Three Biggest Trades for 2011

Three Biggest Trades for 2011 Since trading the markets is also about finding speculative value and then taking on exposure to that, I've decided to post my three biggest trades for 2011. 1. Gold is currently priced at 1052 Euros per ounce. I see the US Dollar making a comeback this year to retrace about 25% of its losses from 2010 on the heels of renewed growth in the US and a sense that the Fed will start to tighten near the end of 2011 impacting short term rates, as well as the longer end of the yield curve to continue under the selling pressure we have seen in the past six weeks. Along the same lines, the ECB will have to continue to remain steadfast in dealing with the peripheral sovereign debt concerns as the European crisis is not done impacting things. This on the backdrop of increasing growth in the BRIC countries (Brazil, Russia, India, China) will allow for both gold and the dollar to do well in the first parts of 2011. As such, with gold currently priced at 1052 currently, I see this moving to 1350 in the first nine months and settling at 1275 at years end. This will create an extremely healthy risk-adjusted return by mitigating the dollar risk in the trade. 2. The S and P 500, currently at 1250 is going to close the year at 1420 because the recession is over. The January effect will be powerful, with equities putting on gains between 3-4% in the month alone setting the stage for a robust revitalization of the American economy. Implied volatility will continue to compress in 2011 and the VIX (Volatility Index) will reach pre-financial crisis record lows of 11 less than three years following the bloodiest October in stock market history in 2008. 3. Commodities continue to be all the rage, despite the dollar strengthening and rates rising as the global growth story becomes the prevailing sentiment. Copper will be above $6 a lb., Silver will see a move to $39, Gold will rally to $1800 an ounce, and Crude will hit and trade the $105 level. I do think we get a very tradable correction from May through July, as questions as to if we have come too far, too fast in this market move began to prompt investors to take profits. However, the longer term secular trend will ultimately help drive these markets back to new heights and continue rewarding traders and investors who used the dip as a chance to aggressively add to their positions. Good luck trading in 2011... We truly live blessed lives...

[B][I]The recession is over? What? Happy New Year![/I][/B] Come on John, the markets always have a mini spike in the new year, but the housing market tells the real story. The banks are headed for another Government bail out, each State has no budget left, they're broke and over spent .....and it gets worse...now in 2011 for the first time in the housing crunch, all the 5 year Option Arms are due and the there will be another huge waive of foreclosures! Haven't really used my economics degree in a while, but even the squares can figure this out.

Time will tell, of course, but the money that keeps that market and metals going is the money not being spent in the housing market. That's why both the Dow and gold are doing well now. The money has to go somewhere. And people with 5-year ARMs have had plenty of opportunity to get something done with their toxic loans. I myself used Obama's whatever it's called to convert mine to a 30-year fixed with the same maturity date and a lower rate. After all, all the 5-year ARMs doled out in 2005 didn't seem to cause too much trouble this year, did they? As long as someone buys the bonds (it's not just China -- they only hold 10% of our debt), we'll be OK. That's the risk right there.

Alf I agree with you but I think one thing makes John's thesis on commodites and the markets correct. Helicopter Ben has already stated emphatically that he will flood the market with liquidity. Housing can go down on a relative basis but if all assets are inflated by double then the prices can still go up. A rising tide lifts all boats and even though the resulting bubble could get ugly at some future point it is possible that short term the adage "Dont fight the Fed" works.

Alf, I not only usually agree with your sports picks, I agree with your economic forecasting as well (and I work full-time as a stock trader). @ others: Ben Bernanke and the Fed will inflate as much as possible, but wages aren't rising, and with global wages far lower than ours, and continued outsourcing, Ben and his helicopter will eventually starve the population if he overinflates, as wages won't keep up with the rising cost of food and gas. Combine that with a Republican Congress far less receptive to bailouts and handouts, and you have the makings of bad risk-to-reward scenario to be long the stock market. Being long the stock market might work, but in my opinion, the sharps have cashed out either in this Christmas rally, or long ago. To put it in perspective, the market has rallied nearly 100% in 21 months. Talk about being late to the game! To be honest, an eventual retest of SPX 925 (sometime in the next few years) wouldn't surprise me at all. As for the housing market, history has taught us that the previous bubble is never reblown. Just look at the Nasdaq 2000 (50% lower 10 years later) or the Nikkei 1990 bubble (75% lower still after 20 years) as just two examples. I'm sure long ago people in Holland bought tulip bulbs for years after that bubble, just knowing that a rebound to new highs surely was coming! :) Best of luck to everyone, John

Fire Bernanke, abolish the Fed, let the insolvent banks fail. No more bailouts with the taxpayers money. How is the recession over? When is the last time you went to a grocery store ? Real estate will continue to plummet / interest rates on the rise.

Peter Schiff FTW

[QUOTE=sunnyisle69;36424]Fire Bernanke, abolish the Fed, let the insolvent banks fail. No more bailouts with the taxpayers money. How is the recession over? When is the last time you went to a grocery store ? Real estate will continue to plummet / interest rates on the rise.[/QUOTE] I'm flagging my own post here, because if this post gets off topic, it would be nice to nip this in the bud. You can flag it too if you want. These "bailouts" have done a lot of good, and we're actually set up to get a pretty good return on our investment. If your case is to say the government shouldn't get involved, even if it's to make money, I can respect that. The recession is over because GDP is positive. Sure, the economy isn't good right now, but it's not in a recession. Real estate is flat, not plummeting, and interest rates have been forecast to rise for two years now. Bound to happen at some point, but it's no different than betting red until it hits and then saying, "See?" At least you're not suggesting going back on the gold standard.

[QUOTE=Alf M;36410][B][I]The recession is over? What? Happy New Year![/I][/B] Come on John, the markets always have a mini spike in the new year, but the housing market tells the real story. The banks are headed for another Government bail out, each State has no budget left, they're broke and over spent .....and it gets worse...now in 2011 for the first time in the housing crunch, all the 5 year Option Arms are due and the there will be another huge waive of foreclosures! Haven't really used my economics degree in a while, but even the squares can figure this out.[/QUOTE] Alf - The market is an anticipatory mechanism that has already factored in the above points. If you examine where S and P 500 companies profits come from, there is a materially different composition that is derived much more from exporting to the BRIC countries. Taking a more quantitative approach, Steve Ellison did a great breakdown on [url]www.dailyspeculations.com[/url]. Steve is very mathematical and really quantifies a number of his trades based on large macroeconomic variables. Here is some of his rationale at how the S and P will rally: "I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010. The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures. Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do. The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143. The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028. In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of 0.050. Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier. Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52. Factor Prediction t N R sq US Treasury yield curve 1.162 2.17 30 0.143 30-year change 1.052 -2.28 52 0.094 Trailing 5-year E/P 1.104 0.92 18 0.050 US unemployment rate 1.153 0.90 30 0.028 Weighted total 1.118 SPY 12/30/10 125.72 Predicted SPY 12/30/11 140.52 "

People say that the stock market is a leading indicator, and that it anticipates news well in advance, but that really isn't the case. Real estate topped in the summer of 2005, yet the market continued to rally straight into the fall of 2007. In fact, according to (government manipulated) statistics, the recession officially began before the market even topped! The market also rallied its largest two day rally ever in September 2008, right before the mega-crash one month later. What about in 2000? Stocks that were trading over $600 were only $2 less than one year later! In truth, the market is simply a reflection of the sum of the sentiment out there. Because of all human nature, sometimes the market is cautious, sometimes irrational, sometimes euphoric, and sometimes overly pessimistic. I do think that it is overly optimistic now though, with the underlying false belief that everything is getting better and that the Fed can and will fix everything. I believe both of these are false. This is not a typical recession. We just experienced the greatest bubble in debt that the world has ever seen. Debt levels everywhere (personal, corporate, and government) reached staggering levels. Much of this is still unresolved. To think that the popping of the greatest debt bubble ever will be fully healed and resolved in less than three years in my opinion is incorrect and slightly naive. Remember, the Nikkei index in Japan is 75% below its bubble peak even now 20 years later after it topped. It has rallied 50-75% over six times in those twenty years, but every rally was eventually fully given back. I'm sure that every rally was led by a chorus of bulls (often from Wall Street houses proclaiming that the market never goes down!). Good luck to everyone, John