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Sunday, October 31, 2010

Three Macroplays

The market remains in an uptrend but it is a “weak dollar” rally, not a “strong economy” rally.  In real, dollar-adjusted terms, the market is closer to flat.  A possible crash triggered by the weakening economy or a currency war is not out of the question.  Don’t fight the trend – but I’m certainly not jumping in on the long side with both feet either.

 China’s recent interest rate hike and Fed Chief Ben Bernanke’s recent QE2 interest rate cut put us on a collision course. You simply can't have one country lowering interest rates in another country raising interest rates when the two currencies are held together by a fixed peg. Something has to give, and I think perhaps that Ben Bernanke is trying to force the Chinese to revalue the yuan because the Fed chairman knows that the White House and Congress don't have the backbone to do it – and the Fed chairman also knows that reducing the global imbalances between China and the US is critical to long-term recovery.

 From an investor's point of view, I see three related macroplays: Long the yuan via CYB, short the long bond via TBT, and short the Japanese yen, YCS.  (I have all three positions)

 The yuan MUST eventually rise and can’t go down so CYB is very low risk.   Once the yuan starts to rise, long bond yields must rise because the Chinese. Buying as many treasuries as they do now. This will cause a spike in TBT.  The yen is grossly over-valued because the yuan is grossly undervalued – it must fall once the yuan starts to rise.

 I continue to allocate 20% or more of my portfolio to small cap, discovery stage biotechs outside the cycle.   I said to get into SVNT prior to an FDA ruling that would lead to a 75% pop.  I said to sell SV is NT after the pop because it might be hard to get a buyer for the company.  Now that SVNT has fallen dramatically because of a failure to find a buyer, I think it is a buy again and has at least a 25% upside. (I bought on drop).

 Right now, my favorite little penny play and best performer is Stellar Biotech (SBOTF) – it has almost doubled since I first noted it in the newsletter.  (Check my previous newsletters for more detail.)   I've also begun to build a position in Direct TV as a long term secular play as satellites spring up all over.

 My other highly risky penny play that is making a very nice move on low volume is LPTN.  If it breaches a buck, it should start to run nicely.

Since I got into the rare earth bonanza a bit late, my small positions in several stocks are flat to down; but I'm not really worried because this is a long-term building project. So far, I have opened small positions in ARAFF, GDLNF,GWMGF, and LYSCF. Only GWMGF is up.  (As previously noted, I purposely stayed away from Molycorp as it is way too expensive.) 

I sold Hovanian for a small loss and reloaded with Beazer, which has better technicals – so that's my play on the housing sector, which I think is at a bottom.

I dumped him my shares in DUSA, MDVN, and TEVA not because I have lost faith in it but simply because I wanted to deploy my cash elsewhere and I didn't see much upside in the near-term.

I also closed my position in QTWW on news that it was going to undergo a reverse stock split. I just hate that crap, and reverse stock splits invariably reduce a stock’s price.

I closed my short position in GameStop with a very nice little profit -- with the market trend robustly up, just don't want to be short now.

I also opened a position in a penny stock called Converted Organics (COIN). It's got excellent technicals and came up on my Market Edge screen. It's a good long-term play on agriculture.

Stocks that I am long:

ARAFF,BZH,COIN,CYB,DTV,DUSA,FEED,GTXO,GWMGF,GDLNF,LPTN,LYSCF,NRGX,SVMI,SNT,

SBOTF,SVNT,TBT,YCS

1:42 pm edt 

Saturday, October 16, 2010

TBT Rising & Beggar Thy Neighbor Ben
Here's the lowdown on last week's action from Marketedge: Stocks continued to march higher last week as both the DJIA and the NASDAQ posted modest gains for the period.… The technical condition of the market was mixed last week as the CTI lost a couple of points, there was considerable deterioration in the Strength Indexes but the Momentum Index remained strong."

Translation: The upward trend remains intact but there's some disquieting underlying technical deterioration that we must take note of.

On the fundamental front, virtually all economic leading indicators are pointing towards a slow growth scenario over the next 12 months, in the range of 2% real GDP growth, which is significantly below our potential output of about 3% to 3.5%. If this forecast holds true, unemployment will remain high, income will remain stagnant, and it is unlikely that consumption will help pull the economy up to full and steady growth.

As for why the stock market is rallying on this lukewarm news, the most likely scenario here is that the market’s upward trend is more an illusion than reality once one discounts for the rapid, recent decline in the dollar.

It's a salacious little menage a trios we have goin gon: The Federal Reserve keeps short-term interest rates low and engages in quantitative easing to lower long-term interest rates and thereby turns on the monetary printing press. The increase in the money supply drives down the value of the dollar. Meanwhile, the Smart Money borrows money at low interest rates and buys stocks, with a heavy skew towards energy and commodity-based stocks which will hold their value through price appreciation as the dollar falls.

In other words, pierce this veil and you see that there's nothing really going on fundamentally to suggest a strengthening economy. Rather, it is more a house of mirrors from the Federal Reserve.

On that note, I used to think that Ben Bernanke was a very smart guy doing a very dumb thing by printing endless reams of money at the Federal Reserve. Maybe he is just Machiavelli. Could this latest move with QE2 and a cheapening of the dollar simply be Beggar Thy Neighbor Ben’s way of stimulating our economy via exports and putting more pressure on the Chinese to let their currency float?   Smart or dumb, Ben Bernanke is playing a very risky game.

So what does all this mean for traders and investors? For traders, there remain opportunities for short-term trading with the upward bullish trend – but be careful, as the technical indicators are suggesting softening.   For investors, despite the upward trend of the market, I remain nervous about fully deploying cash into this market.

Finally, I have to talk (brag?) a little bit about TBT. After lamenting several weeks ago that this has been one of my worst trades – so far – I also indicated that I wasn't really worried about being in the red and that I had adopted a modified "double down" strategy that has involved adding to the position every time TBT (which shorts the long bond) went down.

Last week, that strategy finally paid off as TBT made a nice upward move and put the trade back into the green. The move was all the more amazing in the light of repeated announcements by the Federal Reserve that it would engage in more quantitative easing, which should push long-term bond yields down and prices up and further push TBT down. However, that didn't happen, and the reason I think goes back to the issue of the impact of a falling dollar on the inflation rate and an eventual bursting of the current bond market bubble. So I continue to like the TBT trade. Let's see where it goes.

I opened new positions in several rare earth stocks based on China's export restrictions on its supply – China is the OPEC of rare earths. (See my video about this at TheStreet.com.) This is strictly very high risk, penny stock stuff; and I run the risk of buying late in the run so I am only buying small positions and will only add them as the trade moves in my favor. So far, I have opened small positions in ARAFF, GWMGF, and LYSCF. (I purposely stayed away from Molycorp as it is way too expensive.)  (If any readers have any thoughts on the rare earths stock plays, I'd love to hear from you.)

I also opened up a new position in FEED based simply on technical considerations – this is an agricultural play in China.

Stocks that I am long:

CYB,DTV,DUSA,GTXO,HOV,LPTN,MDVN,NRGX,QTWW,SVMI,SNT,SBOTF,TEVA,VVUS

Stocks I am short: GME.

Updates: I cashed out both DEPO and SNTA with very nice gains -- no news in the nearer midterm future to propel them much higher.  I took a small loss in SOMX – a bad trade where i got sucked into a parabolic move.   I also significantly trimmed my very large position in SNT – I still have faith in it but will only add back to this position as it moves up, which looks like it will take a long while.

Last take: I haven't mentioned previously my long position in DTV. This is kind of like a "Peter Lynch" play – the famous mutual fund manager who used to get his ideas from talking to his children about what they saw at the mall. I'm just seeing a lot of satellite dishes going up.

 

DISCLAIMER: There are often typos in this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon Naturally Speaking. The accuracy rate is quite high, but some silly things do slip through. So if you see something that doesn't look quite right, trust the syntax and make your own internal correction.

6:04 pm edt 

Sunday, October 10, 2010

Fareed Zakaria Floats Away -- Weekly Newsletter
Stock market trend: Up

Market Pulse

The good news: The US market indices continue their upward trend last week as the Dow Jones industrial average broke above the 11,000 mark for the first time in over five months. The bad news: this latest market uptrend appears not to be driven by good economic news but rather by an emerging "carry trade" driven by the easy money policies of the US and a number of other countries around the world, including Japan.

The carry trade game here is simply to borrow money from the Federal Reserve or Bank of Japan via low interest rates and invest in the stock market. In this carry trade, the dollar falls and the US markets go up but the net effect in real, dollar adjusted terms is negligible.

From this perspective, any price appreciation in the stock market is merely offsetting negative currency effects. This is hardly a bullish scenario. That's why while this may be a good market for short-term traders, it is a dangerous one for longer-term investors tempted to move cash off the sidelines.

What bugs me about all this is a Wall Street "patriotism" that equates the debasement of the currency and easy money with something it must be good for the country because it's good for the markets. What a crock.

All of this will continue until countries around the world confront China on its mercantilist and protectionist trade policies. China's grossly undervalued and manipulated currency alone is driving the monetary policy not just of the United States but also most of the countries in Asia. A weak Chinese yuan forces Japan, South Korea, Taiwan, and all of China's major competitors in Asia to try to drive their currencies down. Meanwhile, the commodity countries like Brazil and Australia are going bonkers because their currencies are bearing the lion's share of the burden of China's beggar thy neighbor currency regime through currency appreciations of their own – and result in export difficulties.

What I find really irritating as well is the rush of American journalists – Exhibit A is Fareed Zakaria's mindless apology for China in this week's Time magazine – to support Chinese mercantilism and protectionism. It's not even blind ideology on Zakaria’s part. It's just plain arrogance and stupidity. If you get on enough TV shows and get asked your opinion enough, you start to believe you actually know something. My guess, however, is that when the light weight Zakaria is on any TV set, they have to nail his shoes to the floor so he won't float away.

Anyway, that's my rant for the week and I'm sticking to it. The sober analysis is that this is an upward trending market with a wall of worry that is primarily macro-based. Climb it with caution.

Stocks that I am holding: SNTA, DEPO,DUSA,LPTN,NRGX,QTWW,SVMI,SNT,SBOTF,CYB,TBT,MITI,

GME(SHORT),DTV,VVUS,HOV,TEVA,SOMX,MDVN

Updates: I cashed out the rest of my Chelsea – will reload if it dips below $5.  I took a small loss in YRCW, which did a reverse stock split and wiped out all the fun speculation on a penny stock.  I will add to TBT every time it drops a buck.

As a final note, there are often typos in this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon Naturally Speaking. The accuracy rate is quite high, but some silly things do slip through. So if you see something that doesn't look quite right, trust the syntax and make your own internal correction.

<a href=”http://affiliates.wallstreetsurvivor.com/z/228/CD302/"> Try our Free Stock Market Game at WallStreetSurvivor.com.</a>

 

1:19 pm edt 

Saturday, October 2, 2010

Bernanke Bond Put -- Weekly Newsletter
Market Trend: Up

According to Market Edge: “
After four weeks of impressive gains, stocks took a breather last week as both the DJIA and the NASDAQ ended the period with minor losses. The DJIA started the week with a 48.22 point (-0.4%) loss which was just the fifth losing session in September. Traders bought the dips throughout the week as the DJIA saw triple digit intra-day swings on both Tuesday and Thursday. Despite several disappointing economic reports, traders kept a bullish outlook throughout the week. For the period, the Dow lost 30 points (-0.3%) to close at 10829, snapping its four week win streak.”

This is indeed either a breather or the knocking of the markets on a glass ceiling otherwise known as a sideways pattern. You know my concerns. While September was as pleasurable as August was painful, there are still some major tests of technical resistance ahead before we can feel comfortable with the idea of an uptrend.

As always, we must look to economic fundamentals to handicap the markets next technical moves. This last week we had a minor drop in the ISM manufacturing index and the leveling off of the ECR I Weekly Leading Index. Meanwhile, consumer sentiment offered a similarly uncertain picture. Based on what we continue to see from the economic data, this is a "watch and wait" period in which short-term traders can try to take advantage of the upward trend an buy-and-hold investors should remain mostly in cash on the sidelines.


With that out of the way, let’s talk about some longer-term business. In the last newsletter, I trumpeted some of my recent calls in the biotech space – PBTH, CHTP, and SVNT were all double- or triple-digit winners. I also trumpeted two of my short calls on Palm and RIMM and a long on Apple at $250 – likewise huge double-digit winners.


Just to make sure that I don't get too full of myself, several readers absolutely hammered me for my short call on gold in mid July and my call to short the long bond in mid April. I think it is worth talking about each of these trades because discussing the gold trade will help remind readers about the importance of managing your trades and taking profits while discussing the bond trade will both underscore the need to cut losses early and to understand from a macro point of view what drives bond prices and yields.


Let's start with my “short the gold market” trade.  On July 15 when I made the call, the exchange traded fund GLL which shorts the gold market as an unleveraged ETF, was priced at $39.78. By July 29, it hit a high of $42.73 – a nice little gain.


At this point, a seasoned trader would've put up stop loss at at least the initial buying price, and such a stop loss would have been triggered as early as August 6 – no harm, no foul.   My point is simply that any stock that you buy whether because of your own research or by reviewing the research of others requires careful money management and risk assessment. If you don't know how to use stop losses and trailing stops and set your stop losses near key levels of support, then you really have no business engaging in short-term trading at all.


So my advice if you are losing money on trades that first went up but then went back down is to do some more research on trading techniques.  In this regard, I can say without too much self-promotion that my book When the Market Moves, Will You Be Ready? Is a pretty good manual on how to trade and manage both your risk and cash..


Now let’s turn to my “short the long bond” trade – arguably my biggest loser in the last several years.  My instrument of choice is an ETF called TBT. Let's break this one down.
I first flagged this one around April Fools' Day when the price was just around $50. Unfortunately I wasn't joking about buying this dog because as of now it's down to almost $30. Of course, anybody who rode this from $50 down to $30 really needs to go back to Trade School. The most you should ever lose on a trade is 10%,  In fact, if you manage your money well, you can still make a lot of money even if six out of every 10 stocks you pick are losers.

My logic for shorting the long bond in April was simply this: the economy looked like it was recovering, federal budget deficits were spiraling out of control, and these two factors should have pushed the long bond yield up and prices down. What I didn't bargain for was the financial crisis in Europe that made the dollar a safe haven for global investors – and when I say the dollar, what I mean is that these investors bought a ton of US government bonds after exchanging euros for dollars. This had the effect of both driving the dollar up and bond prices up.


This is hardly the end of the story, however. The TBT trade has continued to grow worse as the economy has softened and Federal Reserve Chairman Ben Bernanke has pledged to engage in so-called quantitative easing to further stimulate the economy.


Quantitative easing is a way for the Federal Reserve to manipulate long bond yields by purchasing US government bonds which are being issued to finance the US government budget deficit. The net result of quantitative easing is to provide long bond holders with a hedge against the risk of falling bond prices. In this way, the Bernanke policy of quantitative easing represents a “Bernanke Put” by providing bondholders with put protection on bond prices just as from the late 90s to the early 2000, Fed chairman Alan Greenspan used a policy of easy money to provide stock market investors with put protection of falling stock prices.


While I know this is going to sound like the stupidity of the 1990s tech bubble, I will now say with no tongue in my cheek that if you liked TBT at $50, you will love it at $30. Yep, I haven't given up on this trade-- although I feel a little bit like the guy in the movie Tin Cup who kept trying to hit the ball over the water.


My reasoning is that at some point bond prices are going to have to plummet and yields are going to have to skyrocket as an era of cheap money, huge deficits (and a possible rising Chinese yuan) put a bloody end to the bond market bubble and the Bernanke Bond Put.


So I have begun to rebuild a small position in TBT and I continue to add a little bit to it every time it drops another point. Call me crazy, but I have no doubt that this trade will eventually pay off big. It's simply a matter of time, and the difference between doubling down on an exchange traded fund like TBT and an actual stock of a company that is performing as badly as TBT is this: the company likely sucks and that is what explains its poor stock performance. In contrast, with TBT, it's only as good or bad as it's macro environment –there are no dumb managers or bad products or anything else to worry about. Because I just don't think interest rates will stay at record lows forever, I going to keep a hand in the TBT game just like I kept trying prematurely to short housing stocks during the housing bubble and kept getting burned – and then one day I didn't.


So that's my TBT story and I'm sticking to it. I'm bleeding a little bit with it, but my biotechs and other trade have more than offset any small losses in TBT. Eventually I think TBT will be a good trade. At any rate, a position in TBT helps keep me in tune with the economy as I have plenty of skin in the game to pay attention.


As a final note, there are often typos in this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon Naturally Speaking. The accuracy rate is quite high, but some silly things do slip through. So if you see something that doesn't look quite right, trust the syntax and make your own internal correction.

 
8:47 pm edt 


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DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.







DISCLAIMER: The newsletters and blogging on this page are written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

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