(FXY) Archives

Ben Gives Green Light to Bull Markets

I told you so!

Ben Bernanke?s decision not to taper $85 billion a month of Federal Reserve bond purchases came as a surprise to everyone, but me.

The reasons were legion. Blame Syria, blame the weak August nonfarm payroll, blame a near zero inflation rate, blame the coming debt ceiling crisis. The bottom line is that the numbers are just not there. The economy is growing at just a 2.5% annualized rate at best. A 7.3% unemployment rate isn?t exactly a security blanket. At this point in the economic cycle, nonfarm payrolls should be at 400,000, not well under 200,000. Ben is afraid that if he takes the training wheels off of the economy now, we?ll crash and burn.

The financial markets didn?t need to be told twice what to do. Stocks and commodities soared on the prospect at least six more weeks of maximum monetary stimulus. Bonds rocketed because there is now another $170 billion of government bond buying no one knew was coming. The ten year Treasury yield plunged from last week?s 3% high to only 2.70%.

Gold (GLD) and silver (SLV) finally had a good day because their yield disadvantage has been placed on a back burner. The barbarous relic screamed $55 to the upside. Oil (USO) was strong. Now that Syrian hostilities have been displaced by diplomatic initiatives, the focus is on renewed economic growth. If any of this sounds contradictory, you?d be right. Every trading market is seeing what it wants to see.

The dollar crashed against the euro (FXE), the Aussie (FXA), and the British pound (FXB), since an anticipated yield advantage for the greenback instantly vanished. The yen popped momentarily, but then gave up most of its gains because the fundamental arguments for it to further weaken are so overwhelming.

We did get some useful hints about the future. Although QE didn?t end today, it is unlikely to be still around in a year. The first actual rises in interest rates may not occur until the unemployment rate declines substantially below 6.5%. The Federal Funds rate is projected to be below 2% as far out as through 2016, far below the historical mean. Low interest rates are here to stay, taper or not.

The Fed?s move basically sets in stone my bullish scenario for stocks and other ?RISK ON? assets for the rest of 2013 (click here for My 2013 Stock Market Outlook?). A target for the S&P 500 of 1,780 looks good, and we might well see that figure print on the last trading day of the year.

It also makes the Mad Hedge Fund Trader?s model portfolio for the Trade Alert service look pretty clever. Right now, it is long US stocks, long the Australian dollar (FXA), and short the Japanese yen (FXY), (YCS). Did I mention that we are now up 44% on the year?

Ben?s September Surprise

September 19, 2013/by Mad Hedge Fund Trader

It?s All About Larry

Newsletter

When I first heard about Larry Summers decision to withdraw his name from consideration as the next Chairman of the Federal Reserve, I thought ?Whoa! ?RISK ON, here we come.? I knew immediately that global stock (SPY), bond (TLT), and commodity markets would rocket and the dollar would crash (FXA), except against the Japanese yen (FXY), (YCS). That?s what we got in spades at the Monday morning opening.

This has to be one of the greatest left-handed compliments of all time. Who knew Summers choice to remain in the private sector would add 20 points to the S&P 500 and slash 10 basis points off ten year Treasury yields? The markets are saying ?Thank you for staying away,? in the loudest possible voice. It reminds me of the huge pop in Microsoft (MSFT) stock we saw in the wake of CEO Steve Ballmer?s retirement announcement. Is Summers really that bad?

You have to wonder if the guy who got fired as the president of Harvard University for his cantankerousness was the ideal pick to build a consensus among the sitting Fed governors, a group already known for outsized egos. The financial markets were afraid that he would deep six Ben Bernanke?s quantitative easing policy because it might reignite the inflationary fires far down the road.

After all, it wasn?t his idea, and his public comments about the hyper expansionary monetary policy were neutral at best. ?Not invented here? would have been a great reason to end the stimulus once the new governor takes up his post in January. This is why I have been predicting that a Summers pick by Obama would have chopped 10% off the Dow in a matter of days.

My long time friend, Federal Reserve co-chairperson, Janet Yellen, is now the no brainer winner here. For a start, her co-chair position makes it an easy transition to the top job that will be welcomed by the markets. She is widely loved and respected at the UC Berkeley Haas School of Business, where she taught for many years, and where I also have been known to address the occasional class.

She is already viewed as an ultra dove who will keep QE initiative alive and well. Fed governors tend to be more representative of their local economy than national trends. Texas governors reflect what is happening in the oil industry. As the most populous state in the nation, California governors are a mirror image of what is going on in the housing market, the Golden State?s largest industry. Education and technology are not far behind.

That is great news for the rest of us. A housing priority means keeping interest rates lower for longer. It will not only help the real estate market, but all ?RISK ON? assets as well. It makes our jobs as traders easy. You just close your eyes and BUY. That?s why stocks are inches short of all time highs as I write this.

I have been ramping up risk in my model-trading portfolio all month, as have most other hedge fund managers. But I was doing so for different reasons. I did not believe Bernanke would taper this month, as the economic data are lukewarm, at best. I thought a taper no show would send markets soaring, and was positioned accordingly. It turns out that a Summers no show has the same effect. It?s all a classic example of ?The harder I work, the luckier I get.?

Which begs us to ask the question, ?Is Yellen really that good?? the permabulls shouldn?t get too deep over their heads here. The things that Janet looks at to track the health of business activity are starting to light up. Housing in San Francisco is up a blistering 32% YOY. And Silicon Valley is probably the only part of the country that is seeing real wage inflation. There are rampant bidding wars here for competent computer programmers and engineers. Soaring asset and wage prices are the traditional reason for the Fed to throttle back and raise interest rates. Therefore, the ultra easy monetary policy the markets expect from Yellen may, like Larry Summers, be dead on arrival.

Obama also has an opportunity here to address a frequent complaint from his base, that he hasn?t been appointing enough women in senior positions in his administration. Here is a great one all tied up with a bow and ready to go.

Janet Yellen grew up in the Bay Ridge section of Brooklyn, New York, from which the Italian branch of my OWN family originates. She graduated summa cum laude from Brown University (I thought they didn?t give grades?), and went on to get a PhD from Yale, where she rubbed shoulders with Hillary Clinton.

She started work as an economist at the Federal Reserve in 1977. Her first political appointment came in 1997 when Bill Clinton named her to the Council of Economic Advisors. From 2004-2010 she was president of the Federal Reserve Bank of San Francisco, where she was a voting member of the Federal Open Market Committee. In 2010, Obama made her vice chairperson of the Federal Reserve.

Oh, and for good measure, her husband, George Akerlof, has a Nobel Prize in economics. The kitchen talk must be fascinating.

A woman in charge of the national purse strings? Yikes! There goes my bowling allowance!

Next Up for Bernanke?s Job

September 17, 2013/by Mad Hedge Fund Trader

Get Ready for the Next Golden Age

Diary, Newsletter

I believe that the global economy is setting up for a new golden age reminiscent of the one the United States enjoyed during the 1950?s, and which I still remember fondly. This is not some pie in the sky prediction. It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.

What I call ?intergenerational arbitrage? will be the principal impetus. The main reason that we are now enduring two ?lost decades? is that 80 million baby boomers are retiring to be followed by only 65 million ?Gen Xer?s?. When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and ?RISK ON? assets like equities, and more buyers of assisted living facilities, health care, and ?RISK OFF? assets like bonds.

The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.

Fast forward ten years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home. That is when you have 65 million Gen Xer?s being chased by 85 million of the ?millennial? generation trying to buy their assets.

By then we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes. The middle class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990?s.

The stock market rockets in this scenario. Share prices may rise very gradually for the rest of the teens as long as tepid 2% growth persists. A 5% annual gain takes the Dow to 20,000 by 2020. After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 80,000 by 2030. Emerging stock markets (EEM) with much higher growth rates do far better.

This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well. The 100-year supply of natural gas (UNG) we have recently discovered through the new ?fracking? technology will finally make it to end users, replacing coal (KOL) and oil (USO). Fracking applied to oilfields is also unlocking vast new supplies.

Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC?s share of global reserves is collapsing. This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.? Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years. Total gasoline consumption is now at a five year low.

Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation. I now have an all-electric garage, with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. The net result of all of this is lower energy prices for everyone.

It will also flip the US from a net importer to an exporter of energy, with hugely positive implications for America?s balance of payments. Eliminating our largest import and adding an important export is very dollar bullish for the long term. That sets up a multiyear short for the world?s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.

Accelerating technology will bring another continuing positive. Of course, it?s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos. But at the enterprise level this is enabling speedy improvements in productivity that is filtering down to every business in the US, lower costs everywhere.

This is why corporate earnings have been outperforming the economy as a whole by a large margin. Profit margins are at an all time high. Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development. When the winners emerge they will have a big cross-leveraged effect on economy.

New health care breakthroughs will make serious disease a thing of the past, which are also being spearheaded in the San Francisco Bay area. This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented. It raised $3 billion through a bond issue to fund its own research, even though it couldn?t afford it.

I tell my kids they will never be afflicted by my maladies. When they get cancer in 40 years they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday. What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver?s seat on these innovations? The USA.

There is a political element to the new Golden Age as well. Gridlock in Washington can?t last forever. Eventually, one side or another will prevail with a clear majority. Conservatives may grind their teeth, but if Hillary Clinton wins in 2016, the Democrats will control the White House until 2025. Right now, she is leading by a 60% margin with Republican women.

This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for. That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don?t need the $30,156 annual supplement. Nor do I.

The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cuts defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.

I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up. A Pax Americana would ensue. That means China will have to defend its own oil supply, instead of relying on us to do it for them. That?s why they have recently bought a second used aircraft carrier.

Medicare also needs to be reformed. How is it that the world?s most efficient economy has the least efficient health care system, with the worst outcomes? This is going to be a decade long workout and I can?t guess how it will end. Raise the growth rate and trim back the government?s participation in the credit markets, and you make the numerous miracles above more likely.

The national debt comes under control, and we don?t end up like Greece. The long awaited Treasury bond (TLT) crash never happens. Ben Bernanke has already told us as much by indicating that the Federal Reserve may never unwind its massive $3.5 trillion in bond holdings.

Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won?t kick in for another decade. But some individual industries and companies will start to discount this rosy scenario now. Perhaps this is what the nonstop rally in stocks since November has been trying to tell us.

Dow Average 1970-2012

Another American Golden Age is Coming

August 30, 2013/by Mad Hedge Fund Trader

Ambush in Australia

Diary, Newsletter

For a lifetime central bank watcher, like myself, this was one for the record books.

Reserve Bank of Australia, Glenn Stevens, said last week that he welcomed a weak Australia dollar and that it probably had further to fall. To put gasoline on the flames, he added that there was room for the RBA to further lower interest rates, assuring that more weakness in the Aussie was assured.

The Australian dollar didn?t have to be told twice what to do. All bids for the troubled currency immediately vaporized, and it gapped down two full cents to the 90-cent level, a three-year low. When the Aussie broke a crucial support level at parity in the spring, I predicted that 80 cents was in the cards.

That forecast, bemoaned and lambasted at the time, is now looking increasingly likely. This is why I have been warning my Australian friends all year to pay for their summer vacations in advance while their currency was still dear.

What is far more important here is what the RBA moves means for the global economy. It certainly raises the stakes in the international race to the bottom, where every country tries to devalue their way to prosperity. During the Great Depression, this was known at the ?beggar thy neighbor? policy, a term I?m sure you have all heard a lot about. A cheaper currency means your exports now cost less, so customers shift business from your neighbors to you, boosting your economy.

In recent years, the US was winning that game. Then Japan took over the lead in November, with a yen (FXY), (YCS) that has fallen 25% since. Now, Australia has grabbed first place, with a 15% plunge since March. Who is the big loser in all this? Europe, where even the guy who runs the beach mini mart in Mykonos tells me his economy sucks because his currency (FXE) is grotesquely overvalued.

The sad thing is, I don?t think a weaker Aussie will help the Land Down Under very much, if at all. Their problem is not a price one for their commodities, but a demand one. Everything Australia sells is a commodity where prices are set by a global marketplace.

The slowing of China?s economy is the big driver here, as orders for Australia?s exports of iron ore, copper, and coal fall precipitously. Grains (DBA) sales are hurt by America?s bumper crop, which is killing prices. Fukushima demolished uranium exports (NLR). Australian offshore natural gas (UNG), at $16/btu, doesn?t stack up very well against US fracking gas at $3.50. Gold (GLD) is not exactly flying off the shelf either, with prices at one point this year down 33% from the highs.

There is another big factor, which no one but myself seems to me noticing. The slowdown in Chinese commodity demand is not a temporary affair, it is a permanent one. The government there is making every effort to shift the economy away from commodity consuming, metal bashing exports, to a more services oriented one.

This more suitably matches the Middle Kingdom?s own resource base, of which there are few, towards a higher rung in its own development. You will probably start to hear about this from other strategists, gurus, and research houses in about a year. It is momentous in its implications.

The RBA?s move caught many traders off guard, as they had already begun scaling into long Australian dollar positions, looking for an autumn rally. Mad Day Trader, Jim Parker, knew better, and was advising Aussie shorts up to the 94 cent level.

As for me, I?ll be selling every decent Aussie rally for the foreseeable future, until global commodity prices finally bottom, or Australia changes central bank governors, whichever happens first. I bet a lot of Australians right now prefer the latter over the former.

The Thunder Down Under is Fading

August 9, 2013/by Mad Hedge Fund Trader

The Yen Carry Trade Blow Up

Newsletter

When I staggered downstairs at 11:00 PM to check the close for the Tokyo stock market, my eyes just about popped out of my head. Yikes! Down 6.3%! The yen was up another 2% to ?94 against the US dollar as well!! It looked like the world was in for another round of ?RISK OFF? with a turbocharger. Fasten your seatbelts, and pack an extra pair of shorts.

So I called an old friend in Japan who always seems to know what is going on whenever the wheels fall off there. Ed Merner is the CEO of the Atlantis Japan Growth Fund (LSE-AJG), who has long been rated the number one stock picker in the Land of the Rising Sun. Ed?s fund, which trades on the London Stock Exchange, was, at one point, up a gob smacking 53% this year without a stitch of leverage.

When the ink was barely dry on the US Japan peace treaty in 1950, Ed?s father uprooted his family from the rural High Sierra hamlet of Truckee, California, and moved them to Tokyo. That gave him a front row seat to the economic miracle that followed in the fifties and sixties.

Ed started managing money just a few years before me, in 1970. He toiled away as a portfolio manager at Schroeder?s & Co. in Tokyo for 25 years and then launched his own firm in 1995. Ed, who is a fascinating individual and a genuine nice guy, is the man I always turn to for my long-term view on Japan. Suffice it to say, Ed knows which end of a piece of sushi to hold upward, and is said to be able to snatch a fly midair with a pair of chopsticks. His Japanese is flawless, and he is now regarded as a local celebrity.

Ed says that the ?Rebirth of Japan? story is anything but over, and in fact, is just getting started. He thinks that the Nikkei index could soar from the current ?12,445 to above the 1989 all time high of ?39,000 in years to come. What we are seeing now is a long overdue rest for the world?s best performing major stock market. Bank of Japan mouthing?s of empty platitudes, rather than concrete action is what triggered the current rout.

Much of the money that went into Japan this year was of the hot, algorithm driven variety. You saw this in the dominance of the index names in trading, like Sony (SNE), Toyota (TM), and Honda Motors (HMC). Individual stock picking almost ceased to exist as an investment strategy. When the same hedge funds all tried to unwind their Japanese stock longs and yen shorts at the same time, you got the predictable flash fire in the movie theater. Margin calls became the order of the day.

As the index money leaves in this correction, it will be replaced by more traditional mutual fund and individual investors, who have a more stable orientation. Stock selection will become more fundamentally driven. That?s when Japan transitions from the flavor of the day to a serious core investment.

Now is about the time you should expect that to happen. Japan?s upper House of Councilors election will take place on July 21, and Prime Minister Abe?s ruling Liberal Democratic Party will win by a landslide. After that, you can expand Abe?s plans for an overdue major restructuring of the economy to mature from idle speculation to specific proposals. That is what the market wants to hear. Until then, he is loath to ruffle political feathers. He is going to have to break a lot of eggs to make this omelet.

On the table in his ?Third Arrow? plan are deregulation of virtually all financial markets, modernization of the health care system, immigration reform to open the way for more foreign workers, and rationalization of a bloated government bureaucracy. International trade will get streamlined and capital investment incentivized. More infrastructure spending will be aimed at maintenance and repair, so there will be no more ?bridges to nowhere.?

Oh, and he wants to enable the national pension fund system to step up its purchases of Japanese stocks. Abe wants to compress all of the deregulation that the US has enacted in the past 30 years into the next three.

The truly encouraging thing here is that Abe?s early actions are already bearing fruit. ?Arrows? 1 and 2 put the country on track to double its money supply in two years and paved the way for a staggering $150 billion in new public works spending. The crash in the yen this prompted is causing corporate earnings to go through the roof. Those results will be reported in the fall.

Then, the best company performance in two decades and a national reorganization plan on the scale of Roosevelt?s New Deal will be the impetus for the next leg up in the Great Japanese Bull Market of the 2010?s. That is why I banged out Trade Alerts on Wednesday to buy Japanese stocks through the Wisdom Tree Japan Hedge Equity ETF (DXJ) and sell short the yen through the Currency Shares Japan Yen Trust ETF (FXY) and the Proshares Ultra Short Yen ETF (YCS).

Atlantis Japan Growth Fund

Use the Dip to Buy Japan

June 14, 2013/by Mad Hedge Fund Trader

Learning in the School of Hard Knocks

Newsletter

I always believe that any loss you don?t learn from is a loss wasted. One reason I know so much is because I have suffered a lot of losses, mostly at my own expense when I was young and stupid, well before the Trade Alert Service started.

So what did we learn from our most recent ill-advised attempt to profit from selling short the Japanese yen against the US dollar? Let me count the ways.

1) When the world?s largest short-term positions all key off of the identical stop loss points, watch out! The 15 minute 3% move we saw today was one of the sharpest in the 40-year history of the free floating foreign exchange markets. This is the bitter fruit of a crowded trade.

2) No one ever got fired for taking a profit. At one point, we had a 1.40 profit on this trade, leaving only 40 basis points left to expiration, instead of a -1.95% loss.

3) When there is nothing to do, don?t do anything.

4) Watch those stop losses. I think I?ll include underlying stop loss points in my Trade Alerts from here on out. It took an 8% move in two weeks to take us out of this one, which is unbelievable for the foreign exchange market. I thought a 5% safety margin was more than enough room to take us into expiration, but I was wrong. These days, the unbelievable happens on a regular basis, both on the upside and the downside.

5) Limiting position sizes to 10% of your total portfolio is a total winner. That?s why I?m laughing now, instead of crying, or looking for a new job on Craig?s List. At a certain point, leverage quits being investment and become reckless gambling.

6) Next May, sell and go away!

7) Never complain that I am not sending out enough Trade Alerts. I can understand why you want as many as you can get, as 90% have been profitable this year. Doing nothing doesn?t mean I have suddenly become lazy in my old age, am out spending my millions, or am developing dementia. It means the current risk levels in the markets are extremely elevated, as I warned you all many times, that the risk/reward ratio totally sucks, and that you are better off making room in your sock drawer for your cash than placing it in the market. ?Nothing to do? really does mean ?nothing to do.?

The next time you are in a hurry to get another Trade Alert, take a look at the profit and loss in this yen trade. Read it and weep.

June 10, 2013/by Mad Hedge Fund Trader

SkyBridge Capital?s Anthony Scaramucci on Hedge Fund Radio

Diary, Newsletter

Markets are overbought now, especially given that the US economy is only growing at a subpar 2% annual rate. But the S&P 500 (SPY) will close higher by yearend. Despite the fact that 30-year Treasury prices (TLT) are near all time highs, there are still huge opportunities in the fixed income space. And both the Japanese yen (FXY) (YCS) and the Tokyo stock market (EWJ) (DXJ) have more to run.

These were a few choice investment nuggets I gleaned from my wide-ranging interview with my friend, Anthony Scaramucci. Anthony is the founder and managing partner of SkyBridge Capital, a leading fund of funds for alternative investments. To learn more about SkyBridge Capital, please go to their website at http://www.skybridgecapital.com/.

After getting a law degree from Harvard, he started his investment career at Goldman Sachs in 1989, where he spent 7 years in the wealth management division. He went on to start his own money management firm, which he sold to Neuberger Berman in 2001. When Lehman Brothers bought Neuberger Berman in 2003, Scaramucci spent a short stint there as managing director of its Investment Management Division.

Anthony is the author of two books: The Little Book of Hedge Funds: What You Need to Know About Hedge Funds but the Managers Won?t Tell You and Goodbye Gordon Gekko: How to Find Your Fortune Without Losing Your Soul.

Scaramucci is focusing his heaviest weighting in fixed income strategies that benefit from improving credit ratings in the US real estate market and low prepayment rates. This brilliant, reasonably well risk adjusted strategy is earning him 11%-13% annual returns, or 5-7 times the cash flow of ten-year Treasury bonds.

Anthony has been consistently negative on gold, which makes him look like a genius for the past two years. He has a small weighting in emerging markets, which offer higher risk and volatility, but potentially greater returns. His picks there include the Southeast Asian nations of Indonesia (IDX), Singapore (EWS), and Malaysia (EWM).

He thinks Apple (AAPL) is very cheap, but is facing an innovation headwind. Still, investors in Steve Jobs? creation should do well over the long term.

SkyBridge Capital uses 28 sub managers to generate outsized market returns. He came out ahead by 20% in 2012 and is up 9% so far this year. It has won awards for the best fund of funds with over $1 billion in assets for the last three years in a row. The firm now has over $7.7 billion in assets under management or advisement.

Anthony?s team of professionals does all the spadework in finding great managers, doing the due diligence, and cross hedging exposures. He charges 1.50% management fee, but last year earned back 77 basis points for his clients in manager discounts. So on a net basis the fees are really quite reasonable.

New investors can open an account for as little as $50,000. This is a big deal because some of the best managers have minimums as high as $10-$15 million. It is the only way the little guy can get access to the best of the best. Customers must be accredited investors with at least $200,000 in annual income and a net worth of over $1 million.

Anthony comes across as polished and erudite, yet cautious. He clearly spends a lot of time thinking about how to invest other people?s money.

As if Scaramucci didn?t have enough to do, he devotes much energy to organizing the SkyBridge Alternatives Conferences, the annual Woodstock for the high and the mighty of the hedge fund industry. The most recent event in Las Vegas presented heavyweight hedge fund legends Paulson & Co.?s John Paulson, Third Point?s Daniel Loeb, and Omega?s Leon Cooperman (click here for my coverage of this love fest).

I will be attending the next SkyBridge Alternatives Conference in Singapore during September 24-27, 2013 (click the link http://www.saltconference.com/saltasia2013/). Former Treasury secretary, Tim Geithner, and the last European Central Bank president, Jean-Claude Trichet, will be the keynote speakers.

To learn the precise details of the SkyBridge high return strategy, please follow the instructions for downloading the full interview below. There you can also get his list of the best US stocks to buy in the current environment.

Just go to the AUDIO menu tab and click on the pull down menu for RADIO SHOW (click here for the link at http://madhedgefundradio.com/radio-show/). Click on the green BUY NOW button and complete the order form. A blue link will appear telling you to ?click here to proceed?. Then click on the small blue box with the question mark inside to download. Hit the PLAY arrow to listen. You can pause, fast forward, or rewind at any time. Given the quality of the information you will obtain, the $4.95 price is a bargain.

To buy The Little Book of Hedge Funds at a discounted Amazon price, please click here. To buy Goodbye Gordon Gekko, please click here.

SkyBridge Capital?s Anthony Scaramucci on Hedge Fund Radio

May 28, 2013/by Mad Hedge Fund Trader

Japan is Just Getting Started

Diary, Newsletter

Constantly chained to my MacBook Pro at home writing this letter, it is not often that I am in the room when a major market-moving event occurs. That is what happened at the SkyBridge Alternatives Asset Conference (SALT) in Las Vegas on Thursday (click here for the link at http://www.saltconference.com/).

I was listening to one of the legendary titans of the hedge fund industry make the case for Japan. According to the rules of engagement, I can?t tell you who he was, or I would have to kill you. I don?t want to do that because if you?re dead, you might not renew your subscription, and that would be bad for business. But I can pass on the gist of his arguments, which are already well known to the readers of this letter.

He said Japanese companies have tremendous leverage to a falling yen. The Bank of Japan was doing what was necessary to move the yen down from ?100 to ?110 to the dollar. The game changer will come when the government announces its restructuring plan in a few months.

Therefore, Japan?s TOPIX Index at a 13-14X earnings multiple looks cheap. That?s why his fund has been running a major long Japanese stock/short yen position since last year. If he is right, a Nikkei average of 20,000 is in the cards, up another 36% from last night?s close.

I was watching the Currency Shares Japanese Yen Trust (FXY) tick on my iPhone 5s as he spoke. It immediately gapped down 100 basis points. I surveyed the room and saw many heads bowed, fingers furiously typing the news to trading desks, or entering their own ?SELL? orders into online trading platforms.

That smashed the cash market through major resistance at the ?100 barrier, a new four year low. If I had been as digitally endowed, I would have sent out my own Trade Alert to dump the yen. But I?m not. By the Friday opening the next day, (FXY) had given up an additional 100 basis points.

I had been holding back on selling the yen in recent weeks for several reasons. First, we have covered a lot of ground very quickly, the beleaguered Japanese currency plunging 25% in just six months. That is prompting Japanese owners of the $2 trillion in direct and indirect foreign assets to realize some of the recent $500 billion in paper gains. That creates yen buying and downward pressure on the dollar.

Finally, my own trading gains have been so enormous this year, up some 35%, that I am becoming less inclined to stick my neck out and take inordinate risks. Trading has become more of a cherry picking game.

However, the yen?s move through ?100 has been so violent, and on such big volume, that it looks like the real deal. That means the old ?100 upside resistance level now becomes support. That equates to $101.00 in the (FXY). So my (FXY) June, 2013 $100-$103 in-the-money bear put spread actually looks pretty cautious.

This lines up nicely with my own long term downside target for the yen of ?150. This may sound like one of those outrageous predictions one finds so often on the Internet. For me it is not such a stretch. When I first arrived in Tokyo in 1974 and Nixon was taking the US off the gold standard, the yen had just devalued from the old Dodge Line of ?360 to ?305. The move I am predicting represents a give back of only a quarter of the gains since then.

If I am right, it would make my hedge fund friend?s upside predictions for the Nikkei look downright conservative. It would take the ProShares Ultra Short Yen ETF (YCS) from $68 to over $110. It would also boost the Wisdom Tree Japan Hedge Equity ETF (DXJ) from $49.67 to as high as $100.

I indicated to readers at the beginning of the year that this could be the trade that keeps on giving, like having a rich uncle. It looks like, so far, I am right.

Looks Like We?re Just Getting Started

May 13, 2013/by Mad Hedge Fund Trader

New BOJ Governor Crushes the Yen

Newsletter

Wow! What a day! In perhaps the most dramatic policy move by any central bank, anywhere in history, the Bank of Japan pulled out all the stops to stimulate its moribund, demographically challenged economy. Japan is now lapping its competitors in Europe and the US in the international race to the bottom.

The markets certainly got the memo. Japan?s beleaguered currency collapsed nearly 4% over night, one of the biggest single day moves ever. The ten-year Japanese government bond yield plummeted to a breathtaking 44 basis points, another record low, making our own Treasuries look positively high yield. The Japanese stock market rocketed.

I was busier than the proverbial one-handed paperhanger. There?s nothing like waking up early in the morning and finding that your largest short position has just enjoyed one of the sharpest falls on record. It doesn?t get any better than that in hedge fund land.

So I shipped out the Trade Alerts as fast as I could write them, burning up the national broadband covering those shorts. I also took profits on my short in United Continental Group (UAL). I then turned around and plowed some of my profits back into an increased short position on the S&P 500 Index.

The actions on the new BOJ governor, Haruhiko Kuroda, who only moved into his office on Monday, were nothing less than mind blowing. He plans to double the money supply in two years. He broadened the range of instruments it plans to buy to cover everything from 20 year government bonds to equity ETF?s. No time wasted getting one?s feet under the desk here!

Quantitative easing will be increased to $82 billion a month, nearly the same as Ben Bernanke?s munificent efforts. Keep in mind that Japan?s economy is only one third that of the US. It is the most inflationary and currency depreciating set of policies since Indonesia?s hyperinflation of the 1960?s. All of this, just to get the country?s inflation rate back up to 2% after decades of negative real numbers.

While the yen made it back up to ?95.6 this morning, we are clearly targeting ?100 in coming months. That has the ETF (FXY) falling from today?s $101.60 to $96, and the leverage short ETF (YCS) rising from $61.4 to $67. Use every two-point rally to slam the daylights out of the yen on the short side. That has been my advice for the past six months, and I?m going to stick with it as long as it is working.

Get to 100, and the international community will rise up against Japan?s obvious efforts to grow its economy at their expense. Korean companies are getting slaughtered by the six-month, 20% devaluation of the yen against the Won, rendering their exports prices uncompetitive. China is also pretty unhappy, and could well step up their military posture as a way of expressing its displeasure. Then, watch the fur fly!

I See You a Trillion and Raise You Two Trillion

April 5, 2013/by Mad Hedge Fund Trader

Get Ready for the Next Golden Age

Diary, Newsletter

I believe that the global economy is setting up for a new golden age reminiscent of the one the United States enjoyed during the 1950?s, and which I still remember fondly. This is not some pie in the sky prediction. It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.

What I call ?intergenerational arbitrage? will be the principal impetus. The main reason that we are now enduring two ?lost decades? is that 80 million baby boomers are retiring to be followed by only 65 million ?Gen Xer?s?. When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and ?RISK ON? assets like equities, and more buyers of assisted living facilities, health care, and ?RISK OFF? assets like bonds. The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.

Fast forward ten years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home. That is when you have 65 million Gen Xer?s being chased by 85 million of the ?millennial? generation trying to buy their assets.

By then we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes. The middle class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990?s.

The stock market rockets in this scenario. Share prices may rise gradually for the rest of the teens as long as growth stagnates. A 5% annual gain takes the Dow to 20,000 by 2020. After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 80,000 by 2030. Emerging stock markets (EEM) with much higher growth rates do far better.

This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well. The 100-year supply of natural gas (UNG) we have recently discovered through the new ?fracking? technology will finally make it to end users, replacing coal (KOL) and oil (USO). Fracking applied to oilfields is also unlocking vast new supplies. That?s why oil is now $70 a barrel in North Dakota versus $95 in Oklahoma 1,000 miles to the South.

Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC?s share of global reserves is collapsing. This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.? Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years. Total gasoline consumption is now at a five year low.

Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation. I now have an all electric garage, with a Nissan Leaf (NSANY) for local errands and a Tesla S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. The net result of all of this is lower energy prices for everyone.

It will also flip the US from a net importer to an exporter of energy, with hugely positive implications for America?s balance of payments. Eliminating our largest import and adding an important export is very dollar bullish for the long term. That sets up a multiyear short for the world?s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.

Accelerating technology will bring another continuing positive. Of course, it?s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos. But at the enterprise level this is enabling speedy improvements in productivity that is filtering down to every business in the US.

This is why corporate earnings have been outperforming the economy as a whole by a large margin. Profit margins are at an all time high. Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development. When the winners emerge they will have a big cross-leveraged effect on economy.

New health care breakthroughs will make serious disease a thing of the past, which are also being spearheaded in the San Francisco Bay area. This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented. It raised $3 billion through a bond issue to fund its own research, even though it couldn?t afford it.

I tell my kids they will never be afflicted by my maladies. When they get cancer in 40 years they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday. What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver?s seat on these innovations? The USA.

There is a political element to the new Golden Age as well. Gridlock in Washington can?t last forever. Eventually, one side or another will prevail with a clear majority. This will allow them to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for. That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don?t need the $30,156 annual supplement. Nor do I.

The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cuts defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.

I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up. A Pax Americana would ensue. That means China will have to defend its own oil supply, instead of relying on us to do it for them. That?s why they?re in the market for a second used aircraft carrier.

Medicare also needs to be reformed. How is it that the world?s most efficient economy has the least efficient health care system? This is going to be a decade long workout and I can?t guess how it will end. Raise the growth rate and trim back the government?s participation in the credit markets, and you make the numerous miracles above more likely.

The national debt comes under control, and we don?t end up like Greece. The long awaited Treasury bond (TLT) crash never happens. Ben Bernanke has already told us as much by indicating that the Federal Reserve may never unwind its massive $3.5 trillion in bond holdings.

Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won?t kick in for another decade. But some individual industries and companies will start to discount this rosy scenario now. Perhaps this is what the nonstop rally in stocks since November has been trying to tell us.

Dow Average 1970-2012

Is Another American Golden Age Coming?

April 1, 2013/by Mad Hedge Fund Trader

Posts

Ben?s September Surprise

Next Up for Bernanke?s Job

Dow Average 1970-2012

Another American Golden Age is Coming

The Thunder Down Under is Fading

Atlantis Japan Growth Fund

Use the Dip to Buy Japan

SkyBridge Capital?s Anthony Scaramucci on Hedge Fund Radio

Looks Like We?re Just Getting Started

I See You a Trillion and Raise You Two Trillion

Dow Average 1970-2012

Is Another American Golden Age Coming?

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