From time to time I receive an email from a subscriber telling me that they are unable to get executions on trade alerts that are as good as the ones I get. There are several possible reasons for this:
1) Markets move, sometimes quite dramatically so.
2) Your Trade Alert email was hung up on your local provider?s server, getting it to you late. This is a function of your local provider?s capital investment, and is totally outside our control.
3) The spreads on deep-in-the-money options spreads can be quite wide. This is why I recommend readers place limit orders to work in the middle market. Make the market come to you.
4) Hundreds of market makers read Global Trading Dispatch. The second they see one of my Trade Alerts, they adjust their markets accordingly. This is especially true for deep-in-the-money options. A spread can go from totally ignored to a hot item in seconds.
On the one hand, this is good news, as my Trade Alerts have earned such credibility in the marketplace. On the other hand, it is a problem for readers encountering sharp elbows when attempting executions.
5) Occasionally, emails just disappear into thin air. This is cutting edge technology, and sometimes it just plain doesn?t work. This is why I strongly recommend that readers sign up for my free Text Alert Service as a back up.
The bottom line on all of this is that the prices quoted in my Trade Alerts are just ballpark ones with the intention of giving traders some directional guidance. You have to exercise your own judgment as to whether the risk/reward is sufficient with the prices you are able to execute yourself. Sometimes it is better to pay up by a few cents rather than miss the big trend. The market rarely gives you second chances.
I was in a huge hurry last week when I sent out a Trade Alert to buy insurance giant American International Group (AIG), operating from a Chicago hotel suite with a stock market that was flying. Now that I am home, and have single handedly brought Oakland?s crime wave to a juddering halt, I have an opportunity to go into depth on this troubled company.
I know it well, as it originally started out in Shanghai to insure the once sizeable Jewish and white Russian community there. When the communists took over China in 1949, it moved its entire business to Japan. Its skyscraper just across the moat from the Imperial Palace still maintains a conspicuous presence on the Tokyo skyline.
Buy sun hats in the winter and snow boots in the summer. That?s the simple argument. The stock market equivalent to this is to buy insurance company shares in the wake of a giant hurricane, as we had with Hurricane Sandy in November. That?s because companies can jack up rates enormously after disasters such as these, just when the probability of another storm declines, to the benefit of the bottom line. Investment sage, Warren Buffet, figured this out 60 years ago, which is why he has carried major holdings in this sector ever since.
I picked (AIG) in particular because it has a whole raft of special circumstances. You may recall that the company went bust in 2009 after massively leveraged derivatives bets by its Greenwich, CT office went awry. Because it was feared that the extent of their bets would take down the entire global financial system, the Treasury stepped in with a whopping $183 billion bailout.
Much of this money went to European banks, and some $165 million was paid out as retention bonuses to the errant staff. It was the most despised rescue in the history of US financial markets.
I believe it was the single largest policy error of the Obama administration. Instead of honoring AIG?s obligations in full, I would have offered 50 cents on the dollar, which the creditors would have taken in a heartbeat at the time. But the new Obama administration had exactly a week to figure this out, with no time for research or analysis. When your ship is on fire and sinking, you don?t spend a lot of time figuring out what kind of fire hose to use.
In the end, the government made a $23 billion profit on the deal, dumping its last 15% share of the company in December. It was largely assisted by the bond market bubble, which panicked investors of every stripe to reach for yield, including that offered by the impossible to define garbage on AIG?s books. In the end, (AIG) turned out be to a gigantic, hyper leveraged call on the corporate bond market.
With the government out of its hair now, it is suddenly a whole new world for AIG. Investors had been avoiding the stock like the plague, as the ever present risk of a government unload was capping the share price. You only need 10 institutional investors to take 5% weightings each to soak up the entire government holding.
The company, which consists of its core U.S. life, global property and casualty, and U.S. mortgage insurance units, will now have to focus on turning around earnings at the property and casualty business, formerly known as Chartis. As a stand-alone entity, the investment case for (AIG) is really quite compelling. It is trading at a big discount to book, and is even a bigger bargain when compared to its insurance industry peers.
On top of this, the company is a big asset story. It still retains some securities that originally got it into trouble, which are marked at, or close to, zero. As these are sold out into a frothy bond market, huge profits will be realized. What we don?t know is how much money regulators will allow the company to take out of reserves to book in profits or pay in dividends.
As for the lawsuit just announced by former owner, Hank Greenberg, (which AIG has refused to participate in) claiming that the government paid an unfairly low price for the company, you can forget about it. This is more about salving an ego than pursuing a legitimate economic claim. If he had done a better job managing his risk, AIG would not have gone under in the first place. What is a fair price for an illiquid asset when the world is ending?
https://www.madhedgefundtrader.com/wp-content/uploads/2013/01/AIG-1-10-13.jpg396498Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-01-10 23:03:232013-01-10 23:03:23The Bull Case for AIG
I have been relying on David Hale 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 such a rapid-fire succession.
Since David is an independent economic advisor to many of the world's government?s, largest banks, and investment firms, I thought his views would be of riveting interest. It was with great pleasure that I joined him for lunch at the Federal Reserve Bank of San Francisco to discuss the outlook for Asia.
David sees the US economy growing by 2.5% in 2013, China by 8.5%, but for much of Europe to remain in recession. He sees the best growth opportunities in Southeast Asia, which delivered stellar results last year.
The Philippines grew by 6.6% and has the best long-term outlook of all. Some 600,000 now work there in the call center and support business, and the industry is growing at a breakneck pace. Personal consumption is flying, and the government is about to launch a major infrastructure program. Heaven knows they need it, as I recall the roads there are absolutely deplorable. The ETF (EPHE) was on fire last year, up some 56%, making it one of the best performing single country funds.
Indonesia (IDX) expanded by 6.1% in 2012, making a killing on energy and commodity exports to China and Japan. Its ETF was unchanged last year, but could be ready for take off. Thailand (THD) scored a 5.5% gain in its GDP, boosted by flood reconstruction, taking its ETF northward by 38%. Malaysia?s economy (EWM) expanded by 5.3%.
David has seen the same dramatic improvement that I have in the economic data from China over the last three months. This is in response to a moderate stimulus budget which they started to implement in the summer. Residential housing, which has been a major drag on the economy for the past year, is now starting to trend up. Liberalization of real estate lending is in the cards.
While the Middle Kingdom lost 20 million jobs during the 2008 crash, almost none disappeared in the latest slowdown. This year, Chinese consumption will exceed that of the US for the first time in history, at $470 billion compared to $403 billion.
The fight against corruption has emerged as a major domestic issue. Some 25% of all the luxury spending in China is though to be for gifts (bribes) to government officials. Mid level Mandarins caught wearing $50,000 watches are now getting fired.
David made some far out predictions that were real zingers. Population growth is grinding to a halt throughout Asia. It is already well below the replacement rate in Japan and South Korea, which will soon be joined by China. This will eventually lead to labor shortages in Asia, and bring to an end the cheap labor regime, which has driven their economies for the past 100 years. The Chinese work force will shrink from five times ours to only three times.
Their cost advantage then goes out the window. The upshot for us is that perhaps half of the 6 million jobs that America lost to China over the last 20 years will come back. Many items can now be bought cheaper in Chicago than they can in Shanghai.
China will still become far and away the world?s largest economy in our lifetimes. In 1700, Asia accounted for 58% of world GDP. Some 250 years of wars pulled that figure down to 15% by 1950. It is on track to recover to 50% by 2050.
To learn more about David Hale and the extensive list of services he offers, please visit the site of David Hale Global Economics at http://www.davidhaleweb.com.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/01/David-Hale.jpg335308Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-01-10 10:02:482013-01-10 10:02:48Economist David Hale Says the Action will be in Southeast Asia
I am writing this report from a first class sleeping cabin on Amtrak's California Zephyr. We are now pulling away from Chicago's Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I am headed for Emeryville, California, just across the bay from San Francisco. That gives me only 56 hours to complete this report. I tip my porter, Courtney, a $100 in advance to make sure everything goes well during the long adventure.
The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Spellchecker can catch most of the mistakes, but not all of them.
As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied searches during stops at stations along the way to chase down data finer points.
You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS. Who new that 95% of America is off the grid?
After making the rounds with strategists, portfolio managers, and hedge fund traders, I can confirm that 2012 was the most hellacious for careers lasting 30, 40, or 50 years. With the Dow gaining a modest 4.5% in 2012, and S&P 500 up a positively virile 12%, most hedge funds lagged the index by miles, taking in, on average, a meager 5%. I managed to triple that with my Trade Alert Service, hauling in a 14.87% gain.
If you think I spend too much time absorbing conspiracy theories from the Internet, let me give you a list of the challenges I see financial markets facing in the coming year:
The Highlights of 2013
1) Stocks will finish 2013 higher, but there will be hard work along the way.
2) Performance this year will be front end loaded into the first quarter.
3) The Treasury bond market has peaked.
4) The Yen has peaked too.
5) The Euro trades in a range.
6) So do oil and gold.
7) Commodities begin a modest recovery.
8) Residential real estate bounces along the bottom.
The Thumbnail Portfolio
Equities - An "M" shaped year: run up to 1,600, sell off over the summer, then a year end rally closes us at the highs. Bonds - Keep putting in a choppy 60 year top, then collapse. Currencies - Dollar down in the winter, strong in the spring and summer, and strong again in the autumn. Commodities - A China recovery takes them up, then sideways, then up some more. Precious Metals - Sideways until the monetary expansion guaranteed by QE7 become obvious, and then up. Real Estate - Multifamily up, commercial up, single family homes sideways to up small.
1) The Economy-The Second Lost Decade Continues
I am sticking with a 2% growth forecast for 2013. We are clearly entering the New Year on a growth spurt that could take Q4 up to an annualized 3%-3.5% rate. The end of the presidential election was a major impetus here. One day, billions of dollars were spent convincing us how terrible conditions in the country were, so businessmen and consumers sat on their hands. The next day they were gone, and the end of this uncertainty encouraged them to invest, hire, and spend. All of the data releases since then bear this out. Not even a drenching hurricane Sandy could slow the economy down. So we enter 2013 on a high note.
There is one big positive that we can count on in the New Year. Corporate earnings will probably come in at $105 a share for the S&P 500, a gain of 5% over the previous year. During the last four years we have seen the most dramatic increase in earnings in history, taking them to all-time highs. This is set to continue. Furthermore, this growth will be front end loaded into Q1.
With a GDP growing at a feeble 2% in 2013, and corporate earnings topping out at $105 a share, those with a traditional "buy and hold" approach to the stock market will do alright, provided they are willing to sleep through some gut churning volatility. A Costco sized bottle of Jack Daniels might help too.
Earnings multiples will increase a bit as well, from 14X to 15.2X, thanks to a prolonged zero interest rate regime from the Fed and paucity of attractive alternative investments. This is not an outrageous expectation, given the 10-22 earnings multiple range that we have enjoyed during the last 30 years.
This is the "least bad house in a crummy neighborhood that everyone in the world wants to live in" economic theory. John Maynard Keynes, eat your heart out. After all, Ben Bernanke is paying you to buy stock with cheap money, so why not? This is why weak earnings will benefit from a multiplier effect, possibly as high as 2:1. That gets the S&P 500 up to 1,600 by yearend, a gain of about 14% from here.
This does not represent a new view for me. It is simply a continuation of the strategy I outlined in October, 2012
Whereas 2012 saw slowing in both Europe and China, this year, a recovering Middle Kingdom will offset a slowing continent. The kicker is that Europe then starts to recover on its own by year-end, taking global GDP growth to the top end of its recent range.
Cost cutting through layoffs is reaching an end, as there is no one left to fire. That leaves technology as the sole remaining source of margin increases, which will continue its inexorable improvements. Think of more machines and software replacing people.
Deleveraging will remain a dominant factor affecting the economy for another 5-8 years. Much of the hyper growth we witnessed over the past 30 years, possibly half, was borrowed from the future through excessive credit, and it is now time to pay the piper. We are still at the beginning of a second lost decade. Don't expect a robust GDP while governments, corporations, and individuals are sucking money out of the economy.
You can count on demographics to suck life out of this economy for the rest of the decade. Big spenders, those in the 46-50 age group, don't return in big numbers until 2022. This lines up nicely with my 2% target.
Forget about employment. The news will always be bad. At this stage of the economic cycle, we should be generating a robust 400,000 jobs a month, not a paltry 150,000. I believe that the US has entered a period of long-term structural unemployment similar to what Germany saw in the 1990's. Yes, we may grind down to 7%, but no lower than that. Keep close tabs on the weekly jobless claims that come out at 8:30 AM Eastern every Thursday for a good read of the financial markets to head in a 'RISK ON" or "RISK OFF" direction.
While the "fiscal cliff" resolution generated a nice short-term pop in the market, the longer-term consequences will create a big drag economy. I know there is a lot of double counting going on here. But will someone please explain to me how taking money out of both of our pockets at the same time, through higher taxes and less spending, is cause to go out and celebrate? If you are only starting with an economy that is growing 2% a year, that eventually spells recession, and a bear market. In the end, congress was negotiating over how big of a recession to have next.
This does not represent a new view for me. It is simply a continuation of the strategy I outlined in October, 2012 (click here for "My 2012-2013 Stock Market Forecast").
Technology will be the top-performing sector in the market in 2012, with Apple (AAPL) taking the lead once again, along with their entire ecosystem. This year, they will be joined by consumer cyclicals, industrials, financials, and autos.
Share prices will deliver anything but a straight line move. I am looking for an ?M? type year. We start with a ferocious rally that takes us up to the highs, then suffer a heart stopping summer selloff, followed by an aggressive yearend rally. If you put a gun to my head and forced me to come up with some round numbers, I would say we go up 10%, then down 20%, then up 25% to give us an up 10% year. This is why it will play out this way:
Quarter 1
A ton of good news hits the market, including:
1) Resolution of the fiscal cliff.
2) A major reallocation out of bonds and into stocks.
3) A slow reacceleration of the Chinese recovery.
4) New Year allocation of new cash by institutional investors.
5) Stocks sold to reap lower capital gains taxes in 2012 need to get bought back, especially in technology.
6) A Q4 growth spurt prompted by the end of the US presidential election cycle and Hurricane Sandy reconstruction continue to feed strong data into Q1.
7) Markets are very thin and illiquid, so any of the factors above will give an outsized and disproportional push to the upside.
As investors will be slow to comprehend the impact of all of these events, they will react incrementally, not getting fully invested until March or April. By then, the S&P 500 will be at 1,600, the top of a 14-year range, where it always fails in a 2% growth economy.
Get Ready to Fail Again
Quarters 2 and 3
The next leg of the European sovereign debt crisis reminds us all to ?Sell in May, and go away? for the fifth year in a row. The contagion spreads to Italy and France. This creates a hiccup in China, so the recovery slows there. A steadily improving jobless rate prompts the Fed to start hinting about the end of quantitative easing. A nasty, public slugfest in congress over the March 31 debt ceiling will further give stock owners ulcers. This triggers recession fears and cuts the legs out from under the market. The way is cleared for a 20% swoon down to 1,300.
I will observe all of this with complete indifference from my Alpine chalet in Zermatt, Switzerland (yes, the one with the shabby outhouse, but great broadband), having sold everything before I went on vacation. I wile away my time practicing my German with the goat herders by day, and dancing the polka with the local frauleins at night. I return in August, just in time to buy the market at the absolute bottom.
Crash, we won?t, and this is what my Armageddon friends don?t get. To break to deeper lows, you need sellers, and lots of them. Those were in abundance in 2008, when the bear market caught many completely by surprise, everyone was leveraged to the hilt, and risk controls provided all the security of wet tissue paper. The margin clerks ruled supreme.
This time around it?s different. Prime brokers now require a pound of flesh as collateral, especially in the wake of the MF Global Bankruptcy, and leverage as almost an extinct species. In the meantime, individuals have been decamping from stocks en masse, with equity mutual fund sales over the past four years hitting $500 billion, compared to $1 trillion in bond fund purchases. That will leave hedge funds the only players at an (SPX) of 1,300, who will be loath to run big shorts at 20% dips. You can?t have a crash if there is no one left to sell.
Quarter 4
Bargain prices give us a nice springboard to rally into Q4, for any number of reasons. The Federal Reserve will use any substantial weakness on the market to launch another quantitative easing program, be it QE5, 6, or 7. The European Central Bank can come up with an LTRO at any time. Japan?s new, more aggressive monetary easing and epic public spending should be reaching its stride by then. China seems to always have another $500 billion stimulus budget that they can pull off the shelf at any time. A Treasury bond market singing its swan song by then would be another plus, panicking more money into stocks.
Amtrak needs to fill every seat in the dining car, so you never know who you will get paired with. There was the Vietnam vet Phantom jet pilot who now refused to fly because he was treated so badly at airports. A young couple desperate to get out of Omaha could only afford seats as far as Salt Lake City, sitting up all night. I paid for their breakfast. A retired British couple was circumnavigating the entire US in a month on a ?See America Pass.? Mennonites returned home by train because their religion forbade airplanes.
Will this be the year that the Treasury bond market finally collapses? The single worst call, by both me, and the hedge fund industry for the past four years was that massive borrowing by the Federal government would cause the Treasury bond market to crash. Not only did Mr. Market repeatedly dope slap us all, it blasted through to new 60 year highs, sending ten year yields to 1.38%, which adjusted for inflation is a real negative yield of -1.2% a year.
Bond investors today will get back 80 cents worth of purchasing power at maturity for every dollar they invest. But institutions and individuals will grudgingly lock in these appalling returns because they believe that the losses in any other asset class will be much greater. The problem is that driving eighty miles per hour while only looking in the rear view mirror can be hazardous to you financial health.
What I underestimated in 2012 was the absolute perniciousness of today?s deflation. The price for everything you want to sell is continuing a relentless fall, including your home and your labor. The cost of the things you need to buy, like food, energy, health care, and education, is rocketing. Globalization is the fat on the fire. I call this ?The New Inflation?. This goes a long way in explaining the causes behind a 30-year decline in the middle class standard of living.
The other thing I miscalculated on was how rapid contagion fears spread from Europe. When the world gets into trouble, everyone picks up their marbles and goes home. For the financial markets, that translates into massive buying of the core ?flight to safety? assets of the US dollar and Treasury bonds.
While much of the current political debate centers around excessive government borrowing, the markets are telling us the exact opposite. A 1.90%, ten-year yield is proof to me that there is a Treasury bond shortage, and that the government is not borrowing too much money, but not enough. Given the choice between what a politician wants me to believe and the harsh judgment of the marketplace, I will take the latter every time.
So what will 2013 bring us? I think we will start to chip away at the bond market bubble?s granite edifice. I am not looking for a free fall in price and a spike up in rates, just a move to a new higher trading range in yields. The high and low for ten year paper for the past nine months has been 1.40% - 1.90%. We could easily ratchet up to a 1.90% to 2.50% range, but not much higher than that. You might have to wait for your grandchildren to start trading before we see a return of 12% Treasuries last seen in the early eighties.
Reaching for yield will continue to be a popular strategy among many investors. That focuses buying on junk bonds (JNK), (PHB), and (HYG), REITS (HCP), and master limited partnerships (KMP), (LINE). There is also emerging market sovereign debt to consider (PCY). At least there, you have the tailwinds of strong economies, little outstanding debt, appreciating currencies, and higher interest rates than those found at home.
As for municipal bonds (MUB), we are seeing only the opening act of a decade of fiscal woes by local government. Still, there is a good case for sticking with munis. No matter what anyone says, taxes are going up, and when they do, this will increase muni values. So if you hate paying taxes go ahead and buy this exempt paper, but only with the expectation of holding it to maturity. Liquidity could get pretty thin along the way. Be sure to consult with a local financial advisor to max out the state, county, and city tax benefits.
Any trader will tell you to never bet against the trend, and the overwhelming direction for the US dollar for the last 220 years has been down. The only question is how far, how fast. Going short the currency of the world?s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long-term growth rate is a no brainer.
This year, the call against the dollar has to be a little more nuanced, defined by the relative aggressiveness of central bankers in each of the major currency blocks. Japan?s Ministry of Finance is now, far and away, the most ambitious government agency, hell bent on crushing the yen to rescue its dying economy. You can thank the newly installed Liberal Democratic Party for this, which swept to victory in the December elections.
The problems in the Land of the Rising Sun are almost too numerous to count: the world?s highest debt to GDP ratio, a horrific demographic problem, flagging export competitiveness against neighboring China and South Korea, and the world?s lowest developed country economic growth rate. The dramatic sell off we saw in the Japanese currency since December is the beginning of what I believe will be a multiyear, and possibly multidecade, move down.
The US comes in second in the global race to weaken currencies, thanks to QE 1, 2, 3, 4, and ultra low interest rates. Bernanke has promised to continue this until 2015, or until our unemployment rates fall below 6.5%, which could be forever. This means the dollar will be strong against the yen, but weaker when measured in Australian, Canadian, or New Zealand dollars.
The Euro is a bit of a quandary. While European Central Bank president, Mario Draghi, has talked a lot about monetary easing, he has actually done very little. Recurring financial crisis on the continent will be offset by the prospects of a year-end recovery in the economy and progress on a new treaty. So we could see a range here for the year of $1.20-$1.37, with little net movement overall. Euro currency traders may have to go to sleep for a while, or move on the more fertile fields, like betting against the yen.
For a sleeper, use the next plunge in emerging markets to buy the Chinese Yuan ETF (CYB) for your back book, but don?t expect more than single digit returns. The Middle Kingdom will move heaven and earth in order to keep its appreciation modest to maintain their crucial export competitiveness.
This is an easy call to make. If the China recovery is real, as the markets believe, then you want to be loading the boat with commodities here. If this is just a temporary post election (the one in Beijing, not the US) ?feel good? rally, then you want to unload whatever you have. I believe in the former case.
China is not returning to the double-digit growth rates of the past. Just stabilizing here at a 7% annual rate would be a big win. Then they may crawl back to an 8% growth rate, but not much higher. That?s still four times faster than America?s arthritic 2% growth rate.
The Middle Kingdom is currently changing drivers of its economy, from exports to domestic consumption. This will be a multidecade process, and they have $4 trillion in reserves to finance it. It will still demand prodigious amounts of imported commodities, especially, oil, copper, iron ore, and coal, all of which we sell. The derivative equity plays here are Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE).
The food commodities are a tremendous long term Malthusian play, with corn (CORN), wheat (WEAT), and soybeans (SOYB) coming off the back of great returns in 2012. The harsh reality here is that the world is making people faster than the food to feed them, the global population jumping from 7 billion to 9 billion by 2050. Half of that increase comes in countries unable to feed themselves today, largely in the Middle East. The idea here is to use any substantial weakness this winter to build long positions that will double again if global warming returns in the summer.
These can be played through the ETF?s (MOO) and (DBA), and the stocks Mosaic (MOS), Monsanto (MON), Potash (POT), and Agrium (AGU). The grain ETF (JJG) is another handy play. Though an unconventional commodity play, the impending shortage of water will make the energy crisis look like a cakewalk. You can participate in this most liquid of asset with the ETF?s (PHO) and (FIW).
Our train has moved over to a siding to permit a freight train to pass, as it has priority on the Amtrak system. Three Burlington Northern engines are heaving to pull over 100 black, brand new tank cars, each carrying 30,000 gallons of oil from the fracking fields in North Dakota. Regulatory delays for the construction of the Keystone pipeline prevent the oil from heading south any other way. There is another tank car train right behind it. No wonder Warren Buffett tap dances to work every day, as he owns the road. US Steel (X) also does the two-step, since they provide immense amounts of steel to build these massive cars.
The US energy boom sparked by fracking will be the biggest factor altering the American economic landscape for the next decade. It will flip us from a net energy importer to an exporter within three years, allowing a faster than expected reduction in military spending in the Middle East. Cheaper energy will bestow new found competitiveness on US companies that will enable them to claw back millions of jobs from China in dozens of industries. This will end our structural unemployment faster than demographic realities would otherwise permit.
Add the energies of oil (DIG), Cheniere Energy (LNG), Transocean (RIG), and Occidental Petroleum (OXY). Skip natural gas (UNG), because the discovery of a new 100-year supply from ?fracking? and horizontal drilling in shale formations is going to overhang this subsector for a very long time. However, major reforms are required in Washington before use of this molecule goes mainstream.
The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains. On a steep curve, we pass along an antiquated freight train of hopper cars filled with rocks. The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a train over on to its side.
In the snow filled canyons we sighted a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informed us that a rare bald eagle was flying along the left side of the train. We also saw countless abandoned gold mines and the broken down wooden trestles leading to them, so it is timely here to speak about precious metals.
Gold is not dead; it is just resting. I believe that the monetary expansion arguments to buy gold prompted by QE3 and QE4 are still valid. But because QE3 is entirely focused on the housing market through the Fed purchase of $40 billion a month of mortgage backed securities, the effect on the broader money supply is delayed. Nevertheless, I expect it to start kicking in sometime in 2013, bringing a dramatic increase in the monetary base as calculated by the Reserve Bank of St. Louis. Then a new high for the barbarous relic is in the cards.
Until then, the pain trade for gold holders is on. After all, who needs a safety umbrella in the middle of a bad news drought? The chip shot here is $1,500 on the downside, once the remaining hedge fund redemptions and other hot money are cleared out. If we have a real recession this year, $1,200 might be doable. Remember, the speculative frenzy is as great as it was in 1979, which saw the beginning of a 75% plunge in the yellow metal.
But the long-term bull case is still there. Obama has not suddenly become a paragon of fiscal restraint. Bernanke has not morphed into a tightwad. When I pull a dollar bill out of my wallet, it?s as limp as ever.
If you forgot to buy gold at $35, $300, or $800, another entry point is setting up for those who, so far, have missed the gravy train. The precious metals have to work off a severely overbought condition before we make substantial new highs. Remember, this is the asset class that takes the escalator up and the elevator down, and sometimes the window.
If the institutional world devotes just 5% of their assets to a weighting in gold, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation adjusted all-time high, or more. This is why emerging market central banks step in as large buyers every time we probe lower prices. For me, that pegs the range for 2013 at $1,500-$1,950 for 2013. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP).
I would also be using the next bout of weakness to pick up the high beta, more volatile precious metal, silver (SLV), which I think could hit $50 once more. Palladium (PALL) and platinum (PPLT), which have their own auto related long term fundamentals working on their behalf, would also be something to consider on a dip.
8) Real Estate (XHB)
The majestic snow covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write. My apologies to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada; it is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my immigrant forebears in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80.
As I am now crossing a desert, it is relevant that I discuss the real estate market. There is no doubt that there is a modest recovery underway. If you live in most of the country, we are talking about small, single digit gains. At least, it has stopped going down. If you live within commuting distance of Apple (AAPL), Google (GOOG), or Facebook (FB) headquarters in California, you are looking at multiple offers, bidding wars, and prices at all time highs.
However, I don?t believe we are in a new bull market for housing, especially, single-family homes. There are only three numbers you need to know in the housing market: there are 80 million baby boomers, 65 million Generation Xer?s who follow them, and 85 million in the generation after that, the Millennials.
The boomers have been desperately trying to unload dwellings to the Gen Xer?s since prices peaked in 2007. But there are not enough of them, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. If they have prospered, banks won?t lend to them. Brokers used to say that their market was all about ?location, location, location.? Now it is ?overhang, overhang, overhang.?
Now consider the coming changes that will affect this market. The home mortgage deduction is unlikely to survive any real attempt to balance the budget. And why should renters be subsidizing homeowners anyway? Nor is the government likely to spend billions keeping Fannie Mae and Freddie Mac alive, which now account for 95% of home mortgages.
That means the home loan market will be privatized, leading to mortgage rates 200 basis points higher than today. If this sounds extreme, look no further than the jumbo market for proof. It is already bereft of government subsidies, so loans of this size are priced at premiums. This also means that the fixed rate 30-year loan will disappear, as banks seek to offload duration risk to consumers. This happened long ago in the rest of the developed world.
What put in the bottom in this bear market this time was the appearance for the first time of hedge funds and institutional investors as buyers in large numbers. Up to 60% of the recent foreclosure sales in California have been snapped up by this group of specialty investors. These are the new private equity investors of our day. They see cheap housing as nothing more than a yield play, a way to cash in on Ben Bernanke?s munificence, by locking in 15-year money for 2.5%. The downside of their participation here is that they will probably be capping the upside in future real estate bull markets by selling to lock in capital gains.
There is a happy ending to this story. By 2022 the Millennials will start to kick in as the dominant buyers in the market. Some 85 million Millennials will be chasing the homes of only 65 Gen Xer?s, causing housing shortages and rising prices. This will happen in the context of a labor shortfall and rising standards of living. Remember too, that by then, the US will not have built any new houses in large numbers in 15 years. In fact, the 2020?s could bring a repeat of our last golden age, the 1950?s.
The best-case scenario for residential real estate is that it bounces along a bottom or gradually moves up for another decade, unless you live in Cupertino or Mountain View. Only buy a home if your wife is nagging you about living in that cardboard box under the freeway overpass. But expect to put up your first-born child as collateral, and bring in your entire extended family in as cosigners if you want to get a bank loan. Then pray that the price starts to go up in 10 years. Rent; don?t buy. There are better things to do with your money, like buy high yield, single digit PE US stocks during the next summer swim.
Would You Believe This is a Blue State?
We have pulled into the station at Truckee in the midst of a howling blizzard. My loyal staff have made the 20 mile treck from my beachfront estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champaign, which has been resting in a snowbank. I am spared from taking my last meal with Amtrak.
Well, that?s all for now. We?ve just passed the Pacific mothball fleet moored in the Sacramento River Delta and we?re crossing the Benicia Bridge. The pressure drop caused by an 8,000 foot descent from Donner Pass has crushed my water bottle. The Golden Gate and the soaring spire of the Transamerica building are just around the next bend across San Francisco Bay. A storm has just blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my Macbook Pro and iPhone 5 and pack up.
We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten mile night hike up Grizzly Peak and still get home in time to watch the season opener for Downton Abbey. I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. It is going to be a good year.
I?ll shoot you a trade alert whenever I see a window open on any of the trades above. Good trading in 2013!
https://www.madhedgefundtrader.com/wp-content/uploads/2013/01/Train.jpg313337Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-01-07 16:52:532013-01-07 16:52:532013 Annual Asset Class Review
Given the sudden uptick in trade alerts I have been sending out to my Global Trading Dispatch subscribers, some 60 since August 10, I have been inundated with requests for how to execute these. So I thought I?d take some time today to expound on the basics of order execution 101.
There are three basic ways to intelligently get an order into the market:
1) The No Brainer Average In. Buy half at the in receipt of the alert and half at the close. It?s that simple. If there is a tight spread and lots of volume, just go to the market. This is what a lot of institutions do, and is why you get the volume spikes in the market at the opening and the close every day.
If you are trying to get into an illiquid position, such as a far month option, the spreads can be quite wide, possibly as much as 10%. Going to the market can mean giving up a large chunk of your profit up front. So place limit orders in the middle of the spread, giving the market makers time to lay off risk in the underlying security, or in the futures. That will enable them to tighten up the spread and fill you order without taking you to the cleaners.
2) The Principal Method. If you are a large, high net-worth individual or institution, you can call you broker and ask him to make a market in any security. He will give you a bid and an offer wide enough to compensate for the risk he is taking, and you just lift the leg you want. Warning: if your broker consistently losses money trading with you, he will quit returning your phone calls.
3) The Discretionary Method. Find a broker you trust to execute on a best efforts basis at his discretion. He will want to grow your business and will do the best price he can. Expect to pay a higher commission for this service, as you should. But a good broker worth his salt will usually earn his keep and then some, so it is worthwhile. He has the news feeds right in front of him, has access to in-house and third-party research, like this newsletter, and is talking to clients and other traders all day long. So he should use this information to your advantage. Don?t expect his service to be price competitive with discount online execution services. You get what you pay for. Better not to be penny wise, but pound foolish. Caution: many brokers won?t take these orders unless they know you well, as they are afraid of getting sued.
4) Deep In-the-Money Option Spread Orders. I have been doing a lot of these lately, as they have a built-in short volatility and time decay element to them, and are great to have when market volatility declines and then stays flat, which has really been the case all year. This is the core trade that has taken me up double digits since April.
These involve buying and option on a stock or ETF 15% in-the money and simultaneously selling short and in-the-money call option only 5% in-the-money. Only enter these as a single order for the combined spread, not the individual legs. The difference between the bid and the offered side of the market on these is big enough to drive a Ferrari through. If you just go in and buy at market you will give up half of your potential profit going in.
Let me go through a real world example. The Apple December, 2012 $620-$650 call spread requires you to buy the $620 calls and sell short the $650 calls against them. The market for these is currently $18.60 bid - $19.50 offered. If you pay the gross $0.90 spread, it eats up 5% of you potential profit. But you put in a bid at 5 cents over the middle market price of $19.05 you will get done 90% of the time and cut this cost in half.
Keep in mind that the spread orders are all done by computers these days. This means you can get executions on the individual legs that can vary widely from second to second. As long as they add up to your limit bid that?s all that matters.
Be very careful of using limit stop losses these days. In the big flash crash, some unfortunate investors got filled down 50%, especially with ETF?s. Better to let your broker to use a ?pocket? stop loss where he will call you before executing.
If you get a trade alert from me and the security has already moved 10%, don?t chase it. This has been happening a lot lately, with the recent extreme volatility. Sometimes merely going for a refill on your coffee, taking out the trash, or reading the morning papers is enough to miss an opportunity in this market. I know because I have done it plenty of times myself. Keep your discipline. Wait for the price to come back to you, or wait for the next trade alert. There are plenty of fish in the sea, and it is just a matter of time before another juicy one swims by.
I can just imagine how Ben Bernanke?s announcement of QE3 went down at Mitt Romney?s campaign headquarters in Massachusetts last week. Doors slammed, heads pounded against walls, and hair was torn out.
You can almost hear the whoosh of resume?s flying down to conservative think tanks on Washington DC?s ?K? street as campaign workers scramble to find post-election employment. Dreams of that coveted White House office have now gone up in smoke. Campaign vice-chairman Tim Pawlenty has already decamped for better climes, leaving the rest to wallow in a sea of finger pointing, blame, and recriminations.
The hard truth is that QE3 has thrust a stake through the heart of the Republican campaign that is far more lethal than any Obama could have possibly delivered. Just as the markets were preparing for a swan dive into November, Ben has ridden to the rescue with essentially unlimited liquidity for all risk assets.
The move promises to close the markets at five-year highs right when voters enter the polling booths at levels more than double the 2009 bottom, leaving them in a decidedly upbeat, administration-friendly mood. And Romney gets all this ill treatment from a fellow Republican!
I have been watching the polls all year, and have noted an anomaly early on. While the race was tied in the national polls, Obama has always led in all nine battle ground states. Add the national and state polls together and you get a voter turnout of 110%. So who had the phantom 10%, Romney or Obama?
The recent deterioration of Romney?s position fueled by some poorly-timed comments about the entitled 47% in recent weeks has lifted the veil. The president is now overwhelmingly ahead, and could well surpass the 365 electoral votes that he captured in 2008, a healthy margin over the 270 he needs to win. Obama could lock it up by winning only Florida and any other single state. In the ultimate irony, it is highly unlikely that neither Romney nor running vice presidential running? mate, Paul Ryan win their home states of Massachusetts and Wisconsin.
This is why the Republican National Committee has been pulling money out of the Romney campaign and redirecting it into local races where the party has a better chance of success. Romney TV ads have suddenly ?gone dark? in several states. Having lost the presidency, the Republicans are fighting tooth and nail to hold on to the House.
At this point, there is only a 50/50 chance that they can pull this off. The winner will have no clear mandate, as the margin will likely only be a handful of seats and vanishingly small. Even Republican strategist and Pac master, Carl Rove, expects to lose a minimum of 25 seats, mostly from the Tea Party wing, reducing the chamber to a dead heat. And whoever wins, good luck herding cats.
Below, see the poll results in the battleground states compiled by the independent website Politico. These compare to the latest national polls that show Obama with a solid 5% lead. To analyze the data directly, please click here. The Intrade betting on an Obama win, where traders can make real cash wagers on the outcome, have rocketed to 73.3% to 26.7% in favor of the president in recent weeks (click here?for that link).
Of course, all of this is just speculation. The only poll that really counts is the one held on September 7. Then, we shall see. The bigger question remains of how to trade around all of this. For that answer, please stay tuned to this letter.
Obama Lead
Colorado-5%
Florida-5%
Iowa-8%
Nevada-9%
North Carolina-4%
Ohio-8%
Pennsylvania-12%
Virginia-4%
Wisconsin-12%
I received another one of those scratchy cell phone calls from my friend in the West Texas oil patch. You could almost feel the dust coming through the ether. He said that while Ben Bernanke his committed to buying $40 billion a month of mortgage-backed securities as part of QE3, he has not promised to buy a single barrel of oil. This is bad for oil.
That means Texas Tea has to take the full brunt of collapsing demand caused by economies in free-fall like Europe, China, and Japan. There are no bailouts here. On top of that, Saudi Arabia wants to whip some discipline into its fellow OPEC members.
Saudi Arabia does this by permitting its own production to surge, dropping prices, and inflicting pain on recalcitrant cartel members, especially Iran. Around $80 a barrel is thought to be a price they would be happy with, some $15 a barrel lower than today?s price.
Last week rumors were rife of a ?fat finger? trade that drew in high frequency traders and triggered an almost instantaneous $4 plunge in the price of oil. But notice how it has failed to bounce back. This generated chart sell alerts more than you can count.
The break of the 50-day moving average on the charts is thought to be particularly significant, reversing an uptrend that has been in place since June. Notice that the ?fat fingers? always seem to hit the ?SELL? button and are oblivious to the location of the ?BUY? button ? maybe they don?t have one.
On top of all this is the never ending threat of a Strategic Petroleum Reserve release by the administration that would cause prices to immediately gap down. It is safe to say that energy is not Obama?s favorite industry. He is essentially sailing ?Buy those $100 calls on oil at your peril, because I will render them worthless.? That is what he did with his jawboning campaign in the spring when crude threatened $107. ?Substantially tougher margin trading requirements for many commodities by the main exchanges quickly followed.
One factor that no one appears to be watching is the dramatic ramp up in Iraqi oil production. In recent years, we have gone from zero to 3 million barrels a day, and appear to be headed toward 5 million barrels a day by 2015. That is half of Saudi Arabia?s total annual output. Norway and Canada are also increasing production.
Back in the U.S., conservation is making a dent on the consumption side in a thousand different ways that are impossible to quantify in the aggregate. Every time someone trades in a gas guzzler for a hybrid or electric vehicle they are cutting U.S. consumption by 24 barrels of oil a year. Toyota will sell 2 million hybrids in the U.S. this year, about half in California. That works out to a total oil savings of 48 million barrels a year, 132,000? barrels a day, or 1.3% of our total imports.
Energy savings are going on every day in a myriad of ways, from better building design, to industrial recycling of heat, and conversion of light bulbs from incandescent to fluorescent. It has become a major cost-cutting issue for U.S. corporations. I just checked the specs on my new 80 inch 3D flat screen TV and it uses a quarter of the power of its cathode ray tube predecessor now headed towards the recycling center (notice how all the actors have suddenly aged 10 years). I have always said that this will be the big sleeper on the American energy front.
The final argument is that in the wake of QE3, there is a sudden death of ?RISK OFF? positions to trade against. Oil is almost one of the only ones out there. So an oil short will partially hedge out downside risk in the substantial ?RISK ON? positions we have built up in (GLD), (AAPL), and (GOOG).
The extra turbocharger on this trade is that the hedge fund community is still hugely long oil, betting an attack on Iran by Israel that never came. As we move into yearend, the pressure on them to dump their losers will be overwhelming. So I am quite happy to buy the United States Oil Fund (USO) December $32.50-$35 put spread at $1.07 or best.
The (USO) in particular is a great instrument to play from the short side because it has one of the worst tracking errors to the underlying in the entire (ETF) universe. (Only the natural gas ETF (UNG) is worse). Notice how it always goes down faster that it goes up. This is because of the enormous contango in the oil futures market, whereby far month futures trade at gigantic premiums to the front months. The (USO) has to take the hit on the rollovers; hence, its terrible track record.
I thanked my friend for his valuable eve insights on oil and then enquired about his view on the election. He didn?t understand all the noise about an Obama win in November. There in the Texas heartland he didn?t know a single person who was voting for the president. I warned him to prepare to be surprised about the November 7 outcome.
The trick is to watch the polls in the ten battleground states, where Obama is ahead by 5-8 points. The national polls have largely become irrelevant. Texas and California have cancelled out each other in the electoral college, so we might as well go out and get drunk on election day.
I asked him to put his money where his mouth was and bet him a case of Sierra Nevada Pale Ale. He answered that I was on, and countered with a case of Lone Star beer. Delivery would be made at Billy Bobs in Houston where the Texas sized 24 ounce chicken fried steaks droop over both sides of the plate. I told him I would collect after my upcoming Houston strategy luncheon on Wednesday, November 7.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/09/OIL2.jpg264399DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-09-25 01:27:502012-09-25 01:27:50Oil is Not Looking So Hot.
Those transfixed by gold blasting through the $1,750 level have been missing the real action in silver. The white metal has soared 34% to $34 since the beginning of the year, compared to only a 14% move for the barbaric relic, an outperformance of 2.4 to one. I have been a raging bull on the precious metals space since early August. Silver gives you additional diversification into the space with that extra bit of spice on the volatility side.
It is nothing less than owning gold with a turbocharger. Silver gives you a nice double play. Its qualities as a precious metal are giving it a major boost from the flight from the dollar, a certainty since Ben Bernanke proclaimed QE3.? It is also an industrial commodity, which unlike gold, is consumed, and therefore gives you a call on the recovering economy. Most of the silver mined in history has been burned, used in chemical processes, is sitting at the dump, or in people?s teeth in graveyards around the world.
If you don?t think this move is real, check out the shares of the silver producers. Coeur D Alene Mines (CDE) has rocketed by a gob smacking 92% in less than three months, while Silver Wheaton (SLW), and Hecla Mining (HL) have also done almost as well.
Until the shock value of the magnitude of this QE3 are fully digested by the market, the white metal should continue to appreciate. Should the ?RISK ON? move continue, $40 an ounce is on the table by early next year.
Players here should entertain calls or call spreads on the silver ETF (SLV). Those who like to live life dangerously can look at the triple leveraged long silver ETF (AGQ). If you are in the futures market, you trade a 5,000 ounce contract on the COMEX, which offers 8.8 times leverage on an initial maintenance requirement of $18,900.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-09-23 23:16:342012-09-23 23:16:34Don't Miss the Big Show in Silver.
Take a look at the 30 year chart of the S&P 500 below, and it?s clear that the market is approaching a critical juncture. With the closely watched index closing at 1,460 today, we are a mere 140 points from the iron ceiling that has been unassailable for the past 13 years.
The chart is a roll call of past disasters for American investors. The 2000 peak was the apex of the Dotcom Bubble. The 2006 high water market defined the end of the Housing Bubble. Since March 9, 2009, a scant 15 days after president Obama took office, the index has soared by a record breaking 119%.
Something tells me this won?t go down in history as the ?Great Obama Bull Market?. Maybe it will become known as the ?Quantitative Easing Bubble? or the ?Bernanke Bubble?. Only future armchair economic historians will know for sure.
The chart clearly defines the last lost decade for stocks, as well as the second missing decade we are currently in. If the US economy were growing at a nice 3% annual clip, I would say that we are taking a run at the 13 year high, will breakout to the upside, and quickly tack on 10%-20% from there.
Unfortunately, that is not the world we live in. In fact, we are growing at half that rate on a good day, and are facing major challenges ahead. Bernanke?s announcement of QE3 last week (although he never used that precise term), will give markets the juice to take a serious run at 1,600 in the coming six months. But then, I think the fundamentals will cause it to fail once again.
Even the best case scenario for the resolution of the fiscal cliff at year-end takes a minimum of 3.5% out of GDP growth next year. The economies of Europe, China, and Japan remain in free-fall. U.S. corporations may be about to deliver their first YOY zero earnings growth in three years.
All of this sets up a recession in 2013 that will be tough to avoid. This is why U.S. companies are loathe to hire, have crimped capital spending at half of their historic levels at $2 trillion, and are sitting on cash mountains. They are obviously running scared.
The shock of the magnitude of this QE3 will get digested and fully priced in by the markets by Q1, 2013, right around the time the (SPX) is peaking short of 1,600. Then, one of the greatest shorting opportunities of the century will set up. I hate to sound like a broken record, but ?Sell in May and go away? is likely to work for the fourth year in a row. Except this time, you might not want to come back until August of 2014.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/09/Bubble-Dude.jpg320320DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-09-21 02:36:112012-09-21 02:36:11The 30-Year View on What's Happening Today.
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