Reflection the a Future End Point

It does not seem to be happening but it is coming.

A friend sends me the following interview. http://www.thedailybell.com/29047/Anthony-Wile-Antal-Fekete-Gold-Backwardation-and-the-Collapse-of-the-Tacoma-Bridge.   It is difficult to listen but it points to the end point to which all these craziness happening in the world today. There are plenty of books and websites describing similar scenarios. The more balanced views are those by Jim Rickard “Currency Wars”,  Mauldin “End Game" Niall Fergusion "The Ascent of Money". There are the more extreme views  by like Prechter and Peter Schiff.  While I dismiss many of the Armageddon forecasts, I cannot deny that we will somehow end this modern experiment of Keynesian economics quite badly.

Technically, UK, France, Spain, Portugal Japan are bankrupt. Japan has reached 250% of debt to GDP

US is the biggest debtor in the world. It debt has gone from $800 billion when Obama took over to $3.2 T now. The balance sheet is growing exponentially.  

Fed is buying ¾ of the Treasuries issuances now. It is a matter of time, they will be buy 100%.

Since 2008, there is an injection of $20T into the market globally. Wonder why the market having a great time in an environment of anemic economic growth?

Total world debt is $250 Trillion excluding unfunded liabilities. Out of this amount, there is easily a 10% bad debt which is around $25 T.  The actual bad debt is most probably 33% which is around $70T. This is the same amount as the total world’s GDP. Add to this are one quadrillion of global derivatives accumulated during the 2008 crisis. Most of it is worthless now.

From March 2009 when the first round of quantitative easing began, central banks have cut interest rates a total of 515 times and injected $12 trillion into markets.

Keynesian economists point to the “escape velocity” needed to get us out of the poor economic environment. We will really need rocket fuel to get us out of these debts. All these scholarly discourse does not tell us how the debt will be repaid!

It is still partying time in the market. When this party will end, it is hard to conjecture. With all the manipulation and coordinated pumping of liquidity, the party can continue for a while. But it will end badly.

One cannot be too pessimistic short term or you will lose the intermediate gains which can be huge. If you follow the doom day scenario after the dot.com bubble around 2001 and housing crash on 2008, you would have lost huge opportunity to make money on the rebound.

But it will end. When it ends, a number of things should happen.

First, there will be a return to value which means assets which retains the value will go up in prices. A reset of the financial system will occur ending the experiment.

Second, there will be inflation or maybe hyperinflation.

Third, there will be a collapse of major currencies.

Finally, there will be massive bond and treasuries collapse ending the 30 years bond bubble. The price actions on the last few days points to bond prices breaking down. We should know by next week whether this is happening.

This is the black swan that will one day appear. It is not a question of whether it will be appearing but when.

These are all facts not some dreams, illusion or scholarly theories or formulae. These are empirical data and not theoretical assumptions of economics.

I shudder to think of what could happen.

Big disconnect in the market

I believe in fundamentals. But fundamentals can lag price action for an extended period of time.

This is exactly the current situation. I said this regarding gold in my previous post.

Most of the fundamental economic indicators are weak and market is on a historic move without a 5% correction for the longest period of time.

• April PPI is: -0.7%.
• May Empire State: -1.43%
• March Factory orders: -4%
• April NFIB index of small business Optimism a weak +2.5 to 92.1

Where are the effects of sequestration? What about the fiscal cliff? It is completely forgotten now. Is'nt there supposed to be tax increase with Obama's administration? Obviously, the tremendous amount of liquidity pumped into the market is having its effect.

Market ignore the economic data and trade like a teenager – buy and buy. People are being Abenomics is the real answer to all our problems. Kyle Bass is completely wrong for the time being.

Short players are being squeezed as seen in Tesla, Groupon, Pandora, Netflix and many speculative stocks. Telsla’s rise is historic.

People hate it but are buying it. Feel like the dot.com bubble all over again!

To quote Bill Gross recently: 

Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk.

–Bill Gross, PIMCO, 14 May 2013

Old rules of buying the dips are suspended. There are no dips! There is also no sell in May and go away. Another rule says “don’t chase the market”. But if you do not chase, you are left out.

I have been chasing stock cautiously through naked puts and the stock keep running away from me.

In a normal market, I should have made a lot more money. In a way, I am still underinvested. Making money from naked puts does not help me to run with the market. Also, my core positions in precious metal is dragging my portfolio down.

Although this market makes me nervous but I am participating.

However, in this business, it is important to keep your eyes on the exit door.

Once it happens it can be really ugly. But for the time being, I expect the market to melt up

What are my strategies now?

I expect the market to melt up. I will remain bullish as long as the trend tells me so. Buy those that is showing strength and sell those showing weaknesses.

I will continue to use naked puts to get into positions with a clear exit if I am wrong.

Market will return the mean over time but this excess could extend for a while. Exponential rising or falling market WILL go further than you think although it is not permanent. The greater the excess in one direction will lead to an opposite excess in the other direction. A good trader will make more money than a “buy and Hold” investor.

Whenever there is a conflict between price action and fundamental, follow the price action. Never trade against the trend. I must keep strict discipline to my weekly regression trend channels. Never let confirmation bias influence my trade.  In many cases we are breaking off on a stage 2 rally of market cycle. Enjoy the ride while you can but remember to say good bye when it is time.

It is my belief when it breaks, it can be very severe but it may be a while before this occurs. It will come like a black swan where nobody expects.
 

Historic price actions for gold

It is time that I put up a new post on precious metals. 

It has some historic moves. As I write, it is hovering around $1,350 an ounce. That's a 28% drop from its all-time high of $1,895 on September 5. It's the biggest two-day drop for gold in 30 years! This was also the biggest back to back drop sinc 1983.

Gold is still at its most oversold level since 1999.  Let me give you a perspective in a different angle. The amount of paper gold sold is equivalent to 100 years of production allegedly sold in one day. Comex traded an amount greater than the total above ground silver stores on the entire planet. 

Dr Craig Roberts made the following comments:

"Consider the 500 tons of paper gold sold on Friday. Begin with the question, how many ounces is 500 tons? There are 2,000 pounds to one ton. 500 tons equal 1,000,000 pounds. There are 16 ounces to one pound, which comes to 16 million ounces of short sales on Friday.

Who has 16 million ounces of gold? At the beginning gold price that day of about $1,550, that comes to $24,800,000,000. Who has that kind of money?"

What is happening?

Gold has had a dozen reasons to rally over the past six months. 

• the European monetary crisis, the Italian elections, the Spanish elections, 
• the Cyprus bank account seizures
• sequestration 
• the fiscal cliff, 
• Ben Bernanke’s QE3
• the Japanese ultra QE
• rising capital gains taxes
• the reelection of president Obama.
• negative real interest rates in the U.S. ...
• $7 trillion more in federal deficits ...
• multiplied our monetary base at the fastest rate in the history of this country and we're still printing approximately $85 billion a month ...
• Central Banks around the world are now engaged in currency wars to see who can devalue their money even faster ..

But it is not acting with the fundamentals. So short term, I stay bearish.

I am over hedging many of my positions and actually taking advantage of the downward momentum to make some money. But one has to be very vigilant. A rebound will be fast and furious. Thus, I will be ready to take profit very quickly.  It is a difficult play. For small positions, you might keep it and average up when the trend is back.  You can easily be whipped sawed if you short.

It is actually hard to conceive how one can be bearish in precious metals in this environment. 

Seth Klarman, the legendary value investor and head of the Baupost hedge fund described the situation like this in his annual letter:

"The short-term palliatives we are currently pursuing go against everything a long-term-oriented society should aspire to achieve. Today's policies encourage spending over savings, reward the profligate over the prudent, and support the failing at the expense of the successful. The antidote now being dispensed puts us squarely in uncharted territory in which the risks are outside the range of historical experience..."

We believe the world's economy is now entering a kind of blind alley. By willfully abdicating the responsibilities of the markets – by monetizing our debts, by deliberately inflating our currencies, by bailing out failed companies, and by promising to deliver more benefits than can be afforded – the major economies of the West (including America's) have chosen the path of socialism."

Besides, there are reports of  extraordinary physical deliveries, not just through London but also every other major global center including Shanghai. I cannot verify this but I believe it is true. There is record demand for metal from the US Mint. The official Chinese confirmed 90 metric tonnes of metal import in February  alone.  

Two weeks ago, ABN AMRO  failed to deliver the physical gold of customers that were in their vault. This is technically a default. 

These are all anecdotal evidence that there are bullish forces for gold despite the extreme bearishness of price actions right now.

There are possible reasons for smash of gold prices too. 

Many gold bugs scream conspiracy theories and manipulation. I reserve my judgment on this. 

It is possible that the world is dumping hard assets of every description and pouring the money into paper ones. Commodities you can drop on your foot are getting dumped, and generous premiums are being paid for anything that can be created with a printing press. It is hard to believe but it is the way price are moving now. If this is true, it is short sighted and the trend will not last for long. 

This is also why both bonds and stocks going up at the same time, a rare event in capital markets. In effect, everything is now a bond, both the wide array of fixed income securities that are getting chased, along with dividend yielding stocks. This is why a wide swath of technology stocks, like Apple (AAPL), are not participating in the game. 

Some funds will be in trouble. The recent yen volatility has got some speculative funds into trouble. For that matter, when markets moves violently, there will be funds in trouble. The easiest thing to do to cover margin calls and redemption from customers is to sell including your long term gold holdings. John Paulson's fund is one of them. With the current gold price movements, I believe more funds will be in trouble. Margin clerks will be quite busy right now.

It is also that central bank printing is losing its impact on the markets. There are too much debt floating around the globe and there is not way central bank money printing can offset it. With the austerity in Europe and United States, there are overpowering the inflating impact of money supply.

Interestingly on the contrary,  Japan’s new aggressive policy to devalue its currency is also not bullish for gold. Japanese investors are plowing their money instead into their own stock market, and my sources tell me loads of Japanese capital is also fleeing to our stock market. People are looking for safety in cash and stocks.

All that matters is whether the sellers are in control or the buyers. All that matters is whether the market is in a bull market or a bear market and that is ALL YOU NEED TO KNOW. Trying to figure out why gold is dropping right is the wrong thing to do now. It is dropping because it has been in a bear market for almost two years now and at the end of bear markets you can get crashes and extremes in bearish sentiment as every person who is a potential seller finally sells in a giant capitulation.

When is the bottom?

Now, how do we know when it the bottom.

I will use silver for the analysis as it is highly correlated with gold. 

From a historical perspective, there were 5 major crashes in the last 10 years. I should say the bottom is quite close.

 

You can also examine the COT just before the crash, silver short is the highest in 2 decades. 

Lastly, lets look at Gold miners' bullish sentiments.  I wonder how low can it go. It is usually a good contrarian indicator.

As for gold stocks. the valuation really cheap. They are so cheap that no one wants them anymore.NEM is paying a 5% dividend. The gold stock ETF GDXJ is paying a 6.13% dividend.

When will I buy?

So, it is my belief we are in a capitulation phase. The volume transacted also pointing to this direction. We are near the bottom.

The mistake is usually made when one tries to catch the bottom. I will let the price actions show me the bottom itself. 

My guess, is that there will be a some strong rebound within the next few days. After that, there will be selling. The strength of the selling usually establish the bottom if it clearly stops at a higher low. Normally, it results in a cup and handle, head and shoulder or saucer formation. It is better to wait for the pattern to demonstrate itself. It needs a lot of patience. You can make good money trying to catch the bottom but you can lose big too.

Also, there could be be quick reversal with "a morning star" candlestick formation and reverses straight up. This is less slightly scenario unless it is followed by some clear fundamental events. A lot of technical damage has been done.

So when only when some bottoming action manifests itself,  you can start bottom fishing with naked or bull puts. Be very careful. If you are wrong, exercise your secondary exits which I had outlined in various posts in this blog. You may need to test the bottom a couple of times before getting it. If you are careful you will not be burnt and may even make some money as the price continues to move down. With options, the volatility allows you to safely test the bottom.

Once you are right and trend is clear, go with stocks or covered calls. If there is momentum, I will go with call calendar and calls.

The actions over the last few days show that some historical change is happening.  Eventually we will see the end of the Great Keynesian Experiment. Gold, commodities and hard assets will resume its appropriate positions in your investment assets. 

When it happens, these are the extremes in the market that helps in extraordinary gains.

Trading Plan - 2013

2012 Recap

It was a volatile year but the market ended up despite fears of European contagion, default on debt and going over the fiscal cliff.

For the year:

• SPX 500  up 16%
• SCI Emerging Market  up 18.2%, helped by final quarter recovery of China market. The Chinese market reaches a low in early Q 4 and recovered once the uncertainty of leadership change 
• Gold up 7.1%. This is 12 years bull in a row, a record bull market of any single class of assets
• Silver up 20.1%
• Euro 50 Index surpirsing up 19.7% 
• Median Home prices up 11.3%

However, Gold Miners are down -8.5%. This was the main drag on my portfolio. which ended the year with a slight loss. As a contrarian indicator, I am holding onf to my core positions of gold mining companies. I believe it will outperform in 2013. If gold prices go up, miners will out perform. Reasons  for the under performance of miners were the dilution of shares through debt finding for expansion, and higher cost of operations. Many gold majors are starting to give out higher dividends and reduce their ambitions on further exploration. From experience, this is not the time to hold to core positions, watch closely for reversal and add to the shares. I will elaborate on this later when we discuss specific strategies in this sector.

There were some dramas in 2012

• Greece was on the verge of default, went through elections,riots, austerity, and multiple bailouts. It is stabilized now but the problems are certainly not over
• Contagion in Europe were spreading quickly from Greece to Portugal to Spain and Italy. 
• France has moved into socialism. The rich are taxed 70%, retirement age is reduced, workers are on 35 hours week, and children are stopped from bring homework back! 
• Multiple negative economic indicators for Europe which include Germany and France.
• Arguments over debt ceiling and fiscal cliff brought US a downgrade and fear in the market

Despite all the negatives, it surprised the market that Euro 50 index went up 19.7%. Does not look like a recession in Europe!

• The main factor that sustain the whole global economy was monetary easing or money printing or "counterfeiting" of currencies
• USA ended the year with a target of injecting $85b / mth into mortgages and treasuries. Interest rates will be maintain close to zero at least till 2015. The QE will not stop unless unemployment improves to 6%.
• In Europe, Draghi  came out with the statement that he will do "whatever it takes" to hold the European Union together. It will not be allowed to slide into a contagion. Interestingly, Mario Draghi became "super Mario" and was voted person of the year by FT

 

 

• Japan new LDP leader, Shinto Abe became Helicopter Abe. He is forcing Japan central bank to ease, weaken the Yen and target inflation >2%. It is a risky strategy but the Japanese market has been rallying since. 
• Bank of England has been easing
• China added stimulus and there is a potential of another $500 B in 2013
• Even the fiscally conservative Swiss pegged its currencies to the Euro

This has resulted in the rally of almost all major markets. The financial market performed well.  It has also caused a housing and auto recovery

It should be noted when QE1 was introduced, it 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. QE 3 actually lasted only 1 day and had a delayed action. It did not have the immediate effects on the stock market especially commodity. 

The Key question is now whether QE 3 and to infinity is enough to drive the market and commodity much higher than QE 1 amd QE 2. Looking at the price actions, it look like QE 3 + will have the effect but only delayed. The money that was printed were unfortunately circulating in the banks. They should find a way to get into the market soon.

Thus I am forecasting a bullish 2013. The primary driver for the bull is liquidity.It is is the Beranke Asset Bubble.

2013 Overview

Market is a complex mechanism. The performance is combination of economics, emotional, and political factorsl. Whether price moves up or down, bull or bear is a highly complex issue that cannot be pinned with precision of timing. So any prediction is necessary but is fraught with risk. The best way is to assign probability and ready to adapt in a changing environment.  As goes with the saying, " he will try to look into the crystal ball often ends up with broken glass" 

Having said that, I am going to risk some predictions. It will form the basis of my trading directional bias. I will adapt as the environment changes. 

Opportunity

I am forecasting a percentage gain the market which is mainly driven by insane liquidity that is pumped into the market. 

1. Liquidity will drive higher equity and commodity prices

There is one certainty. The market will be volatile. The market may correct even up to 20% but there is no crash like 2008. Question is whether we are entering a secular bull market since 2008 or we are at the end of the secular bear market? My bet is that we are still in the secular bear. It will take one more deep crisis and a clear reset of the financial system to usher into a secular bull. But the probably of going 2013 below 2008 crash is low. It may come a few years later. 

During 2008, the market is highly leveraged.Today it requires a pound of flesh as collateral if you were to borrow any money from the bank. 

In the wake of MF global bankruptcy, it seems that leverage is almost extinct.

In the meantime, individual have been dumping stocks and mutual funds. Over $500 b of of redemption of mutual funds and $1 trillion of bond purchases. If there is a crash,  there are not many sellers left. Also noted a  total of $22.2 billion was plowed into equity funds in the second week of January. In the entire history of the stock market, the only week with bigger inflows was in March 2000! The funds that went into emerging market funds were the largest of all time.

US Fed is on standby to do QE 4, QE 5 ....7 and China, Europe and Japan ready to pump more stimulus if there is a hiccup in the global economy. 

2013 - Timing Cycle 

Let me risk by forecasting the possible timing of market performance for the year.

• Overall - should see SPY higher by the end of the year
• Current bull market is stretched but may continue till end April. We should see good earnings during this reporting season.  The debt ceiling debate will cause a temporary spike in VIX and drop in the market, and then rally into April or May. SPY may hit a high of 1550 to 1600. 
• Euro contagion will be back before summer and it spreads to Italy and France. So hiccups in China recovery, US debt and politics continued to weight on the economy and a fear of recession. So sell in May and go for a vacation. Sell in May and back in September.
• SPX can hit 1550 and drop 20%. Then panic stimulus which will bring the market to a strong bull by Q4. 

Although the Fed may talk about ending QE but this is not possible in the foreseeable future. 

• There are not many buyers of treasury left. 
• The Fed cannot allow interest rates to rise a few percent. They cannot afford the interests on the huge debt.
• It is difficult to see how unemployment can hit less than 6%

Politicians have not shown any will power to reduce debt and spending. When faced with the debt ceiling, there was discussion on the illusion of a Trillion platinum coin that was  proposed. This is a cute way for politicians to technically stay within the law and have free reign over spending again.

Economy will continue to muddle through growing at 2-2.5% But the stock market will perform well because of tons of cash floating in the market.

There is lot of positive tailwinds. So a drop of 20% will be a gift to add to the portfolio for a year end rally

Risks

The outlook is not all rosy. For me the question is when all the kicking the can down the road is coming back to hit us on the economy. My guess is that it is not going to happen in 2013.

Clearly, the current money printing cannot continue. There are no clear solutions to the debt and deficits but mainly political rhetoric. 

Below are some points to ponder: 

• Do we believe that the $16T and growing debt will be payable? There are no real plan to address spending except proposal of some magic coin solutions. Too much borrowed, too many promises  and too much spent
• Is inflation really 1.8%? There is definitely inflation for food, health care, energy and education - things you want to buy  and deflation for wages and home - things you need to sell.   This has resulted in decline in middle class standard of living.
• Is the unemployment really 7-8%? Many who are left unemployed for > 12 months and go on welfare are taken out from the statistics. 
• Is the 50% youth unemployment in Greece and Spain going to be solved soon?
• How can Japan create 3% inflation and prevent bond from collapsing and continued rally of the Japanese market long term? In many measures, Japan is in a bad shape with an aging demographic and the highest debt to GDP in the world.
• Is the dollar a safe haven, a reserve currency? Will it continue to fall longer term?
• Will US tax themselves into prosperity or deficit spend into poverty?

The world is on financial heroin. The drug is temporary effective to those who are desperately wounded but if you fail to remove the dosage over time, there will be serious damage. It is more looking like that world is now addicted. We have built a generation that is addicted to entitlements. Enjoy the hallucination before it has to suffer the pains to get out of the drug addiction.

My view is that eventually, it will result in a reset to the financial system resulting in a collapse of the global economy causing much pains and misery. 

It is going to be ugly. It will make 2008 crisis looks just look like a warm up. This is a scary scenario. Fortunately or unfortunately, it will take a little longer for it to happen.

Dollar will continue to fall. It has been falling since the establishment of the Fed reserve. Shorting the dollar is betting against the world greatest  trade and account deficit. The break on the straw on the camel's back is the risk of losing reserve currency status in US.

So how do I handle the situation? The key is to be prepared and ride on the trend when it comes. It is the KEY factor of success in my trading plan. It is no easy task but I believe I have an edge to handle all these volatility with a combination of clear understanding  on the fundamentals, the technical competence to sense the change in direction and the availability of options tools to hedge. When the events transpire, I will be there to profit from it. 

The other risks I foresee are: 

• Europe problems will come to a reckoning with predicament spreading into Italy and France
• Inflation going out of control. To control inflation is more difficult that what the Fed likes to think
• Middle East - Israel attack on Iran causing global instability. This is a highly probable event.
• HFT - causing havoc and volatility leading to black swan events
• Bank implosion - much of the derivative swept under the carpet, lawsuits make a comeback to haunt the financial industry
• China went out of control and collapse

These are black swan events that could torpedo the bull in 2013.

Talking about black swan, I better get back to read one time the book by Nassim Taleb  " Black Swan - the impact of the highly improbable"

Trends in 2013

1. Currencies

Dollar will probably maintain its strength with the Japanese Yen but losing its values against Australian, Canadian New Zealand collars and the Chinese Yuan. Dollar will probably hold against the Euro. Mario Draghi has talked a lot about monetary easing promising to do whatever it takes to hold the Euro together but has actually done very little. Last week, Euro holds their interest rates which causes the Euro to spike against the dollar.

QE shift from Mortgage to Treasury - sending assets price up. Currently QE has no real effect on gold yet. It will come when QE shift from Mortgage to buying treasury this year. For gold to rise, monetary supply has to increase.

2. Treasury

Treasury looks like peaking over a 60 years cycle.

Many had been burnt including me for shorting treasury in the last 2 years. At least, I know I was in the company of Bill Gross of Pimco and had to cut loss.

But we are at the biggest bubble of the multi decades and looks like a reversal will come.

Interest yields will spike to 2-4% but it will not go into the moon like what happened when Paul Volcker was the Fed Chairman. I do not foresee the hyperinflation scenario some doom and gloom forecaster are saying.

I will continue to short treasury. Until the trend is clear, it will be via some bull puts. Upon a clear trend, I will go long on stocks and calls.

3. Agriculture

Agriculture commodities are on a long term secular bull.

Drought will bring high prices to agriculture commodities.

Monetary easing will cause inflation in basic commodities.

Fertilizers are under applied in emerging countries. They have the biggest needs. I am bullish on fertilizer and agricultural companies. Continue to add positions when there is a correction to support

4. Energy and Services

I sense a rotation into energy and materials

I like energy services, components of industries that support the natural gas abundance supply like gas engines and transportation

I like oil and gas majors like OKS, APC and OXY. There are beginning to turn around.

Energy and Materials under investing with 2% of funds  15% of stocks in SPX 500

There is an undergoing energy revolution in the oil industry because of fracking technology. It is estimated that with in few years, US may turn from a net important to a net exporter of oil. There are now enough natural gas for many years to come.The United States in now adding more oil and gas production than any other country in the wold. America's domestic oil production jumped 14$ last year alone. This is the largest rise in annual US production since the middle the 19th centry.

The boom will add jobs and allow USA to continue its prosperity for years to come despite the huge debt and deficits. There is a $150 b investment in the US oil fracking industry which is causing a renaissance in the energy business. It is believed that production will accelerate in 2013.

The natural thing to happen is to replace coal with natural gas for power generation, diesel engines with natural gas engines. Company like Westport Innovation ( WPRT) will thrive. It has currently long term contracts with Caterpillar, Volvo and major trucking companies to replace engine driven by diesel with natural gas.. WPRT is a longer term play. This is a candidate for multiple baggers in profit.

The EIA projects U.S. natural gas production to increase from 23.0 trillion
cubic feet in 2011 to 33.1 trillion cubic feet in 2040, a 44% increase. Almost all
of this increase in domestic natural gas production is due to projected growth
in shale-gas production, which grows from 7.8 trillion cubic feet in 2011 to 16.7
trillion cubic feet in 2040. The surplus in Natural Gas has to go somewhere. It needs infrastructure to transport it. Many of the infrastructure are not going to be built overnight. It won't be in place until at least 2016.US is positioned to become a key exporter of oil and natural gas.

Because of the over supply of gas and inability to export it, price of natural gas is $3.2 in US and an average of $11.83 in Europe and $17.3 in Japan!

The other sub segment that will ride on the supply of natural gas is storage and transportation. For these I am looking at companies like LNG and CLNE

5. China and Asia

I am a long term bull in China. Short term may still see China trading sideway  but it will break to the upside again. It is my belief the bull in China will sustain for a few decades to come.  Despite the questionable balance sheet at banks, real estate bubble, I believe China will still become far and away the world’s largest economy in our lifetimes. In 1700, Asia accounted for 58% of world GDP. Some 250 years of wars pulled that figure down to 15% by 1950. It is on track to recover to 50% by 2050. 

Positive economic data are coming out from China over the last three months. This is in response to a moderate stimulus budget which they started to implement in the summer. Residential housing, which has been a major drag on the economy for the past year, is now starting to trend up. Liberalization of real estate lending is in the cards

The Shanghai Index has fallen 72%. From 1996 to 1997, the Shanghai index gained 345% and went on to drop 82% from middle 1997 to 1999. Today in 2013, China top regulators trying to revive the domestic stock market again. There are new stimulus. Also announced is regulators will allow a 10 fold increase of money by Qualified Foregin investors ( QFI) to invest in Chinese stocks. This is a major move.  Being a centrally controlled, they have shown that if they want the market to go up, it will go up. But it will also built up a bubble and fall again.

China growth is multi decade process. It will go through scary downturns but the overall trend is up. I know there are bears on China like Jim Chanos who has been shorting China for years. I remembered there was all kind of fears on China in 2005 when I left Singapore to live in Vancouver. But over the ensuing years including the big credit collapse in 2008,  if you failed to invest in China, you miseds the greatest bull market in the last decade. There are problems - corruption, lack of transparency but the estimated growth of 7-8% is still 4 times the USA. The drivers of the economy is changing from exports to domestic consumption. Unlike all other economies, they have $4 T in reserves to finance their growth. It is still run by the level headed communist leaders and in many instances, they are more capitalists and less regulated in the US. The Asian economies are fiscally conservative and now acting more capitalistic than US and Europe.

This is what is happening to the western world:

“When you’ve got a situation of governments that are running monstrous deficits, are able to borrow at zero…the basic bloodstream mechanisms of capitalism are seriously at risk.”  - Don Cox 

I came across the book "The coming collapse of China" by Gordon Chang. I heard him in a speech recently. He has made a revision to his book written in 2001. One wondered why the West still listens earnestly to a person who has been wrong for more than a decade? 

I like China and Asian countries because 

• Their GDPs are outperforming advance economy
• They are fiscally conservative. 
• Demographic is positive except for China
• Instead of debt, there is surplus.
• Free market thrive although the political control at the top is still dictatorial. Actually, because of this, they are able to move faster instead of the crazy politics happening in US
• Company growing at 10% annum with more than 5% dividends - not many in US
• Funds is flowing into emerging market. The $7.4 b that went into emerging market in second week of Jan 2013 is the biggest of all time.

 

6. Gold and Silver

 It is clear that I am long term bullish on gold. I am not a gold bug. Also, I do not really think that gold is money but is a good reference and storage for value in money. I believe it is a good hedge against the current insanity of money printing right now.

I have articulated many times on reasons for my bullishness in Gold.  It was discussed
here and here and here and many other posts in the blog.

The fundamental remains and is actually stronger now.

Unless there is a very long time frame, most people loss money in 2011 middle -2012. 

My core positions on physical gold and silver is still more than 100% gains over the last 5 years

My core positions on some miners, despite the brutal downturn, is still up. 

But I lost money on gold miners and caught by some of the volatility in gold and silver. Overall, I am still well into the positive longer term but gold miners did drag down my performance last year.

I am not going through all the reasons for my bullishness on gold again but gold miners are showing some bottoming signs in 2013. 

I have to admit that I was not successful in my gold miner stocks. It underperformed on my portfolio despite some hedging. There were junior miners that I do not hedge and hold it out for longer term. These are stocks that I expect returns of few hundred percent when gold goes into a maniac bullish phase. It takes patience and time. It is about 10% of my portfolio

 Despite all the whining, there are still record profit and margins at the major miners.

There are definite signs that gold and miners are giving a buy signal

 Central bank remains the net buyers of Gold. GFMS Gold Survey for 2012 which reported that central banks around the world bought more bullion last year in terms of tonnage than at any time in almost half a century.They added a net 536 tonnes in 2012 as they diversified fresh reserves away from the four fiat suspects: dollar, euro, sterling, and yen.

Although probability is that the bottom is near but gold may drop one more time $1400 to flush off bullish players with not enough convictions. If it does, it is a gift for me to add to my portfolio.


Silver is a more volatile metal than gold. If gold goes up 1 X, silver will go up 4X

There are beliefs that silver is greatly manipulated by the bankers. 4 major commercial players are hold 80% of the shorts. There is simply  not enough physical supply to meet the paper trades.

Currently, silver production just meet industry demand. Investment demand is on the increase and thus no enough supply

7. Uranium

Uranium fell to a low after the Japanese nuclear disaster in Japan in first half of 2012.  It was followed by declaration of moving away from nuclear energies by countries like Japan and Germany.

Since then it has fallen to a low and seems to be on an inflection point.

My bet is although nuclear energy has its risks but it is not going away. It is the cleanest and most efficient form of energy.

Once uranium supply from nuclear weapons are depleted, demand will exceed supply. Looks like a deficit will start by end 2014

Market environment and trading strategies

Managing volatility is key to success in the our market

 

There were big bets by hedge funds and banks ( which are using bailout money from the government ). I am amazed by the risks taken and level of manipulation in the market especially for gold, silver and commodities. I used to own a stock trading firm in Australia and many of the blatant price manipulation practices today would have caught the attention of the regulators and perpetrators punished and sent to jail! Looks like the regulators are asleep in the US. It is not longer a fair game - insider trading, high risk lop sided bets, price "painting", volume manipulation etc. 

The appetite for big risks had also cause the bankruptcy of MF Global ( nothing happened to Jim Corzine - CEO despite losing $2 billion of custodian funds of customers ), JPM's trading loss close to $8 billion dollars ( initially reported only $2b), and the bankruptcy of some hedge funds funds. 

We will continue to see more rogue traders, fat fingers and bankruptcy. After all, many of them are not gambling with their own money. Much of it are government money from tax payers.

High Frequency trading (HFT) has also removed the level playing field in the market. Retail investors and day traders are at great disadvantage. Not anyone can locate servers close to the exchange, employ high level quant mathematicians, advance notification of orders from the market and through algorithmic trading execute thousands in nano seconds.

I am actually not disturbed by the situation. The only to deal with it is the core of my trading strategies which are:

• Stick to the fundamentals
• Use longer term technicals to time the market. There is element of probability as to catching the reversal
• Using options to hedge the trade

The key objective is to be able to capture major trends and momentum based on the above

I will not elaborate on my trading strategies but the core components involve:

• Using naked puts to buy shares which are fundamentally strong and show signs of reversals. Hedge it when it is wrong. Allow time to work on your side. If underpinning fundamentals and technicals are proven wrong, get out with minimum loss and often with some gains.
• When trend and momentum is clear, use long stocks, OTM covered calls and call calendars to ride the trend
• Take profit consistently and when there are signs of reversals.

Tactical Strategies

• Apply a contrarian approach. I like stocks that are fundamentally strong but being beaten down but showing signs of reversals. The same is applied for shorts if the stocks is fundamentally weak, is overextended and showing signs of breaking down.
• Never trade against a trend
• Use a weekly time frame to watch the reversal and daily time frame to enter the trade
• Key indicators used are:

1. regression channels - look for change of slope, price behaviors on support and resistance
2. ichimoku to gage longer term bull, consolidation or bear
3. Fib. retracement to look out for important turning points. It is amazing how prices behave at key Fib retracement points
4. Bollinger bands to gage short term overbought and oversold conditions
5. volatility and theta measurement to decide on the type of option strategies to be used. 
6. MACD is a lagging indicator and is used only as a guide to the overall momentum and trend

In summary, all the above are used to read the price actions which is the most important indicator for the stock directions. If I can get 50% correct in my calls, I will make good money. So I do not need any more high probability trades or holy grail. I need risk management and discipline.

At all time, manage the risk and make the best attempt to avoid being hit by a standard deviation tail end or black swan event. 

Watchlist 

Technology

• AAPL  - This is a value play and bottom fishing candidates. The drop in price is believe to be sentimental. Trend is still negative and thus move in with a lot of caution using bull or collar. Bottom fishing candidates. Even when they were $85 and I was screaming for people to buy AAPL. It took 7 months (October '08 – April '09) for them to get back over $100 – and that was down from $200 – more than 50%.  so it's not like nobody had seen better value in AAPL earlier.  It stayed over $150 for about a year and then spent 7 months at a 50%+ discount.  Now they fell from $600 (I wouldn't count the brief spike to $700) to $500 for about 3 months – maybe they still go to $400 and maybe it lasts another 6 months.

This is a company with a PE 11 and tons of cash. It still has the cult following. There is the potential of China and Japanese market that are not fully realized. It is still an innovative company. Talks are ongoing with China Telecom which has 700 million subscribers and Japan Docomo.  Indication from production and vendors is still humming. Today news of cut in iPhone 5 is old news. It was cut from a high number. The Mac and iTunes division are still doing extremely well. I am certainly a fan of Apple having bought 4 Macbooks, 5 ipods just in the last 2 years! I swear I will never use another window notebook again once I shifted to a MacBook Pro.

• Google - one of the most innovative company that has still potential to grow.

• Facebook - a new platform and clear leader of the social media. If any company were to monetize the social media revolution, it is facebook. Just like dot.com companies, FB is the first mover like Amazon for online retail, ebay for auction. Valuation is very high now but  If it is driven by momentum, it could go parabolic before a massive correction again. It could also maintain its high valuation for a while like Amazon.

Precious Metal

I like royalty companies. I like their business models. It is a great leverage for the metal if it goes up. These are my 3 core positions

• SLW - for silver
• RGLD - for gold
• FNV - for Silver

Majors gold and silver companies for Core position

• AUY
• CDE
• GLD
• KGC 

Juniors

• SA  - for gold
• EXK  - for silver

Energy

• OXY - major oil producer
• CRR - major share in  ceramics used for fracking process in oil extraction
• LNG - transportation for natural gas
• WPRT - making natural gas engines
• BHI. SLB - oil services company. Rigs count has fllen off a cliff but it looks like bottoming in 2013
• CLNE - natural gas play

Uranium

• CCJ - biggest uranium producer in the world

Agriculture

• CF - one of the most profitable and values for Agriculture company. Technically, it has a good trend. Dividends are attractive
• POT, AGU - increased used of fertilizers
• MON 

Income - use these to get income with longer term OTM short calls. Target - 10-15% per annum

• MCD
• DBO
• BA

Currencies

• FXC - bullish
• FXA - bullish
• YCS - short the Yen for at least 1-2 years
• EUO - in a sideline 

These are mostly volatility trades using options. Seldom hold long term except to Japanese Yen recently

Shorts

• TBT - short treasury
• FSLR - a weak sector. Was never a fan of FSLR.
• GMCR - have never been bullish on a coffee makers at such high valuation. I am not convinced on their business model. 

Key success factors

• Clear understanding of the Fundamentals  but it usually lag. Often it can lag for a while!
• Have a clear Technical system to monitor important reversal signals and beginning of momentum to allow for riding of major trends.
• An option strategy to keep safety margins and increase probability of winning.

Big money are not make from active trading but the ability to call the right trend. But the market is unpredictable and thus it needs to be combined with a clear technical trading plan and hedging strategy. Most of the big money are made from managers that really understand the fundamentals although a few traders managed to make it rich but usually not sustainable.

Summary of Trading plan

• Continued focus on gold, silver, miners and agriculture. Watch out for reversal and catalyst for momentum. Anticipate an aggressive impulse trend. 
• Watch out for bond Bubble to burst. Highest probability it will increase modestly. A collapse will happen only if there is a return to growth or a total loss in confidence on the dollar.  Continue to use naked put for bottom fishing until momentum is clear. Will be choppy and then collapse. It will be short of the decade.
• Technology continues to be bullish - cost cutting, increased productivity. Watch out for Apple to bottom and then shoot up
• China recovery - sideways and then up. There will be a re acceleration of the Chinese economy
• Bullish on emerging market especially Asia 
• Market - up till Feb and then mild correction because of debt ceiling debate which causes fear, downgrades and uncertainty. But again, the debt ceiling will be raised as previously and the market continues its  up trend till April when reality of European situation and tax burden in US starts to hurt gain. Expect it to go down in Summer ending with a sizeable year end rally. 

These are my expectations but I reserve the rights to change. I will let the market tell me through my technical signals on key pivot points. If I can get at least half of my trend right,  I expect to make at least above 40%. But my target is to be able to make 15-20% annually. I failed this year because of the under performance of gold miners and some lost on shorting bonds. It was not a disaster after two great years in 2009 and 2010. 

I am optimistic that 2013 will be like 2009. Cycle tends to repeat and probably of achieving target of above 40% is high.