- How hedge funds really make their money (it’s not investing genius)
- Three tricks the “hedgies” don’t want you to know about
- 2015-style volatility: Now comes the rally
- The dawn of the “petro-yuan” — dusk for the dollar?
- Will China be the first country to declare victory in the War on Cash?
- Behind the scenes of last week’s market drama: an alternative history
“It’s a rigged game, and they know it!” laments Zach Scheidt.
If you suspected Wall Street’s “best and brightest” have stacked the deck against you… Zach says you’re absolutely right.
Before Zach found his calling in the newsletter biz, he managed a hedge fund. “I managed millions of dollars in client money back in my hedge fund days, which opened doors for me that you couldn’t even imagine.”
Not that he’s feeling any guilt or shame, understand. “Nothing I did was illegal. It’s just been off-limits to people like you.”
But not for much longer.
More about that in a moment. First, though, Zach will help us pull back the veil on some of the hedge fund industry’s biggest secrets. Be forewarned: Some of this will make you mad.
For starters, hedge funds use a trick to double their dividend income on the backs of small investors.
“The strategy involves buying massive amounts of dividend stocks and then selling special call option contracts for these shares,” Zach explains.
“Hedge funds are counting on ‘little guy’ investors who own the call options to forget about the dividend. If these investors don’t take a specific action before the dividend is paid, hedge funds essentially double their dividend payments — at the expense of individual investors.”
Think about it. Hedge funds control hundreds of millions, even billions, of dollars with which to buy shares. And they can use margin — borrowing money to buy even more shares. That dividend income adds up in a hurry.
Then there’s a strategy hedge funds use to minimize taxes — sometimes at the expense of their own clients!
Through the course of a year, a hedge fund will rack up both short-term and long-term capital gains; as you likely know, short-term gains are taxed at a higher rate.
“Once the year is finished,” Zach explains, “an accounting firm will divvy up all of the gains and losses and assign them to investors in the fund. Keep in mind the managers of the fund are typically some of the biggest investors.
“I’ve seen many funds give preferential treatment to the managing partners of the fund, giving them a larger portion of long-term gains, while ‘normal’ investors are saddled with the short-term gains that carry higher taxes.”
Now here’s a really crazy one in this era of brokerages slashing their commissions on trades: “What if I told you that some hedge funds intentionally pay higher commissions when buying or selling shares?” says Zach.
It’s all about something called a “soft dollar” account that hedge funds set up with brokerages. “After setting up this account, hedge funds intentionally pay higher commissions for trades, and the broker sets aside any extra commissions in this account.
“So for example, a hedge fund might be able to trade for a penny per share. But instead, the fund pays 3 cents per share. So every time the fund trades 500,000 shares, the extra commission of $10,000 is put into an account for the hedge fund manager to use.”
In theory, that money is applied to research expenses. In practice, those research expenses include rentals of luxury cars and penthouse suites. “After all,” says Zach, “you have to be able to drive a nice car and stay in a nice place when you’re on a ‘research’ expedition, right?
“But even at best, this practice gave hedge funds an unfair advantage when it came to information they had on specific stocks,” Zach goes on.
“It’s amazing how much you can find out about a company, an industry or the prospects for different stocks if you have a ton of money to buy that information. Access to the best Wall Street minds, logins and passwords to the most powerful information technology and payments for information that simply isn’t available to common investors is a powerful advantage when it comes to generating higher returns and booking lucrative profits.
“When it comes to your investments, the old phrase ‘knowledge is power’ has never been more true. And hedge funds, with more and more ways to acquire that knowledge, have an unfair advantage in today’s market.”
But no more. Later today, Zach plans to blow the lid off the biggest hedge fund secret of all. This secret has the potential to deliver you a four- or even five-figure payoff in as little as seven days.
This is confidential, sensitive stuff. (Zach is sure to alienate some of his contacts back in the hedge fund world — but he feels this is information you deserve to see.) Watch for a special email we’ll send you around 3:00 p.m. EDT. The subject line will have your name in it: “URGENT: [Your name], Signature Requested.”
The major U.S. stock indexes are catching their breath after a monster run-up yesterday.
The Dow leaped 669 points by the close — good for No. 3 on the list of all-time gains measured in the number of points. (In percentage terms, it’s not that big a deal.) Indeed, all three major indexes registered their biggest one-day gain since the volatile summer of 2015. And as we write this morning, the Big Board has added another 59 points to reach 24,261.
Profit-taking has hit gold; the Midas metal is down $10, to $1,342. Crude is still holding the line on $65 a barrel.
The big economic number of the day is the Case-Shiller home price index. It leaped 0.8% in January. The year-over-year increase works out to 6.4% — with far bigger increases in hot spots like Seattle, San Francisco and Las Vegas.
We can’t shake the nagging thought that if interest rates are rising and consumers are feeling stretched, housing prices can’t keep climbing at this pace — certainly not in high-tax states where the new tax law makes it less attractive to own a pricey home with steep property taxes.
The Asian press is catching on to a cheeky proposition we threw out there a while back: America’s shale energy bounty could prove the undoing of the U.S. dollar.
Yesterday, the first oil futures contract denominated in Chinese yuan began trading in Shanghai. The timing is no accident: Because “fracking” and other technology have turbocharged U.S. oil production, China surpassed the United States last year as the world’s biggest importer of crude.
Hong Kong’s respected newspaper, the South China Morning Post, recognizes the significance. It quotes Shao Yu, an economist at Orient Securities, as saying, “The contracts, denominated in yuan, can technically help China gain pricing power and internationalize the yuan, if a mature market with strong trading activities by global investors is set up.”
Granted, that won’t happen tomorrow or next week. But the pieces are in place. Last fall, Jim Rickards called it the first step toward “a new international monetary order that does not involve dollars.” Russia and Iran will be especially interested in such an arrangement in the face of U.S. sanctions.
For more than 40 years, Washington has ruled the global monetary roost by propping up Middle East dictators in exchange for those dictators pricing their oil in dollars. That system is slowly coming to an end. Economic and financial shock waves are sure to follow. We’ll stay on top of it…
“Nah, nah, nah, nah… goodbye!”: Cash might become a thing of the past in China.
The country with the largest population in the world and the second-largest global economy is dropping hints — like Shaq’s high-top-size hints — that cash might become “obsolete.”
Early this month, the People’s Bank of China’s outgoing governor Zhou Xiaochuan said “the PBOC is looking into digital currencies as it pursues faster, cheaper and more convenient payment methods,” according to an article at Bloomberg.
Wait… is this the same PBOC that clamped down on crypto exchanges?
Well, yes.
Zhou Xiaochuan still toes the party line, warning, per Bloomberg, that “cryptocurrencies like bitcoin — more often used for speculation than payments — don’t serve the economy.”
So why would China go to a cashless economy?
Jim Rickards contends: “This is consistent with the Communist plan for total control of their people.” (Cue Darth Vader theme now.)
This is how it works: Once the volume of cash in the marketplace dips below a certain threshold, it no longer makes financial sense for merchants to accept cash payments. “Cash can be expensive to handle because vendors have to hire armored cars to move it, buy machines to count it, pay premiums to insure it and risk losses due to theft,” says Jim.
So… bye-bye, cash!
The Chinese government is ready and waiting for that event with “huge digital payments platforms developed by their own companies, Tencent and Alibaba, in addition to traditional credit and debit cards and mobile phone payments,” Jim says.
“Once physical cash is gone, your liberty is gone, because government can easily monitor and freeze all digital payments,” he continues.
“The only recourse for the Chinese people once their cash is gone will be physical gold and silver.”
And Jim believes China’s assault on cash might be the tipping point for a global movement: “Movements like this might start slowly, but they gain momentum and end quickly.”
“I have a working hypothesis about the events of last week and what’s happening in the markets,” a reader writes. “Since you have a supremely tuned bull$#!+ detector, I want to bounce this off you and see if it’s worth floating for discussion on The 5.
“Spoiler alert: No matter how cynical you are, prepare to take it to a new level:
“Monday — Trump and a few select congressional leaders get the word from their bosses in the central banking cartel re: We’re about to crash the market. No more propping up/plunge protection. In fact, we’re going short. So do what you need to do with your personal portfolios (i.e., sell stocks, buy gold, etc.).
“More importantly, gather up all the spending bills you were planning to pork through the system over the next six–12 months and push them through ASAP. By this time next week, the indexes will be plummeting and you’ll be in full crisis mode. We’re popping the everything bubble and all the leverage in the system could bring down bonds and the dollar as well.
“Tuesday and Wednesday — McConnell, Pelosi, Ryan and Schumer scramble to compile spending bills with their buddies in the House and Senate. A 2,000-page, $1.3 trillion barrel of pork suddenly appears from nowhere.
“Thursday — House of Representatives quickly approves the bill and forwards it to the Senate. The stock market tanks.
“Friday — Senate approves the bill at 0-dark-30 and forwards it to President Trump. At 5:55 a.m., he tweets, ‘I am considering a VETO of the Omnibus Spending Bill.’ At 1 p.m., he announces that he has signed it.
“So The Donald sent a misleading message before the markets opened Friday morning to stabilize things for a few hours while he and the other swamp rats closed out any remaining holdings in their personal portfolios and repositioned for the coming crackup. It worked. The market held steady until 2 p.m. and then resumed tanking.
“Bottom line: Either Big Short v2 is here or I’m wrong and the stock market bounces out of this dive and resumes its uptrend (in which case I’ll crawl back under my rock).”
The 5: An interesting thought experiment. Given the bounce yesterday — and as the day wears on the Dow has tacked on 200 more points — the rock is calling. But that’s not to rule out a similar scenario somewhere down the line.
We’re giving it till late July. By then, six months will have elapsed since the all-time highs. If those highs can’t be eclipsed within six months, then it might be safe to say the top is in for this cycle…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. One more time — Zach Scheidt is moments away from revealing some of the most closely guarded and profitable secrets of the hedge fund crowd.
Check your inbox around 3:00 p.m. EDT for the subject line “URGENT: [Your name], Signature Requested.” Don’t wait till later; this information is so sensitive it might go offline with no warning.
