History Repeat or Rhythm

Finally, I finished reading the book, "The Big Short" by Michael Lewis.

I have to say it is one the better books I have read for a long time. 

Reliving the story before the housing crisis, it is filled with drama, emotions of fear and greed showing the stupidity of human reactions dealing with it.

There are plenty of lessons to be learned. The events of 2008 crisis will stay clearly in the minds of many for years to come.

I can draw some parallels to events that is happening currently.

In reality, we have not solved the fundamental problems of the crisis. Reckless speculation still persists.

Banks are still too big to fail.  The solutions given to resolve the crisis was to bail out the big banks through QE1, QE 2 and QE 3 ( or infinity ). 

QE1 — drove the Dow Jones Industrial Average up 2,377 points over a span of about 16 months.

QE2 was good for just 1,199 points and only about 8 months of rally. The interesting thing there is, all of that went up in smoke within a couple of weeks, thanks to the debt ceiling debacle!

Then, just a couple of months ago, Bernanke really thought he was firing the biggest bazooka of all by launching QE-Infinity — saying he was going to print money forever. The rally lasted 1 day!

Until proven otherwise by price actions Q E 3 is not working and there will be QE 4 which will probably be announced tomorrow after the FOMC meeting.

During 2007-8 - just before the crisis, the big banks continue to raise their stake on CDO. These resulted in one of the biggest corporate bankruptcies of financial institutions. Over a short period, we saw the evaporation of some of the biggest names - Lehman Brother, Merrill Lynch, New Century, Watchovia and Northern Rock ( UK ) and the big bailouts for BAC, AIG, GE and Goldman Sachs.   The people who perpetuated the mistakes got out with millions of dollars and went unpunished till today.

I am seeing the same kind of gamble made today. Just only recently, we saw the trading failure of London Whale of JP Morgan. Initial loss were estimated to be only 2 billion but it is slowly exploding the the estimated $8b. It was said to be a hedge but the truth was someone got greedy.

In the book, there was the account of Wing Chau who prided himself as manager of CDOs and Howie Hubler, considered to be a star hedge fund manager at Merrill Lynch, lost huge amount of money. Both got out rich and unpunished. Howie had the notoriety of incurring the biggest loss ever in any trading house.

On the other hand, there were Michael Burry who was right on his bet on CDS against the sub prime but it took longer than he wanted for the events to unfold and that he had to go into hiding to avoid calls from customers and potential lawsuits. Eventually, he made lot of money for all his customers.

I could see similar situation today in the bond and precious metals market. Just take one example. Look a the recent report by Alasdair  Macleod.  http://www.goldmoney.com/gold-research/alasdair-macleod/gold-futures-market-heading-for-crisis.html?gmrefcode=dollarc

The banks are again taking huge speculative positions against the fundamentals. If things break up, they will trigger another crisis and get away free. Tax payers will have to bail them out again. 

How to make money from such market conditions?

First, recognize that fundamentals can lag price actions for a while. It happened in the dot.com bubble, the 2008 crisis, Enron, Worldcom and it will happen today. Sometimes, it can go against you for 2-3 years! Market can be irrational longer than you are solvent.

There are those who are fully convicted and continue to stack on their positions like what Michael Burry was doing. This is a stressful position. Burry almost gone into a depression because of the delay of fundamentals catching up with the price. He was right on the facts but the timing was early.

The key is to continue to research to ensure that your beliefs are fundamentally sound. There is a risk of reinforcing a self directional bias. It takes logical, balance and clear thinking to make sure you are on the right track.

As a trader, I will not trade against the trend. I will trade side way with a directional bias on my fundamental beliefs. You may still lose some money but at least it will be limited. A lot of time you still make some money.

Once the trend is there, jump onto the wagon. The market has a way to ensure that you are totally discouraged before it turns. You may be wrong a couple of times before you get it right. Once you get it right, it could mean a substantial profit that sustains you for the next few years.

I have written a lot on how I trade. Exercise discipline in following your trading plan.

The Big Short - by Michael Lewis

I am half way through Michael Lewis "The Big Short" after finishing "Liar's Poker",  a hilarious account of the time he was in Salomon Brother.

The book gives details about the time before the big housing crash and credit bubble in 2008. It is like reliving that period in a trading environment. Very interesting and a lot of lessons can be related to  the current situation. There are a lot of parallels to be drawn.  For me, the situation mirrors the situation now where the bond market has gone stratospheric with central bankers trying to evade the financial crisis - lots of manipulation to blindside the real direction. It is a great read.

There are few lessons to be learned.

o Fundamentals are key to the market long term.  Often it is not seen until it is a little late. This is the big money maker. I can make money from trading volatility, side way directions but the big bucks is from getting the long term trend right. The best way is to bet on the long term trend. But the market can always go against you short term creating apprehension and fear. Just before the crash housing price continued to go up despite extremely poor fundamentals. Thus, the ability to hedge and following trends are very important skills.

o Market will always go to extremes.Manias engulfes greedy investor and fear cripples the weak. This is where money is made by betting on the right directions.

o There is a problem of personal direction bias - unable to see the true direction of the market because of personal conviction. There are blind spots. Wonder how many smart people failed to see the dot.com bubble or the housing collapse? How could regulators failed to see failing lending standards and rapidly deteriorating fundamentals ? Similar situation to bond market, gold and silver valuations? Can the world continue to thrive with unsound finance, ,massive currency printing and intensified currency wars? To solve the problem, always reexamine your bias in the light of new evidence and at the same time hedge your positions until you get the direction right. The fundamentals can lag the price actions by a few years!

o It depicts rampant greed, manipulation and corruption in the political system and financial world -  companies like JPM, Citibank, Goldman Sach and our previously, Morgan Stanley, Salomon Brother, Lehman Brother etc. Never trust these guys!

Interestingly, I read a bad review on Niall Ferguson "The Ascent of Money".  But I like the book. It gives a wonderful historic account. I am not scholarly enough to debate the good Harvard professor on his account of the history of money. But I am seeing that history is showing much rhyme in current events now. For those who do not read, you can view a 4 hours BBC documentary on the book at  http://www.youtube.com/watch?v=4Xx_5PuLIzc. 

Trading volatility with Gold

Fundamentals of Gold

Gold was down almost $40 on Friday, Nov 2.  It got to resistance of 1730 a couple of times and broke down to <1680 .=".">

Many speculators started to bail out and questioned the long term bull run. Many gold bugs blamed it on manipulation but corn, wheat, oil and all commodities were also down. To me, the key reason was the strengthenening of the US dollars most probably because of increased uncertainty in Europe.

Short term, I cannot predict the direction but long term the trend is clear. It is continuing on a bullish run.

Gold can be very volatile but the fundamentals remain intact. The fundamentals are firmly in place and perhaps getting stronger.

Countries worldwide have accelerated the printing of currency to maintain competitiveness. It is basically a currency war, which devalues its intrinsic values. Bernanke has his $40 billing monthly mortgage purchase and another $45 B operational twist totally $85 b of liquidity pumped monthly into the market. US will continue its QE into next year no matter who is elected on November 6^th. It is QE to infinity.  There is no way out. The process will continue and probability is the Fed will increase the money printing with hurricane Sandy last weekend. Quantitative Easing is now a permanent fixture of the financial markets for, without it, the U.S. bond market would collapse and interest rates would reset multiples higher. Gold remains a sound “yet to be recognized “ monetary asset.

China pumped a record $60 b into the country’s money market last week. The previous record was set only in September just a week before the weeklong national holiday. Japan central bank said it will offer unlimited loans at low interest rates to lenders to try to boost credit demand among companies and households. China and other creditors nation continue to accumulate gold and silver to protect the potential devaluation of the US dollars. Most of them are buying on the dips.

As of Oct 31st, the Bank of Japan increased the QE program to $138 billion US or 11 T yen. The cumulative size of the the stimulus so far is now $825B.

In a few years, we had QE 1,QE2, QE to infinity, cash for clunkers, Tarp, LTRO, OMT Home buyer credit, New job program and operational twist. Yet, Europe is still on the brink of crisis and the only way out is to continue to print money to ease the liquidity and save the  impending collapse of Greece and Spain. France is on a huge liberal monetary expansion reducing retirement age, increase basic wages, benefits without the financial base to support it except to print more money.

With the impending fiscal cliff and imminent breach of the debt ceiling, US credit rating could be downgraded.

Trading range

Gold is still trading at a range between 1500 and 1800. for almost a year now.

Trading is never easy. The market can be irrational longer than you can expect.

Let me do some recalls on the dot.com and housing bubble.

Dot.com Bubble : Valuation was outrageous. I kept shorting stocks and was stopped out many times.

Finally, I decided just to allocate a sum of money and short the highest valued stock in the technical sector. I sufferred tremendous emotion anguish with the huge volatility. I remembered that the names I shorted included high flying stocks like Yahoo, EMC, CISCO, etc.Finally, when the whole thing burst, it was the most profitable year I ever had in my 20 years of trading experience. I had more than 80% ROI. They were stocks that I shorted that went to zero. I was also scared out of Worldcom and Nortel which would had given me huge profits as these stocks went to zero. The market has a way to get you on the wrong track if your conviction and research are not strong enough.

Housing Bubble: Going back to the housing bubble, same thing happened. I saw the bubble at least 2 years before it burst A few of my trading pals discussed and marvelled how it defied gravity and continue to go up even we know it was totally wrong in the fundamental directions. All kind of explanation were given for the rise like “this time it is different”;  “ house value can only go up”; “it is a new paradigm” etc. 

I shorted stock like KBH. I was stopped out a couple of times. Eventually I did make some money on shorting KB Home but did not have the conviction to hold through all the volatility. I got out way too early.

Taking a recent example, I shorted Groupon. Personally, I have done quite a bit of ground research on the company based on their marketing practices, financials and business models. Something is terribly wrong with the company. So I shorted it. But it went against me a couple of times. But I held firm although I had a stop loss which was not triggered despite a couple of short covering that almost flushed my stops. Now I am in the right direction. I will hold it until my fundamental views are proven wrong

Now lets move to gold and silver.

It is similar to the dot.com bust and housing bubble except it is in the reverse direction. The fundamentals are fully in place and getting stronger.

But gold was whacked by $40 on Friday! It can still move down to $1600 or $1500  and still stays within the range. Worst, it can even go to  $1350   although  I doubt it will happen. But in these volatile market, anything can happen.  The only sure conclusion is the final direction will be up and it may even breaks 2000 within 6-8 months. Longer term, it is going much higher.

The market has a way to create such fear that all the longs are flushed out before it starts an incredible rally. It has a way to do whatever it takes to upset most investors. Thus, things will go up when majority is out. So far, they are still some support bullish speculators holding to it. When these speculators gave up, it is a clear sign it has bottomed. From the COT ( commitment of traders report ), it has not happened. Likewise, the housing market went to an unbelievable top before it crashes. Is this “buying when there is fear and selling when there is euphoria or greed”?

Path Forward?

I suggest two strategies.

1. First, work on a longer time frame. Hold a small core position and let it run. Take it as an insurance on your  total portfolio. Be prepared to be take >50% haircut. This is what I am doing with my 5% allocation physical gold and silver holding. Just leave it at the vault and do not sell until we are in a mania or euphoria, which will come eventually. So far, these investments have done very well. I bought gold at around $700 and silver at below $15 about 4 years ago. I wish I could have bought more.

2. As long as the market does not violate the longer time frame, the bull is on. Having said that, gold mining stocks dived down on 2008 breaking every longer term trend lines in 2008 before it formed a double bottom and then charged forward with multiple baggers in 2009. If you have the guts to hold on, you will still make lots of money in 2009. It was one of my best years but I too sufferred some psychological damage at the end of 2008 and got out of some stocks which eventually went up 5-6X.

 

To trade:

           

-        I maintain a bullish bias.

-        When the daily trend (regression channel + MACD are my favourite indicators), I went long.  I stay on a daily and weekly time frame to gage the trend.

-        When momentum is starting, I remove all hedges and went naked.

-        Upon a possible top, I will add my OTM Short calls. If I am wrong, I will be called out on my stock making some good money. At the same time, I will continue to add bull puts or naked puts or even stocks when the trend is continuing. Thus I continue to maintain my positions even though my previous positions were called out. One key advantage of this strategy is that you take some profits and wait for the next trend to return.For example, I have made my money on RGLD and is waiting for a right time to get back again.

-        When the daily starts to turn down, I will add short term ATM puts. This change the covered call position into a collar. Instead of using stops, I will be out of my position when the put expired. If the stocks bottomed and rise, I will lose some money on the puts but this is taken as fees for insurance. The overall position is still very profitable.

-        Sometimes, I spend a little more time managing the puts. As long as the trend is down, do not take out the puts. If it continues to go down, buy a new put ATM and take profit on the original put when it is close to expiration. When trend is stabilizing, sell a SP to convert the long put into put vertical. This will help to pay for the long put. But do not add the SP until the trend has turned up on the daily chart.

-        As long as the trend is down, I will continue to wait for a reversal. Do not get in ahead of time. Trust the trend and your indicators. There will be certainly some mistakes along the way but it will be cushioned by the time and volatility premium gained during the trade. The tendency is to bottom feed because of the bullish bias and it can hurt. It is never late to wait for the trend to turn bullish and jump into the wagon

Currently, I am collared before the smack down on Friday. I will be out of all my positions taking profits I made over the last month or I may move the current put down to keep my position. I am tempted to short but it is dangerous because of the fundamentals. So I refrained and just made money from my slightly bearish collar. If gold fails support at 1650 this week, then I will be stepping aside as it may move down all the way to 1500s again. This is a difficult position given the bullish bias fundamentally but you have to trade what the charts tell you until it aligns with the fundamentals eventually.

Once the trend is reversed I will be back to the game again. Actually, the current downturn is a surprise to me as I expect the QE to infinity should drive price up. But similar patterns happened in QE2 where price initially went up and then down to below the price when it was announced. But subsequently, it shot up 90% from the level at the date of announcement. I am still expecting similar pattern for QE3. The pattern is not confirmed until price actions staged a clear reversal.

It is frustrating but I think this is one good way of handling the volatility. It has been going on for more than a year.  Once the trend returns, I want to make sure I will be there. Perhaps, it will return only after everyone has given up. In that case, the profits will be much better than trading volatility with bull puts, bear calls etc. Currently, the short term trend is down. I want to see some good support at 1650 before making any further adjustments. If there is no strengths at the rebound to 1700, I will be adding more OTM short calls.

The best money is made when it catches the trend correctly. But do it with risk control, care and knowing the market can go against the fundamentals for a long period of time. It can be frustrating but with patience, you will be proven right.

As to the timing, I am not sure when this Keynesian Economic experiment will end but it will certainly end one day badly. My gut feel is that it is getting very near to the cliff. Short term there will be ups and downs but the end game is near.

Critical updates - Gold and Silver

It has been a while I have written anything on my blog. A friend wrote to me for some updates and I have decided to put down some of my key thoughts.

Gold and silver have gone up for a few months. I turned bullish around 1580 in the beginning of August 2012 and has been adding positions since.

Then came all the printing of money worldwide - with Europe and USA putting no limits on adding liquidity to the market to contain the negative economic developments around the world. China and Japan are joining the currency wars. My ideas that I got from reading "End Game" by Mauldin and "Curreny Wars " by Jim Rickard are playing out in high definition. I also read another book "The ascent of money " by Neil Ferguson recently and it certainly added to my understanding of what is going on. As Mark Twain said, " history does not repeat itself but it rhymes"

According to all logic and fundamentals, lost of value in currency should translate into increase in value for sound assets and commodities.

But strangely, during this period, we have seen that oil has not participated in the bullish scenario. It has actually dropped 13% and acting bearishly. To this, I can attribute to some increase of supply over demand and the lower probability of a war with Iran since they are imploding themselves with the imposed sanctions working well.

Also, we have seen a 44% decline in coffee in the past 14 months, 25% in sugar prices, and a decline in copper price. One possible explanation is the debt overhang is still not resolved and deflationary forces are still in play. If that is the case, there will be more easing as indicated by the Fed.

Gold and silver did react positively but has seen been contained at $1800 and $35 respectively

What is happening? Lets look at some interesting Commitment of Traders (COT) data. A good commodity trader always study the COT data that are released every week. 

GOLD

Date      Price closed     Commercials shorts              Net short ratio

8/14      $1602               291358                                  1.98:1

9/11      $1735               380,239(+30%)                       2.66:1

10/2      $1775               405,520 (+7% after QE3)          2.98:1

SILVER

Date      Price closed     Commercials shorts                   Net short ratio   

8/14     $27.85               71,199                                   1.49:1

9/11     $33.57               79,478(+11.6%)                    2.47:1

10/       $34.67               93,628(+17.8% after QE3)     2.62:1

The interpretation is that the few big banks ( JPM, HSBC, GS, etc ) are continuing to pile into the shorts despite the general bullishness of speculators and hedge funds. They are taking huge gamble to double down. This the cardinal sin of a professional trader.

It is concluded by Ted Butler, a long time metal COT analyst that JPM now holds short of 34,000 contracts which is equivalent to 170,000,000 ounces of silver or 20% of world's production for 2012.  If you add the 4 banks together, they hold over 50% of the shorts. It was such a concentrated position that in a normal market, such players will be persecuted. But a ruling came out last week from the courts and throw out CFTC proposition for setting position limits on trading of silver. 

I used to run an internet trading platform in a stock exchange. Such position concentrated by any stock exchange and players will be persecuted or stopped but not in America. Strange?? Is it true that the bankers  ( or banksters ) are so powerful that they have all pervasive influence on the government admin. and legal systems? How I wish I can take such risky gamble without worrying on any downside.

In end Feb this year, this has worked very well for them. There was a dramatic decline the metal prices after that. A lot of fear still exists that history will repeat again. 

So now we understand why the $1800 and $35 gold must be capped. It is a multiple tops. Psychologically, it is very bad for the shorts. If it breaks, the metals are going to shoot up. 

What is effectively done is to stop the metals from breaking the technical levels by all means even taking double or triple the risks.  If they succeed like in Feb. this year, they will make a lot of money. If they lose,  it will be a disaster.  But no worry, the tax payers of America will bail them out again as they are "too big to fail"

Watch out for this level. There is still a probability that it will break up for the following reasons:

Fundamentally, gold and silver are still the best store value with all the money printing around. It is actually very bullish. I have seen many instances of commercials trying to cap the top but eventually they will fail again.

Technically, the precious metals have not lost its momentum. It is over bought but still in the bullish regression channels. Until it breaks, I continue to stay bullish. 

It only needs a few factors that will break the tops.  If the traders from China comes back from holiday and starts buying gold and Spain agrees to a bailout in the new 1-2 days, the commercials will either have to cover their shorts or continue to add to it until it breaks. Eventually, if they fail, it will be a breakdown of the system.

But what to do if it moves bearish and against my positions? It could be fast and furious as a lot of speculators and weak holders will bail out and stop losses will be triggered. It can still breakdown to <$1600 for gold and <$30 for silver although the probability is low. 

I am not taking chances. I will add puts and SCs to my position ( currently naked after enjoying >25% gains in 1.5 months ) once it breaks the bullish channel technically. I will not trade against the general trend. The ability to spot a reversal is very critical. I have my methodology but it is probably only 50-60% accurate which I am satisfied. With my trading system, the ability to spot reversal at these probability levels will be enough for me to make good money.

Effectively, I will bailing out until the situation stabilized. If am whipsawed, I will be taking profits after a good run. I will continue to add on positions again once the bullish trend resumes.

Longer term I am still very bullish.

China - Will it crash?

I believe China will go through a soft landing. You can throw all the crash scenarios of China into the trash bin. We have Jim Chinos who had been shorting the China market but he is 15 years too early! Also, we have Gordon Chang who has been promoting the coming crash of China for more than a decade but it never came. I heard him recently in a conference and he will be wrong again!

In 2005, I felt the same way when so many analysts were calling for a crash into China. But those who did missed one of the biggest booms in history.

Similarly, I believe we are going to experience the same thing in the next five years.

China will go through a soft landing. GDP will lower from 10-12% to a sustainable 6-7%

China is going through a major transition in its government. The boom is at least irreversible for the next decade. It will have its up and downs. It will be a peaceful one although there were tensions, sending some key figures to jail and fierce politicking. Xi Jinping is expected to take power as president in March, 2013, and will owe a broad range of constituents favors for his successful ascent. To solidify his position he will engineer a broad rise in the country’s standard of living that will benefit everyone in the country.

My guess is that he will continue the privatization efforts of industry, keeping yuan up and sending the country into a unprecedented boom.

So watch out for commodities like food, copper, palladium as citizens with a higher income strive to catch up with the west.

It is an exciting time. If you catch it right, it will make you very rich indeed.

I have added some China ETFs, accommodation and stocks to my accumulation list. I will be very interested if the market goes through a phase when there are maximum fear.

Lindsey Williams

This guy makes some very interesting predictions.

If he is right, things are really scary. Sounds like end of the world in 2012?

I am usually skeptical of  extreme predictions like these. There are too many around  and most  of them over history did not come to fruition. Remember end of the world for millennium bug? I had a prominent analyst friend of mine who stocked up ammunition and food and after that the world continues.

As with everything, take it with a grain of salt. It could be new chicken little but there are facts that are very interesting.  Filter out the meat from the bones. I am skeptical of the information from elites, conspiracies and some extreme end of the world predictions. But there are facts that I am aligned on many of the predictions will actually happen.

Following are some facts which I find aligned with current events.  There are some truths you may miss out because you do not it because it is extreme and religious for some.

The USA debt is currently $15.1 trillion. The combined debt for ALL of the Euro Zone is $12.7 trillion. Our debt is unsustainable. 

S

The four signs mentioned that are interesting are:
*Derivatives start to crack
*Currency wars
*Trade wars
*An increase in interest rates

SIGN ONE: DERIVATIVES
Tom Fowler was a broker on Wall Street 35 years ago when the elite introduced derivatives. He was told at that time they were going to use derivatives to bring worldwide economic collapse. They were going to use this phony “paper” in world financial markets to cause worldwide economic collapse. There are currently over ONE QUADRILLOIN DOLLARS IN DERIVATIVES ALTOGETHER WORLDWIDE.
#1. Right now the tax payers in the USA are exposed to $292 TRILLION in worthless derivatives (which they will be expected to pay for) when the stock market and banks collapse.
Currently the whole USA gross national product is only $15 trillion annually. The purpose of creating derivatives was to be able to collapse the US dollar when the elite want to collapse it. The first part of their master plan was to begin to crack the derivative market. How will you know that this is happening? [i.e. - the derivative market is cracking and collapsing?]  By currency wars.
SIGN TWO: CURRENCY WARS
The currency wars have already started. As this happens the value of the US dollar as the worlds' reserve currency will drop to zero. Here is what has happened in the past 2 or 3 months. Before this it was “talk” and threats, but now it is happening. THESE ARE SIGNS OF CURRENCY WARS.
#1. April 14, 2012 ~ China, for the first time, will allow its currency to float. The exchange rate [my words] will be from 0.5% to 1.0% to the dollar. A 1.0% change would cause a 100% change in value of China’s currency against the US dollar. This would cause any goods imported from China to DOUBLE IN PRICE OVERNIGHT.
#2. April 11, 2012 ~ Brazil’s president visited the USA and had a very stern talk with President Obama.  She attacked the USA for potentially causing a worldwide “economic tsunami”.  By what means? By the Federal Reserve’s “Quantitative Easing”. [QE]… What is that? It is The Federal Reserve printing money out of thin air with absolutely nothing what-so-ever to back it up….that is, just printing worthless words on paper (“dollar bills”) with green ink.
The first QE [QE1] happened under George W. Bush.  The second QE [QE2] happened under Obama. The worthless money printed was over $1 trillion. Now the Fed is considering QE3. This is what Brazil was the most concerned about.
The Brazilian president said,  “If you have a QE3, we will have a trade war with you- a dirty currency war.” THERE WILL BE RETALIATION FROM BRAZIL, CHINA AND MANY OTHER COUNTRIES.
Lindsey’s comment: If we do QE3 this will happen. Foreign nations will have a currency war with the USA to destroy the dollar because a QE3 will destroy their economies.

Read a recent book by Jim Rickards  "Currency Wars ". I loaned it from the library and intend to buy a copy.  It contains more facts and many events will come true.

SIGN THREE: TRADE WARS
This is the third sign. The TRADE WARS have begun in earnest in the past 90 days.
#1. Feb. 1, 2012 ~ China and Japan made the largest trade agreement in history. They are going to trade their products among themselves using their currencies. They will NOT use US dollars. This has never happened before.
#2. April 2012 ~ Iran is the #4 oil producer in the world. Every barrel of oil has been traded in US dollars since the inception of the world oil trade. As a result of the economic blockade against Iran, India has now agreed to buy a million barrels of oil from Iran every day AND PAY WITH GOLD BULLION.  This is a trade war.
#3. Saudi Arabia has been the #1 oil importer to the USA.  Saudi Arabia has just made a deal with China to build, (within China’s borders), “the biggest oil refinery in the world”. They will ship the crude oil to China for processing. They will use only their two currencies. This is a trade war.
#4. BRICS ~ Brazil + Russia + India + China + South Africa
    These 5 countries have 43% of the world’s population. They have 18% of the world’s GDP. They control 50% (?) of the world’s capital. These 5 countries are going to form their own bank. They will not use US dollars.
#5. SWIFT ~ An anachronism …as best as I can: “Society of worldwide interbank tele-communications”
    SWIFT is the banking system used worldwide to wire transfers of money. In 10 days (already passed) India, China and many other countries will no longer use SWIFT to transfer money.  They will also use their own currencies, not the USA dollar. (See #4 above.)
#6. April 27, 2012 ~ China has started using gold to buy oil from Iran. This has never happened before.
QE1 happened the last year of GWB’s administration. QE2 happened under Obama. Billions of dollars [which tax payers are responsible for] have been given to banks both in the USA and in the Euro Zone.  Who is buying Greek bonds, (which they know can never be repaid)? Some strangers are buying? Who will buy if they know it is not going to be paid?


BACK TO TRADE WARS
So the world no longer needs the US dollar. This is going to show up big time in 6-9 months in USA grocery stores, hardware stores…etc…
Foreign countries will start cashing in their US dollars. In fact they have already started. These foreigners and foreign governments want tangibles – not dollars. They are already buying gold mines, houses, farm land---whatever they can get their hands on.

SIGN FOUR:  INTEREST RATES RISE
The trade wars bring on SIGN #4. This is the last sign and the VISUAL straw that “breaks the camel’s back”. Interest rates in Japan and the USA are currently virtually at zero. IT IS ALMOST TOO LATE NOW. We are right on the verge of collapse. A single 1% point rise in Federal Reserve interests will raise the national debt by $140 billion.
Also, when the Federal Reserve starts purchasing their [the USA’s] own debt you know it’s over. In 2011, 61% of all T-Bills issued by the Federal Reserve [USA debt] WERE PURCHASED RIGHT BACK BY THE FEDERAL RESERVE ITSELF. That is, they bought their/our own debt. That means IT’S OVER…and according to Lindsey Williams, "It’s not even the debt that’s important, it’s the interest!..."

It is true when US is forced to raise interest rates, everything will collapse FAST.

Trading Directions for the next few months

We are at a very critical stage of market. Things seem to hinge on what Bernanke will hint tomorrow about the Feb policies on any further running  monetary easing  or running of the "printing press"

I am writing  before market opens on Jun 7. For the sake of time, it is written in  short sentences and to the points as I have no time to put up a proper essay. I will modify and improve on it as the week ends. It gives a direction for trades tomorrow and also some directions for the intermediate and longer term.

It is usually a mistake if one is ultra bearish or ultra bullish on the market. There are many extreme calls by analysts and investment commentators on either side because  if they are right, they make a reputation for themselves but if wrong, no one remembers them. Sensationalism sells.

The sound way to invest is to keep some bias on directions short and long term and trade according with risk control and hedges. Ride on the wave when you are right and cut short the loss when you are wrong.  Options are critical for investments using this process. Basically, I am still a trader at heart.

I am trying to make some calls on the directions. As someone said, if you try to predict the future through a crystal ball, more often you end up eating broken glasses.

Economy

So far almost economic data worldwide point to a slow down in continents from Europe to China to USA.

Companies earnings were up but dragged down by USA fiscal cliff, debt burden, Washington deadlock, European crisis, imminent default of Greece and potential default of Spain, Portugal, Italy Iran and spreading to Netherland and France.

Friday's unemployment figures were dismal.It is a big set back for Obama's relection campaign.



Most of the economic data were bad. It is expected it will stay this way for a while or employment probably will worsen to >10%. Shadow stats indicates that unemployment is a lot worst than reported.  Companies are squeezing blood for the bottom line. Unemployment stay or even worsen >10%. Efforts are spent on increasing efficiencies and productivity and in many instances it mean reducing manpower.

Some Key trades

US$ - long term down

- No many people realize that US fiscal condition is worst than Europe. It is camouflaged by having the reserve currency status that allows them to borrow easily for many years.  Much of the spending in America are on borrowed money. They have an annual spending of $32T and a tax income of of only $25T. The debt is ballooning and it will not be paid. There is no balanced budget and for that matter, an agreement on the budget. Some day it will reach a tipping point and implode. Unlike Japan, whose national debt is the largest of all, Americans do not own their public debt. Much of US debt is owned abroad by China Japan and OPEC China could dump $2T in US dominated assets on world markets and all hell will break lose.This will happen some day - confrontation with China? or some really bad economic event - a black swan? The US $ now can fired up the printing press to buy these assets and it is actually doing now. 

- Looking from a long term view and benchmarking against inflation and gold, US$ is on a steady decline for more than a decade.

- Not many people can understand the weakness of the dollar because of the safe haven status, patriotism and also the media propaganda.

So no matter how US$ is acting as a safe haven, I always look for opportunity to enter short trades on the US$. But it can rise substantially on the perception of a safe haven but it will come down.

Bond Market

-  Why the bond market has rallied to this level is beyond me. Paying a bankrupt nation to hold your long term cash for zero returns? How does US able to float $1.5 trillion in new issues each year when the interest rates on bond is less than the rate of inflation?

Having said that, I have lost money in shorting treasuries. It is one of my worst trades for the past 1.5 years. I am waiting to get back again.

A rise of interest rates will come sooner or later. It is as sure as the sun will rise from the east but only problem is that I cannot pin the precise timing. I think it will happen probably at the end of summer with a stock rally. There is a lot of money to be made here.

The bubble in bonds is as huge as the dot.com bubble. It may have capitulate down last Friday with rates going down to 1.44 % - a historic low.

Thus I am looking to a summer reversal to short bond again.

Commodities

I am long term bullish on commodities because I am bearish on the US dollar. Also, commodities offers basic value with the currency wars and printing worldwide.

But technically, it is still bearish.  My belief is that it will bottom. Wait for "risk off " trades again.

For copper I use FCX as proxy

I like PHO ( water ), AGU, POT, MOO and my favorite undervalue stock, CCJ ( for uranium ).

I entered also a call calendar for JOY - maker of Agriculture equipment during the last 2 days.

Currently, all these stocks are being collars waiting for the right time to ride the bull.

Natural Gas: 

Natural Gas is on a long term glut because of new 100 year supply from "fracking" and horizontal drilling in shale formation.  So I will be shorting it if it reaches resistance. It is almost there.

But because of the wide and cheap availability of Natural gas, I betting on CLNE ( transport ), D( transport - an income play ), and WRPT.

CLNE and WRPT are multi baggers but I am probably on the early stage. I like these kind of companies. I have traded successfully with handsome profits for WRPT a couple of times. Currently, I am back on WRPT again. These are pretty wild and volatile stock but offers very nice premiums.

Oil  -

My bias for oil is down. But it is too late to short it. If it breaks from $85 in the next few days, there may be a good calendars or verticals option trades to ride it down to $75. 

There are plenty of supply of oil being built up the last 1.5 years in USA because of new technology

The price of oil is artificially held up by political uncertainty in the middle east  down to $75 and if cannot hold will be lower

- held up by political factor in middle east

- over supply now with new technology in US. US may be even self sufficient if Obama is more friendly to oil companies. He is not. 

Gold

Gold is building its base but no bullish signal yet. At best, it is in a consolidation phase. The bottom for gold is 1400 but it may rally to 1670 or 1700 short term. 

If QE is announced tomorrow, I will change my position.Gold is officially on a bull trend. But as with precious metal bullish news, be careful that manipulative actions will be taken that gold does not go up. It has happened before. Do not buy until you see a break on the upside AFTER the announcement. It will not be too late.

Long term gold is up and I confident about it. But every good trade, we need to wait for the technical to align. Wait until the signal is clear. For the time being, it will trade sideway or down  dipping to 1500 or even 1400.  Gold tends to take the stairs up and the elevators down and many times it just falls out of the windows! It is my belief that gold is manipulated! Many of the price actions in gold should have alerted an Regulatory Agency to proceed investigation and persecution.  One way is just buy at the dips and hold it. That is what I did and am doing with physicals metals I buy and keep it in a vault overseas since 4 years ago. I will only sell if I see a dot.com mania or bubble. We are not even close to it. For the rest, I wait until the signal for the bull is clear.

Also,  for some  junior stocks like EZK and FNV, I buy and hold.  No options. From time to time, I use naked put to double up. Hold it until it is 50-100% or more. Many of these should give me few hundred percent. Keep it to about 2-5% of your portfolio.

Financial

I will not touch financials and real estate except shorting them on peaks. If you understand the underlying leverage, the fractional banking system and the derivatives exposure of $230 T for the top 5 banks, I will not be bullish on it for a while. Too late to short financials now although I am still holding my put calendar on JPM

I will enter more shorts once it hits the resistance again. 

Technology

If there is a bullish sector, it is technology. I can write off companies like DELL but bullish on AAPL, JDSU, CSCO, QCOM, MSFT, INTC.

I buy them on dips. I did enter bullish trades for JDSU and APPL last few days. 

I should be getting more aggressive to acquire ownership of these companies.

My belief is that technology will still be the key drivers for productivity improvement and efficiency which most companies are looking for.

The Market

Market up today. First it rallies because of rumors that Spain is going to be bailed out. Again this is just a rumor. Draghi's speech today is not particularly encouraging to LTRO or QE hopefuls but I respect him taking a sound process towards solving the problem. Reaction to crisis is not the hallmark of a good leader.

I believe there is more downside to the market but it Will NOT crash because we are not as leveraged as 2008. MF Global has cast a shadow of fear on the market. 

Also, many had gotten out of stock and redeem their mutual funds.

There are a lot of cash on the sideline. If there are fears, there will be bottom fishers like me.

But if conditions are real bad and fear is at the maximum, you bet there will be LTRO or QE.  So, we have a Bernanke PUT in place.

So my bias is a market sell-off after Bernanke's speech. I am on a standby to go bullish if there is any announcement of QE. I do not think there will be QE announcement tomorrow. It is a difficult political decision. This is an ammo that will be used only as a last resort - like a nuclear warhead. 

My position is market will continue to go down in the next month or less. Then China confirms their soft landing, various countries announce monetary easing or money printing, the Fed finally pump in liquidity, Europe comes out with a hat trick to solve their crisis temporarily and then stock market rallies for the rest of the year.

Having said all the above, I could be totally wrong. If I am >50% right, I will make money. 

Summary

Stock market will still go down but no crash. It will probably bottom around 1150 to 1200 on the S&P. If no announcement on QE tomorrow, stock market will slide down. It is 'risk off' again.  This is my bias.  I will be ready on puts and negative trades once the announcement is made.

Gold - longer term bull but short term consolidation. Buy on dips and collar.

Nat Gas = will not buy. But actually look to shorting it if it goes up a little higher. But long on transport and engine markers that support Nat Gas

AGU - longer term bullish but not time to buy. Also, like CCJ, POT, and MOO. Too early to buy now. Will get it once I feel the market has bottomed. Obviously, I do not think it has bottomed yet.

Copper - bearish now but longer term bullish. My proxy for trading in copper is FCX. 

Yen - down. Long on YCS and short on FXY. YCS could be a big winner. Current I am on a covered call with Aug OTM SC. Japan is very bearish long term. 

Financial and Euro - will short once it hits resistance again. On the Euros, I have closed my shorts a little early with >25% profit in about 2 months. I intend to buy EUO again if the Euro hits a resistance again. 

Bullish on Technology - continue to accumulate