Daniel Mankani "DynamicTrader – Trend Trading Dynamics" Trading for a living, systematically profiting from longer term trends.


We Are Entering Interesting Times, “Key Reversal Major” ESH2783.85

This gonna be very very interesting, "Key Reversal Major" , HIGH PROBABILITY!.
"Trading For a Living" - Daniel Mankani.

Markets participants tend to overdo,
everything that they intend to do,
if it works, rinse, repeat.

If it doesn't work, lessen the bad ones, keep the good one.
Look at overall system performance not of individual trades. Diversification.

All that is fine. But money is such that it always needs a home to survive.
And what happen's when that home doesn't exist.

Every "Fiat" whose price is reflective of the underlying,
a chase for the underlying begins. This is called a "Melt-Up"

Which is now been suggested by the markets, could be over.
Then comes the turn and we break good lower lows.

Example is; BITCOIN. Analysis of its recent trading anatomy,
how melt up, highest high and it will turn around and take out the lowest lows.

In the Stock Market now, the same underlying pattern is now taking place.

Key Reversal Major..

Co-relation Analysis.

The federal reserve and its associated crony banks have locked themselves in, now the baby is been given to the public.

The stupid and foolhardy investor that always emerges on greed, has now stepped in.

As markets plunge, that fiat has to go somewhere, what does that do to yields?

This coming weekend cot report could show gold squeeze.

Etf squeezes first for delivery and then to liquidate them.

psst here is the secret. “The market is ahead of the curve, what drives it. Sentiment, not economy. Economy on the other hand is reflective of the stock market which is in turn, ahead of the curve.

Its price vs change my friends, a game a cycles of price and time.

Get it?

And as the peak is left behind, feds will still have to hike, to spill more blood. So the foolhardy investor can get his fill.

He is a tough negotiator! He is Trump. He is a republican who are known to start big wars in the first term. He will want to try negotiating debt, bankruptcy king is what he is!

What you see is drip drip drip, once its wet enough, then it slips.

"If the analogy is true, then you can assume the result is other debts holders forgive US debts.  Which means long USD before it starts flying. Buy Moar!"


You are assuming that dollar becomes scarce as they liquidate treasures holdings and yields rise on them. Yes, in such an instance dollar will become scarce and fly, but in that scarcity lies in there its own collapse. Then do you think its will rise in price?

The response for that lies in, understanding whether the countries monetary supply is expanding or shrinking. Is there a trend towards self isolation vs opening up trade, monetary supply expands with more positive spread across borders.

That's your answer. Lies in the underlying.

By 2018 end, dollar will be down another 10% and its global dominance shrinks,
the challenges will be in china. Its becoming japan. USA will see its 1998.

17/Jan/2018 - Dynamictrader.com



Goldman: The Three Biggest Risks Facing Stocks In 2018

When it comes to the most influential investment bank in the world, Goldman Sachs, its 2018 outlook is borderline euphoric despite the bank’s own explicit admission that valuations have never been higher. In a tortured, goalseeked analysis which we discussed last week, the bank’s chief equity strategist David Kostin said that he expects a year of “rational exuberance” catalyzed by the Trump tax cuts becoming law (some time in early 2018), leading to an upward revised year-end S&P price target of 2,850 (from 2,500 previously) and rising to 3,100 by 2020 (Kostin’s “irrationally exuberant” parallel universe sees the S&P rising above 5,000 as the equity bubble repeats the events of the late 1990s – more here).

Naturally, the chief strategist concedes that all bets are off should Trump fail to pass tax reform (or even a far less comprehensive corporate tax cut program), and the S&P is likely to tumble to 2,400 from its current all time high level above 2,600 (Kostin did not have a S&P forecast for outer years which does not implement Trump tax cut, suggesting that Goldman’s clients will be extremely disappointed, and angry, should Goldman’s 80% odds of GOP tax reform passing prove just a "little" off ).

What is more interesting, is that even in discussions of the future that do not include Goldman’s assumptions of legislative reform, or its explicit S&P forecasts, the bank is especially sanguine, and does not anticipate a bear market as a result of 2017 being a “goldilocks year” in which the world enjoyed coordinated, synchronized global growth courtesy of over $2 trillion in central bank liquidity injections but without the matching increase in inflation, which coupled with a perverse collapse in global volatility...

... has resulted in US financial conditions that have almost never been easier, and would be more indicative of three rate cuts rather than three rate increases, as has been the case.

As a result, Goldman is confident that, absent a shock, “a bear market is unlikely” despite rising risks. Here is what Goldman expects in terms of the 2018 big picture:

On the negative side, investors can point to the combination of an already mature economic cycle and a long and strong bull market (mainly driven by loose monetary policy). Valuations are also stretched in most equity markets, particularly the US. These factors, combined with the start of (albeit moderate) quantitative tightening (QT) may also be cause for some concern. 

On the positive side, investors can be reassured by the strength and durability of the current economic cycle. While it has already been a long cycle, the unwinding of the financial crisis has also meant that, until recently, it has been sub-par in terms of strength – as is often the case following financial crises. This has been the case even in the US, where the recovery has been more robust than elsewhere and has helped to contain inflationary pressures.

Goldman is also quick to explain that since equity bull markets do not die of old age, its own bull/bear market indicator – which as we noted two months ago is at levels that preceded both the dot com and the 2007 global financial crisis – should be largely ignored:

Economic cycles and equity bull markets do not generally die of old age. Our work on bear markets shows that major drawdowns require triggers. The most severe type of bear market – the ‘structural’ bears – are a consequence of the unwinding of major economic imbalances and, typically, a financial bubble. These risks are low currently given that many of the pre-crisis imbalances have been reduced or shifted to the official sector and to central banks. Meanwhile, ‘cyclical’ bear markets are a function of the economic cycle and are nearly always triggered by a tightening of monetary policy in response to inflation pressure. While our bull/bear market indicator (Exhibit 6) is at elevated levels, this mainly reflects the strength of the current economic cycle, low unemployment and high valuations. Importantly, two of the other factors that are included in this indicator are not at elevated levels. Inflation is low and stable and, as a consequence, the yield curve remains upward-sloping. Without higher inflation, it is unlikely that we have the conditions for a recession and, therefore, a bear market. 

So while the Goldman “base” case”, which also happens to be the optimistic return scenario in which the S&P rises another 250 points, or roughly 10%,  over the next 12 months (paradoxically resulting in a PE that is roughly 20x even as the Fed hikes rates another 4 times, in the process likely inverting the yield curve, and central banks collectively slowing the annual pace of liquidity injections by  $1 trillion) is clear, the above bolded text lays out what Blankfein’s strategists see as the biggest threat to their scenarios for the coming year: inflation.

But besides rising inflation and/or inflation expectations, Goldman sees two other risks to its otherwise “rationally euphoric” outlook for the coming year. In sum, Goldman believes these are the three biggest risks to stocks in the coming year:

  • A bull squeeze.
  • A short correction.
  • A rise in inflation expectations.

Addressing the first point, also perhaps known as the “crack up boom", or market melt-up case, Goldman’s European strategist Peter Oppenheimer writes that the bank has “heard frequently from clients in recent time about the lack of an exuberant surge in stock prices that is so often synonymous with market peaks.” He notes that  investors fear that they could be left behind in the last ditch “surge of optimism as interest rates stay low and growth expectations continue to build and are further boosted by US tax reform.” To this Oppenheimer counters that “there are plenty of factors, particularly valuation, to suggest a market fall is more likely.” He makes the point by showing that we have now seen the second-longest period since 1929, at least for the S&P 500, of returns without a correction of 5% or more.

Yet even in admitting that a correction (or bear market) is long overdue, Goldman’s advice to clients is simple: don’t sell, to wit:

Even with risks of a correction or bear market, we think the best action is to stay fully invested, as we have found that anticipating market peaks by selling the market too early can be very ‘expensive’ in terms of forgone returns. For example, on average an investor who sells equities just 3 months prior to a peak (in the US) misses a 7% rise in prices; this is around the same amount as an investor who remains fully invested would lose in the first 3 months of a bear market.

Naturally, the above assumes a garden variety correction, and not some of the cataclysmic market corrections predicted by the likes of Fasanara Capital, Marko Kolanovic and others (such as this website), who anticipate a historic collapse, one which could lead to a comprehensive and indefinite market shut down as liquidity is drained in a post central banker backstop world. Goldman then makes a more relevant point, namely that any initial crash will likely see a sharp rebound in the early days of the bear market:

We also find that nearly all bear markets start with a correction, followed by a powerful bounce that offers investors an opportunity to sell later, assuming of course that they recognise this is an opportunity to sell rather than buy.

Here, too a caveat is warranted: the “powerful bounce” envisioned by Goldman is the result of shorts rushing to cover their positions and providing a natural downside buffer to the market. This may well not happen during the next bear market as Goldman itself showed that short positions among the hedge fund community are approaching record low levels, as the market’s relentless grind higher over the past year has crushed all but the most dedicated bears.

This brings us to the next risk, inflation, and as Goldman suggests, “for a correction to turn into something more sustained – a deeper and longer bear market –think inflation needs to rise, pushing up interest rates and increasing the risks of recession." 

As Exhibit 23 shows, there is a very substantial divide between inflation measured in the real economy (consumer prices, wages and commodity prices) since the start of QE in 2009 and inflation in asset prices. Anything that pushes up inflation is likely to result in higher rates. In our central case this is likely to moderate inflation in financial assets (prevent valuations from rising), while in a more extreme case, if inflation rises too sharply interest rates would also need to ‘normalise’ more radically than current markets imply.

The chart Goldman refers to is also the one we showed two months ago when a very confused Janet Yellen said the Fed no longer appears to have a grasp on “low inflation.” As Goldman, and we, showed, inflation is only low in the real economy.  In the financial economy, measured by asset prices, inflation has never been higher.

To be sure, Goldman’s point is valid: if and when inflation seeps out of asset prices and into real economy prices, perhaps as the velocity of money undergoes an unexpected spike (for reasons still unknown) ultimately leading to a sharp rise in wages, the Fed will be forced to catch up aggressively by tightening  monetary conditions far more than the Fed (via the dots) or certainly the market anticipates currently. This, however, brings a scary tangent: on Saturday, Citi’s Hans Lorenzen speculated that the Fed may be paralyzed even in the face of runaway “real world” inflation, as at least “some central bankers Citi has spoken to” admit they are afraid they have lost control over the market and its “reaction function” expectations. This is the world that result in hyperinflation in both the real and financial economies, and potentially culminates with the collapse of both fiat money and conventional monetary economics, unleashing the next global financial crisis as previewed recently by Deutshce Bank’s Jim Reid, and to a similar extent, JPM’s Marco Kolanovic.

Yet in its attempt to avoid a client panic and preempt selling, Goldman comes up with an ingenious loophole: yes, the stock market may crash as it has never been more overvalued, but if it does, it will drag down all other asset prices with it, unleashing a catastrophic liquidation waterfall across all markets. To wit:

In an environment where higher inflation expectations push up bond term premia, we would expect a correction across asset markets. While equity markets are expensive relative to history, so are most asset classes (Exhibit 24 and 25), which means they all are vulnerable to falling together, leaving few places to hide.

And there it is: Goldman admits markets have never been more overvalued, Goldman concedes that the market is long overdue for a correction if not bear market crash (something SocGen had the temerity last week to suggest will happen in 2018), it warns that should Trump’s tax reform not pass the market will tumble, it cautions that if inflation finally does pick up  - which ironically is precisely the Fed’s goal in its attempt to inflate away the world’s record debt load – equities will likely crash… but here’s the punchline: don’t sell because just where are you going to put your money, or as Oppenheimer puts it, “equity markets are expensive relative to history, so are most asset classes which means they all are vulnerable to falling together, leaving few places to hide.”

As a result, according to Goldman’s “logic”, it is not even worth bothering hiding. Well, there is one alternative:

For multi-asset investors, holding cash as a hedge against an overweight equity position remains a favoured strategy as an inflation-led bear market in equities would affect most financial assets, leaving few places to hide.

Or maybe not cash: judging by the meteoric rise in digital currencies, not only do traders disagree with Goldman’s unique brand of “logic”, but it is increasingly cryptocurrencies – and not cash – that is seen as the hedge to a systemic crash which could take down the very fiat monetary system that created it in the first place.


2017 Political Events on the Radar. 

Political events would keep you busy in 2017 
After two major political upheavals in 2016; Brexit referendum and Trump’s victory in the US election, 2017 is not going to be an easy ride either. The year could easily be marked as the year of political uncertainties. Below are the major scheduled political events that would keep investors on their toes.
The first one is the aftermath of the 2016’s major fallout and that is Donald Trump’s inauguration as the 45th president of the United States in January. Judging by his remarks, both pre- and post-election, one might assume a new era coming both in terms of economic and foreign policies.

In March, the British government is scheduled to trigger Article 50 and this could turn out to be a mega event for the year due to unprecedented nature.

Battle with ISIS in Syria would shape the foreign policies of two global superpowers; Russia and the United States in the first half of the year.

Next big one is scheduled through April-May and that is French election, where it is widely expected that Francois Fillon of the conservative Republican will lead the final battle against Eurosceptic National Front leader Marine Le Pen. The Latter win could lead to an exit referendum similar to that of the UK’s.

2016 saw the foreign allegiance of Turkey leans from the West towards East and the Country’s President is going to hold a referendum in the first half of the year which could make him more powerful than ever by making him executive President who could rule the country with as the undisputed head of both state and government.

For any investor, watching the moves of China is a must. So, all, eyes will be on China, when the country holds its 19th party congress in the autumn. This would lay out policies for the next five years.

The year could end with a bitter note if the current German chancellor Angela Merkel fails in her reelection bid in October. She herself has acknowledged that this is the toughest reelection she ever faced as Germans are disgruntled by her open door policy that has led millions of Muslim migrants into the war-torn regions of North Africa, Middle East and Asia.

Source: FxWire Pro - Commentary

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Brexit creates historical crash of massive proportions.

ALL EYES ON 1950 on SP.

^SP500 (Daily)  24_2_2016 - 29_6_2016

Notice the short signal from last yr. till that turns, sell every bounce.

This down trending channel trend line ideally will cap every bounce from here on. Only a close above delays again, it's pivotal.

2037 X 2 - 2118 = 1956

Expecting markets to become unchanged by US open and gold higher by then, gold is already confirming break out from the congested 1300-1320 zone, a move above 1342 confirms it and 1367 above closing, brings in a new bull. 

India to possibly also ease off into its close as its options expiry and roll over session today. 

Once SPX turns negative by 5pts or Dow lower than 35-50 pts today, confirmation will be provided, that a short term peak is in place and a move down below 2005 SPX confirms that a move towards 1950 is underway.

Even if the mkt closes here or 2010 region. Bears are still winning, only those longs will worry on Friday.

Tomorrows closing will be well watched as its the second qtr closing, we need to give good looking reports to all those pension funds type of money, don't we?

Watch dollar yen breaking lower than 102 for direction and bias.


Comparing 1930s with Today

"The Greater Depression Has Started" - Comparing 1930s & Today
Submitted by Doug Casey via InternationalMan.com.
You've heard the axiom "History repeats itself." It does, but never in exactly the same way. To apply the lessons of the past, we must understand the differences of the present.
During the American Revolution, the British came prepared to fight a successful war—but against a European army. Their formations, which gave them devastating firepower, and their red coats, which emphasized their numbers, proved the exact opposite of the tactics needed to fight a guerrilla war.
Before World War I, generals still saw the cavalry as the flower of their armies. Of course, the horse soldiers proved worse than useless in the trenches.
Before World War II, in anticipation of a German attack, the French built the "impenetrable" Maginot Line. History repeated itself and the attack came, but not in the way they expected. Their preparations were useless because the Germans didn't attempt to penetrate it; they simply went around it, and France was defeated.
The generals don't prepare for the last war out of perversity or stupidity, but rather because past experience is all they have to go by. Most of them simply don't know how to interpret that experience. They are correct in preparing for another war but wrong in relying upon what worked in the last one.
Investors, unfortunately, seem to make the same mistakes in marshaling their resources as do the generals. If the last 30 years have been prosperous, they base their actions on more prosperity. Talk of a depression isn't real to them because things are, in fact, so different from the 1930s. To most people, a depression means '30s-style conditions, and since they don't see that, they can't imagine a depression. That's because they know what the last depression was like, but they don't know what one is. It's hard to visualize something you don't understand.
Some of them who are a bit more clever might see an end to prosperity and the start of a depression but—al­though they're going to be a lot better off than most—they're probably looking for this depression to be like the last one.
Although nobody can predict with absolute certainty what this depression will be like, you can be fairly well-assured it won't be an instant replay of the last one. But just because things will be different doesn't mean you have to be taken by surprise.
To define the likely differences between this depres­sion and the last one, it's helpful to compare the situa­tion today to that in the early 1930s. The results aren't very reassuring.
Banks, insurance companies, and big corporations went under on a major scale. Institutions suffered the consequences of past mistakes, and there was no financial safety net to catch them as they fell. Mistakes were liquidated and only the prepared and efficient survived.
The world’s financial institutions are in even worse shape than the last time, but now business ethics have changed and everyone expects the government to "step in." Laws are already in place that not only allow but require government inter­vention in many instances. This time, mistakes will be compounded, and the strong, productive, and ef­ficient will be forced to subsidize the weak, unproductive, and inefficient. It's ironic that businesses were bankrupted in the last depression because the prices of their products fell too low; this time, it'll be because they went too high.
If a man lost his job, he had to find another one as quickly as possible simply to keep from going hungry. A lot of other men in the same position competed desperately for what work was available, and an employer could hire those same men for much lower wages and expect them to work harder than what was the case before the depression. As a result, the men could get jobs and the employer could stay in business.
The average man first has months of unemployment insurance; after that, he can go on welfare if he can't find "suitable work." Instead of taking whatever work is available, especially if it means that a white collar worker has to get his hands dirty, many will go on welfare. This will decrease the production of new wealth and delay the recovery. The worker no longer has to worry about some entrepreneur exploiting (i.e., employing) him at what he considers an unfair wage because the minimum wage laws, among others, precludes that possibility today. As a result, men stay unemployed and employers will go out of business.
If hard times really put a man down and out, he had little recourse but to rely on his family, friends, or local social and church group. There was quite a bit of opprobrium attached to that, and it was only a last resort. The breadlines set up by various government bodies were largely cosmetic measures to soothe the more terror-prone among the voting populace. People made do because they had to, and that meant radically reducing their standards of living and taking any job available at any wage. There were very, very few people on welfare during the last depression.
It's hard to say how those who are still working are going to support those who aren't in this depression. Even in the U.S., 50% of the country is already on some form of welfare. But food stamps, aid to fami­lies with dependent children, Social Security, and local programs are already collapsing in prosperous times. And when the tidal wave hits, they'll be totally overwhelmed. There aren't going to be any breadlines because people who would be standing in them are going to be shopping in local supermarkets just like people who earned their money. Perhaps the most dangerous aspect of it is that people in general have come to think that these programs can just magically make wealth appear, and they expect them to be there, while a whole class of people have grown up never learning to survive without them. It's ironic, yet predictable, that the programs that were supposed to help those who "need" them will serve to devastate those very people.
Most economies have been fairly heavily regulated since the early 1900s, and those regulations caused distortions that added to the severity of the last depression. Rather than allow the economy to liquidate, in the case of the U.S., the Roosevelt regime added many, many more regulations—fixing prices, wages, and the manner of doing business in a static form. It was largely because of these regulations that the depression lingered on until the end of World War II, which "saved" the economy only through its massive reinflation of the currency. Had the government abolished most controls then in existence, instead of creating new ones, the depression would have been less severe and much shorter.
The scores of new agencies set up since the last depression have created far more severe distortions in the ways people relate than those of 80 years ago; the potential adjustment needed is proportionately greater. Unless government restrictions and controls on wages, working conditions, energy consumption, safety, and such are removed, a dramatic economic turnaround during the Greater Depression will be impossible.
The income tax was new to the U.S. in 1913, and by 1929, although it took a maximum 23.1% bite, that was only at the $1 million level. The average family’s income then was $2,335, and that put average families in the 1/10th of 1 percent bracket. And there was still no Social Security tax, no state income tax, no sales tax, and no estate tax. Furthermore, most people in the country didn't even pay the income tax because they earned less than the legal minimum or they didn't bother filing. The government, therefore, had immense untapped sources of revenue to draw upon to fund its schemes to "cure" the depression. Roosevelt was able to raise the average income tax from 1.35% to 16.56% during his tenure—an increase of 1,100%.
Everyone now pays an income tax in addition to all the other taxes. In most Western countries, the total of direct and indirect taxes is over 50%. For that reason, it seems unlikely that direct taxes will go much higher. But inflation is constantly driving everyone into higher brackets and will have the same effect. A person has had to increase his or her income faster than inflation to compensate for taxes. Whatever taxes a man does pay will reduce his standard of living by just that much, and it's reasonable to expect tax evasion and the underground economy to boom in response. That will cushion the severity of the depression somewhat while it serves to help change the philosophical orientation of society.
Prices dropped radically because billions of dollars of inflationary currency were wiped out through the stock market crash, bond defaults, and bank failures. The government, however, somehow equated the high prices of the inflationary '20s with prosperity and attempted to prevent a fall in prices by such things as slaughtering livestock, dumping milk in the gutter, and enacting price supports. Since the collapse wiped out money faster than it could be created, the government felt the destruction of real wealth was a more effective way to raise prices. In other words, if you can't increase the supply of money, decrease the supply of goods.
Nonetheless, the 1930s depression was a deflationary collapse, a time when currency became worth more and prices dropped. This is probably the most confusing thing to most Americans since they assume—as a result of that experience—that "depression" means "deflation." It's also perhaps the biggest single difference between this depression and the last one.
Prices could drop, as they did the last time, but the amount of power the government now has over the economy is far greater than what was the case 80 years ago. Instead of letting the economy cleanse itself by allowing the nancial markets to collapse, governments will probably bail out insolvent banks, create mortgages wholesale to prop up real estate, and central banks will buy bonds to keep their prices from plummeting. All of these actions mean that the total money supply will grow enormously. Trillions will be created to avoid deflation. If you find men selling apples on street corners, it won't be for 5 cents apiece, but $5 apiece. But there won't be a lot of apple sellers because of welfare, nor will there be a lot of apples because of price controls.
Consumer prices will probably skyrocket as a result, and the country will have an inflationary depression. Unlike the 1930s, when people who held dollars were king, by the end of the Greater Depression, people with dollars will be wiped out.
The world was largely rural or small-town. Communications were slow, but people tended to trust the media. The government exercised considerable moral suasion, and people tended to support it. The business of the country was business, as Calvin Coolidge said, and men who created wealth were esteemed. All told, if you were going to have a depression, it was a rather stable environment for it; despite that, however, there were still plenty of riots, marches, and general disorder.
The country is now urban and suburban, and although communications are rapid, there's little interpersonal contact. The media are suspect. The government is seen more as an adversary or an imperial ruler than an arbitrator accepted by a consensus of concerned citizens. Businessmen are viewed as unscrupulous predators who take advantage of anyone weak enough to be exploited.
A major financial smashup in today's atmosphere could do a lot more than wipe out a few naives in the stock market and unemploy some workers, as occurred in the '30s; some sectors of society are now time bombs. It's hard to say, for instance, what third- and fourth-generation welfare recipients are going to do when the going gets really tough.
Relatively slow transportation and communication localized economic conditions. The U.S. itself was somewhat insulated from the rest of the world, and parts of the U.S. were fairly self-contained. Workers were mostly involved in basic agriculture and industry, creating widgets and other tangible items. There wasn't a great deal of specialization, and that made it easier for someone to move laterally from one occupation into the next, without extensive retraining, since people were more able to produce the basics of life on their own. Most women never joined the workforce, and the wife in a marriage acted as a "backup" system should the husband lose his job.
The whole world is interdependent, and a war in the Middle East or a revolution in Africa can have a direct and immediate effect on a barber in Chicago or Krakow. Since the whole economy is centrally controlled from Washington, a mistake there can be a national disaster. People generally aren’t in a position to roll with the punches as more than half the people in the country belong to what is known as the "service economy." That means, in most cases, they're better equipped to shuffle papers than make widgets. Even "necessary" services are often terminated when times get hard. Specialization is part of what an advanced industrial economy is all about, but if the economic order changes radically, it can prove a liability.
The last depression is identified with the collapse of the stock market, which lost over 90% of its value from 1929 to 1933. A secure bond was the best possible investment as interest rates dropped radically. Commodities plummeted, reducing millions of farmers to near subsistence levels. Since most real estate was owned outright and taxes were low, a drop in price didn't make a lot of difference unless you had to sell. Land prices plummeted, but since people bought it to use, not unload to a greater fool, they didn't usually have to sell.
This time, stocks—and especially commodities—are likely to explode on the upside as people panic into them to get out of depreciating dollars in general and bonds in particular. Real estate will be—next to bonds—the most devastated single area of the economy because no one will lend money long term. And real estate is built on the mortgage market, which will vanish.
Everybody who invests in this depression thinking that it will turn out like the last one will be very unhappy with the results. Being aware of the differences between the last depression and this one makes it a lot easier to position yourself to minimize losses and maximize profits.
* * *
So much for the differences. The crucial, obvious, and most important similarity, however, is that most people's standard of living will fall dramatically.
The Greater Depression has started. Most people don't know it because they can neither confront the thought nor understand the differences between this one and the last.
As a climax approaches, many of the things that you've built your life around in the past are going to change and change radically. The ability to adjust to new conditions is the sign of a psychologically healthy person.
Look for the opportunity side of the crisis. The Chinese symbol for "crisis" is a combination of two other symbols - one for danger and one for opportunity.
The dangers that society will face in the years ahead are regrettable, but there's no point in allowing anxiety, frustration, or apathy to overcome you. Face the future with courage, curiosity, and optimism rather than fear. You can be a winner, and if you plan carefully, you will be. The great period of change will give you a chance to regain control of your destiny. And that in itself is the single most important thing in life. This depression can give you that opportunity; it's one of the many ways the Greater Depression can be a very good thing for both you as an individual and society.


Modern Banking System diverges gold prices.

"The Gold Price Has Been Captured By The Modern Banking System" - Submitted by Alasdair Macleod via GoldMoney.com,

It is commonly assumed that the gold price and interest rates move in opposite directions.
In other words, a tendency towards higher interest rates is accompanied by a lower gold price. Like all assumptions about prices, sometimes it is true and sometimes not.

The market today is all about synthetic gold, gold which is referred to but rarely delivered. The current relationship is therefore one of relative interest rates, because positions in synthetic gold, in the form of futures and forwards, are financed from wholesale money markets. This is why a rumour that interest rates might rise sooner than expected, if it is reflected in forward interbank rates, leads to a fall in the gold price.

To the extent that this happens, the gold price has been captured by the modern banking system, but it was not always so. The chart below shows that rising interest rates were accompanied by a higher gold price in the 1970s after 1971.
We can divide the decade into four distinct phases, numbered accordingly on the chart.

In Phase 1, to December 1971, interest rates fell and gold increased in price, much as today's market expectations would suggest, but from then on until the end of the decade a strong positive correlation between the two is clear. So why was this?

Those of us who worked in financial markets at the time may remember the development of stagflation in the late sixties and into the first half of the seventies, whereby prices appeared to be rising without a corresponding increase in underlying demand for the goods concerned. This put central banks in a difficult position. In accordance with post-war macroeconomic thinking, monetary policy was (as it is to this day) one of the principal tools for promoting economic growth, and so the lack of growth was put down to insufficient stimulus. Therefore, monetary policy was diametrically opposed to the higher interest rates needed to counter increasing price inflation. The result was central bankers wished for low interest rates but were forced by markets into raising them, which they did reluctantly and belatedly. This is the logical reason the gold price rose to discount the increasing rate of price inflation, instead of being suppressed by increasing interest rates. This was Phase 2 on the chart.

Stagflation was very evident up to the end of 1974. Dollar price inflation measured by the producer price index increased by over 25% that year, reflecting higher oil prices imposed by the OPEC cartel. Inflation measured by the CPI peaked at 12%. Equity markets collapsed, with the Dow halving and London's FT30 falling by over 70% from its 1972 high. In London, the secondary banking crisis, triggered by rising interest rates, led to the failure of banks which had loaned money to property developers, resulting in a financial crash in November 1973. Again, mainstream economists were confounded, because the collapse in demand following that crisis should have led to deflation, but prices kept on rising.

The gold story was not just a simple one of belated and insufficient rises in interest rates, as the economic runes suggest. The riches endowed on the Middle East from rising oil prices benefited, in western terms, a backward society which invested a significant portion of its windfall dollars in physical gold. This was natural for the Arabs, who believed gold was money and dollars were a sort of funny paper. Investing in physical gold was also recommended to them by their Swiss private bankers. The recycling of petrodollars into gold routinely cleaned out the US Treasury's gold auctions, which failed to suppress the rising gold price.

The financial crisis and the associated collapse of stock markets in 1974 lead us into Phase 3 on the chart. Interest rates declined after the stock markets began to recover from the extreme depths of negative sentiment at that time. The gold price also declined, with the price almost halving from just under $200 in December 1974 to just over $100 in August 1976. It had become apparent that the financial world would survive after all, so bond yields fell while stockmarkets recovered their poise during that period. Fear subsided.

Again, the gold price had correlated with interest rates, this time declining with them. We then commenced Phase 4. From 1976 onwards, economic activity stabilised and price inflation picked up later that year, with the dollar CPI eventually hitting 13% in 1980. Interest rates rose along with price inflation, and gold ran up from the $100 level to as high as $850 at the London PM fix on 21 January 1980. For a third time, the gold price correlated with rising interest rates.

From the history of the 1970s, we have learned that today's non-correlating relationship between gold and interest rates cannot be taken as normal in future market relationships. Admittedly, derivative markets and the London bullion market were not as well-developed then as they are today. But they certainly were in gold's next bull market, from the early 2000s to 2011. However, the comparison with the seventies is the more interesting, particularly given the emergence of stagflation at that time.

While official inflation figures today show the relative absence of price inflation, much of that is down to changes in the way it is calculated. John Williams of ShadowStats.com estimates that inflation today, calculated as it was in the eighties, runs consistently higher than official figures suggest. He reckons it is currently at about 5%. And the Chapwood Index, compiled quarterly including 500 commonly bought items in 50 American cities, records price inflation at 1970s levels, closer to 9%.

As always, official statistics such as the CPI should be treated with immense caution, as John Williams's and the Chapwood inflation estimates confirm. But even the suppressed official CPI is likely to rise beyond the Fed's 2% target within a year from now, if the recent increases in prices of raw materials and energy hold. This is because the negative factors that have suppressed the index, such as the oil price, will soon be dropping out of the back-end of the statistic, giving the CPI an upward boost. Furthermore, rising raw material and energy prices will have little to do with the level of economic demand in the US, because the US economy is no longer the driver for commodity prices. That role now belongs to China, which plans to use vast quantities of raw materials for domestic economic and Asia-wide infrastructure development, and accordingly is beginning to stockpile them.

On this simple analysis, we can see how domestic US prices could record a significant rise without any increase in domestic demand. In other words, the conditions now exist for the stagflation that became so pernicious from the late 1960s onwards. The question then arises as to how the Fed will respond.

One thing hasn't changed over the decades, and that is central bankers' assumptions that prices are tied, however loosely, to demand. This is the text-book basis of the inflation target, which assumes that a 2% inflation rate is consistent with sustainable economic growth. There is, in conventional macroeconomics, no explanation for stagflation, despite evidence the condition exists.

No one is more surprised than the forward-thinking members of the Fed's policy-making committees, who anticipate the same dilemma that their predecessors faced in Phase 2 of our chart of the 1970s. The US economy will be stagnating, while price inflation is rising. The Fed will be torn between the need to keep interest rates low to stimulate credit demand, and raising interest rates to control price inflation. Only this time, a rise in interest rates and bond yields averaging no more than two per cent could be curtains for the Fed itself, because the losses on its bond investments, acquired in the wake of the financial crisis and through quantitative easing, will easily exceed its so-called capital.

The dynamics behind the gold market are however different now from the early seventies. Debt levels today are so high they risk destabilising the whole financial system, making it impossible for the Fed to raise interest rates much without causing a financial wipe-out. Asian governments, such as the Chinese and the Russians are known to have been accumulating strategic positions in physical gold, and the Chinese and Indian populations along with other Asian people have also exhibited notable appetites for physical metal. Instead of starting from a position where the US Treasury on its own in 1969 still held 14% of estimated above-ground stocks, its holding is officially at less than 5% of them today. That is, if you believe it still has the stated 8,134 tonnes.

This time, the gold price is likely to be driven by physical shortages in the old world, as American and European investors wake up to stagflation, their central bank's interest rate dilemma, and the loss of physical liquidity from their vaults.
Today's market set-up, particularly if Chinese demand for energy and commodities materialises in accordance with her new five-year plan, looks like replicating the early stage of Phase 2 in the introductory chart to this article. Gold increased fivefold from $42 to a high of about $200 in three years. The circumstances today have notable differences, not least the launch-pad of negative interest rates. But we can begin to see why, despite the near infinite growth of derivatives as a price-control mechanism, it could be mistaken to assume that the link between interest rates and gold is normally one of non-correlation, and will continue to be so.

Filed under: Trading 2 Comments

Stock Market Top Valuations, at a Critical Juncture

The prevailing valuations in the lofty US stock markets are increasingly becoming a bone of contention. Wall Street calmly asserts stocks are reasonably valued, since it has a huge vested interest in keeping people fully-invested. But with valuations soaring following a massive rally and weak third-quarter earnings season, they are dangerously high and portend great downside risk. Stock topping valuations abound.

Since investing is all about buying low then selling high, the price paid for any investment is everything. Buy good companies at cheap prices, and you’ll multiply your wealth over time. But buying those very same good companies at expensive prices radically stunts future gains. While cheap investments have great potential to soar as traders recognize their inherent value, expensive ones have already exhausted their upside.
And it’s valuations, not absolute stock prices, that define cheap and expensive. Valuations are where stock prices are trading relative to their underlying corporate earnings streams. The less investors pay in terms of stock price for each dollar of profits, the greater their ultimate returns. Valuations are most often expressed in price-to-earnings-ratio terms, with stock prices divided by underlying corporate earnings per share.

This concept is so easy to understand, yet the vast majority of investors ignore it. Imagine purchasing a house for a rental property that has expected annual rental income of $30k. How much would you be willing to pay for it? If you can get it for $210k, 7x earnings, it will pay for itself in just 7 years. That’s a great deal. But if that same house is priced at $630k, 21x, it will take far too long just to recoup the initial cost.

The stock markets work the same way, with each dollar of profits completely fungible. And the US stock markets have a century-and-a-quarter average P/E ratio of 14x earnings. That’s fair value for the stock markets as a whole, paying $14 in stock price for each $1 of underlying corporate earnings. This makes a lot of sense, as stock markets exist to “lend” capital from those with surpluses of it to others running deficits.

The reciprocal of 14x earnings is 7.1%. That’s a fair rate of return for those with excess savings they want to invest, and a fair price to pay for those who want access to that scarce capital. 14x facilitates mutually-beneficial transactions for each side of the capital trade, so it’s right where stock valuations have naturally gravitated towards over the very long term. Cheap and expensive are defined from that baseline.

Half fair value, or 7x earnings, is very cheap historically. Buying good companies’ stocks trading at 7x earnings is a virtual guarantee of massive wealth-multiplying future gains. Conversely double fair value, 28x, is exceedingly-dangerous bubble territory. Buying the same good companies’ stocks at 28x dooms invested capital to many years of lackluster gains at best, and catastrophic losses exceeding 50% at worst.

There’s nothing more important for investors to understand than general-stock-market valuations. They move in great third-of-a-century cycles I call Long Valuation Waves. These are divided into secular bulls and secular bears that each last about 17 years. Valuations start out cheap near 7x, gradually expand to or through 28x in the first-half secular bulls, and then consolidate back to 7x in the second-half secular bears.

Unfortunately the US stock markets remain mired deep in the valuation-contracting secular-bear phase of their LVW today despite their epic cyclical bull of recent years. How can that be true when the US stock markets have more than tripled since early 2009? The flagship S&P 500, despite its massive gains, still remains below its real inflation-adjusted peak from the end of the last secular bull way back in March 2000!

The last cyclical bull peaked in October 2007, and ominously the US stock markets are trading at far-higher valuations today than they were back then. This first chart looks at general-stock valuations as seen through the lens of the benchmark S&P 500, or SPX. Our methodology is simple, conservative, and easy to replicate. At each month-end, we record some key data from all 500 SPX component companies.

Each individual stock price is divided by that company’s latest four quarters of accounting earnings per share as reported to the SEC, yielding individual P/E ratios for all 500 SPX components. This is classic trailing-twelve-month methodology, involving hard historical data and no guesswork on future profits. Then all 500 of these P/Es are averaged, both simply and also weighted by individual companies’ market capitalizations.

Here are the results since the topping of the last cyclical bull, with SPX valuations recently surging up to lofty nosebleed levels. Contrary to Wall Street’s endless claims that the stock markets aren’t expensive today, prevailing valuations are actually way up at dangerous bull-slaying levels. The SPX and therefore US stock markets are trading at topping valuations today, which is a super-bearish omen going forward.

While I’m eager to see November’s valuation data, this month isn’t quite over yet. So our latest SPX valuation data is from the end of October. And that proved pretty ominous, with the market-capitalization-weighted-average price-to-earnings ratio of all 500 SPX component stocks rocketing 17.5% higher on a monthly basis to 25.5x earnings! These elite companies’ simple-average P/E ratio was right in line at 25.6x.

This was a huge jump in valuations in such a short period of time, an exceedingly-rare event. It had two primary drivers. First, the mighty S&P 500 rocketed an epic 8.3% higher in October, its best month since October 2011! Assuming constant corporate profits, any stock-price gains translate directly into proportionally higher price-to-earnings ratios. Up the P/E ratio’s P by any percentage, and the P/E will match that gain.

But that only accounts for about half of October’s extreme valuation ramp. The other half came from a weak third-quarter earnings season. While there were certainly some great results from elite technology companies, the great majority of SPX components saw flat-to-weak profits year-over-year. There were mounting worries of a bifurcated economy, the tech giants thriving while most of the rest of the companies struggle.

Lowering the E in P/E naturally forces valuations higher as well. And it’s pretty amazing lower earnings actually came to pass. It’s not overall corporate profits that feed P/E ratios, but earnings per share. The great majority of elite SPX companies actively manipulate EPS higher through stock buybacks. If overall profits can be spread across fewer outstanding shares, the EPS will rise which will force valuations lower.

And thanks to the Fed’s extreme zero-interest-rate policy held in place since the dark heart of 2008’s stock panic, corporations literally borrowed trillions of dollars near artificial record-low rates to use to buy back their stocks. As of the end of Q2’15, total buybacks over that past year alone had exceeded $555b! And a whopping 3/4ths of the elite SPX companies, the biggest and best in America, bought back their stocks.

These campaigns are explicitly designed to simultaneously boost stock prices and earnings per share, which creates an illusion of growth. Companies can even mask declining earnings by buying back enough shares to more than offset the drop in profits spread across them. And this outright earnings-per-share manipulation that lowers valuations makes this past year’s valuation ramp even more ominous.

A year ago in October 2014, the elite SPX component companies had a market-capitalization-weighted-average P/E ratio of 22.8x. Weighting all components’ P/E ratios by their market caps ensures smaller companies with outsized valuations don’t disproportionately skew the overall average. And the SPX ended that year-ago October at 2018, which was actually pretty close to the 2079 closing out October 2015.

With the SPX merely climbing 3.0% in that year ending October, it’s incredible that valuations still shot up by 11.5% despite those massive stock buybacks! This implies corporate earnings have peaked this past year, which helps explain these grinding toppy stock markets. If companies fail to even maintain their profits, then today’s lofty stock-market valuations based on future earnings growth look even more threatening.

Trading at 25.5x earnings last month, the SPX was right on the cusp of exceedingly-dangerous bubble territory at 28x earnings! No valuations remotely close to this had been seen in over a decade. Even back in October 2007 when the last cyclical bull peaked, the SPX valuation was considerably lower at 21.3x earnings. Yet stocks were still expensive enough to roll over from cyclical bull to cyclical bear.

Valuations are the key arbiter of those great bull-bear cycles in the stock markets. When stocks grow expensive by historical standards late in mature bull markets, the odds mount that a new bear market looms. And investors lulled into a dangerous sense of complacency at these critical times by Wall Street’s perpetually-bullish rationalizations of why stocks should rally forever face devastating bear-market losses.

After that last cyclical bull peaked in October 2007 at merely 21x earnings, the mighty S&P 500 would plunge 56.8% over the next 1.4 years in a brutal cyclical bear. Investors owning the best-of-the-best elite American companies constituting the SPX saw their capital more than sliced in half because they failed to heed the warning of high valuations. And today’s are more extreme, nearly 20% higher than that last bull top!

Remember that for a century and a quarter, the average P/E ratio of the US stock markets has been 14x earnings. The white line in these charts reveals where the SPX would need to trade to match this historical fair-value baseline. And as of the end of October, this number is way down under 1150. With the US stock markets so expensive, the downside as these lofty valuations inevitably mean revert is massive.

The stock markets would have to drop 45% based on current corporate earnings per share, even boosted by the gargantuan ZIRP-spawned stock buybacks in recent years, to merely return to fair value! This is an interesting number, because the typical decline in cyclical stock bears following cyclical stock bulls at this stage in the market cycles is 50%. The recent stock topping valuations are very menacing indeed.

For years, Wall Street has endlessly claimed these lofty Fed-levitated stock markets are justified based on underlying corporate-earnings fundamentals. For years, Wall Street has applauded the manipulative stock buybacks that artificially boost earnings per share. All this has led to extreme complacency, with most investors convinced this long-in-the-tooth bull market can continue indefinitely. Boy will they be surprised.

And even worse, the downside target for the next S&P 500 bear is actually much lower than fair value. At this stage in those great Long Valuation Wave stock-market cycles, valuations actually ought to be much closer to 10x earnings. This next chart, which zooms out to encompass the entire secular bear since 2000, illuminates this enormous downside risk created by the Fed’s brazen artificial stock-market levitation.

The US stock markets remain mired deep in the same secular bear that started back in March 2000. How can that be when the S&P 500 peaked at 1527 back then and recently soared to 2131 in May 2015? If the March 2000 apex of the last secular bull is adjusted for US Consumer Price Index inflation, which is even lowballed for political reasons, it works out to 2122 in constant May 2015 dollars. That’s a staggering revelation.

For 15.2 years, the US stock markets did nothing but grind sideways at best in real terms! For all the sound and fury of the Fed’s extraordinary stock-market levitation of recent years fueled by its unprecedented third quantitative-easing campaign, all it accomplished was returning the stock markets to their last real secular-bull peak. But not even the Fed’s epic money printing could create a solid corporate-profits foundation.

October’s near-bubble 25.5x SPX valuations were last seen 11.3 years earlier in June 2004. And those were right on the major secular-bear stock-valuation downtrend shown above with the thick blue dotted line. That valuation downtrend is exceedingly important, and actual valuations oscillated around it as usual in secular bears until late 2012 when the Fed launched and expanded its infamous QE3 campaign.

QE3 was radically different from QE1 and QE2 because it was open-ended, it had no predetermined size or end date like its predecessors. Top Fed officials deftly used this ambiguity to manipulate psychology among stock traders. They continually implied the Fed was ready to increase the size of QE3’s debt monetizations if the stock markets suffered any material selloff. The Fed was jawboning stocks higher.

Stock traders interpreted this endless dovishness exactly as the Fed intended, believing an effective Fed Put was in place for the stock markets. So they rushed to aggressively buy already-high stocks, ignoring all conventional indicators of risk including valuations. That Fed-sparked stampede into stocks fueled the massive breakout of the SPX above its 13-year-old nominal resistance near 1500 back in early 2013.

As the stock-market valuations rising sharply in the Fed-SPX-levitation era since 2013 prove, the huge stock gains weren’t the result of improving earnings fundamentals but merely Fed hot air. With profits failing to grow enough to justify those lofty stock prices, the fundamental foundation of recent years’ powerful stock bull was totally rotten. Stock valuations were driven to near-bubble extreme topping territory.

And with the Fed’s easy-money policies that inflated the stock markets ending, the chickens are going to come home to roost. The Fed concluded its new quantitative-easing bond buying with money conjured out of thin air in October 2014, and it seems to be on the verge of ending its zero-interest-rate policy kept in place since December 2008 that fueled those epic corporate stock buybacks seen in recent years.

And with the vast bullish psychological impact of QE and ZIRP fading, stock-market valuations are going to mean revert back to their secular downtrend in place before the Fed goosed the stock markets. The whole purpose of secular stock bears is to force the markets to grind sideways for long enough to give corporate earnings time to grow into the extreme stock prices seen at the end of the preceding secular bull.

This massive 17-year secular-bear grind is accomplished through smaller cyclical bears and bulls within that span. Secular bears consist of a series of cyclical bears that first cut stock prices in half, followed by cyclical bulls that double them back up to breakeven again. Since 2000, we’ve seen two of these full cyclical-bull-bear cycles. And as today’s dangerous stock-topping valuations prove, the next bear is imminent.

Thanks to the Fed’s gross market distortions in recent years dragging stocks so far outside of normal trends, this next bear is going to be a doozy. Secular bears begin with stock valuations near or above bubble levels, and end with them around half fair value at 7x earnings before the next secular bull can be born. At this late stage in 17-year secular bears as the valuation downtrend shows, P/Es should be near 10x.

Based on current corporate earnings, which Wall Street constantly claims are excellent, the SPX would have to plunge over 60% from here to 820! Even if profits start miraculously growing in this tough world economy, it’s hard to imagine them rising enough in the next couple years to push the SPX much over 1000 at 10x earnings. The Fed’s artificial stock-market levitation that so stretched valuations will prove disastrous.

Today’s stock topping valuations couldn’t be more dangerous at this stage in the great secular bull-bear cycles. SPX valuations are way up near bubble levels now thanks to the Fed, leaving vast downside to where they ought to be nearly 16 years into an indisputable ongoing secular bear. Investors need to be very careful in buying very expensive stocks today despite Wall Street trying to convince them otherwise.

And frighteningly, the corporate-earnings and therefore valuation situation may be even worse thanks to the gross Fed distortions of recent years. Corporate sales, which can’t be manipulated like earnings, have been weakening. Companies can cost-cut their way to profits for a while, but they can’t fire everyone and eventually have to see revenues improve to grow profits. Even stock buybacks are a temporary stopgap.

As the Fed starts the long road to normalizing rates after it ends its zero-interest-rate policy, the virtually-free money companies have been borrowing to buy back stocks will vanish. Higher borrowing costs will lead to plummeting share buybacks, which will end the manipulation of spreading overall profits across fewer outstanding shares year after year. So valuations could stay high or even climb higher from here.

The stock markets would be extremely expensive at 25.5x earnings even late in a secular bull market, but they are an accident waiting to happen this late in a secular bear. Investors ought to prepare for a new cyclical bear market that will at least cut stock prices in half. The biggest risk is not perceiving it in time, as bears unfold slowly over a couple years to keep investors lulled into complacency for as long as possible.

Investors and speculators alike can trade these stock topping valuations by being ready to liquidate their long stock positions as the stock markets inevitably roll over. Sliding stock markets can also be bet upon directly through put options on the leading SPY SPDR S&P 500 ETF. Alternatively, long positions can be added in gold (GLD ETF) and radically-undervalued gold stocks, as gold tends to thrive during stock bear markets.

Whatever you do, with stock markets at such a critical juncture it’s exceedingly important to cultivate strong contrarian sources of analysis to counter Wall Street’s perpetual Pollyannaish bullishness. That’s what we specialize in at Zeal. For 16 years now, we’ve been intensely studying and trading the markets from a hardcore contrarian perspective. We buy low when few will, to later sell high when few can.

You can put our decades of exceptional experience, knowledge, wisdom, and ongoing research to work helping multiply your wealth through our acclaimed weekly and monthly newsletters for speculators and investors. They explain what’s going on in the markets, why, and how to trade them with specific stocks. With valuations so extreme at this stage in the great cycles, now is a great time to subscribe and get informed!

The bottom line is the US stock markets are trading at dangerous topping valuations. Despite incredible buybacks fueled by record-low rates courtesy of the Fed, corporate profits are still so weak relative to Fed-inflated stock prices that stocks still neared bubble valuations following third-quarter earnings. This is a huge problem so late in a secular bear, when valuations should be far closer to 10x earnings than 26x.

This has to end badly. The gross Fed distortions of recent years artificially extended a mature cyclical bull and delayed a cyclical bear, but central banks can’t eliminate market cycles driven by valuations. The overdue bear market is still coming, and will be far worse starting from such lofty and overvalued conditions. Stock topping valuations at these extremes this late in a secular bear are exceedingly dangerous.

Filed under: Trading 3 Comments

Short and beating returns in a rising market

Short For Three And A Half Years And Outperforming 98% Of Traders: This Hedge Fund Did It
One of the most flagrant "conventional wisdom" market lies is that if one is positioned net short, one is doomed to be crucified, margined out and left penniless, broke and homeless in this quote unquote market, which has been micromanaged by all central banks since 2009 as a confidence-boosting policy vehicle whose only purpose is to levitate higher while creating the wealth effect, ignoring reality, and failing at what used to be a market's primary function: discounting the future.
So what is the truth?

As it turns out one of the best performing hedge funds in the past 4 years is neither a net-long, nor a market neutral, but Horseman Capital, which as of July is -54.2 net short, and has been short since the start of 2012.

Here are the Horseman's stunning returns by years:
2012: 16.27%

2013: 19.15%

2014: 12.63%

YTD: 7.63%

This means that Horseman's cumulative return in the past 3+ years has outperformed 98% of all hedge funds, and certainly most of the net-long biased ones.
How did he do it? By using a long bond position as a natural hedge. In fact, Horseman's net equity short is more than offset by a 60% net long in bonds.
This means that, big picture, while stocks have levitated higher, bonds have levitated higher-er.
So the next time you hear every single pundit on propaganda TV or in Wall Street research desperate to sell you stocks (which they currently hold), or to force you to sell your bond holdings (to them), think why for a few seconds.

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Traders Talk; Putting on the O’hare Spread – Dreamer, Schemer, In Vain Redeemer –

Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power. P.J. O’rourke

It was rollover and I was standing close to the center of the bond pit so that I would have access to both the spread paper and 2nd month brokers, when Darrell Zimmerman walked up to me. The bond market was experiencing a brief respite from it’s usual frenzied trading activity and Darrell had taken the opportunity to come by and talk to me. He informed me that he was working with some large institutional traders in New York and overseas, and that they were going to be trading some size in the 30 year. He then asked me if I would like to fill their orders, or at least a portion of them. I explained to Darrell that although I occasionally did brokerage, it was only as an accommodation to the floor brokers I stood next to, so that they would be able take a break or have lunch.The majority of the time I functioned as a trader, and I wasn’t interested in being taken out of the market, to fill some orders. Besides, I didn’t know who these customers were. Darrell went on to tell me that there was going to be a considerable amount of business, and that if I did a good job, I could have the deck. I respectfully declined his offer and Darrell walked away. It wasn’t long before I saw Darrell talking to another broker on the other side of the pit, and then another. Little did I know, that I had just made one of the smartest decisions of my life.

I had met Darrell and his wife Lisa, who doubled as his clerk, in the lounge of my clearing firm. He was a very talkative and gregarious guy, but in a used-car-salesman kind of way. He was a perennial bust-out, kicked out of numerous clearing firms at both the Merc and the Board, but now had an account where I cleared my trades. There were a lot of Darrells that hung around the Merc and Board; ego-driven dreamers that chronically blew up their trading accounts, yet always found a way to get back in the game; hanging on a little while longer before justice was inevitably meted out. A lot of them would quietly disappear, while others would get jobs on the floor, evaporating into the milieu of floor clerks never to be seen or heard from again, yet always fantasizing about making it big one day.

Every trader did it; dreamed about the big trade; fantasized about taking a shot. Chicago’s traders had their own mythical way for making this dream come true, the O’hare spread. The idea was to put on an incredibly large position, get in a cab, and head for O’hare airport. If the trade was a winner, you either returned home or got on a plane to Hawaii - if the trade was loser, you bought a one way ticket to a country that did not have an extradition agreement with the U.S. We also had a saying, “If you are going to blow out, blow out big” If your debit was too small, your clearing firm would write off the loss, and then write you off. But in the CBOT's version of “too big to fail", if you hurt your clearing firm bad enough, they would arrange a way for you to generate the income necessary, to pay them back. Apparently, Darrell had taken these fantasies to heart having already already planned to put on an O'hare spread, before he approached me in the pit that day. While I had refused his offer, he did manage to enlist 9 unwitting brokers to assist him and his partner, Tony Catalfo, in a scheme that would bring down one of the oldest clearing firms at the CBOT.

The bell rang at 7:20 AM on a Thursday morning and Tony, who had strategically placed himself in the Bond options pit, was buying up every at-the-money put he could get his hands on. Meanwhile, Darrell was putting in huge sell orders in the bonds to the 9 brokers whose help he had enlisted earlier. Tom Baldwin was on the other side of the bulk of these orders, and when the options traders started to lay off the puts they sold to Tony, with short hedges in the bond futures, panic ensued and the market had nowhere to go but down. Darrell then entered the pit himself and began to sell more bonds. In the Bond options pit, the put options were going through the roof, and Tony was beginning to take profits on his long put position. This all took place before 7:30 AM, when an economic release came out which was negative for bond prices. In a stroke of incredible luck, the market broke even more and Tony covered the balance of his position for about a 1.5 million profit, while Darrel was now short about 12,000 bond futures, and up about 5MM on his open position. The feedback loop of selling they had created was working perfectly.

Darrell had been dismissed long ago from my clearing firm, and along with Catalfo, was now clearing Stern & Co., a family run business that was founded by Lee B. Stern. Lee had made his fortune trading grains, and owned the Chicago Sting soccer franchise, a piece of the White Sox, and was one of the most respected members of CBOT. Lee rarely came onto the floor anymore, but when he did make an appearance in one of the grain pits, his actions were highly scrutinized by other traders, as a possible clue to where the market was headed.

Bad news travels fast in the futures industry and virally fast on the floor, so it did not take long for word of Zimmerman’s and Catalfo’s involvement in the bond panic, to reach Stern’s office. Lee’s son and a few of the firm’s employees rushed to the floor and quickly enlisted the help of the security guards. Zimmerman had lost his count and was standing outside of the pit when they grabbed him, while they physically pulled Catalfo out of the Bond options pit. After witnessing this melee, traders in both pits began to piece together what had happened. Tom Baldwin , who had been unsuccessfully taking the opposite side of Zimmerman’s orders, realized the sell-off had been artificially induced, and that traders would have to cover their shorts. He quickly took advantage of the situation and began to bid up the price of bonds. Bond futures and bond options prices reversed on a dime and snapped back with a vengeance.

Meanwhile, Stern’s employees, who had wrestled the trading cards out of Tony and Darrell’s hands, were frantically trying to get a handle on what was now, Stern's position. In addition to the trades that Tony and Darrell had made, were the fills of the 9 floor brokers, which had to be collected and aggregated in order to get an accurate count. It took them 2 hours before they could figure out the position, and what had been a $5MM winner, had turned into an $8.5MM loser by the time the position was liquidated. Had they been able to figure out Zimmerman’s position quicker, and not tipped off floor to what was going down, Stern could have escaped with anywhere from a small loss to a small gain. Instead, Stern had to make good for Zimmerman’s $8.5MM loss, and as a result, lost it’s clearing status after 25 years in business, and had to lay off 20 employees.

Catalfo tried to collect on his $1.5MM profit on his options position, but received a 42 month prison sentence instead.The proceeds from his trades were awarded to Stern to help offset his losses, while Stern went after the 9 filling brokers for the balance. Zimmerman hopped in a cab to the airport and got on a plane to his parents home in Canada, completing the other leg of the O’hare spread. He was eventually extradited and sentenced to 42 months for his efforts. Darrell Zimmerman came very close to pulling off his insane plan, but he let his ego and his greed get the best of him. Had he executed his plan on a smaller scale, in a more restrained manner, he might not have aroused the suspicion of his clearing firm. He had the market right where he wanted it, and had he not lost his count and tipped his hand, he might have been able to cover his position while it was still a huge winner. Whether they would have let him keep his profits is highly dubious, because Zimmerman’s sole legacy from his lunatic scheme, is the eponymously named rule, that allows clearing firms to seize the profits of any trader that attempts to take a shot at them.

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Market Forecasting.

Each time the market falls, our office gets inundated with various calls, inquiring on what to buy or what to sell and we also get calls from concerned clients all the times, who have noticed the differential increase/decrease of the accounts funds performance.

Just at the start of a larger move, these are the first signs for us to usually stand up and pay attention. Which we usually do, infact we are watching the entire world and its developments and use this as our base understanding of fundamentals behind the product commodity asset we are trading. With this information, then we usually begin our next strategic phrase of trading the markets.

Which we refer to as technical analysis. As a market analyst, we invest in charting systems, we develop new algorithmic calculations to identify best probability levels of a trade and then we execute those trades in a systematic manner, remaining true to the system, till either conditions are met. Boom or bust.


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