Value of Perfect Information

If it one truism that I’ve noticed over the years it is just that: but, that is a story for another day. I’ve come today to talk about the triple bottom in the Dow Averages and the good news (if you can call a La Nina inspired potentially devastating drought good) for the agricultural sector. To start the Chinese Government is lobbying on behalf of Potash. Seems they have had enough of bullying by BHP over iron ore, they certainly don’t want to be held hostage over fertilizer supply.  That is the stuff revolutions are made of just ask Marie Antoinette.  The good news is, it is just beginning to dawn on Wall ST. that the other companies deserve a look maybe a play.  They, of course will be happy to trot out their dance cards (so will the M&A boys).

First things first: The Dow Averages, confirmed by MACD are announcing their attempt to rally back to new yearly highs! Witness these charts:

Pictured Above:  The Goldman Sachs Ag index shows steady rise in commodity prices since the Dollar peaked and the Russian drought/fires caught media attention.  Droughts are not sexy, not as good for ratings as floods -but combination of factors have put these companies under accumulation. By the time the media catches on the investment opportunity will have waned. Bunge and CF Industries have steady “stair-step”  trends in the past week.  Agrium (AG) below, shows aggressive accumulation.  As I have iterated before The Food Wars Have Begun!

My guest on Hedge Fund Radio this week is Lee O’Dwyer, a portfolio manager at 5T Wealth Management in the sunny climes of Napa, California. Lee is at the vanguard of a new wave of financial advisors sweeping the nation that is leading the way for individual investors during these difficult times, when everyone is seeking the “new normal”. O’Dwyer is cherry picking for his clients the best money management techniques that have evolved over the last 30 years, and discarding the dross.

5T Wealth Management is offering sophisticated hedge fund management trading and risk control techniques, that until now, have only been available to the big boys, and making them available to the retail investor. Their goal is to achieve absolute returns at all times and strive for every trade to be profitable. Relative performance benchmarked to an arbitrary index, such as the S&P 500, has been consigned to the dustbin of history. We are all traders now, whether we realize it or not. Buy and hold is dead. Unlike your past broker, Lee does not expect you to pay him a big bonus and take him out to lunch because he lost only 10% when an index dropped 20%.

To avail yourself of O’Dwyer’s considerable talents you need only open a custody account at a major house like Fidelity, Goldman Sachs, or Morgan Stanley. You then sign a third person limited power of attorney that enables 5T to execute trades on your behalf, but not withdraw any funds. As you can log into your account online at anytime, transparency is total and complete. The positions are there in all their glory for you to view and analyze at any time, for better or for worse. There are no black boxes, homemade account statements, or a “need to know” basis. The arrangement gives many individual investors all the security they deserve in the wake of the ugliness thrown up by the unfortunate Madoff affair.

For all of this, Lee charges the 1% management fee and the 20% performance bonus that is standard in the hedge fund community. A “high watermark” means that bonuses are only paid out on new net increases in asset values. This makes double dipping in a volatile market impossible. SEC rules limit 5T to accepting only accounts with a minimum size of $750,000 from investors with $1.5 million in liquid assets. The new financial reform act will stair step annual income requirements from $200,000 a year now, to $300,000 and $400,000 down the road.

Lee employs a global long/short macro strategy that scours the world for only the cream of investment opportunities. Long term, he likes commodities (CU), food (DBA), (CORN), water (PHO), other resource plays, and precious metals (GLD), (SLV). He is enamored with the currencies of the commodity producing countries like Canada (FXC) and Australia (FXA). He is very bullish on emerging markets, like the BRIC’s, as well as other new entrants such as Indonesia (IDX), Turkey (TUR), Chile (ECH), and Poland (EPOL).

On the short side, he is adamant that the 30 year Treasury bond (TBT) is reaching the end of an epochal bubble. Lee also thinks that rapidly deteriorating fundamentals and a coming demographic nightmare demand that the Japanese yen (YCS) is headed for a generational fall. In the US O’Dwyer likes technology, energy, and commodity plays, but doesn’t expect much from the main indexes for the coming decade.

Lee hales from England where he obtained a degrees from the University of Wales, focusing on international relations, economics, and accounting. He immigrated to the US in 1993 where he joined a major US hedge fund, learning every corner of the alternative investment business from the ground up. In 2007, he moved on to 5T Wealth Management, an SEC registered investment advisor based just outside San Francisco. During the 2008 financial crisis, Lee limited his maximum draw down to 15% when the S&P 500 crashed 58%. He quickly earned back losses during the rebound that followed, much to the delight of his investors.

As a result, 5T Wealth Management is rapidly attracting new investors, and today boasts $110 million in assets under management. You can learn more about Lee O’Dwyer and 5T Wealth Management by visiting his website at http://www.5twealth.com/ . To listen to my interview with Lee O’Dwyer in full on Hedge Fund Radio, and to gain a glimpse into the future of retail asset management, please click here.

Pi_Fund +44%_YTD __+3.8%_AUG.

Pi was set up as a stock mutual fund mimic so there’s no hiding in cash, past the 40% level.  Thus we focus on non-correlative markets and industries that outperform during recession.

Gold, the fourth currency has been steady performer since April’s rally; however, I caution this trade may not work in the mini-crash we anticipate.  Twenty-eight percent short position will help to protect hard earned profits.  Stocks:  CF, GLD, AZO, GPC, IFN, NEM.  Short ETF’S:   MZZ, TZA. SOLDSHORT:  FAS.  CASH:  35%.

BETA_FUND_+31.3%YTD__+5.7%_AUG.

The Beta Fund with its heavy short position profitable at Dow 10,000:  is set to outperform the average 1.5x on the downside.  Mid and small caps, the favorite short vehicles because of limited foreign exposure and limited access to capital, hindering leverage; have dug toe holds.  Temporarily, we believe, stubbornly refusing further declines. Also, bank stocks remain under pressure and our short of Research in Motion (RIMM) has yielded 11% in as many days -as governments line-up to deny service, unless local ordinances are followed to the letter.  Can Google be far behind?

Be it in ourselves or in our stars?  A retest of long term support in the Dow 8000-8500 range is inevitable.  Market mood [Bipolar] and participation (of lack thereof) is such that, given the right catalyst, all players will crowd to the eye of the needle.  Current analog suggests a 1977 style secondary decline before or just after mid-term  elections.   SECURITIES:  GLD, GDX, EEV, SQQQ, MZZ, TZA, CF.  SHORTSALES:  RIMM, FAS.  CASH:  37%.

 As the food wars continue to percolate, another prominent player pushes higher on heavy volume!

And smile when I see this chart

The fiber optic cable that makes up the Chinese Internet is absolutely burning up today with rumors that the governor of the People’s Bank of China, Zhou Xiaochuan, the Middle Kingdom’s equivalent to Federal Reserve governor Ben Bernanke, has defected to the US. The Chinese authorities’ efforts to censor the story has only succeeded in pouring fuel on the flames. Even if the rumors turn out to be untrue, this could mark the end of three decades of political stability in China.

The report was relayed to the US by Asia Pacific analyst Matt Gertken at STRATFOR, a Texas based boutique private intelligence and geopolitical forecasting firm. It is believed that Chuan was forced to leave the country because of an anti corruption scandal, or worse, a dramatic shakeup of China’s macroeconomic and monetary policies. Chuan has not been seen in public since August 26.

China is facing a generational change in leadership in 2012, and the maneuvering has already begun over whether the country’s breakneck economic reform policies will continue to move ahead, stagnate, or reverse. Many in the 2.25 million People’s Liberation Army, where an underpaid rural underclass is well represented, have not been happy with the overemphasis on development of the coastal population centers. Even prime minister Web Jiabao has felt the heat. The brouhaha may explain why the main Shanghai index has sold off 5% in the past week, and the ETF (FXI) has clocked even bigger losses.

The story was just one of a daily outpouring of intelligence nuggets which I have been able to glean from STRATFOR’s premium subscription service. The combined output of an impressive 70 man research team steeped in credentials and fluent in local languages has a global reach stretching from Vietnam to the Sudan and Latin America. They include coverage of several emerging markets now moving into prime time, which I have written on extensively, like Turkey (TUR), Poland (EPOL), and South Korea (EWY).

STRATFOR is one of a handful of private intelligence firms that hedge funds increasingly rely on, especially when considering a position in frontier markets where hard data is scarce. Readers of the Diary of the Mad Hedge Fund Trader can claim a $50 discount off STRATFOR’s $349 annual fee by clicking here.

The spate of takeover bids we have witnessed in recent weeks, the BHP Billiton (BHP)-Potash (POT) deal, the Sanofi Aventis (SNY)-Genzyme (GENZ) deal, Intel’s (INTC) acquisition of Infineon Technologies (IFX), and the ongoing bidding war by Hewlett Packard (HPQ) and Dell (DELL) to swallow 3Par (PAR), is telling the rest of us reams about the broader market.

Virtually all of the recent bids have been made for cash. That means that the acquiring companies believe that both their own and their target’s share prices are historically cheap. That may be debatable, depending on whether you think the long term US GDP growth rate is 2%, or is going back to the torrid 3.9% we saw in the last decade.

The real education here is the outing of the industries that are attracting the premium bids. Those include agriculture, energy, commodities, biotechnology, and  technology, especially in cloud computing and mobile applications. BP (BP), an oil major, is said to be attracting covetous eyes while its stock is in the basement. Also notice the foreign origins of many of the targets, which underlies my theme that 90% of global earnings for the next ten years are coming from outside the US.

Regular readers of this letter will recognize these industries as part of a handful of major growth leaders for the next decade. By watching the M & A action, you are letting the giants with deep pockets needed to fund massive research efforts do your sector selection for you. Direct investment always leads activity in listed share markets, often by years. Ride on their coat tails for free.

It all reminds me of the “Pacman” takeovers of the early eighties, when Boone Pickens said that it was cheaper to prospect on the floor of the New York Stock Exchange than in the oil patch. The 2010 iteration of that statement has to be that it is cheaper to hire people through takeovers than to hire them outright. The hard truth is the net effect of these mergers is almost always a reduction of the labor force. This is why the jobs picture has not, and will not improve. To boost your investment performance, keep close tabs on newly announced takeovers, or easier still, keep reading this letter.

OK, maybe it hasn’t really crashed yet. But the two day, 3 ½ point sell off in the futures for the 30 year Treasury bond (TBT), at the end of last week was the sharpest drop in 18 months. Winston Churchill’s great 1942 quote, which marked the turning of the tide for Britain in WWII, comes to mind. “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

In my recent piece on the extreme overvaluation of government debt, I pointed out that the last time rates were this low, Treasury bonds brought in a miserly 1.9% yield for a decade (click here for the piece). Professor Jeremy Siegel at the Wharton School at the University of Pennsylvania has one upped me. After yields bottomed in 1956, bonds suffered negative returns for 30 years!

This should have occurred to me, as the first mortgage I took out on a Manhattan coop in 1982 carried an 18% interest rate. That was then Federal Reserve governor Paul Volker was waging a holy war on inflation and eventually won. I took out one of the first ever floating rate mortgages, and by the time I sold it three years later, the rate had melted down to only 11%. I tell this story to kids buying their first starter homes now and they look at me like I’m some kind of dinosaur.

I have always believed that markets will do whatever they have to do to screw the most people. A big part of the parabolic move in bond prices was caused by so many investors going into this the wrong way. Hedge funds were short Treasuries and long steepeners, while mutual and pension funds were underweight.

Remember, this was supposed to be the trade of the year? Of the decade? Only individuals and momentum players have been in there buying with both hands, not because they love low yielding bonds so much, but because they hate equities. All it took to set the cat among the pigeons was for Q2 GDP to come in at 1.6%, not as bad as expected, and for Ben Bernanke to remain silent about any plans to flood the markets with more liquidity.

This may not be the top in the bond market, but it is starting to resemble what tops look like. One more equity puke out in September could easily get us there.

Since June 26 (Lunar Eclipse conjunct Pluto, beginning Cardinal Grand Cross -sorry astrological reference), when gold futures saw huge open interest driving the price down to, eventually, $ 1157.76 -to exactly one month latter; 7/28 when Hightower Report states record open interest set and “the last seller exists” HR 8/9/10. 

China is the world’s largest producer of gold and holds the number two spot behind India for consumption. These new measures would add more foreign members to the Shanghai Gold Exchange to foster greater liquidity while also permitting these banks to hedge gold positions. In short, greater development of China’s gold market provides a big future demand boost for gold

Gold has gone nowhere!  Gold futures are either forming a triple top or establishing a launching pad for assault on $1350. However gold stocks may actually confirm this non-move with new highs signalling an ‘all clear’ … unless the markets crash!

Over the next three months I rate the possibility of a market crash (-15% in one week) at 50/50.  I guess that would be ‘pick-em’ in betting parlance.  The DJIA is sitting on the precipice at 10,000, Dow 3700 beckons the Transports.  Investors, while not panicked, remain shell-shocked, war weary:  pulling out $37 billion so far.  And, more than one major money-man is hanging up the cleats.  It seems like the give-up phase of the bear market has begun.  But, as one friend reminded in her e-mail: the banks, financials, consumer non-durables, and retail charts look so bad, any unexpected ‘better than the worst case’ news will cause a rally. As Chipolte demonstrated Friday sizzling to near highs. 

More than likely the global markets will follow the Nikki experience of the 1990′s -gradually down.  With pockets of strength along the way. Like our fertilizer stocks: CF Industries (CF), Agrium (AGU), Bunge (BG), [Potash officially removed from list +45%].

So far global trade, the myth of globalization, has broken down into regional trade skirmishes aided and abetted by currency discounting.  Every-one’s sucking lemons because Germany is the current export king.  Yet Siemens’ stock can’t break $100.  This just in: Bank of Japan announces renewed quantitative easing (to the tune of $355 billon) to enhance the availability of funds to businesses [pushing on a string].  Just as we forecast in our last missive.  Expect continued steps to reverse the deleterious effects the strong Yen is having on manufacturing, exports, and the deflating domestic economy.

So then stagflation reigns -it is stag deflation this time!  Gold rises as all currencies beat a hasty retreat to zero.  Breaking to new highs on both the futures and the GDX  (any close above $54 will do) would indicate the yellow metal goes along for the ride as a fourth currency (Yen, Euro, Dollar).  Any further financial crisis and Byron Wien’s $1550 becomes a scalable reality.

Surging toward new highs with ABX leading the way for a change.

GLD did not show the same jump in interest as did futures. International hedging thus is suspected.

With global warming a fait au complet (although La Nina augurs for a cold winter 2010/11)Canada is looking better and better.  Happy Labour’s Day Eh!        [Charts: GDX closes in on NH's with ABX leading the charge for a change.  GLD did not see vol. spike as did gold futures, thus international hedging is suspected.]

You are not going to believe this, but on Friday, August 27th, we got both a fifth official Hindenburg Omen observation and a 90 percent up day. Completely bizarre combination, which is the point. It is this sort of confrontational confusion inside markets which is the basis and background for all of the stock market crashes over the past 25 years. This does not mean we are definitely going to get a stock market crash, but it does mean the odds of getting one are far greater than the normal less than one-tenth of one percent on any given day. Because this set-up is rare, only 27 such set-ups over the past 25 years, it throws the market into a unique and infrequent population of only 27 occurrences, and within that unique 27 occurrence set-ups, we have seen a market rattling stock market crash 8 times, or 30 percent of the time this unique set-up occurred. The time span for this set-up is 120 days, 120 days of high risk. The market lacks uniformity, lacks certainty, lacks its normal stability. There were no instances over the past 25 years when a stock market crash occurred without an official Hindenburg Omen being on the clock. We now have a five observation Hindenburg Omen cluster.

First, let’s give the details on the latest and fifth Hindenburg Omen, which ironically arrives on a day when the Industrials rose 165 points, not the sort of day one would expect to see a Hindenburg Omen observation. There were 141 New NYSE 52 Week Highs (and by the way, coming on a day when U.S. Bonds tanked), with 74 New NYSE lows. The lower of the two came in at 2.36 percent of total NYSE issues traded Friday, which was 3,140. New Highs were not more than twice New Lows, the McClellan Oscillator was negative (-48.34), and the 10 Week Moving Average was Rising.

As for the 90 percent panic buying up day Friday, there is an amazing phenomenon going on since the April 26th, 2010 top. We have now had twelve 90 percent panic buying up days and thirteen 90 percent panic selling down days since that top. That is, 25 out of the past 87 trading days have been panic trading days, with an approximate equal number of up versus down. This is astonishing.

What does this mean? Pretty much the same thing as the confirmed and official Hindenburg Omen observation means, that the market lacks uniformity, that the market is in an unstable condition, and it is at these times that markets are especially vulnerable to a stock market crash. Again, this does not guarantee a crash, as the odds are only about 30 percent, but compared to the normal less than one-tenth of one percent probability for a crash on any given day, that is an astronomical increase in the odds for a crash. A 90 percent up day occurs when both up points and up volume are above 90 percent of total volume, with the converse being true for 90 percent down days. These are usually rare, but the incidences since April 26th, 2010 have been anything but rare. We get one on average every fourth trading day.

That said, if you are a high stakes gambler, there is a 70 percent chance we will not see a full-blown crash over the next three and a half months (120 days from the first observation, August 12th, 2010). But there are higher odds that a large and significant decline could come over this period, even if it falls short of a crash. The odds of a decline of 10 percent or more are 40.8 percent; the odds of a decline 8 percent or greater are 55.6 percent; and the odds of a decline greater than 5 percent are 77.8 percent — pretty high. Since August 12th, 2010, the date of the first observation, the Industrials have fallen 3.7 percent, and since the second and cluster-confirming observation on August 20th, the Industrials have fallen 2.7 percent. But there is a long way to go before the threat period ends.

On page 16 and 17 in this Weekend’s Expanded Market Report we show that the large Head & Shoulders top patterns from November 2009 have now completed in the S&P 500 and NDX, prices having fallen to the necklines. This increases the odds that a stock market crash is slowly developing and will have an acceleration point over the next several months. Why? Because to reach the downside price targets would require a decline greater than 15 percent, actually greater than 20 percent from the top of the right shoulders.

Check out our AUGUST Specials, including an amazing 8 month offering for only $189, or 2 years for only $459 at www.technicalindicatorindex.com. We also offer a 3 months for $89 budget friendly deal this week.

We cover a host of indicators and patterns, and present charts for most major markets in our International and U.S. Market reports, available to subscribers at www.technicalindicatorindex.com

If you would like to follow us as we analyze precious metals, mining stocks, and major stock market indices around the globe, you can get a Free 30 day trial subscription by going to www.technicalindicatorindex.com and clicking on the Free Trial button at the upper right of the home page. We prepare daily and expanded weekend reports, and also offer mid-day market updates 3 to 4 times a week for our subscribers.

“Jesus said to them, “I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day.”

John 6: 35, 38, 40

 I attended the Woodstock of investment conferences last week, the San Francisco Money Show, which offered an entertaining three ring circus of traders, foreign exchange models, options platforms, newsletters, cruises, video broadcasts, and more.

The cavernous Marriott Marquis hotel and convention center South of Market on 4^th Street was absolutely bubbling with new ideas. You couldn’t walk five feet without tripping over a great investment theme, and information overload was the problem of the day. There was a plethora of celebrity speakers, including Elaine Garzarelli, John Mauldin, and Think or Swim founder, Tom Sosnoff.

There really is no corner of the financial markets that was not well represented by market makers, analysts, technology providers, and investors– thousands of them. With the soaring level of US government debt scaring the daylights out of everyone, the precious metals dealers were there in force.

Of course, the hard asset crowd was everywhere, and you could not swing a dead cat without hitting a miner looking for new funding. Never mind that the barbaric relic went up for all the wrong reasons. The dollars they’re making are still just as good at the bar. The only thing missing from the show was the long predicted hyper inflation. Want to prospect in the Ivory Coast? No problem.

I was pleasantly surprised by the diversity of major corporate sponsors there to promote their own shares, like Darden Restaurants, Proctor and Gamble, Roche, Sanofi Aventis, Vale, and Nidec, several of which are great investments. A variety of oil service companies were also well represented. A “green” section offered a look at wind, solar, and geothermal energy providers.

I took the opportunity to talk with companies about everything from the latest drilling costs, long term food prices, and the true cost of geothermal, to the clever play in gold coins (go for those struck at the San Francisco Mint). I was constantly amused every few minutes by attendees who, seeing my nametag, asked to have a photo taken with the one and only Mad Hedge Fund Trader, and to sign their program.

After I make my fortune, there was even a booth extolling the virtues of retiring on the beach in Costa Rica or Belize. It was a great opportunity to chat with the end investors who ultimately drive all these markets. All in all, it was a weekend well invested. For a calendar of future events, go to www.MoneyShow.com.