It seems like another day, another analyst downgrade for technology. The latest report came from Japan's Nihon Keizai Shimbun, which reported that Apple has asked parts suppliers throughout Asia to cut back parts shipments for its iPhones by 20%. Apple shares responded by falling by $5 to $190.
Granted, the global cell phone market has been flat for the past two years. What is new is that Apple has been extracting an ever-larger share of the global smart phone profit stream, now at a heady 92%, thanks to more expensive products with better functionality. That's what I'm focusing on.
We saw a similar downgrade for the chip sector days early, which cut $9 off the high beta play there, Micron technology (MU).
The bad news was enough to trigger a long overdue rotation from perennial leaders in technology toward laggard banks, retailers, materials, and consumer discretionary.
Remember, as long as no new net cash is coming into equities beyond share buybacks, the main indexes can't break out to new all-time highs. My 10-month range for the (SPY) lives!
It is normal to hear a rising tide of wailing from Cassandras decrying impending doom as we reach the end of an economic and stock market cycle. At nine years, this one is already the second longest in history. But we have six more years to run to top the market performance from 1949 to 1961.
Personally, I believe the current technology cycle has a minimum of one to two years to go, so there is more than ample time to make money in the sector.
Much media was focused last week on the G7 Meeting in Quebec City Canada, which appears to soon become the G6, ex the United States. Here we see the unfolding of another aspect of Trump's global strategy.
He wants to break up the American led post WWII order, which made us all wealthy and abandon Europe, Japan, and Australia as allies. This is what all the new trade wars against our friends are all about.
Instead, the NEW world order has us allied with Russia, Saudi Arabia, and a handful of Gulf sheikdoms. If carried out, it should shrink U.S. GDP growth by 1% to 2% a year, caused the mother of all stock market crashes, and greatly undermine the security of the United States.
My prediction is that it won't last. The market risk is zero for the short term, but enormous for the long term. I am not alone in these predictions.
There was another new world order emerging this week, and that the addition of Twitter (TWTR) this week to the S&P 500, replacing old line chemical company Monsanto (MON). I have to confess that I totally missed the Twitter turnaround, which has rocked from $14 to $45 in a year.
Maybe meeting Twitter employees during my nightly hikes on Grizzly Peak and meeting despairing Twitter employees who went up there to commit suicide had something to do with it. This kind of experience kind of puts one off a stock for life.
As for the Mad Hedge Trade Alert Service we are having another blockbuster month. I caught the upside breakout by the lapels and shook it for all it was worth with aggressive long positions in Microsoft (MSFT), Amazon (AMZN), Salesforce (CRM), Apple (AAPL), and the Biotechnology Index (IBB).
The result was to take the performance of the Mad Hedge Trade Alert Service to yet another all-time high. Those who signed up at any time in the past 12 months have to be extremely happy.
After one trading day, my June return is +6.24%, my year-to-date return stands at a robust 26.75%, my trailing one-year returns have risen to 62.14%, and my eight-year profit sits at a 303.65% apex.
This coming week will be all about the big Fed decision on interest rates on Wednesday.
On Monday, June 11, no data of note is released.
On Tuesday, June 12, the Federal Open Market Committee Meeting begins. At 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.
On Wednesday, June 13, at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST, the Fed is expected to raise interest rates by 25 basis points. At 2:30 Fed Chair Jerome Powell holds a press conference.
Thursday, June 14, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.
On Friday, June 15 at 9:15 AM EST, we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, I will be taking off on my 2018 Mad Hedge U.S. Road Show. See you at lunch.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/06/John-Thomas-on-laptop-story-2-image-5-e1528494429743.jpg400300MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-06-11 01:07:252018-06-11 01:07:25Market Outlook for the Week Ahead, or Welcome to the New World Order
There is in fact a logical mathematical path that gets us precisely there.
If there is one question I get asked more than any other as a 50-year market veteran, it is "When will stocks peak out?"
You can blame recent memory.
Those who followed my advice, bailed at the market 2008 top, and then heavily shorted bank shares laughed all the way to the bank.
Nonbelievers who didn't got slaughtered, questioning whether they'd ever touch another stock again.
We're about to replay that movie.
By now, the reasons behind the runaway bull market are familiar to all.
Even my gardener, cleaning lady, and shoeshine boy know by now.
They are also asking if they should be buying bitcoin, after it has made the move from $1 to $6,000.
So let me tell you how I get to such a precise top in the current move.
This time it WON'T be different.
The Fed will definitely trigger the next recession.
But it will be different in that the next recession will be prompted by a much lower interest rate spike than seen at past market tops.
Blame deflation.
We already know that stock markets accelerate their appreciation at the beginning of every tightening cycle.
So far, so good.
Assume that the Fed continues "normalizing" interest rates by raising 25 basis points a quarter for the next five quarters.
That takes the overnight Fed funds rate up to a 2.50% to 2.75% range by December 2018.
This will create an inverted yield curve whereby short-term rates are higher than the present 2.38% 10- year Treasury bond yield.
Bond yield will also rise and prices fall, but not by much.
There is just too much money around.
Over the past 100 years, inverted yield curves have had an average life of 14 months, within a range of nine to 19 months.
At first, rising interest rates INCREASE borrowing dramatically, as investors scramble to beat the move.
This enables them to make up for shrinking profit margins caused by higher rates by increasing size.
This is already happening in a major way.
When the return finally turns negative, they then dump EVERYTHING, causing interest rates to explode, igniting a recession.
That's when 10-year Treasury bonds spike to 4%, or even 5%.
This has a recession beginning 14 months after the December 15, 2018 Fed meeting, or February 2020.
Historically, stock markets peak exactly 7.2 months before a recession, so this takes us back to August 2019.
Back out three more months for a "Sell in May and go away" effect.
Bear markets usually begin on Mondays (remember the many Black Mondays of our careers?) because investors are prone to digest deteriorating market technicals and fundamentals over a weekend and then panic at the first opportunity.
I expected the Dow Average to plunge at least 400 points at the following that Monday opening.
Add all this together, and you arrive at my target market peak of Friday, May 10, 2019 at 4:00 PM EST. Look for a final spike into the close.
You may catch me gingerly stepping out of the market a few weeks or months before that.
As my late mentor Barton Biggs used to say, "Always leave the last 10% of a move for the next guy."
Remember also that once stocks start to go in reverse, liquidity will completely vaporize right when numerous risk protection algorithms simultaneously kick in.
So the bigger institutions will start scaling out of major positions well before then. This, by the way, helps set up the negative technicals that create the top.
Of course, any number of black swans can move this timetable forward, which I have covered in previous letters (North Korea, impeachment, no tax cuts, etc.).
So I may be making necessary adjustments to my market top target date along the way.
And here's the scary part.
Stock markets could rise another 20% to 25% before they peak out. That takes the Dow Average to a neat 28,750.
So despite knowing the blowup day well in advance, you're still going to have to stay in the market, lest you lose all your clients.
After all, they don't pay fat fees for us to hide in a cave somewhere and sit on our hands.
So, you wanted to be in show business?
When a client asks you the favorite question of the day, he will be suitably impressed when you provide him with the above answer, as he should be.
In fact, he will probably give you more money to manage.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/06/Dart-board-story-2-image-2.jpg265400MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-06-07 01:07:262018-06-07 01:07:26Why the Stock Market Will Peak on May 10, 2019, at 4:00 PM EST
We knew the May Nonfarm Payroll Report was coming in hot when the president leaked the numbers ahead of time. He tweeted that he "Was looking forward to" the numbers hours before the official release.
Last month, when the report was weak, we heard nary a word from Twitter. Just add that to the ever-growing list of unpredictables we traders have to deal with on a daily basis.
As for myself, I was looking for robust numbers last Tuesday when I piled on an aggressive, highly leveraged short position in the bond market, right at the four months highs. When bonds collapsed my reward was a 62.50% profit in only three trading days.
In the blink of an eye, we have made back half of the drop in interest rates prompted by the Italian political crisis. Ten-year U.S. Treasury yields plunged from 3.12% all the way down to 2.75% and are now back up to 2.92%. Bonds have almost fallen three points in three days.
This trade instructs you on the merits of going outright long options instead of more conservative spreads when you expect a very sharp, rapid move in the immediate term.
The result was to take the performance of the Mad Hedge Trade Alert Service to yet another all-time high. Those who signed up at any time in the past 12 months have to be extremely happy.
After one trading day, my June return is +2.94%, my year-to-date return stands at a robust 23.31%, my trailing one-year return has risen to 59.20%, and my eight-year profit sits at a 299.78% apex.
The payroll report suggests that the nine-year economic expansion will easily growth to 10. Never mind that we are putting it all on an American Express card and that our kids are going to have to pick up the tab. For now, it's happy days.
That means my 2018 year-end forecast is alive and well for a (SPY) of 3,000. If earnings continue to grow at a 25% annual rate and you assume a modest 17.5 X, getting there is a chip shot. Next year is another story, when year-on-year growth rates fall to zero.
The jobs report came in at 223,000 versus the three-month average of 175,000, and the Headline Unemployment Rate dropped to 3.8%, a new decade low. Average Hourly Earnings rose to an inflationary 0.3%.
Retail gained 31,0000 jobs, Health Care 29,000, and Construction 25,000. Only Temporary Workers lost 7,800.
The broader U-6 "discouraged worker" unemployment rate fell to 7.6%, a 17-year low.
The major hallmark of the week was an upside breakout of technology. Microsoft (MSFT), Amazon (AMZN), Apple (AAPL), and Facebook (FB) all hit historic highs.
I don't know why tech is breaking out here. Maybe the market is discounting another round of blockbuster quarterly earnings that starts in two months. Possibly the tech growth rate is accelerating at the granular level.
Perhaps there is nothing else to buy. But for whatever reason, tech is going up and I want in. Tech is the secular growth story of our generation and will remain so for the foreseeable future.
The smartest that I have done this year is to start my Mad Hedge Technology Letter in February as it added 60 hours of research into tech companies into our research mix. As a result, the readers are swimming in profits.
This coming week is nearly clueless in terms of hard data releases.
On Monday, June 4, at 10:00 AM, we get May Factory Orders.
On Tuesday, June 5, May PMI Services is announced.
On Wednesday, June 6, at 7:00 AM, the MBA Mortgage Applications come out.
Thursday, June 7, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 11,000 last week from a 43-year low.
On Friday, June 8, at 8:30 AM EST, we get the Baker Hughes Rig Count at 1:00 PM EST, which rose by only 1 last week.
As for me, I will be glued to my TV watching the local Golden State Warriors trounce the Cleveland Cavaliers. That's providing they can overcome LeBron James, who seems to be a force of nature.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/06/Trailing-one-year-return-story-2-image-1.jpg489610MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-06-04 01:06:172018-06-04 01:06:17The Market Outlook for the Week Ahead, or New All-Time Highs and New All-Time Highs
The shares of FANGs are all about to double in value in the Silicon Valley if commercial real estate is any indication of the future growth rates.
The group is gobbling up office space at such a prodigious rate that only a vast expansion of their business would justify these massive long-term commitments.
Commercial real estate commitments are one of the most valuable leading indicators of stock performance out there. They show what the companies themselves think are their future prospects.
Apparently, the stock market agrees with me. Technology is virtually the only group of shares moving to new all-time highs in these otherwise dismal trading conditions.
Just this month Facebook (FB) signed a lease for the entire brand new 43-story Park Tower in downtown San Francisco, and that's just to house its Instagram business.
Google (GOOGL) is leasing 39% of the office space in Mountain View, CA. It is currently in negotiations with the nearby city of San Jose to build a skyscraper occupying an entire city block that will house 10,000 tech workers. It also is building another 1 million square feet near an old prewar dirigible landing strip in Moffett Park.
Apple (AAPL) is hogging some 69% of the office space in Cupertino, CA. It is just now moving into its new massive spaceship-inspired headquarters, where 10,000 workers will slave away. The world's largest company is currently on the hunt for a second headquarters location.
Netflix is slowly gobbling up Los Gatos, CA. It was recently joined by the set top device company Roku (ROKU), which is growing by leaps and bounds.
Fruit canning was the original industry of Silicon Valley at the turn of the 20th century, taking advantage of the surrounding peach, plum, and apricot groves. When I was a kid after WWII, defense firms such as Lockheed (LMT) took over, creating thousands of high-paying engineering jobs.
It didn't hurt that Stanford University was spitting distance away, and the University of California was just on the other side of the bay. These two schools supplied the manpower to fuel the hypergrowth ahead.
To say the growth has caused local headaches would be an understatement in the extreme. The San Francisco Bay Area now sports the world's most expensive residential housing. The median San Francisco home price has skyrocketed to $1,334,000 and requires an annual income of $334,000 to support it.
Small businesses such as dry cleaners, nail salons, restaurants, and barber shops have been driven out by soaring rents. It's not uncommon now to go out to dinner only to find a "closed" sign on your favorite nightspot. Your personal assistant now has to travel miles just to get your suits pressed.
As for traffic, forget about it. Rush hour has ceased to exist. Freeways are now jammed a nonstop 12 hours a day in the worst neighborhoods.
Success has its price, and this was never truer than in Silicon Valley.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/05/APPLE-HQ-story-2-image-6-e1527804149789.jpg326580MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-06-01 01:07:092018-06-01 01:07:09Why Your FANG Stocks are About to Double in Value
Is gold your best performing asset for the next five years? Is it high-growth technology stocks? Energy stocks? Or maybe biotech shares?
How about French collectable postage stamps or vintage racing cars?
Nope, you're not even close. I'll give you a hint: You're probably sitting in it.
Yes, the best performing investment you will own for the next five years will most likely be the home you live in.
Psshaww you may say. Perhaps even balderdash! However, if you look at the crucial data that drives this long-ignored sector, my conclusions are unassailable.
If fact, you can pretty much count on your home to appreciate at a 3% to 4% annual rate until well into the next decade, and much more if you are fortunate enough to live on the red hot west coast.
Net out the copious tax breaks that still come with home ownership, and your take home will be even higher than that.
This beats the daylights out of stocks (SPY) (1.84% yield), 10-year Treasury bonds (TLT) (2.85%) and approaches junk bonds (HYG) (5.74%) in terms of the potential returns.
For a start, the Federal Reserve's go-slow policy on interest rate rises is hugely pro housing.
The conventional 30-year fixed home mortgage can now be had for a bargain 4.5%. And many finance their properties with the 5/1 ARMs that I have been recommending, which are currently going for only 3.25%.
Worried about what happens in five years when the interest rate is reset? Just refinance during the next recession, which will almost certainly happen well before then, and you'll probably get a lower rate than you can get now.
That is, assuming you still have a job.
The good news for those homeowners who rely on the floating rates of an adjustable rate mortgage is that this is not a low interest rate decade, but a low interest rate century.
Another positive is weekly jobless claims of 222,000 at 43-year low, and a decade low unemployment rate of 4.0%, meaning that a lot more people have the income with which to purchase homes, far more than only a couple of years ago.
Not only will this be a low interest rate century, it will be a low energy cost century as well. If solar energy costs continue their dramatic rate of improvement, around 50% every four years, it will nearly be free by 2030.
Not only will free energy provide a big underpinning under home values. It will also increase the value of suburban homes where commuting is a major factor.
It gets better.
You know that Millennial of yours who's been living in your basement since he graduated from college?
Go downstairs and take a look. Chances are he probably moved out when you weren't looking, turning his prodigious gaming skills into a high-paying coding job.
What's more, he's now dating a girl. You know, the one with the nose ring, the streak of purple hair, and tattoos up and down both arms?
That leads to family formation. And you know what? The most important trend affecting the economy that no one knows about is that THE UNITED STATES IS ABOUT TO ENJOY ANOTHER BABY BOOM!
That's why new household formations are likely to jump from the current 1.2 to 1.5 million a year in the coming decade.
However, only 1 million homes a year are being built, thanks to the halving of construction capacity in the aftermath of the Great Recession. Subtract from that 250,000 houses a year that get demolished.
Does anyone hear the words "short squeeze"?
That means 85 million Millennials will be chasing the homes of only 65 million Gen Xer's. Here in the San Francisco Bay Area they are showing up at weekend open houses and paying cash for beautiful $3 million homes with great views, writing the check right on the spot.
Americans aren't the only ones buying homes. Some 8% of all the real estate sold in the U.S. in 2017 was to foreign investors, largely Chinese and Hispanics, according to the National Association of Realtors. That is an all-time high. They view U.S. real estate as a great asset protection strategy.
Are you convinced now? Are you ready to jump into the real estate boom and participate more than just through your residence?
Fortunate, there are a number of ways you can achieve this.
You can also go into traditional new homebuilders, such as KB Homes (KBH), Pulte Homes (PHM), and DH Horton (DHI). Another option is to take a basket approach by picking up the iShares U.S. Home Construction ETF (ITB).
https://www.madhedgefundtrader.com/wp-content/uploads/2018/05/Open-house-story-3-image-5-e1527803775253.jpg199300MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-06-01 01:06:222018-06-01 01:06:22Here is Your Top-Performing Investment for the Next Five Years
Those planning a European vacation this summer just received a big gift from the people of Italy.
Since April, the Euro (FXE) has fallen by 10%. That $1,000 Florence hotel suite now costs only $900. Mille grazie!
You can blame the political instability on the Home of Caesar, which has not had a functioning government since March. The big fear is that the extreme left would form a coalition government with the extreme right that could lead to its departure from the European Community and the Euro. Think of it as Bernie Sanders joining Donald Trump!
In fact, Italy has had 61 different governments since WWII. It changes administrations like I change luxury cars, about once a year. Welcome to European debt crisis part 27.
I can't remember the last time markets cared about what happened in Europe. It was probably the first Greek debt crisis in 2011. This month, 10-year Italian bond yields have rocketed from 1% to 3%. But they care today, big time.
Given the reaction of the global financial markets, you could have been forgiven for thinking that the world had just ended.
U.S. Treasury Bond yields (TLT) saw their biggest plunge in years, off 15 basis points to 2.75%. The Dow Average ($INDU) collapsed by $500 to $24,250, with interest sensitive banks such J.P. Morgan Chase (JPM) and Bank of America (BAC) delivering the worst performance of the day.
Even oil prices collapsed for an entirely separate set of reasons - so far, the best performing commodity of 2018. The price of Texas Tea pared 10% in a week.
Saudi Arabia looks like it is about to abandon the wildly successful OPEC production quotas that have been boosting oil prices for the past year, and there are concerns that Iran will withdraw from the nuclear non-proliferation treaty. The geopolitical premium is back with a vengeance.
So, if the Italian developments are a canard why are we REALLY going down?
You're not going to like the answer.
It turns out that rising inflation, interest rates, oil and commodity prices, the U.S. dollar, U.S. national debt, budget deficits, and stagnant wage growth are a TERRIBLE backdrop for risk in general and stocks specifically. And this is all happening with the major indexes at the top end of recent ranges.
In other words, it was an accident waiting to happen.
Traders are extremely nervous, global uncertainty is high, the seasonals are awful, and Washington is s ticking time bomb. If you were wondering why I was issuing so few Trade Alerts in May these are the reasons.
This all confirms my expectation that markets will remain in increasingly narrow trading ranges for the next six months until the mid-term congressional elections.
Which is creating opportunities.
If you hated bonds at a 3.12% yield from two weeks ago, you absolutely have to despise them at 2.75% today. That's why I added outright bond put options today to my model trading portfolio.
Stocks are still wildly overvalued for the short term, so I'll keep my short position there. As for oil (USO), gold (GLD), and the currencies, I don't want to touch them here.
So watch for those coming Trade Alerts. I'm not dead yet, just resting.
Ignore the lessons of history, and the cost to your portfolio will be great. Especially if you are a bond trader!
Meet deflation, up-front and ugly.
If you looked at a chart for data from the United States, consumer prices are showing a feeble 2.5% YOY price gain. This is slightly above the Federal Reserve's own 2% annual inflation target, with most of the recent gains coming from rising oil prices.
And here's the rub. Wage growth, which accounts for 70% of the inflation calculation, has been practically nil. So, don't expect inflation to rise much from here, despite an unemployment rate at a 17-year low.
We are not just having a deflationary year or decade. We may be having a deflationary century.
If so, it will not be the first one.
The 19th century saw continuously falling prices as well. Read the financial history of the United States, and it is beset with continuous stock market crashes, economic crisis, and liquidity shortages.
The union movement sprung largely from the need to put a break on falling wages created by perennial labor oversupply and sub living wages.
Enjoy riding the New York subway? Workers paid 10 cents an hour built it 120 years ago. It couldn't be constructed today, as other more modern cities have discovered. The cost would be wildly prohibitive.
The causes of 19th century price collapses were easy to discern. A technology boom sparked an industrial revolution that reduced the labor content of end products by 10 to hundredfold.
Instead of employing 100 women for a day to make 100 spools of thread, a single man operating a machine could do the job in an hour.
The dramatic productivity gains swept through then developing economies like a hurricane. The jump from steam to electric power during the last quarter of the century took manufacturing gains a quantum leap forward.
If any of this sounds familiar, it is because we are now seeing a repeat of the exact same impact of accelerating technology. Machines and software are replacing human workers faster than their ability to retrain for new professions.
This is why there has been no net gain in middle class wages for the past 30 years. It is the cause of the structural high U-6 "discouraged workers" employment rate, as well as the millions of Millennials still living in parents' basements.
To the above add the huge advances now being made in healthcare, biotechnology, genetic engineering, DNA-based computing, and big data solutions to problems.
If all the major diseases in the world were wiped out - a probability within 10 years - how many health care jobs would that destroy?
Probably tens of millions.
So the deflation that we have been suffering in recent years isn't likely to end any time soon. If fact, it is just getting started.
Why am I interested in this issue? Of course, I always enjoy analyzing and predicting the far future, using the unfolding of the last half-century as my guide. Then I have to live long enough to see if I'm right.
I did nail the rise of eight-track tapes over six-track ones, the victory of VHS over Betamax, the ascendance of Microsoft operating systems over OS2, and then the conquest of Apple over Microsoft. So, I have a pretty good track record on this front.
For bond traders especially, there are far-reaching consequences of a deflationary century. It means that there will be no bond market crash, as many are predicting, just a slow grind up in long-term interest rates instead.
Amazingly, the top in rates in the coming cycle may only reach the bottom of past cycles, around 3% for 10-year Treasury bonds (TLT), (TBT).
The soonest that we could possibly see real wage rises will be when a generational demographic labor shortage kicks in during the 2020s. That could be a decade off.
I say this not as a casual observer, buy as a trader who is constantly active in an entire range of debt instruments.
So, the bottom line here is that there is additional room for bond prices to fall and yields to rise is pretty limited. But not by that much, given historical comparisons. Think of singles, and not home runs.
It really will just be a trade. Thought you'd like to know.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/05/Horses-in-field-story-2-image-3-e1527631796330.jpg389580MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-05-30 01:06:322018-05-30 01:06:32Welcome to the Deflationary Century
All good things must come to an end, and I think the latest rally in stocks has just about run out of steam.
Up 12 out of 14 days, and the stock market is starting to reach a point of exhaustion. The S&P 500 (SPY) is now at the top end of a four-month trading range.
In addition, we are now well into a seasonally negative period for stocks, the six months when the total return on indexes is zero. The summer slowdown is upon us, and the declining trading volume is screaming at us loud and clear.
Please note that for the past months, stocks have been rising on small volume and falling on big volume. That is classic late cycle market action and is increasingly making me afraid of my own shadow.
We have just had an onslaught of surprise good news that took us up this high, thus giving us a fabulous short side entry point.
That would include a China trade war temporarily going on hold, the administration's free pass for Iran sanctions busting for the multinational Chinese telecom company ZTE, and Micron Technology's (MU) announcement of a $10 billion share buyback. Good news tends to happen in three's, and on the third one you sell.
So, a shot on the short side is reasonable here. However, doing ANY trade with the Volatility Index (VIX) down here at the $12 handle is a bit of a stretch. But I have only sent out one Trade Alert so far in May, and my traders are starving for fresh red meat.
I am not turning bearish, nor do I expect a recession to strike imminently. That will take place in late 2019 at the earliest. I'm just executing a short-term trade here to keep from being bored to death.
It is all just a matter of numbers. The American labor force is currently growing at 0.5% a year, while productivity is expanding by 1.5%. Add them together and that gives you 2% annual trend growth. Add in a 2% inflation rate and you get a 4% nominal GDP growth rate.
That growth rate means the Fed funds overnight interest rate should be 2.5%, a full 1% above the present 1.5%, so four more 25 basis point Fed rate hikes are a sure thing. It will get to 2.5% in a year.
Similarly, a 4% nominal growth rate historically brings you a 4% 10-year U.S. Treasury bond yield versus the current 3.07%, so we have another year to get to 4% as well.
That means our short strategy in the (TLT) is alive and well, we're just waiting for a better entry point. A 4% Treasury bond targets $98 on the downside in the (TLT), or down another $19 from today's close.
With a price earnings multiple 17X and an assumed earnings per share of $155, that puts the fair value for the S&P 500 of $2,720, or exactly where it is right now.
So the stock market isn't expensive, rich, or euphoric. Nor is it at bargain basement throwing the baby out with the bathwater cheap. It is dead in the middle.
And bull markets never end with fair valuation; they end with valuation upside blowouts. We dallied there at the end of January, but only for a few days. We may not see those high numbers again until the end of 2018.
And here's the bad news. Trading conditions could remain like this for another five months, until the November midterm congressional elections.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/05/Joh-n-in-suit-story-2-image-3-e1527027062176.jpg277300MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2018-05-23 01:07:392018-05-23 01:07:39Why I'm Selling Short the Stock Market
My phone started ringing on Sunday afternoon as soon as the futures markets opened in Asia. The U.S. had reached agreement with China on trade and the Dow futures were up 200 points.
Had the next leg of the bull market begun? ?Was it time to buy?
I asked what were the specifics of the deal. There weren't any. I asked about generalities. Those were absent as well.
All they knew was that the U.S. was suspending threatened tariff increases in exchange for a vague Chinese promise to buy more U.S. exports over the long term.
It was in effect a big Chinese win. The development allows the Middle Kingdom to do nothing but stall for time until the next U.S. administration comes to power regardless of which party wins. The Chinese think in terms of centuries, so waiting three more years for a better negotiating backdrop is no big deal.
It vindicates my own call on how the Chinese trade war would play out. After a lot of threats and saber rattling, the administration would achieve nothing, declare victory, and go home.
Traders should NOT be buying this pop in stock prices on pain of death. All that will happen is that stocks will trade back up to the top of the recent range, and then stall out once again as we slide back into slow summer trading. In fact, all we have accomplished is to revisit last week's high in stocks.
Stocks (SPY) weren't buying this trade agreement for two seconds, nor were bonds (TLT), foreign exchange (UUP), gold (GLD), or energy (USO). Not even the agricultural markets were believing it. Soybeans (SOYB), the commodity most affected by the China trade, were up a measly 2.45%. If markets really believed something substantial was afoot they would be limit up three days in a row. I've seen this happen.
It was obvious that little was accomplished when you saw the endless parade of administration officials praising the deals merits. My half century of trading experience has taught me when someone is working so hard to sell you a bridge, you look the other way.
And here is the problem. Beyond cutting-edge technology, there's nothing that China HAS to buy from the U.S. China's largest imports are in energy and foodstuffs, both globally traded commodities.
The oil and gas coming out of America looks pretty much like the Saudi Arabian and Russian kind. U.S. energy infrastructure is already groaning at the seams as it approaches 11 million barrels a day.
To double that from current levels just to fill the trade gap with China would require a multi-decade effort financed with trillions of dollars in private capital just to produce more oil with prices at a three-year high. In other words, it isn't going to happen.
The same is true with agriculture. I doubt there is a single farmer in the country willing to risk his own money to increase production on the back of the China deal. Rainfall is a much bigger concern.
In the end, stocks will eventually rise to new highs by the end of the year, just not right now. And they will do so on the back of the prodigious earnings growth of U.S. companies, which has been expanding at a breakneck pace for nearly a decade.
It is notable that the only major index that hit new highs today was the small cap Russell 2000 (IWM) where the constituent companies essentially do NO trade with China.
To believe otherwise would be giving the cock the credit for the sun rising, which happens every morning like clockwork.
I constantly receive emails from readers around the world inquiring how I accomplish this or that in my far-reaching travels around the globe.
After all, I have visited 125 countries over the past 50 years. What's more, I have run the Mad Hedge Fund Trader Global Empire for the past 10 years, on the fly, from a laptop and a cell phone.
Given that Europe is now 20% cheaper than last year, and 40% less expensive than four years ago, an increasing number of you are going to cross the pond for your summer vacation.
That certainly was the case this year, when I saw a substantially larger number of American families traveling with children.
For the first time in decades, I am finding gaggles of American students in train stations backpacking their way around the continent with a Eurail Pass, much like I did in the 1960s.
With the right information, your cell phone can make your trip vastly more enjoyable, while preventing it from becoming wildly expensive. In fact, it is hard to imagine how we got along without them. So here goes:
1) Hardware
U.S. issued phones only work abroad if you have an international SIM card, as do most iPhones. Before you leave, call your cell phone provider and ask if you have an international SIM card in your phone.
Each company has exactly one person who knows how this works. If you don't have one, get one. The person at Verizon is named Maria.
Upon arriving abroad, the truly adventurous remove their American SIM cards and install a local one, signing up for a local plan. This can cut your international bill to as little as $10 a month.
You just reinstall your U.S. SIM card when you return home. However, as SIM cards are too small for me to see, I have yet to attempt this bit of technological acrobatics.
If you keep your U.S. SIM card, to make a call when abroad you have to assume you are still in the United States, since you have a U.S. number.
To call another country in Europe just hold down the "0" in your phone number pad until a + sign appears. Then dial 011 for the international exchange, and the numbers for the local country and city codes.
To call the U.S. from abroad, hold the "0" until a + sign appears, then dial 1, then the area code and number.
2) Roaming
International roaming can cost a fortune. Before I figured out the game, I was spending $500 a week downloading email, newspapers, and research reports. TED talks are the worst, costing at least $25 each to watch over foreign air.
So it is crucial to turn off the roaming feature on your phone. On an iPhone you do this by going into settings, then cellular data, and then turning the cellular data function off. Do this, and you will still be able to receive voice calls, such as from a lost traveling companion in distress.
Here is the key rule: Only access the Internet through the free Wi-Fi at your hotel. Download all your big files, news, email here. This saves you a ton of money.
You will need to turn on you cellular roaming to get your apps to work. But if you have already downloaded the big files, the additional cost to check your stock prices, weather forecast, or the way to a sought-after restaurant will be minimal.
Another tactic is to de spam your email accounts. Find all of those useless, unsolicited marketing emails promising get rich quick schemes, dating opportunities, or male enhancements. Then mark them as spam (unless they are from me). When you do use your cellular roaming, they won't eat up all of your data budget.
Warning: Start doing this every day a month before you leave. That's how much spam is out there. You can always unmark email as spam from senders you like, such as the local public library, when you return home.
American companies finally now offer international plans. This year Verizon is offering 250 MB of data, 250 emails and text messages, and 250 minutes of talk time for $80 a month. This is nowhere near enough, but it is a start.
Every time you cross a border, the local cell phone company will text you with usage and overage rates, which is usually $25 per 100 MB of data, or 10 cents a minute for voice or messaging.
You can find the Americans on a train when their phones all ping at once, often when you cross a bridge, or come out of a tunnel, or land at an airport.
3) Apps
Google Maps can provide perfect, detailed directions on how to reach the most remote destinations, whether you are in the Istanbul Bazaar, the Marrakech Medina, or the back alleys of Rome.
You can choose instructions whether you are on foot or driving. As soon as you arrive at your hotel, type in the address so you can always find home. The really great thing about Google Maps is that, unlike paper maps, it tells you where you are.
Just be careful not to bump into another traveler who is similarly staring at his cell phone to find his way (I walked straight into a concrete lamppost once in Tokyo and almost knocked myself out).
Be sure to download a free flashlight app before you leave home. These are great for navigating your way down dark streets, reading a menu in an ill lit restaurant, or finding the keyhole in your door.
The weather app is indispensable. It will allow you to fine-tune your travel plans up to a week in advance.
Being an ex-Boy Scout, I find a compass app particularly useful. Knowing where magnetic north is comes in handy when using those free tourist maps.
Stock market apps will bring you the assurance that the Mad Hedge Fund Trader Alerts are working well and paying for the entire trip. Remember that the New York Stock Exchange opens at 3:30 PM on the European continent because of the time change.
Travel in Europe is made much easier when you speak seven languages, although it's hard to find a living Roman centurion to practice your Latin. Limited to the King's English?
No problem! Get free language apps for the countries of your destination. Sometimes, the translation of a single word can mean the difference between life and death.
It's better to pay a couple of bucks and get the expanded vocabulary apps so you never come up short. That is how I found out yesterday that "sardi" is a type of Italian pasta unique to Northern Italy, and not a sardine.
You may have your own special apps you use. I like to visit my Tesla occasionally, verifying that it is still in my garage and fully charged. I also like to check the daily output of my solar panels to prove that my house is still standing.
Coming from California, I can never be sure. Google Earth is useless here because the pictures can be up to six months old. They are obviously lacking on satellite time.
4) Security
Identity theft is exploding in Europe, thanks to the close proximity of a hacker's paradise in unpoliced Eastern Europe. Never access your financial accounts through a free public network that is not password protected. It's like leaving your wallet in the middle of Saint Mark's Square in Venice and expecting to find it there an hour later.
Don't even attempt an innocent checking of balances. And I don't mean a password like 123456789. You can count on your accounts getting cleaned out. There is no greater bummer than being told by a hotel clerk that you can't check out because all of your credit cards have been canceled.
If you do need to check your balance on the run, do it only through your cell phone, and only over a cell network (no Wi-Fi), where an extra level of security is provided. The same is true with inter-account transfers. This can be expensive, but it is worth it.
Please note, that in China, the security situation is becoming so severe that many multinationals will not permit employees to bring their laptops. They have adopted "cell phone only" policies in the Middle Kingdom, where the security is so much better.
Too many western visitors were getting their entire hard drives copied by these crooks searching for western intellectual property, in addition to the easy pickings among bank accounts.
5)Entertainment
OK, so watching Wheel of Fortune in German, French, or Italian is not your cup of tea. Before you leave home and still have reasonable broadband, download a batch of old movies from iTunes, Netflix, or Amazon to your laptop.
That way, you have something to do in the middle of the night waiting for your jet lag to adjust. Bring a 6-foot HDMI cable and you can change the input channel on your hotel TV, plug in, and watch your flick there.
6) Bandwidth
European bandwidth can vary all over the map, from lightning fast (the Ritz Carlton in Barcelona) to painfully slow (Agadir, Morocco). Europeans just don't seem to grasp how fast apps are growing, and bandwidth demand is accelerating.
More than a few times, I have had to crawl under front desks and reboot routers to get systems working again.
Suffice it to say, the more you pay, the faster your Wi-Fi. If you check into your hotel and see half the residents sitting in the lobby checking their email, it is not a good sign.
Wi-Fi was invented in the U.S., where 2-by-4 wooden studs and 1-inch sheetrock used in construction is common.
Two-foot thick stonewalls typical in historic European city centers (where you will want to stay) are terrible for Wi-Fi range, and it is not unusual to have no access from your room.
If Apple or Microsoft want to upgrade your operating system on the road, wait until you get home. Otherwise, you might crash your system and not be able to use your device until you return home.
7) Tickets
It is now possible to do a search of your next foreign city for coming events while you are on a train, buy tickets online, and show the ticket on your phone to gain admission.
I also have settled a couple of checkout disputes proving that I prepaid hotel stays by displaying proof of payment from my PayPal or bank account.
Incredible, but true.
I will be following this piece up with another on general travel tips in a couple of weeks entitled Travel Tips from a Pro, which I am now working on.
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