Monthly Archives: March 2012
Macro Millionaire Trade Alert: Buy the Currency Shares Japanese Yen Trust (FXY)
Buy the Currency Shares Japanese Yen Trust (FXY) June, 2012 $120 Puts at $2.50 or best
- Opening Trade
- 3-29-2012 – 10:30 am EST
- expiration date: June 15, 2012
- Portfolio weighting: 5%
- ($5,000/100/$2.50) = 20 Contracts
You know how I love second helpings, especially when the sushi bar is involved. I especially like unagi, or cooked eel, which is said to be an oriental aphrodisiac.
I am going to take advantage of Japan’s fiscal year end book closing on March 30 to reenter my short position of the Japanese yen. This is the one time a year when Japanese corporations suddenly repatriate yen back to Japan to beef up the cash on their books for their annual reports. Every year, this creates a quick boost to the yen against the US dollar which fades away in the following weeks like so much smoke.
Like everything else this year, the yen has had a straight line move since I put out my last call to sell the yen at the end of January. So while I made a nice profit on the first trade, I was never given another chance to reenter on the way down. Now I have that opportunity.
Since the yen bottomed on March 21, it has given back 25% of the move. Sure, I would prefer to get back in on the traditional one third pull back. But there are so few attractive trading opportunities out there right now that I am happy to jump the gun. If the yen strengthens more from here I will simply double up the position. This is a trade that I’ll be happy to live with for a while.
I have hammered away at the structural weakness of the Japanese economy ad nauseum for the past year. The one liner is that buyers of the country’s 1% yielding ten year bonds are dying off in droves, it has the world’s worst debt to GDP ratio, and labors under an Armageddon like demographic burden. It doesn’t help that they haven’t invested anything new since Godzilla ate the big screen. Sony (SNE) should have become Apple (AAPL). For those who wish to undertake a refresher course, please read the research pieces listed below:
My preferred instrument here is the Currency Shares Japanese Yen Trust ETF (FXY) , where I will be buying the June, 2012 puts. At the very least, the (FXY) should make it back down to $117 in the near future, a price we visited just a week ago, which should give you a quickie 70% return on the June $120 puts.
For those who are unwilling or unable to play in the options space, you can invest in the ProShares Ultra Yen Short ETF (YCS), a 2X leveraged bet that the yen falls against the dollar.
Do I hear Any Bids?
Japan’s Last Good Invention
The “New Normal” Calls for a Lower Market Multiple.
I am getting tired of the endless procession of perma bulls who keep insisting that, at a 14 times multiple, the S&P 500 is cheap. The last time I heard this was in 2000, when NASDAQ multiples went from 100 to 50, on their way to 10. Before that, it was in Japan in 1990, when multiples went from, guess what, 100 to 50 on their way to 10. Some 20 years later, Japanese multiples are still at a lowly 15.
When I first entered the stock business in the seventies, typical equity earnings multiples were in the seven to eight neighborhood. If you performed exhaustive stock screens, which then involved paging through endless reams of 10-k’s, newsletters, and tip sheets printed in impossibly small type, you could occasionally find something at a two multiple, the kind Graham and Dodd wrote about. Anything over ten was considered outrageously overpriced, fit only to be sold on to retail investors. This is when the prime rate was at 6%.
The weakness we saw this week is consistent with my long term view that we are permanently downshifting from a 3.9% to a 2%-2.5% growth rate, and the lower multiples this deserves. I’m convinced that if the circuit breakers had not been installed, we would have been visited by another flash crash last week. If you look at a 30 year range of market multiples, it ranges from 10-22. Given our flaccid growth prospects going forward, I think the new range will be 10-16. It doesn’t make today’s 14 multiple look like such a bargain.
The Bull’s Days Are Numbered
Quote of the Day
“The luckiest person in the world today is the baby being born in the United States. The outlook for this country is fantastic,” said Warren Buffet.
Decoding What’s in Your Pocket.
If you want to impress your friends with your vast knowledge of financial matters, then here are the Latin translations of the script on the backside of a US dollar bill.
“ANNUIT COEPTIS” means “God has favored our undertaking.” “NOVUS ORDO SECLORUM” translates into “A new order has begun.” The Roman numerals at the base of the pyramid are “1776.” The better known “E PLURIBUS UNUM” is “One nation from many people.”
The basic design for the cotton and linen currency with red and blue silk fibers, which has been in circulation since 1957, carries enough symbolism to drive conspiracy theorists to distraction. An all seeing eye? The darkened Western face of the pyramid? And of course, the number “13” abounds.
Thank freemason Benjamin Franklin for these cryptic symbols, and watch Nicholas Cage’s historical adventure movie “National Treasure.” The balanced scales in the seal are certainly wishful thinking and a bit quaint if they refer to the Federal budget. Study the buck closely, because there are soon going to be a lot more of them around.
What Did You Really Mean, Ben?
A Century Forecast on Emerging Markets.
I love making very long term forecasts, because they give tremendous insights into the future of the global economy, and because at my advanced age, I won’t live long enough to see if I am right or wrong.
Check out the chart below which shows predicted GDP growth rates for a 100 year period from 1950 to 2050. It shows why you should be infatuated with emerging markets (EEM) like Brazil (EWZ), China (FXI), and India (PIN), lukewarm about the US (SPX), and avoiding Europe and Japan (EWJ) like the plague. It also gives the underlying argument behind my long term currency calls to stay short the yen.
The basic trade is to be long countries and currencies with high growth rates, and be short, or at least stay out of, countries and currencies with low growth rates. As exciting as this chart is, I really don’t see myself living another 38 years to 2050. But who knows? Isn’t 100 the new 80?
Buy Indonesia on the Dip.
If you are looking for another emerging market to add to your list of things to buy on big dips, then take a look at Indonesia.
The world’s largest Muslim country offers a combination that I love, a population with great demographics that is also a major energy and commodities exporter. The archipelago is the biggest country in Southeast Asia and a huge exporter of oil and LPG to Japan on long term contracts. (An old friend of mine torched their Borneo fields at the beginning of WWII, and spent four years in a Japanese prison camp for his troubles.)
Other big exports include marvelous textiles, rubber, and increasingly rare tropical hardwoods. The global financial crisis only knocked their growth rate from 6.1% to 4.5%, and now it is back above 6%. No doubt, $63 billion of direct foreign investment into the country last year helped.
A series of tax reforms promise to keep the train moving, cutting the top corporate rate from 30% in 2008 to 28% in 2009, and 25% in 2010. Wisdom Tree had the “wisdom” to launch the country’s first ETF (IDX) close to a market bottom, a rare event indeed (what timing!), which became one of the best performers of 2009, rocketing over 300% from the lows to $60.
Islamic inspired terrorism is still a lingering concern. I keep Indonesia in the category of highly volatile, high risk, high return frontier markets that you only want to buy on a big dip. Keep it on your radar.
Quote of the Day
“If you can’t make yourself loved, make yourself feared,” said Meyer Amschel Rothschild, founder of the banking dynasty.
The Fusion in Your Future.
Expect to hear a lot about ignition in the next year. No, I don’t mean the rebuilt ignition for the beat up ’68 Cadillac El Dorado up on blocks in your front yard. I’m referring to the inauguration of the National Ignition Facility next door to me at Lawrence Livermore National Labs in Livermore, California.
Mention California to most people, and images of love beads, tie died T-shirts, and Birkenstocks come to mind. But it is also the home of the hydrogen bomb, which was originally designed amid the vineyards and cow pastures of this bucolic suburb. The thinking at the time was that if someone accidently flipped the wrong switch, it wouldn’t blow up San Francisco, or more importantly, Berkeley.
The $5 billion project aims 192 lasers at a BB sized piece of frozen hydrogen, using fusion to convert it to helium and unlimited amounts of clean energy. The heat released by this process reaches 100 million degrees, hotter than the core of the sun, and will be used to fuel conventional steam electric power plants. There is no need for a four foot thick reinforced concrete containment structure that accounts for half the construction cost of conventional nuclear plants. The entire facility is housed in a large warehouse.
The raw material is seawater, and a byproduct is liquid hydrogen, which can be used to fuel cars, trucks, and aircraft. If this all sounds like it is out of Star Trek, you’d be right. I worked with these guys in the early seventies, back when math was used to make things, and before it was used to game financial markets, and I can tell you, there is not a smarter and more dedicated bunch of people on the planet.
If it works, we will get unlimited amounts of clean energy for low cost in about 20 years. Oil will only be used to make plastics and fertilizer, taking the price down to $10 for domestic production only. The crude left in the Middle East will become worthless. Lumps of coal will only be found in museums, or in jewelry, its original use. If it doesn’t work, it will melt the adjacent Mt. Diablo and take me with it. If you don’t get your newsletter tomorrow, you’ll know what happened. Now what is this switch for?