What They’re Smoking on Wall Street

by Addison Wiggin & Ian Mathias

  • Study shows sky-high use of marijuana among Wall Street traders
  • Chris Mayer on a popular investment that will likely prove to be a bummer
  • One unusual trade to protect you from the coming stock market meltdown
  • The worst data point so far this year… proof the recession is far from over. Plus, an income program to help you deal with it


  Markets make opinions, the old-timers say. Today, we have empirical proof. Or at least a litmus test on the “mood” out there.

Gone are the days of the stereotypical high-rolling cokehead on Wall Street, says the drug screening firm Sterling. After conducting tests at 270 firms over the past three years, positives for cocaine have dropped 60%… down to just 7% of all failed tests.

Use of ganja, whacky tobacky, sensi, the good stuff — whatever your favorite name for it is — is way up. Marijuana now accounts for 80% of failed tests.

Nationwide, according to the Health Department, growth in cocaine and marijuana use was relatively stagnant over the same period. Perhaps, the stimulus money didn’t reach as far down the ladder as we’d suspected.

  Still, dude, doesn’t that explain everything? You must be high — paralyzed by laziness from the neck down — if you think there is no better investment out there than lending the U.S. Treasury money for two years at a record-low 0.46%.

Fuzzy-headed 10-year notes found a new low today, too. The T bill yields just 2.5% this morning — its lowest in 17 months, back when the global banking system was in the grips of the credit crisis.

  “Too many institutional investors are looking for yield,” says Agora Financial’s sober managing editor Chris Mayer. “Their quest will end in tears.

“This bond bubble is not only for Treasuries and corporate debt, but across the yield spectrum.

“For example, master limited partnerships, or MLPs, are popular with investors. Mostly these companies own pipelines for oil and gas. They pay out most of their earnings to their unit holders. Yields are now about 5.5% for the popular Alerian MLP Index. A 5.5% yield looks good today. But about a year ago, MLPs paid about 8.8% on average, according to the WSJ.

“To get to just an 8.8% yield from 5.5% means a drop in the price of the MLP of nearly 40%, everything else being equal. MLPs are too popular. They are overpriced, in my view.

“Most everything on the yield spectrum is similarly expensive. Investors are getting paid too little for the risks they are taking…

“In the end, I think it will end badly. Yield-starved investors will get the hammer dropped on them. The big buyers of the M&A boom will have paid too much. Higher taxes on dividends will gnaw away at shareholder wealth. And buybacks will prove too costly.”

  Another “you must be high” trade: the Japanese yen.

The same flight to safety trade that has pushed Treasury yields to record lows bumped the yen up to a 15-year high versus the dollar, at 84.17. Traders are rushing out of their carry trades and back into yen, even though fundamentals of the Japanese economy remain dismal, at best.

“The swings from risk aversion to risk appetite are always with us,” writes our new currency trader Abe Confas. “It may change from day to day and week to week, but it is not a surprise. The key to success is to correlate the prevailing sentiment with the trading opportunity. Let's look a bit closer at the current risk-aversion sentiment.

“The chart below shows an interesting co-movement between the S&P 500 and the dollar/yen rate (USDJPY) from October 2009. When the S&P strengthens, the USDJPY chart also moves up. When the S&P weakens, the USDJPY chart moves down. This is clearly showing that the yen is acting as a "safe haven" basket when the market is risk averse.

“For equity investors, this is a significant contemporary correlation. It means that equity portfolios can be protected with currency options. That is, a put on the USDJPY becomes a protective strategy for those fearing further declines in the U.S. equity markets.

“If the S&P falls, you can expect the USDJPY to fall in tandem,” increasing the value of protective puts Abe has suggested readers of his currency service use. We’re gathering our empirical evidence of Abe’s successful trading strategy as we speak. We’ll be “relaunching” the service this fall. Keep your eyes peeled.

  Another potentially “high” trade: commodities. Traders have currently amassed their largest long position in commodities since April 2008 — right before the crash.

According to data compiled by the Commodity Futures Trading Commission (CFTC) and Bloomberg, “long” futures contracts for an index of 20 commodities have reached a nosebleed 1.75 million.

A quick look at the Reuters/ Jefferies CRB Index of commodities reveals the prices are already breaking down.

In early January of this year, traders got similarly excited about a potential return of the 2008 frenzy for resources. That rally sold off quite sharply. We too expect the return of strength in commodities prices. But not before traders quit their addiction to Treasuries and money market funds.

  Part of the correction in the CRB Index comes at behest of the black goo. Crude oil, if you’ve been watching, has been hit hard over the last month, falling from $85 a barrel to just $71 today.

Thus, we note the majority of those speculative commodity holdings right now are in wheat and corn, up 51% and 16% this month, respectively. Our Resource Trader Alert readers raked in handsome profits earlier this month on these trades. Editor Alan Knuckman recommended they exit their corn and sugar positions before the crowd rushed in and banked 83% and 187% winnings.

Alan reminds us often, you can make money when the market corrects, too. He sat down with us recently and offered his unique wealth building secrets. Here’s what he had to say.

  The Dow and S&P opened down over 1% this morning. Traders were especially blown away by the biggest monthly drop in new homes sales history. The National Association of Realtors (NAR) announced this morning that July saw a 27% drop — nearly three times as bad as the Street forecast.

Inventories of unsold homes rose to a 12.5-month supply, the worst backup since at least 1999. All while median home prices remained flat, year over year, and mortgage rates were at generational lows.

The nation’s appetite for McMansions appears to have been satiated. Without more government incentives and tax credits, the housing market remains comatose.

  “The recession in America never really ended,” Dan Denning interprets the data from his desk in Melbourne. “It just got papered over by asset inflation driven by Fed policy and government stimulus that lulled people into somnambulant complacency. Yet it's clear that ordering extra gravy on your fries will not make you thin…

“A recession is the natural way of correcting bad investments made at the end of the business cycle or a credit boom. Those bad investments are failed businesses or misallocations of credit that didn't produce jobs, income or a net economic benefit. When credit excesses emerge, the recession wipes away the slate and puts the economy and the job market back on a sound economic footing where real growth based on real demand from real savings can begin again.

“Not that we're arguing in praise of recessions. But preventing them is a willful denial that any bad investments were made in the previous boom. It's like saying you don't need to burn calories to lose weight. You just need to eat more gravy fries and let fitness come to you naturally, while you gorge on Tim Tams on your couch and watch MasterChef.”

  “In my 401(k), I'm pursuing a barbell strategy,” a reader writes, responding to our question yesterday: How are you preparing for retirement?

“I keep 50% of my money in cash and the remainder allocated among stock and bond funds (60/40). In stocks, I'm overweighted in international and income funds. I'm underweight the S&P 500, as I believe the earnings growth with U.S.-based companies is short-lived.”

  “We went to cash in both our 401(k)s on Jan. 4, 2008,” a reader writes, responding to the same question.

“Those accounts are still in cash. Yes, we missed the climb off the March 2009 bottom, but we never felt comfortable enough with the light volume/high-frequency trading-driven phony rally to put half of our retirement assets back into the risk trade. We've gotten some grief for being conservative.

“Another 40% our assets are in a U.S. Treasury bond fund that has done well. With the final 10%, we're actively trading S&P 500 (ES) and Russell 2000 (TF) futures, both long and short. The bond market and general economic news has us expecting a significant retest of the March 2009 lows in the next year, and we think that cash and government bonds will be better than precious metals in that event.
“As long as humankind does not revert to cave dwelling and fighting with clubs and rocks, we think that three-five years out, there will be some real equity bargains again — when the Fed/U.S. government effort to prop up assets prices finally fails and real price discovery occurs.

“Maybe when PEs hit 6-8 again we'll consider buying equities, but we'll never own them for the long haul. We have a position trader's mind-set at this point.”

The 5: Being “in cash” is a position, too. 50% cash = 50% U.S. dollar, which, given its enduring flight-to-safety status these days is not necessarily a bad thing. However, you can get better rates if you diversify out of the U.S. dollar. EverBank currently offers a MarketSafe Currency CD well equipped for such a task. Might be worth a look.

We have an ongoing business relationship with EverBank, so we may be compensated if you open an account. Of course, we like the cut of their jib, otherwise we wouldn’t be in a relationship with them. Likewise, we think their CDs are a good deal for you if you’re trying to save your money.

  “10% in dividend stocks,” another reader rattles off. “25% in farmland. 50% in bank CDs. 10% gold/silver (physical). 5% in residential real estate.”

  “The best retirement income comes from several sources,” our last reader opines. “In my case, it's gold; guns; cash value life insurance; cash (all good); a 403(b); Social Security (not nearly as good); and a young, working wife (best of all.)

“Life is good.”

The 5: Indeed, it is.


Addison Wiggin
The 5 Min. Forecast

P.S. Our income specialist Jim Nelson has been looking far and wide for programs that will pay handsomely on the money you invest. Here, he presents a “government-backed” program we think is worth your consideration. Just click on the calendar of payments below:



Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More