pritzkers, first as important contacts of mine at The Economist, then as clients of mine at Morgan Stanley, then as investors in my hedge fund, and now as subscribers to The Diary of a Mad Hedge Fund Trader.

The wealthier families become the more conservative they get in their investment choices. Their goal shifts from capital appreciation to asset protection.

They lose interest in return on capital and become obsessed with return of capital. This is how the rich stay rich, sometimes for centuries. I have even noticed this among my newly minted billionaire hedge fund buddies.

What this means for the bond market is that they never sell. When they buy a 30-year Treasury bond, it is with the expectation of keeping it for the full 30 years until maturity.

That way they can avoid capital gains taxes and only have to pay taxes on the coupon interest. When they die, spouses get the step up in the cost basis, and then the wealth passes from one generation to the next. Taxes are never paid.

Back in the 1980s, when wealth was more evenly distributed, the top 1% only accounted for 1% of Treasury bond ownership. Today, that figure is closer to 25%.

Add this to the 50% of our national debt that is owned by foreign investors, primarily central banks, who also tend to hold paper for its full life. Central banks don?t pay taxes either.

China and Japan are the biggest holders with around $1 trillion each. This means that 75% or more of bonds are owned by investors who won?t sell. What does that mean for the rest of us? Bond prices that never go down.

With bonds very close to 30-year highs, keeping your bonds has been the right thing to do. I can?t tell you how many investment advisors I know who have distilled their practices down to managing fixed income instruments only.

This involves the entire coupon clipping space, including municipal bonds (MUB), corporates (LQD), junk (JNK), and even emerging market debt (ELD).

This is driven by customer demand, the 1%ers, not from any great insights or epiphanies they achieved on their own.

Of course, there is a certain amount of "driving with your eyes firmly fixed on the rear view mirror" going on here. Maybe the rich will finally sell their bonds once prices fall hard, stay down and then go down some more.

Inflation rearing its ugly head might also do the trick since it is always bad for bond prices as it reduces the purchasing power of money. Selling is certainly what they were doing in the early eighties, when the ten-year yield hit 12%.

Again, the rear view mirror effect, when bond were called ?certificates of wealth confiscation.?

There are other matters to consider with the 1% owning so much of the bond market and keeping it there.

This money is not getting invested in new start ups and creating jobs. It is money that is not being used to engender new economic growth. One of the fantasies of the last election was the claim that the 1% were creating so many jobs. They weren?t, not as long as their money was parked in a risk free bond market.

Instead, it is just stagnating. This is one reason why economic growth is so flaccid this decade and will remain so. This is fine for the 1%, but not so good for the rest of us.

The bottom line here is that while bonds are overbought and due for a pullback, they are not by any means going to crash. We could be living in the 2.60%-3.50% range for the 30-year for quite some time, maybe for years.

That is if the new Federal Reserve governor and my friend, ultra dove Janet Yellen, has anything to say about it. She has only just started and could be with us for another eight years.

Personally, I don?t foresee any appreciable rise in interest rates until we get well into the 2020s, when real inflation finally returns from the dead.

That is when bonds will become the asset class you don?t want to know, whether you?re in the 1% or not.

Bonds Will Stay Up Until Inflation Returns from the Dead

January 20, 2016/by Mad Hedge Fund Trader

Bidding for the Stars

Diary, Free Research, Newsletter

A few years ago, I went to a charity fund raiser at San Francisco?s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5.

Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area?s premier hotties, whom shall remain nameless. Suffice to say, she is now married to a tech titan and has a sports stadium named after her.

Obviously, I didn?t work hard enough.

The bids soared to $15,000, $16,000, $17,000.

After all, it was for a good cause. But when it hit $17,750, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $17,000.? I said ?no thanks.? $16,500, $16,000, $16,250?

I passed.

The altitude of the stock market right now reminds me of that evening.

If you rode the S&P 500 (SPX) from 700 to 2,100 and the Dow Average (INDU) from 7,000 to 17,750, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it did then?

I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands.

But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: ?There is a time to fish, and a time to hang your nets out to dry.? If you followed my Trade Alerts this year and are up now 38%, you don?t have to chase every trade.

At least then I?ll have plenty of dry powder for when the window of opportunity reopens for business. So while I?m mending my nets, I?ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again.

Time to Mend the Nets

November 2, 2015/by Mad Hedge Fund Trader

Is This the Big Trade of 2016?

Diary, Free Research, Newsletter

Watching the entire commodity complex collapse in unison this year was nothing less than amazing, with many down 30% or more. And I mean the broader definition of commodity.

It includes the base metals like copper (JJC), (CU), agricultural products (CORN), (SOYB), (DBA), precious metals (GLD), (SLV), and even energy (USO), (KOL).

If you look carefully, you can find commonality in many, but not all, of these.

A slowing China meant that global consumption of bulk commodities would recede to a low ebb. The Chinese stock market crash threw gasoline on the fire.

A bull market in US stocks produced a world clamoring for paper assets at the expense of hard ones.

And of course, the high prices seen in all of these nearly four years ago cured high prices, drawing in new production from untold corners of the earth.

This is how bubbles always end.

What leaves many scratching heads is how widespread the route became. Those clever people who used one commodity to hedge another were left with portfolios of ashes, as everything plunged in lockstep.

The big talk now among my global strategist friends is this: will this year?s dogs become next year?s Cinderellas?

It is easy to imagine how this could happen. For a start, the higher paper stocks rise, the cheaper commodities look. They are now starting to appear like great laggard/diversification plays.

Here is another conundrum.

The world is on track for a global synchronized recovery, with the US. China, Japan and Europe all going ?pedal to the metal? to spur economic growth.

So how is it supposed to do this without using more commodities?

Yes, you can argue, there are big stockpiles to eat through before we see any real price appreciation. But stores can be exhausted in mere months.

This is why I am starting to get interested in the entire commodity space. I have already executed a couple of profitable trades in Freeport McMoRan (FCX) this year-- one of the world?s largest copper producers.

And if my old friend, Carl Icahn, is interested, should I be?

I look forward to more visits to the trough.

Higher prices for commodities in 2016 may not turn out to be a fairy tale after all.

A Commodity Recovery in 2016 is No Fairy Tale

September 10, 2015/by Mad Hedge Fund Trader

What?s Really Happening in the Middle East

Diary, Free Research, Newsletter

Long-term observers of financial markets are befuddled, confused, and amazed at their complete lack of interest in the rapidly unfolding events in the Middle East.

It seems that the more horrific the atrocities, the higher stock prices want to climb.

Go figure.

ISIS is in fact accelerating the most important geopolitical event so far in this century, the rapprochement of relations between the U.S. and Iran, which have been in a deep freeze for 40 years.

A serious dialogue has not been held between these two countries since 52 hostages were seized at the American embassy in Tehran in 1979 and held for 444 days.

The Mullahs in Iran can?t help but notice last week?s U.S. air strikes to protect Shiite cities from a Sunni slaughter at the hands of ISIS. Suddenly, our natural enemy in the region has become our natural ally.

The Iranians have even offered to back up our air power with their ground forces, an offer the Obama administration has so far wisely turned down.

Don?t worry about ISIS. Their threat is being wildly overrated by the media.

There is a reason why terrorist groups have never held territory before. That makes them a big fat target for drones, smart bombs, and all the other types of fire that we rain down upon our enemies from above. This may be the first war in history entirely fought by drones on our side. That means it will be cheap, without casualties, and over quickly.

So what will the new treaty and peace between the U.S. and Iran bring us?

So far, Iran has agreed to a freeze on its nuclear enrichment program in exchange for international inspections and the unfreezing of $100 billion of their assets. Secret negotiations are being held intermittently in Geneva, Switzerland (I stopped by to say hello a few weeks ago).

This is unbelievably positive for all asset classes, except energy. This is the cause of the recent collapse of oil prices, which are now 65% off their 2014 high.

The US is now in a tremendously powerful negotiating position. If Iran dumps their nuclear program to our satisfaction, Iran then gets the carrot.

It will rejoin the world economy, unfreeze the rest of its assets and recover $100 billion a year in trade. The country?s banks will be allowed to rejoin U.S. dollar clearing, the $1 trillion a day CHIPS and SWIFT systems, their absence from which has been a deathblow to their international trade.

Its oil exports (USO) can recover from 750,000 barrels a day back to the pre crisis level of 3 million barrels. If it doesn?t then it gets the stick again in six months, resuming their economic freefall.

The geopolitical implications for the U.S. are enormous.? Iran is the last major rogue state hostile to the US in the Middle East, and it is teetering. The final domino of the Arab spring falls squarely at the gates of Tehran.

A friendly, or at least a non-hostile Iran, means we really don?t care what happens in Syria.

Remember that the first real revolution in the region was Iran?s Green Revolution in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards.

The true death toll will never be known, but is thought to be well into the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.

At the end of the day, the majority of the Persian population wants to join the relentless tide of globalization. They want to buy iPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all.

Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have abjectly failed to cater to these desires

If Iran doesn?t do a deal on nukes soon, it?s economy with sink deeper into the morass in which they currently find themselves. The Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite.

The Obama administration is now pulling out all the stops to accelerate the process.

The oil embargo former Secretary of State, Hillary Clinton, organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain.

Yes, Russia and China are doing what they can to slow the process. This is what the Ukraine crisis is really all about, an attempt to keep oil prices high, Russia?s biggest earner.

But conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 40%.? The Iranian Rial has collapsed by 50%.

Let?s see how docile these people remain when the air conditioning quits running because of power shortages. Iran is a rotten piece of fruit ready to fall off on its own accord and go splat. The US is doing everything she can to shake the tree.

No military action of any kind is required on America?s part. No shot has been fired. That?s a big deal when the shots cost $10,000 apiece.

The geopolitical payoff of such an event for the U.S. would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.

Oil will has completely lost its risk premium, once believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $20 a barrel.

This price drop seen so far amount to a gigantic $2.18 trillion trillion tax cut for not just the US, but the entire global economy as well (92 million barrels a day X 365 days a year X $65).

Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare.

ISIS is a short.

At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.

The implications for the financial markets will be enormous. The US will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992.

As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom.

A collapse in oil imports will cause the U.S. dollar (UUP) to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse.

With the US government gone as a major new borrower, interest rates across the yield curve will fall further. The national debt completely disappears by the 2030?s (as it almost did during the late 1990?s).

A peace dividend will also cause US GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food.

The Dow will soar to 30,000 and the S&P 500 (SPY) to 3,500, the Euro collapses to parity, gold rockets to $2,300 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel.

Some 2 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up.

We will enter a new Golden Age, not just at home, but for civilization as a whole.

Wait, you ask, what if Iran develops an atomic bomb and holds the US at bay?

Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program large enough to threaten the United States. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime.

According to them, Iran has been within a month of producing a tactical nuclear weapon for the last 30 years. I'm still waiting.

The head of the miniscule effort they have was assassinated by Israeli intelligence two years ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).

If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago.

Even if Iran had one nuclear weapon, would they really want to attack a country with 6,700, the US?

There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.

I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do.

The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.

If the advent of a new, docile Iran were going to lead to a global multi-decade economic boom and the end of history, how would the stock markets behave now?

They would remain in a long-term bull market, much like we have seen for the past six years. That?s why 10% corrections have been few and far between.

The Problem is That it?s a Hollow Threat

Aim This One at the Bears

August 26, 2015/by Mad Hedge Fund Trader

The Party is Just Getting Started With the Japanese Yen

Diary, Free Research, Newsletter

I?m sorry, but I just don?t believe that we will see a weak dollar potentially going into the first interest rate rise in nine years.

If my friend, Janet, pulls the trigger, then the greenback will become the only currency in the world that is raising rates. Currencies just don?t decline in those circumstances.

In that case, we want to go out and sell short the weakest link in the currency milieu, and that is the Japanese yen.

Even if Janet doesn?t move in September, the prospect will hang over then yen like a Damocles sword.

In addition, the yen is bumping up key chart resistance around ?125. A decisive breakout would clear the way towards ?130, my yearend target for the beleaguered Japanese currency.

A short in the yen is a safe, low risk trade right here in a world gone crazy.

?Oh, how I despise the yen, let me count the ways.?

I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.

To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:

* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange 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 well over a nosebleed 280% of GDP, or 140% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of only 0.36%, 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 inevitably comes, we?re going to ?130 then ?150, then ?180. That works out to a price of $200 for the (YCS), which last traded at $94.93. But it might take a few years to get there.

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 ?125 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.

It?s All Over For the Yen

August 14, 2015/by Mad Hedge Fund Trader

Mad Hedge Fund Trader Hits 31.5% Gain in 2015

Diary, Free Research, Newsletter, Research

Life is good.

Since my last letter to you, I hired a Mercedes and a Moroccan driver, driven the three hours from Tangier to Casablanca, and spent a day touring the architecture of the French colonial art deco center of that storied city.

It turns out that my driver only did his job part time. He was in fact a graduate student in economics studying in Tangier and had a lot to say about his fascinating country?s economy.

Jackpot!

I?ll write up his comments in a future letter, subject to the regular fact checking with the IMF and the World Bank. Until then, we have winnings of a difference sort to discuss.

It has been a pretty prosperous time for followers of the Mad Hedge Fund Trader?s trade alert service as well.

After staying out of the market during a tempestuous, white knuckled month, I finally sense an interim market bottom.

In quick order, I phone Trade Alerts into the head office to buy Apple (AAPL), the S&P 500 (SPY), and to sell short the Japanese yen (FXY), (YCS). I caught a $12 move in (AAPL) and a 4% move in the (SPY).

The yen vaporized, producing a very speedy 16.5% profit, which I quickly seized.

I then sought to protect my gains by adding a new short position in the (SPY) close to the recent highs. To get risk neutral, I then added a short position in Treasury bonds (TLT), (TBT).

The fruit of these labors was to take the Mad Hedge Fund Trader?s performance for 2015 up to a new all time high at 31.54%. July alone was as hot at the Sahara Desert that I recently escaped, up 4.86%.

This brings my performance since inception four years and eight months ago to 184.38%. That annualizes out to 39.5% per year, not bad in this topsy turvey world. It seems like only a Madman can prosper in these hopeless trading conditions.

Some 15 of the last 16 consecutive Trade Alerts, over the past three months, have been profitable. Followers have found themselves in the green every month of 2015, quite substantially so.

Better than a poke in the eye with a sharp stick. And the best is yet to come!

I started out 2015 with the goal of earning 25% for my readers during the first half, and another 25% in the second half. This latest batch of trades puts me right on track for reaching my yearend goal.

I should take these extended research trips more often! My back office tells me that subscriptions have been falling off in North Korea, Mali has been weak of late, and that a strategy luncheon in Bhutan would be welcome any time.

Under promise and over deliver; it has always been a winning business strategy for me.

This is against a backdrop of major market indexes that are nearly unchanged so far this year, despite sudden bursts of volatility and long, Sahara like stretches of boredom.

The key to winning this year has been to put the pedal to the mettle during those brief, but hair raising selloffs, and then take quick profits. They don?t call me ?Mad? for nothing.

When the market is dead, you sit on your hands.

After all, you are trying to pay for your own yacht, not your broker?s.

When the market pays you to stay away, you stay away.

Those who have made the effort to wake up early every morning and read my witty and incisive prose have an impressive row of notches on their bedpost to show for their effort.

My groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud.

Some 50% of my clients are over 50 and managing their own retirement funds fleeing the shoddy but expensive services provided by Wall Street. The balance is institutional investors, hedge funds, and professional financial advisors.

The Mad Hedge Fund Trader seeks to level the playing field for the average Joe. Looking at the testimonials that come in every day, I?d say we?ve accomplished that goal.

It has all been a vindication of the trading and investment strategy that I have been preaching to followers for the past eight years.

Quite a few followers were able to move fast enough to cash in on my trading recommendations. To read the plaudits yourself, please go to my testimonials page by clicking here. Our business is booming, so I am plowing profits back in to enhance our added value for you.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, 67.45% in 2013, and 30.3% in 2014.

Our flagship product,?Mad Hedge Fund Trader PRO, costs $4,500 a year. It includes?Global Trading Dispatch?(my trade alert service and daily newsletter).

You get a real-time trading portfolio, an enormous research database, and live biweekly strategy webinars. You also get Bill Davis?s Mad Day Trader service, which provides great intra day market color.

To subscribe, please go to my website, ?www.madhedgefundtrader.com, click on the ?Memberships? located on the second row of tabs.

And now for the rest of the year.

I can?t wait!

Letter From Casablanca

July 28, 2015/by Mad Hedge Fund Trader

Will Gold Coins Suffer the Fate of the $10,000 Bill?

Diary, Free Research, Newsletter

The conspiracy theorists will love this one.

Buried deep in the bowels of the 2,000 page health care bill was a new requirement for gold dealers to file Form 1099's for all retail sales by individuals over $600. Specifically, the measure can be found in section 9006 of the Patient Protection and Affordability Act of 2010.

For foreign readers unencumbered by such concerns, Internal Revenue Service Form 1099's are required to report miscellaneous income associated with services rendered by independent contractors and self-employed individuals.

The IRS has long despised the barbaric relic (GLD) as an ideal medium to make invisible large transactions. Don?t you ever wonder what happened to $500, $1,000, $5,000, $10,000, and $100,000 bills?

The $100,000 bill was only used for reserve transfers between banks, and was never seen by the public. The other high denomination bills were last printed in 1945, and withdrawn from circulation in 1969.

Although the Federal Reserve claims on their website that they were withdrawn because of lack of use, the word at the time was that they disappeared to clamp down on money laundering operations by the mafia. In fact, the goal was to flush out income from the rest of us.

Dan Lundgren, a republican from California's 3^rd congressional district, a rural gerrymander east of Sacramento that includes the gold bearing Sierras, has introduced legislation to repeal the requirement, claiming that it places an unaffordable burden on small business.

Even the IRS is doubtful that it can initially deal with the tidal wave of paper that the measure would create.

Currency trivia question of the day: whose picture is engraved on the $10,000 bill? You guessed it, Salmon P. Chase, Abraham Lincoln's Secretary of the Treasury.

Ever Wonder Where The $10,000 Bill Went?

July 28, 2015/by Mad Hedge Fund Trader

So What?s Next for the Markets?

Diary, Free Research, Newsletter

I am writing to you from the bar of the El-Minzah Hotel in Tangiers, Morocco, a one-time favorite of literary greats, F. Scott Fitzgerald, Earnest Hemingway, and Paul Bowls.

A warm, languid breeze coming off the Atlantic Ocean is causing the date palms around the pool to sway in rhythmic fashion.

The city has long been a hotbed of espionage, international intrigue, and illicit trade. It was once home of the Barbary Pirates.

I first came here in 1968 and slept on the roof of a run down medina inn for 50 cents a night and thought it was the deal of the century.

How times change.

If you recognize the place from the pictures below, there?s a good reason. It is the location on which Rick?s Caf? Americain was based in the 1942 Humphrey Bogart film classic, Casablanca, complete with a grand piano.

Damn, and I already sent my white dinner jacket home!

Whenever I check into a hotel with decent broadband or WiFi, I undertake the same ritual drill. It is a practice born of a half century of analyzing markets.

I go to the ever-trustworthy www.stockcharts.com and rapidly run through 100 charts among all asset classes. This immediately gives me an instant snapshot of the global economy, and where to find the action in financial markets.

And what I?m finding today is nothing less than astounding.

On the one hand, a very impressive collapse of all energy, commodity, and precious metal prices suggests that we have already fallen into the morass of a severe recession.

On the other, some 77% of US companies beat forecasts for Q2 earnings and are painting a rosy picture of the future, confirming that the moderate economic recovery still has legs.

Which asset class has it right, and which one is missing the target?

I?ll go with the expansion scenario. I think that the stock market crash in the former Red China is sending us all schools of red herrings on the prediction front.

Middle Kingdom margin calls are triggering capitulation sell offs across the commodities board, leading to fears that the woes of newbie stock speculators will feed into the main economy. This, in turn, will prompt a global recession.

I don?t think this will happen. Rampant stock speculation was engaged in by only 4% of the population, with most of the gains confined to a couple of months.

Most of this was mere paper gains that went as quickly as they came. Thankfully, this was not a decade long build up, like the one we saw in NASDAQ during the 1990?s, which would have been far more damaging.

Furthermore, the government in Beijing is doing everything they can to prevent the collapse from going systemic. I think they will succeed. Only 3% of listed Chinese shares are now freely tradable.

The creation of financial markets from scratch for a major economy, which the Chinese are now attempting to engineer, was never going to be easy. I know, because I went through this with Japan 40 years ago.

Everything else that could have gone wrong this year, Iran, Greece, the Supreme Court decision on Obamacare, the Ukraine crisis, Iraq, has now passed us by, all resolving for the positive, as far as stock markets are concerned.

We have run out of things that could go wrong. A possible ?% Fed interest rate rise in September is so insignificant that it doesn?t even show up on the radar.

So it?s simple. Wait for the Chinese stock bubble to unwind, and then load the boat with global equities.

Except that it?s not that simple.

The US equity markets have been so boring this year that it is creating a situation that is unprecedented in the history of technical analysis. Volatility is now at a staggering 100 year low.

According to the Wall Street Journal, only six stocks, Amazon (AMZN), Google (GOOG), Apple (AAPL), Facebook (FB), Gilead Sciences (GILD), and Walt Disney (DIS) have accounted for more than the entire $199 billion in gains in the S&P 500 this year.

The other 494 stocks in the big cap index have, for the most part, been unchanged, or are losers.

I am proud to say that four of these six, (GOOG), (AAPL), (GILD), and (DIS) have been the subject of successful Trade Alerts or bullish research reports in this newsletter.

That?s not a bad home run record. Just go to www.madhedgefundtrader.com a search for the reports.

The situation is nearly as dire with the NASDAQ (QQQ), where the same stocks account for half of the $664 billion in gains there.

To long in the tooth traders, such as myself, a technical set up like this against falling volume this isn?t just a red warning light. It is an entire Christmas tree?s worth of warning lights.

You can see this in all its eloquence in the chart below of a declining advance/decline ratio, which broke its 200-day moving average on Friday.

This is why I shot out a Trade Alert last week to bail on my ?RISK ON? short position in the Japanese yen (FXY) and to sell short the (SPY).

Now here is the really scary part. All of this is setting up going into the two highest risk months of the year, September and October, from which the legendary stock crashes of old spring.

In other words, the calendar couldn?t be worse for traders.

So here is the bottom line. Positive fundamentals have been checkmated by negative technicals. So we may go nowhere for a while, until corporate earnings catch up with share prices and make them look cheap once again.

S&P 500 earnings traded at 17 times earnings on Friday. Get them back to 16 times earnings in a zero interest rate world, and new money will come pouring in.

That means we may have to suffer the umpteenth 5% correction of this bull market in the weeks ahead (see chart below), or 10% in a really extreme case.

Just thought you?d like to know.

At Rick?s Caf? Americain

July 27, 2015/by Mad Hedge Fund Trader

The Case Against Treasury Bonds

Diary, Free Research, Newsletter

My friend, Texan money manager Mike Robertson, asked me the other day if there was one asset class that I truly despised.

I didn?t hesitate: bonds.

In fact, fixed income investments are about to regain the nickname they earned during the 1980?s: ?certificates of wealth confiscation.?

That leaves me within a hair?s breadth of pulling the trigger on some new short positions in fixed income instruments. My hedge fund buddies are lining up varies short plays here, like clay ducks in a shooting match.

With the ten year Treasury bond yield at a microscopic 2.30%, and 3.06% for the 30 year, you have a classic ?heads I win, tales, you lose? trade. Best case, you break even over the next decade. Worst case, you lose half or more of your capital.

The US has no history of excessive debt, except during WWII, when it briefly exceeded 100% of GDP. That abruptly changed in 2001, when George W. Bush took office.

In short order, the new president implemented massive tax cuts, provided expanded Medicare benefits for seniors, and launched two wars, causing budgets deficits to explode at the fastest rate in history.

To accomplish this, strict 'pay as you go' rules enforced by the previous Clinton administration, were scrapped. The net net was to double the national debt to $10.5 trillion in a mere eight years.

Another $5 trillion in Keynesian reflationary deficit spending by President Obama since then has taken matters from bad to worse.

This year, the national debt just nudged past our GDP at $17 trillion. The Congressional Budget Office is now forecasting that, with the current spending trajectory, total debt will reach $23 trillion by 2020, or some 160% of today's GDP, 1.6 times the WWII peak.

By then, the Treasury will have to pay a staggering $5 trillion a year just to roll over maturing debt. What's more, these figures greatly understate the severity of the problem.

They do not include another $9 trillion in debts guaranteed by the federal government, such as bonds issued by home mortgage providers, Fannie Mae and Freddie Mac. State and local governments owe another $3 trillion. Double interest rates, which they inevitably will, and our debt service burden doubles as well.

It is unlikely that the warring parties in Congress will kiss and make up anytime soon. It is therefore likely that the capital markets will emerge as the sole source of any fiscal discipline, with the return of the bond vigilantes.

They have already made their predatory presence known in the profligate nations of Europe, and they are expected to arrive here eventually.

Such forces have not been at play in Washington since the early 1980's, when bond yields reached 13%, and homeowners (including me) paid 18% for mortgages.

Since foreign investors hold 50% of our debt, policy responses will not be dictated by the US, but by the Mandarins in Beijing and Tokyo. They could enforce a cut back in defense spending from the current annual $700 billion.

Personally, I think the US will never recover from the debt explosions engineered by Bush and by 'deficits don't count' Vice President Chaney. The outcome has permanently lowered standards of living for middle class Americans and reduced influence on the global stage.

But I'm not going to get mad, I'm going to get even. I am going to make a killing profiting from the coming collapse of the US Treasury market through buying the leveraged short Treasury bond ETF, the (TBT).

I am sticking to my short term forecast for this fund to rise from the current $58 to $100, then $150. And that is despite a hefty and rising cost of carry of nearly 0.5% a month.

Where?s My Social Security?

July 23, 2015/by Mad Hedge Fund Trader

July 8, 2015 - SPECIAL EDITION - Special Update on the Oil Collapse

Diary, Free Research, Newsletter

Global Market Comments
July 8, 2015
Fiat Lux

EMERGENCY OIL ISSUE

Featured Trade:
(SPECIAL UPDATE ON THE OIL COLLAPSE),
(USO), (XOM), (OXY), (COP), (LINE)

United States Oil Fund LP (USO)
Exxon Mobil Corporation (XOM)
Occidental Petroleum Corporation (OXY)
ConocoPhillips (COP)
Linn Energy, LLC (LINE)

The Middle East is a miserable place to be during Ramadan, a month where the faithful reevaluate their lives and recommit to the teachings of Islam. This year it runs from June 17 to July 17.

During this period, the Muslims are not permitted to eat or drink from sunrise to sunset, or criticize others, or engage in a long list of other hurtful activities.

Although infidels, such as myself, are exempt from these rules, living amidst a population subject to these eighth century laws can be wearing. Everyone is starving, exhausted, and in a foul mood. Restaurants don?t open until sunset. Then people party all night, keeping you awake.

In the more fundamentalist conservative countries, like Saudi Arabia, Oman, and Kuwait, the Religious Police beat offenders with sticks and clubs that they come across in public.

That includes those eating, drinking, or women wearing immodest dress, like short pants and tank tops. Did I mention it reached 120 degrees yesterday in those countries?

As a result, anyone who can afford to do so flees to more liberal regimes during the fasting period, like Turkey, Egypt, and Morocco.

As a result, I am bumping into quite a few interesting people in the five star hotels here who have quite a lot to say about the price of oil.

A rash of hurried negotiations has suddenly broken out between American and European oil majors and the government of Iran. The word is out. Iran is going to imminently cave on US demands of inspections of nuclear facilities, especially the military ones.

The fact that this is all happening now is no coincidence. According to the Koran, Ramadan is a time to ?make peace with those who have wronged us.?

The hard numbers being assigned to these contracts is having the effect of increasing the size of the carrot for both the West and Iran to wind up the talks. The impact will be to permit Iran to rejoin the global economy for the first time in 36 years.

This paves the way for Iran to double its oil exports from 1.2 to 2.4 million barrels a day immediately, and then double them again once desperately needed energy infrastructure investments are made.

It won?t take long for this impending tsunami of oil to hit the markets. The Reuters news agency is reporting that 38 million barrels of Iranian oil are sitting in 15 VLCC tankers slow cruising the Persian Gulf and Indian Ocean.

The second the ink is dry on any US/Iran agreements, these ships are sailing for western and Asian ports to make delivery.

This is why you have seen a cataclysmic plunge in the price of Texas tea over the past few weeks, from $62 to $51, some 18%.

Saudi Arabia has responded to the decline by aggressively cutting prices for their largest customer, and ramping up production even more, in a determined effort to boost market share.

Therefore, the March low of $43 now seems within range, and maybe then some. You have already seen this in the contango for far month futures markets, which have widened fantastically. The world has returned to paying huge premiums for storage.

In case you missed the generational low at these prices four months ago, you now have another shot.

The share prices of my favorite oil plays, Exxon Mobile (XOM), Occidental Petroleum (OXY), Conoco Phillips (COP), and Linn Energy (LINE) all saw this route coming months ago and are already there.

In fact, the weak energy sector, which accounts for 10% of the S&P 500, was a major reason why the index failed to break out to new highs a few weeks ago.

I think that energy could be one of your seminal investment plays for the rest of 2015. Crude should make it back up to the $90 handle within the next three years, riding on the back of the global synchronized economic recovery.

After that, the question arises of whether the next move is to $10, as carbon based energy forms are replaced by alternatives on a large scale. Allow for a Moore?s Law type exponential growth of efficiencies, and we?ll soon be there.

That is Saudi Arabia?s current $5 per barrel cost of production, plus a 20% profit margin and $4 for shipping. Remember, it was only $8 as recently as 1998.

Just thought you?d like to know.

And now, back to my loyal rental camel, whose price, it turns out, is determined by, you guessed it, the price of oil.