($SPX) - Page 11 - Mad Hedge Fund Trader

Bring Back the Smoke Filled Rooms

In days of old, when congressional impasses presented themselves, the Speaker of the House, rosy-cheeked Tip O?Neil, would meet his counterpart in the Senate for a night of poker. Several bottles of Scotch later, a deal would get struck, and the two would be photographed together shaking hands the next morning, talking about the good of the country. The process moved on.

That doesn?t happen anymore. Speaker John Boehner is new at the job, and he is learning through trial and error, mostly the latter. He is up against a world-class constitutional law professor. I can?t imagine Boehner playing cards with Harry Reid, Obama, or anyone.

Even if he does come to an agreement, it is unlikely that he can make it stick by getting his own party to follow him. Many of the new junior house members are from the Tea Party, whose understanding of economics, financial markets, and the law making process is shaky at best. In another six months they have to start campaigning again, going to their supporters and financial backers with a list of what they have achieved. It is a very short list.

If Tip O?Neal faced recalcitrant members of his own party, he would threaten a cut off in funding of all pork barrel projects in their district, banish them to the least popular committees, and kill any bill they brought to the floor. But at least if Tip cut a deal, you knew he could deliver the votes. Today, rebellious republicans won?t even take a call from Boehner, who view him with almost as much hostility as they do Obama.

What we are seeing here is sausage making in public, in all its odiferous ugliness. It is negotiation out in the open, never a good idea, especially when both sides believe the other is doing so in bad faith.

All of this leads us to bemoan the passing of the Reagan republicans, who you could work with and get a few laughs along the way. It also means that the volatility that I promised you will be arriving by the boatload in coming months. Watch this space.

August 14, 2013/by Mad Hedge Fund Trader

End of the Commodity Super Cycle

Newsletter

Traders have been watching in complete awe the rapid decent of the price of gold, which is emerging as the most despised asset class of 2013. But it is becoming increasingly apparent that the collapse of prices for the barbarous relic is part of a much larger, longer-term macro trend.

It isn?t just the yellow metal that is hurting. So are the rest of the precious and semi precious metals (SLV), (PPLT), (PALL), base metals (CU), (BHP), oil (USO), and food (CORN), (WEAT), (SOYB), (DBA).

Many senior hedge fund managers are now implementing strategies assuming that the commodity super cycle, which ran like a horse with the bit between its teeth for ten years, is over, done, and kaput. Former George Soros partner, hedge fund legend Paul Tudor Jones, has been leading the intellectual charge since last year for this concept. Many major funds have joined him.

Launching at the end of 2001, when gold, silver, copper, iron ore, and other base metals, hit bottom after a 21 year bear market, it is looking like the sector reached a multidecade peak in 2011.

Commodities have long been a leading source of profits for investors of every persuasion. During the 1970?s, when President Richard Nixon took the US off of the gold standard and inflation soared into double digits, commodities were everybody?s best friend. Then, Federal Reserve governor, Paul Volker, killed them off en masse by raising the federal funds rate up to a nosebleed 18.5%.

Commodities died a long slow, and painful death. I joined Morgan Stanley about that time with the mandate to build an international equities business from scratch. In those days, the most commonly traded foreign securities were gold stocks. For years, I watched long-suffering clients buy every dip until they no longer ceased to exist.

The managing director responsible for covering the copper industry was steadily moved to ever smaller offices, first near the elevators, then the men?s room, and finally out of the building completely. He retired early when the industry consolidated into just two companies, and there was no one left to cover. It was heartbreaking to watch. Warning: we could be in for a repeat.

After two decades of downsizing, rationalization, and bankruptcies, the supply of most commodities shrank to a shadow of its former self by 2000. Then, China suddenly showed up as a voracious consumer of everything. It was off to the races, and hedge fund managers were sent scurrying to look up long forgotten ticker symbols and futures contracts.

By then commodities promoters, especially the gold bugs, had become a pretty scruffy lot. They would show up at conferences with dirt under their finger nails, wearing threadbare shirts and suits that looked like they came from the Salvation Army. As prices steadily rose, the Brioni suits started making appearances, followed by Turnbull & Asser shirts and Gucci loafers.

There was a crucial aspect of the bull case for commodities that made it particularly compelling. While you can simply create more stocks and bonds by running a printing press, or these days, creating entries on excel spreadsheets, that is definitely not the case with commodities. To discover deposits, raise the capital, get permits and licenses, pay the bribes, build the infrastructure, and dig the mines and pits for most commodities, takes 5-15 years.

So while demand may soar, supply comes on at a snails pace. Because these markets were so illiquid, a 1% rise in demand would easily crease price hikes of 50%, 100%, and more. That is exactly what happened. Gold soared from $250 to $1,922. This is what a hedge fund manager will tell is the perfect asymmetric trade. Silver rocketed from $2 to $50. Copper leapt from 80 cents a pound to $4.50. Everyone instantly became commodities experts. An underweight position in the sector left most managers in the dust.

Some 12 years later, and now what are we seeing? Many of the gigantic projects that started showing up on drawing boards in 2001 are coming on stream. In the meantime, slowing economic growth in China means their appetite has become less than voracious. Supply and demand fell out of balance. The infinitesimal change in demand that delivered red-hot price gains in the 2000?s is now producing equally impressive price declines. And therein lies the problem. Click here for my piece on the mothballing of brand new Australian iron ore projects, ?BHP Cuts Bode Ill for the Global Economy?.

But this time it may be different. In my discussions with the senior Chinese leadership over the years, there has been one recurring theme. They would love to have America?s service economy. I always tell them that they have a real beef with their ancient ancestors. When they migrated out of Africa 50,000 years ago, that stopped moving the people exactly where the natural resources aren?t. If they had only continued a little farther across the Bering Straights to North America, they would be drowning in resources, as we are in the US.

By upgrading their economy from a manufacturing, to a services based economy, the Chinese will substantially change the makeup of their GDP growth. Added value will come in the form of intellectual capital, which creates patents, trademarks, copyrights, and brands. The raw material is brainpower, which China already has plenty of.

There will no longer be any need to import massive amounts of commodities from abroad. If I am right, this would explain why prices for many commodities have fallen further than a Middle Kingdom economy growing at a 7.7% annual rate would suggest. This is the heart of the argument that the commodities super cycle is over.

If so, the implications for global assets prices are huge. It is great news for equities, especially for big commodity importing countries like the US, Japan, and Europe. This may be why we are seeing such straight line, one way moves up in global equity markets this year.

It is very bad news for commodity exporting countries, like Australia, South America, and the Middle East. This is why a large short position in the Australian dollar is a core position in Tudor-Jones? portfolio. Take a look at the chart for Aussie against the US dollar (FXA), and it looks like it has come down with a severe case of Montezuma?s revenge.

Last week?s 0.25% cut in interest rates by the Reserve Bank of Australia took a fundamentally weak currency and sent it to intensive care. Aussie could hit 90 cents, and eventually 80 cents to the greenback before the crying ends. Australians better pay for their foreign vacations fast before prices go through the roof. It also explains why the route has carried on across such a broad, seemingly unconnected range of commodities.

In the end, my friend at Morgan Stanley had the last laugh. When the commodity super cycle began, there was almost no one around still working who knew the industry as he did. He was hired by a big hedge fund and earned a $25 million performance bonus in the first year. And he ended up with the biggest damn office in the whole company, a corner one with a spectacular view of midtown Manhattan. He is now retired for good, working on his short game at Pebble Beach. Good for you, John.

Not as Shiny as it Once Was

May 21, 2013/by Mad Hedge Fund Trader

Trade Alert Service Posts Two Year 90% Profit

Diary, Newsletter

The Trade Alert Service of the Mad Hedge Fund Trader has posted a 90.6% profit since the inception of the service 30 months ago. That compares to a modest 21% return for the Dow average during the same period. This raises the average annualized return for the service to 36.2%, elevating it to the absolute apex of hedge fund ranks.

My bet that the stock markets would continue to grind up to new all time highs in the face of complete disbelief and multiple international shocks paid off big time, as I continued to initiate new long positions in the S&P. After steering readers away from gold (GLD) all year, I then caught the bottom and rode a $74 rally on the way back up. Every short position in the yen has been a money maker. I even managed to cover a brief short in the Treasury bond market for a small profit.

Trade Alerts that I wrote up, but never sent, worked. That?s because I have been 100% invested for the entire year in long stock/short positions. However, followers of my biweekly strategy webinars caught my drift and benefited from the thinking, and many did these trades on their own. These included shorts in the Treasury bond market, (TLT), the Euro (FXE), (EUO), and the British pound (FXB).

Sometimes the best trades are the ones you don?t do. I have been able to dodge the bullets that have been killing off other hedge funds, including those in (USO) and commodities (CORN), (CU). The average hedge fund is up only 4% in 2013, as their short positions in the lowest quality companies have easily outpaced their longs on the upside.

All told, the last 35 of the 42 trade alerts issued by the Trade Alert Service in 2013 were profitable, a success rate of 83%. The year-to-date profit stands at a stunning 35.5%.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011 and 14.87% in 2012. The service includes my Trade Alert Service, daily newsletter, real-time trading portfolio, an enormous trading idea database, and live biweekly strategy webinars. To subscribe, please go to my website at www.madhedgefundtrader.com, find the ?Global Trading Dispatch? box on the right, and click on the lime green ?SUBSCRIBE NOW? button.

April 30, 2013/by Mad Hedge Fund Trader

?Sell in May? Has Started

Newsletter

You don?t have to wait until May for the next correction in the stock market, which is only four trading days away. Take a look at the charts below prepared by my good friends, Arthur Hill and John Murphy at Stockcharts.com, and you?ll see it has already started. In fact, it might be almost over.

Only 42% of stocks listed on the New York Stock Exchange are now above their 50-day moving averages, down from the 90% peak at the end of January. That suggests we are already well into bear market territory. The downturn has been lead by materials, technology, energy, and industrials.

Look at the charts for the S&P 500 (SPY) and the Dow. We are clearly on target to match the previous all time highs in the next few days, possibly during the month end liquidity surge. That?s where potential double tops come into play. If I am right, then we could be in for a 5%-10% pullback. If I am wrong, then we are in for a flat line for a month before we resume the upward path.

So I am modifying my trading strategy that has been wildly successful for the past six months, delivering to you a 45% performance gain off the bottom. To use all of my favorite sailing metaphors, I?ll be battening down the hatches, clearing the decks, reefing the sheets, and preparing for a squall.

Here are the following course adjustments I recommend for a tougher market:

1) Cut your book in half and maintain a 50% cash position to take advantage of the unanticipated opportunities that will almost certainly come. You can?t buy bottoms if you lost all of your money on the downslide.

2) Shorten your maturities. Instead of betting the ranch by going out two or three months, limit option positions to the front month. There is no crueler existence than managing a long dated option position that is going against you.

3) Pigs get fed, but hogs get slaughtered. Instead of running positions into expiration, go for quicker, smaller profits. Instead of keeping the entire profit, settle for half or two thirds. Market volatility is so low that it is not worth hanging on for the final two weeks just to capture the last few basis points. This shortens the time that surprises or black swans can happen. Use time as capital. As I have so magnificently shown this year, you get a much higher score hitting 40 singles than a couple of home runs (hint for foreigners: our baseball season has just started).

4) Get yourself some short exposure for the inevitable shakeout. I recommend put spreads in the Russell 2000 (IWM), which always falls the fastest in down markets. But go at least 5% in-the-money to give yourself a safety margin income in case this thing keeps clawing its way up.

5) Avoid positions that have worked well for the past half-year, because this is where traders will rush to take profits and ?de-risk? their books first. This includes long positions in consumer staples, pharmaceuticals, utilities, and transportation, and short positions in commodities (CU), oil (USO), and precious metals (GLD) (SLV).

6) Get out of your bond shorts. It?s amazing to me that ten-year yields (TLT) have fallen to a parsimonious 1.70%, while stocks have rallied. But then, it has been an amazing life. This is rare in the rich tapestry of financial markets and usually presages trouble. It can only mean that the smart money is positioning itself cautiously in anticipation of a dump in stocks. If that is the case, the May correction could take ten year yields down to 1.50%, and bond prices though the roof. Use the month end ?RISK ON? surge to take profits on the (TBT).

There is an alternative explanation for all of this. The correction is already done and we are about to launch into a new bull leg. The selloff has been masked by a rotation within the broader indexes. Take another look at the chart of stocks above their 50-day moving averages. We have spent three months falling from 90% to 42%. Historically, it bottoms at 20%. The last time this happened was at the end of November and early June. Remember what happened after that?

If that is the case, we are already two thirds of the way through the spring correction, and on the eve of another 5%-10% leg up in stocks and other risk assets. It is what investors are least expecting; therefore, it cannot be ruled out. As my in-house strategist, Sherlock Holmes, used to say, ?Eliminate the obvious, and consider all other possibilities.?

Meet My New Strategist

April 25, 2013/by Mad Hedge Fund Trader

Japanese Cash Tsunami Hits US

Diary, Newsletter

When Japanese central bank governor, Haruhiko Kuroda, announced the most aggressive monetary stimulus program in history last week, he no doubt expected Tokyo share prices to head for the moon. In that, he has succeeded admirably, the yen hedged Japanese equity ETF (DXJ) soaring by 13.4% in the five trading days since he lobbed his bombshell.

What the bespectacled bureaucrat did not anticipate was that his action would send American shares through the roof as well. Both the Dow average and the S&P 500 surged to new all time highs today, much of the move powered by new Japanese cash. Just when American traders were wringing their hands over the potential loss of quantitative easing, they instead were handed a second campaign of ultra monetary easing.

Until last week, the Fed was pumping $85 billion a month into the financial system. From this week, the Fed plus the BOJ monthly total doubles to $170 billion. I don?t have to draw pictures for you to explain what this means for stock prices.

Indeed, the BOJ?s fingerprints could be found daily on securities of almost every imaginable description. What they have been buying is size exchange traded funds of equities (ETF?s) and bonds of every maturity. Imagine the Fed coming in one morning, calling all the major brokers, and placing orders for a billion dollars each of the (SPX) and the (IWM). That is what?s happening in Japan now.

The problem is that domestic investors in Japan have been unloading positions they have been lugging for years to the central bank, and then reinvesting the cash into better quality, higher yielding US stocks. Notice how well the big cap dividend yielders have been trading, favorite targets of foreign investors. Notice, also, that technology appears to be staging a turnaround on the back of the international money, with recent pariah, Apple (AAPL) actually showing signs of life.

It?s easy to see why this is happening. If you were a Japanese investor, would you want to buy a low growth, low yielding stock in a depreciating currency? Or buy a share in a faster growing company with a much higher dividend an appreciating currency. I rest my case. God bless America!

Needless to say, beyond the sunset made a complete hash of my few remaining short positions in the S&P 500, which only had seven days left to run into expiration. Thank you, Mr. Market for my biggest loss of the year.

Fortunately, that hickey was more than generously offset by profits on shorts I harvested last week, in addition to remaining longs in Bank of America (BAC), Apple (AAPL), and hefty shorts in the yen. As of this writing, I am up a breathtaking 37% so far in 2013.

Where does this party end? Now that we have two QE?s, instead of just one, I think it is safe to say that risk assets everywhere are going much higher. How high is anyone?s guess. It also means that the ?RISK OFF? assets of gold (GLD), silver (SLV), and Treasury bonds (TLT) are headed lower. That?s why I added a long in the leverage short Treasury bond ETF (TBT) this week for the first time in years. The punch bowl just got topped up again, and I don?t have to be asked twice to refill my glass.

The Punch Bowl Has Just Been Refilled

April 11, 2013/by Mad Hedge Fund Trader

Here Comes the Rolling Top

Newsletter

The S&P 500 is now at 1,564, and most strategist forecasts for the end of 2013 hover around 1,550-1,600, plus or minus some spare change. So the next nine months are going to be incredibly boring. Or they won?t.

Even in a bull market, one expects to see pullbacks of at least one third of the recent gain. Apply that logic towards the 224 points the (SPX) has tacked on since the November low, and that adds up to a 74 point, or a 4.7% correction down to 1,490.

There is massive liquidity in the system, many individuals and institutions are underweight, and interest rates are still at incredibly low levels. It also appears that every foreign financial disaster results in more money getting sent to the US for safety.

Usually, the (SPX) never rises more than 9% above the 200 day moving average without hitting a correction. This year is different. I can?t remember the last time the index spent this much time at that level without a pullback.

We are therefore likely to see a rolling type market top that unfolds over the next several months. That is in contrast to a spike top, which you can spot on a chart without your glasses from 20 feet away. These tops can be devilishly difficult to trade, with the limits defined more by time than price.

If you want to see what such a rolling top looks like, take a peak at the chart for my old friend, Dr. Copper, that great prognosticator of future economic activity. He put in such a rolling top during the first eight months of 2011, and has been trying to recover ever since, to no avail.

This no doubt reflects the slowing economy and the building copper inventories in China, where the red metal is widely used as a monetary instrument. China, in effect, is on a copper standard. It is rare to see the (SPX) going up and copper dropping like, well, a bar of copper.

While the broader indexes are likely to deliver a rolling top, that is not the case with individual sectors and stocks. That means you can use these individual spikes to assist in your timing of the overall market. You need to watch the market leaders like a hawk, such as the financials and the transports. If Bank of America (BAC) and United Continental Group (UAL), suddenly crash and burn, you can bet the rest of the market won?t be far behind. This is one of the reasons why I have these two names in my model-trading portfolio, on which you should maintain your laser focus.

The consumer discretionary and retail sectors are two additional pathfinder sectors that are the most economically sensitive in the market, which also make great canaries in the coalmine. As long as consumers are packing MacDonald?s (MCD), Home Depot (HD), and Target (TGT), or burning up their Comcast (CMCSA) broadband connections buying stuff from Amazon (AMZN), you won?t see appreciable market weakness. Earnings disappointments at these businesses, which could start in three weeks, are another great precursor of market trouble.

Finally, there is another class of stocks that may lead the charge on the downside, and that is small caps. Look at the chart below for the ETF for the Russell 2000 (IWM). Small companies are always hardest hit in any slowdown because they are more highly leveraged and have less access to external financing, like bank loans and equity floatations. I made a bundle last year shorting the (IWM) into the ?Sell in May? market meltdown, and plan to do so again this year.

Of course, timing is everything, and I?ll tell you what worries me the most. The overdependence of this bull market on the largess of the Federal Reserve cannot be underestimated. Any hint that quantitative easing is about to join the dustbin of history will take the market with it.

The conventional wisdom is that our esteemed central bank won?t embark on this path until year-end. What if it surprises us with a June tightening? The bull market would die of an instant heart attack. What would trigger this? A blowout monthly nonfarm payroll number approaching 300,000, which would quickly take the headline unemployment rate close to the Fed?s publicly announced 6.5% target. With the economy perhaps growing at a 3% rate this quarter, such a development might be only a handful of Friday?s away.

So how is the genius, aggressive hedge fund trader going to deal with these opaque markets? Bet that the market is going to stay in a broad range for a few more months. We aren?t going to the moon, nor are we going to crash. We are more likely to die of ice than fire. That?s what the volatility markets (VIX) are telling us.

There are several ways to play this kind of market. If you have a plain vanilla stock portfolio, you should be executing ?buy writes? against your existing holdings to take in extra premium income. With the bull move five months old, call options are trading at historically rich levels. This low risk, high return strategy involves selling short call options against existing stock positions. If your stock gets called away, you just say ?thank you very much? and buy it back on the way down.

For the more aggressive, you can add naked short sales of deep out of the money calls one month out. You don?t get rich with a strategy like this, but you earn a living.

You might also buy some deep out-of-the-money index puts for pennies. They are now trading near the cheapest prices in history. One market hiccup, and these things double very quickly.

Hmmm. Doesn?t Look Like Ben Bernanke

March 26, 2013/by Mad Hedge Fund Trader

Buy Stocks on the Cyprus Dip

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I?ll never forget the last time I was in Cyprus. I landed my twin Cessna 340 and asked for a fill up, hoping to make it back to Rome in one hop. An hour later, a truck dumped three 45-gallon drums of 100LL avgas on the tarmac with a hand pump, and asked to be paid in US dollars, cash.

When I asked how to get the fuel into the plane, the driver responded with a rotating motion with his hand, which I initially took to be an obscene gesture. In all, it took me about three hours to hand pump 135 gallons of fuel in the 90 degree heart. I vowed never to return.

I bet there were a lot of traders who wish they never heard of Cyprus this morning. Last night, news that the government there was imposing huge fees on all bank accounts to avoid a default heralded the second black swan of 2013. This triggered bank runs, caused global stock prices to collapse, sent Treasury bonds soaring, and cratered Dow futures as much as 155 points. The fees amounted to 6.75% for accounts under ?100,000, 10% on accounts from ?100,000 to ?500,000, and 15% for those over ?500,000. All of the country?s banks are closed until Thursday. Yikes!

Cyprus has long been the chancre sore of the international banking system, acting as the low-end, no questions asked, money laundering place of choice for decades. Their history of hiding assets for the Russian nobility goes back the czarist period. The money there was so dirty, I refused to accept any investors in my hedge fund with this home address. Mention a Cypriot connection with any financial transaction here in the US, and bankers have a heart attack.

Guess where the Cypriot banks invested a major portion of their deposits over the last several years? Greece, where there has been a major haircut on valuations imposed by the European Central Bank. Relations between the two countries go back 5,000 years. In fact, some of the Greeks returning from the successful sack of Troy in 800 BC were blown off course and ended up in Cyprus. Hence, the current crisis.

The is the second time this year that a foreign black swan flew over and pooped on our markets at home, first from Italy, and now Cyprus. The financial media seems to love throwing gasoline on the fire, predicting that debacles in Europe are a precursor to Armageddon at home, unless we immediately abandon our wicked socialist ways. Every dummy out there unloaded shares on these headlines, which in fact, turned out to be great long side entry points on every occasion.

The reality is that the goings on in Cyprus are so insignificant as to not even move the needle outside of their three-mile limit. Its $24.7 billion GDP ranks it smaller than any US state, and about on par with the city of San Diego, yet, they have been able to attract $65 billion in foreign bank deposits. Most of the deposits about to be assessed there belong to the Russian mafia. Other than raising goats, growing olives, and a few topless beaches, there is not a lot going on there. The bottom-line for we law abiding taxpayers here: who cares?

There is no doubt that the markets stateside were begging for a correction, and Cyprus looks like it is going to give us one. Too bad I dumped my 70% long exposure on Friday and went into Sunday night net short. But don?t expect this to last for more than a couple of days or for a couple of hundred Dow points. Buy the dip.

Guess what?s on the top of everyone?s ?BUY? list? Apple! For more on Steve Jobs? creation, click here for ?Has Apple hit Bottom?.? What are they selling to get there? Google.

My last trip to Cyprus got even worse. To enjoy the scenery, I flew across the Mediterranean at 500 feet and 220 kts. An hour out of Larnaca airport, an American F-16 fighter flew alongside of me and then edged closer, to just 10 feet off of my port wingtip. Then a second joined on the starboard side, and a third on my tail. I held up my New York Yankees baseball cap, to no avail. Finally, I hit the panic button I dialed in 122.50 MHz on the radio and put out a ?Mayday? call.

The British army base in Cyprus picked me up. He referred me to a US helicopter at an undisclosed location. Then a southern drawl came on the air and I asked what the hell was going on. Right then, through the heavy haze, I spotted the answer. A huge American aircraft carrier surrounded by 30 support ships was cruising into the wind. I had inadvertently flown a course that took me on a straight line from Lebanon, where terrorist attacks against US troops were occurring daily, to the heart of the American fleet.

?Don?t worry,? the radioman said. ?They?re just a little pissed off that you violated their restricted airspace.?

?Where is their restricted air space?? I asked.?

?That?s top secret,? he answered.

As I passed over the carrier, I saw their deck was a hive of activity, with several jets getting refueled and rearmed. My three jets peeled away and disappeared.

Like I said, I?m not going back to Cyprus anytime soon.

Oops!

March 19, 2013/by Mad Hedge Fund Trader

Taking Profits on Stocks

Diary, Newsletter

With the (SPY) approaching an all time high, there are just a few pennies to go, I am going to take the money and run on my position in the SPDR S&P 500 (SPY) April, 2013 $145-$150 deep in-the-money bull call spread. At $4.97, there is only 3 cents left in potential profit, and I would have to run the position for another month to get it. We have already captured 93% of the potential profit in this position. The risk/reward here is no longer attractive.

The market is now up ten days in a row, the most since 1996, and has gained every day in March. Will it shoot for 11? It looks like it. By freeing up cash here we gain some dry powder to use on any market dips. That is, if they haven?t made selling stocks illegal, which the market apparently thinks they have. It also means you don?t have to rush out and change your underwear every five minutes if one of my predicted black swans comes in for a landing.

There is also the matter of being up 31% so far this year, I have outperformed virtually everyone in the hedge fund industry, except for maybe David Tepper (Thanks for the heads up, David!). With this trade, I have closed out 15 consecutive profitable trades. I have another six moneymakers still on the books, taking my own hot streak up to 21. The only trade I have lost money on during 2013 is with Apple (AAPL).

That means I no longer need to swing for the fences to make my year. Instead, I can settle back into the sort of ultra cautious, scaredy cat, type of trades typical for an investor of my advanced age. That is, unless, we get a 5% dip in the market, in which case, it will be pedal to the metal once again.

That?s My Kind of Trade!

March 15, 2013/by Mad Hedge Fund Trader

The Elton John Market

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I remember 1997 like it was yesterday. Bill Clinton was president, the US government was running a balanced budget, and the Dotcom IPO bubble parties in Silicon Valley were happening almost every day.

The Florida Marlins beat the Cleveland Indians in a seven game World Series, where the last game went to a heart stopping 11 innings. Elton John scored the top hit of the year with ?A Candle in the Wind.?

1997 was also the last time that the Dow average closed up for nine consecutive days. Sure, the market only managed to eke out a 5.22 point gain. But hey, up is up.

The market was on its way to losing its winning streak until hedge fund legend, my old buddy David Tepper, spoke to the press. He mentioned that the Dow could end up 20% in 2013. That means we still have another 9.5% to go, potentially taking the Dow as high as 16,000. Warning: David has a long history of being right, with his own long-term average annualized return nearly matching my own at 38%.

One could easily imagine a course of events that gets us there. The Republicans and Democrats kiss and make up and produce a budget acceptable to both sides that cuts our deficit over the long haul. The sequester ends. China stops double dipping. Europe gets its act together, with ECB president, Mario Draghi, finally cutting euro interest rates. Oil prices collapse.

There is another big factor that could keep driving share prices higher. Ben Bernanke could keep the pedal to the metal and maintain the present rate of monetary easing. March is turning into one of the most fascinating months in the history of the bond markets. For the first time ever, The Fed is buying more bonds that the Treasury is issuing, with the excess demand getting soaked up in the marketplace.

Without a doubt, the most underestimated, misunderstood development of the year was when the esteemed Fed chairman told us that they may never sell their $3 billion plus stash of Treasury bond holdings, but hold them until maturity instead.

This is huge. It means that the Armageddon predicted by everyone when the Fed unwound its massive bond position is never going to happen. Instead, we will see a slow grind higher in yields and lower in prices. I have been expecting this all along, warning readers in my own forecasts that we may never get the bond market crash they had been hoping for, and that they should avoid high cost of carry short bond plays, like the (TBT).

As a mathematician, I have to assume that Chaos Theory is going to kick in here pretty soon and force the indexes to revert back to the mean. This is another way of saying the longer the market moves in a single direction, the greater the probability that it will reverse.

Not to do so will really tempt fate. That is why I picked up a modest short position in stocks today, selling some short dated, deep out-of-the-money, calls on the S&P 500 (SPY). I am also deliberately dragging my feet in adding any new longs to the Trade Alert Service model-trading portfolio.

Even if Tepper is right and we blow through the top end of the most wildly bullish forecasts for 2013, we need to have a pullback first. Yes, it has been a long wait. But nothing goes up forever, trees don?t grow to the sky, yada, yada, yada.

When the hiatus begins, there should be room to make some money through the type of short position which I tacked on today. David did not say he expects the market to rise to 16,000 by the end of this quarter, which is already on track to deliver the best stock market performance in history.

If the Dow closes up again for a 10^th day in a row, it will be the longest string of wins since 1996. What was the number one hit that year? The ?Macarena?? Can you hum a few bars for me?

Shall We Go For 10?

March 14, 2013/by Mad Hedge Fund Trader

Black Swans Are Circling

Newsletter

Basking in the glow of my 31% gain so far this year, I have to start wondering what could go wrong. Call me a pessimist, a paranoid, and worrywart, but whenever things got this good in the past, they were about to turn very bad. It is not my intention to ruin your day. But I may well do that if you read the rest of this piece.

Traders are piling on new longs with reckless abandon, gushing about the sweet spot for equities, Goldilocks, and how different it is this time. Retail flows into equity mutual funds have turned positive for the first time in years.

However, I am hearing a rising tide of negativity from the jungle telegraph. Don?t forget to sit down when the music stops playing. This is just a trade, not a new golden age. There are ?black swans? circling out there everywhere, and the risk is that they alight upon us in great unexpected flocks, like a scene out of Alfred Hitchcock?s classic film, The Birds.

Let me give you a list of things that can still go wrong this year:

*The ten year Treasury bond spikes to 4% and money finally gets expensive. About one third of present day corporate earnings are coming from assorted forms of financial engineering, like share buy backs and refinancing?s, that disappear when money becomes dear. This is why you are getting profit growth against no top line growth.

*The sequester looks like a big nothing now, but could develop into something much more serious in six months when the federal funds in the pipeline dry up. Don?t forget the reverse multiplier effect.

*Falling disposable incomes created by this year?s tax hikes on earners over $450,000 haven?t yet translated into falling consumer spending. But it will, as it always does.

*A Middle East flare up causes crude to soar to $120 a barrel and gasoline rises to $5 a gallon, putting the brakes on an already low economic growth rate.

*Europe blows up again, sending the dollar through the roof. Better keep taking those Italian lessons to get a head start on the next ?tape bomb.?

*Seeing stock prices soar and the jobless rate fall, Ben Bernanke ends QE3 early, paring it down to maybe QE 1 ?.

*China?s weakening data flow persists, and the country falls into a double dip recession. Weak commodity and precious metals prices tell us this has already started.

*High frequency traders and quants, starved for a big mean reversion, smell blood in the water and trigger another ?flash crash.? Volatility goes through the roof. The short vol crowd in Chicago gets wiped out.

*Retail investors conclude they were right to stay away and bail on what they have remaining.

*A giant asteroid hits the earth and destroys all life as we know it, except for cockroaches and Twinkies.

And here is the scariest thing of all. All of these black swans could hit at the same time and reinforce each other, possibly around May or June. Could this be the fifth consecutive ?sell in May and go away? year?

This conjures up the vision of a ?ground hog year?, where 2013 is a carbon copy of 2012.? A strong first quarter is followed by two dead quarters, and then a strong year-end finish. This is what ?lost decades? look like. Look at the 30 year chart of the (SPX) below and tell me this isn?t happening.

Of course, this is just one of many possible scenarios that could play out this year. As for me, I?m booking my chalet in Zermatt in the Swiss Alps now to beat out the rest of you.