Mad Hedge Fund Trader

Report from Europe: All Bulled Up Pre Fed Meeting

tyi First of all, let me warn you that reading this paragraph is a complete waste of your time. Still interested? There is chatter about that the Fed is considering a surprise interest rate rise at its upcoming meeting. After all, where can they go from zero, but up? They could be emboldened by the recession ending Q3 GDP of 3.5%. The bond market is certainly telling us that rates should go higher, with yields on ten year Treasuries jumping from 2.45% to 3.40% since March. Unfortunately, this is the usual kind of gibberish you get from pundits and prognosticators , who, at a loss for any explanation of the real reasons for Friday’s melt down, resort to making stuff up out of thin air. US industrial capacity utilization is terrible, while unemployment is rising to record levels. Banks still aren’t lending to small businesses, the largest job creators in the country, because they are about to get hit with an onslaught of bad commercial real estate loans. Sure, commodity prices have doubled or tripled this year. But this happened because investors were desperate for any alternative to the sickly dollar, not because there is huge underlying demand by end users. This is one of the reasons why I have been ringing the alarm bell about all long positions for the last three weeks. So I can say with complete confidence that the chances of an interest rate hike are less than zero for the foreseeable future. This discussion did have the one benefit that it did enable me to fill this space in my newsletter.

Can't Stop the Market Bulls

nnd It’s all about the dollar, which I have hated all year (click here for my call ). The assured onslaught of federal debt issuance headed our way will be the overriding investment consideration for traders and portfolio managers for the next decade. That will knock the stuffing out of the greenback against every currency except the Zimbabwean dollar, and even that will rally when you get a regime change. There was once an argument that foreigners piled into these currencies to capture a huge yield pickup, but even that advantage is now gone. The soggy buck also explains a lot of what is going on in our stock market, with companies earning most of their from increasingly wealthy foreigners, like those in technology, energy, and commodities. As I write this, I am looking at new one year highs for my favorite picks of the former British crown colony currencies of the Canadian (up 14% YTD), Australian (up 26% YTD), and New Zealand (up 23% YTD) dollars (for my C$report click here ). There bounteous resources, Anglo-Saxon contract law, an almost common language, and vibrant ports make them the safe bet of choice. It’s just a matter of time before the loony hits parity, to be followed by the Aussie dollar, and then the kiwi.

Market Memory: Where I’m Invested Long-Term (Part Two)

ccsc The dinosaurs of the market, like myself, are collectively being struck by the similarity of the current stock market and that of September 1987, just before the one day, 25% plunge in the Dow. That was when I tied to buy stock with the index down 300 from a payphone in Paris, only to have the trader at Morgan Stanley burst into tears and smash the phone down on the desk (remember that David G.?). My new guru is Gluskin Sheff’s strategist David Rosenberg, who says that stocks have already discounted two years of recovery and now carry a lot of risk. It is priced for 40% EPS growth and a “V” shaped recovery, which we have zero chance of getting. GDP this year will come in at negative 2.5%, and will claw back a listless 1-2% rate in 2010. Stocks are discounting a 4% GDP growth, compared to only 2% for bonds, so he’d much rather own those. With a deflation rate of minus 2% and high yield returns of 12%, junk now offers a 14% inflation adjusted yield, not bad. The secular 25 year bull market in credit expansion is over. Rent still accounts for a third of the CPI, and they are falling for the first time in 17 years. Sure, we’ll see ephemeral sugar highs like those for cash-for-clunkers and the tax credit for first time home buyers. But at best, it will only add up to a series of small “W”’s, or what I refer to the as the “square root” shaped recovery. With the price of everything stretched, you better start reeling in some of that risk.

Are Financial Stocks Preparing for 'The Fall'?

zxcb. There has been a lot of chatter in the blogosphere lately about the eerie and frightening similarities between our current global stock markets and those of 1937. Look at the great chart below, which I obtained from the ace quants at charlesnenner.com/. After a ferocious dead cat bounce and a tortuous period of sideways consolidation, we break down to a final Armageddon sell off. Top technical analyst, Louise Yamada, has also been highlighting this risk, and many big hedge funds are positioned accordingly. I believe that markets will always do what they have to do to screw the most people, and this would be it in spades. Imagine trying to trade the tedious 500 point range for six months, only to see the indexes drop by half and volatility double. You can kiss another generation of traders goodbye. Whatever you do, don’t short volatility here in the mid twenties in mid August.

Despite Its Recent Run-Up, The DJIA Isn't Expensive

Maybe in your world. There is no doubt that the next trade from here in stocks is a sell. Buying NASDAQ on a 12th consecutive up day, the S&P 500 on the back of a 110 point move, and the Dow on top of a 1,000 point pop is not what great fortunes are made of. After stopping out of my own shorts in the 880’s, I have been holding back, holding back, holding back. See my warning not to sell too soon . I have never been one to fight the tape. The only trader who is always right is Mr. Market. The earnings to support a full fledged bull market are not just there. Deleveraging worlds don’t support expanding earnings multiples. It all works for me because the more it goes up now, the bigger the fall later. Even the raging bulls are warning about a “W” shaped recession and another market dive in 2010. How finely do you want to trade this thing? It’s clear the big core shorts at the major hedge funds haven’t budged, and that most of the recent low volume action has come from day traders, momentum players and CTA’s. All we need now is for mom and pop to come in and ring the bell at the top. Is 2009 going to be replay of 2008? Is a “Sell in May and go Away” to be followed by another October crash? If your friends’ long positions make money from here, just revel in their good fortune, and let them pick up the dinner check.

Higher Bond Yields: Are We Making Progress?

I'll take some inflation with my TBT please. Just another update on my core short in long dated US Treasury bonds, the TBT, which hit a new high for the year of $60, up 72% from my initial call (www.madhedgefundtrader...). The nine to eleven year note auction went off OK, despite its enormous size. What drove the yield on the ten year to a seven month high of 3.99%, the 30 year to 4.67%, and herded buyers into the TBT was the May US budget deficit of $190 billion, an all time record, despite massive inflows of income tax revenues. There was also word that Russia didn’t want to buy any more US government debt because they hated the dollar. After having spent four decades on the front lines of the cold war, I have to pinch myself when I hear stuff like this. The news sent equities on a 200 point intraday swoon. If higher rates and $70 crude don’t go away, they are going to kill the stock market. Everyone is holding their breath for the 30 Treasury bond auction tomorrow. The time to pay the piper is coming, and his rates are going up.

Where Have All the Buybacks Gone?

I was wondering the same thing.I have a question, Mr. Market. If General Electric (GE) got down to $5, Bank of America (BAC) to $2, and Citigroup (C) to $1, where were the share buybacks? Are these companies too broke to buy their own shares, or do they think a few bucks over zero is too much to pay? I’m not sure I like either answer, or even my own question.

Markets Gird for Earnings Season

Today I spoke to my old Morgan Stanley boss , Barton Biggs, who is so bullish that he believes we are only one third to one half of the way through the current stock market rally. Barton, voted best international strategist for seven years, and one of the founding fathers of investment in emerging markets (with some pushing from me), now runs Traxis Partners, a major global macro hedge fund. This earnings season will be a disaster, with forecast S&P 500 earnings at $40-$55 or lower. But hedge funds are still net sellers of assets, according to well placed prime brokers, and most still expect a retest of the lows at 666 in the S&P, or new lows in the 400’s. The capacity for the industry to take on new risk is therefore huge. Also encouraging is three consecutive monthly improvements in the Purchasing Managers Index (PMI). He sees this year as a replay of 1938, when a huge rally ensued after a long bear market, with 1938 valuations to boot.