Global Market Comments
September 4, 2019
Fiat Lux
Featured Trade:
(HOW FREE ENERGY WILL POWER THE COMING ROARING TWENTIES),
(SPWR), (TSLA)
(ARE YOU IN THE 1%?),
(SNE), (HMC), (TLT)
I have been in the much-talked-about and often despised 1% for most of my adult life.
I started my relentless march towards wealth and financial independence when I was 11 years old and landed a job delivering newspapers for the Los Angeles Herald Examiner, an old Hearst rag, earning $30 a month.
I’ll never forget the weight of 30 pounds of newsprint on my shoulders as I delivered them around my neighborhood in the dark on my Schwinn bicycle.
I eventually got fired because I found the stock pages so enthralling that I was always late delivering the papers. The Herald was run out of business by the Los Angeles Times in 1989.
My next step towards success came with a job in the snack bar at the May Company, a Los Angeles department store that also no longer exists, earning the untold sum of $1 an hour, then the minimum wage.
The really smart thing I did there was that whenever a customer paid for a hot dog with a 40% pure Kennedy silver half dollar, which in 1967 was still in widespread circulation, I would switch it for paper money.
Eventually, I accumulated 100 of these half dollars.
At age 15, I was willing to bet that someday the US would go off the gold standard and all precious metals would rise in value.
President Nixon did exactly that in 1971, and the value of my stash rose 100-fold to $5,000.
I still have those silver half dollars. I understand that Texas hedge fund manager Kyle Bass owns the rest.
I finally made it into the 1% when I was 33, after spending two years at Morgan Stanley. By then, my pay there had rocketed from an entry level $45,000 to $300,000 a year.
It helped that I won the betting pool for picking the best performing stock in the world two years running.
Back then, nobody had ever heard of an obscure electronics company in Japan called Sony (SNE) which rose in value 85-fold in dollar terms over the following seven years.
Nor had they heard of Honda Motors (HMC). When the other traders saw their little eggshell shaped cars for the first time, they laughed.
The pitiful vehicles had to make a high-speed run to make it to the top of an American freeway onramp. Its shares rose 45 times in dollar terms.
This was back when $300,000 could buy you a luxury two-bedroom condo on the 34th floor on the upper east side of Manhattan. That is exactly what I did, right next door to corporate raider Carl Icahn, and across the street from Henry Kissinger and Ginger Rogers.
A London mansion followed, located between other homes owned by Jacob Rothschild and Sir Richard Branson.
After a few more years at Morgan Stanley, and then founding the first-ever dedicated international hedge fund, I soon found myself in the much-vaunted 1/10th of the top 1% of American earners.
I stayed there for quite a while.
However, I recently got the bad news from the New York Times that I have been kicked out of the top tier.
According to their research, to prove I have grabbed the brass ring, I have to have an average annual income of $9,446,793. Only 115,000 taxpayers can meet this elevated standard.
I am still in the top 1%, where I only need to earn $2,107,531 to qualify and can remain with my 1,128,000 friends.
My Brioni suits, Turnbull & Asser Sea Island Silk shirts, and Bruno Magli shoes will not be found for sale on eBay anytime soon.
Which left me to ponder why I had lost my position at the apex of US earning power.
It turns out that the concentration of wealth at the top has vastly accelerated since the stock market bottomed in March 2009.
Risk takers, like those who owned stocks, bonds, and real estate, were tremendously rewarded by the recovery of asset prices.
Those who don’t own any assets, about 40% of the country, were left behind in the dust.
So, the low tax leveraged longs, like those running big hedge and private equity funds, started to greatly outpace my own earning power.
Concentrating so much wealth at the top is a problem for the United States. As any financial advisor can tell you, the richer people become, the more conservative they get with their investments.
Eventually, it all ends up in the bond market, where positions are never sold to avoid paying taxes. In other words, it stagnates and is one of the causes of our present low 2.5% GDP growth rate.
It is also where the 1.46% ten-year Treasury bond (TLT) comes from.
It is usually NOT placed with higher risk, job-creating, equity type investments. For more on this, click here for “The Bond Market and the 1%”.
This always happens when you have a big bulge generation retire all at once, like the 85 million baby boomers.
Another reason I lost my guarantee of the best table in every restaurant I walk into is that I am paying a lot more in taxes than I used to.
This is because I shifted careers from the hedge fund business, where I paid a bargain 15% tax rate on my realized carried interest, to the newsletter game where I am tagged for a heart-rending 43.4%, including the Obamacare add on.
As a result, I pay more in taxes in a single year than most people earn in a lifetime. In other words, for the first time in my life, I am paying taxes like everyone else.
Ouch, and double ouch!
Want to know why I am so interested in what happens in Washington? BECAUSE IT’S MY MONEY THEY’RE SPENDING!
It is also why I have come to learn so much about our arcane and abstruse tax system, and how I am able to periodically pass on insights to you.
I have to pay my accountants tens of thousands of dollars to ferret this stuff out, for your benefit.
When I had dinner with former Federal Reserve Chairman Ben Bernanke, he told me that “rising income inequality is the biggest structural problem we face.”
To find out where you stand in the country’s multi-tiered income structure, I have reproduced the New York Times data below.
Who has seen the greatest accumulation of wealth since the 2009 low? The Koch Brothers, whose combined net worth has soared from $26 billion to $90 billion since then.
Go Figure.
For one more piece on the 1%, please click here for “Mixing With the 1% at Pebble Beach”.
These days, I get to download my papers on my iPad every morning no matter where I am in the world, which then update themselves throughout the day.
I now get up even earlier than when I delivered the papers by bike.
Come to think of it, that “Horatio Alger Effect” that Ben Bernanke mentioned to me over dinner the other day applies to me as well.
I bet it has worked for a lot of you too.
Being a Hedge Fund Manager Did Have Its Advantages
Global Market Comments
September 3, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or VISIBILITY IS POOR),
(SPY), (TLT), (FXB), (WMT), (USO), (XLE)
I have a pretty good view from my home on a mountaintop in San Francisco.
To the west, I can see through the Golden Gate Bridge all the way out to the Farallon Islands 20 miles off the coast. To the south, there is Stanford’s Hoover Tower and all of Silicon Valley. In the winter I can look east and see the snow-covered High Sierras 200 miles away.
However, during last year’s wildfires, I couldn’t see a thing. Visibility ended at 100 yards, the cars parked outside were covered in ash, and I could barely breathe. We were all confined indoors.
I kind of feel that’s the way the stock market is right now. You can’t see a thing, so it’s better to stay indoors.
Not only are market gyrations subject to unpredictable and random, out-of-the-blue influences. The old playbook about cross market correlations and how asset classes respond at different points of the economic cycle doesn’t work either.
The good news is that August is over, the second worth trading month of the year. The bad news? September is the WORST trading month of the year!
So, what does a trader do on the first day of the worst investment month of the year?
Research.
That's what I’ll be doing, waiting for the next cataclysmic collapse to buy or the next euphoric bubble to sell short. Until then, I’ll be sitting tight. Just running my existing long/short trading book, I’ll be up 3.4% by the September 20 option expiration date in 15 trading days.
There is one BIG positive for the economy that no one is talking about. The home ATM is open for business, and open like it’s never been open before.
The thirty-year fixed rate mortgage rate is now at 3.56%, 10 basis points over a decade low and 20 basis points above an all-time low (see the chart below). There are currently $9.4 trillion of outstanding home mortgages in the US. Some $5 trillion is in Fannie Mae and Freddie Mac conforming loans, some 90% of which have interest rates higher than the current market.
If just ten million of these mortgages refinance obtaining an average of $4,560 in annual savings each, that will amount to a de facto tax cut of $456 billion per year, not an inconsequential amount. And Goldman Sachs thinks we could be in for as much as 37 million refis. It could be enough to offset the negative impact of the trade war.
As for the past week, it seemed like a disaster a day.
Trump ordered all US companies out of China. Like you can reverse 40 years’ worth of trillions of dollars of investment with a Tweet. If they did, an iPhone would cost $10,000 and your low-end laptop $15,000. An escalation of the trade war is the last thing your 401k wanted to hear. Kiss that early retirement goodbye.
Oil crashed (USO) on trade war escalation, with the industry now seeing a recession as a sure thing. Russian cheating on quotas is pouring the fat on the fire creating a massive supply glut in the face of shrinking demand. Take a long nap before considering any energy investment (XLE). The long-term charts show they are all going to zero.
Prime Minister Boris Johnson suspended Parliament, prompting a free fall in the pound. It’s to keep Parliament from blocking his hard Brexit, where it would certainly loose by a landslide. It’s all up to the Queen now, the monarch, not the rock group.
The yield inversion is deepening, with the US Treasury selling two-year notes today at a 1.56% yield, with ten-year yield closing at 1.45%. And that’s with the Treasury selling a total of a gob smacking $113 billion worth of bonds last week, which should have driven rates UP! US ten-year TIPS now showing negative interest rates.
Company stock buy backs are fading. That's a big deal as corporations retiring their own shares have been the biggest buyers in the market for the past two years. As if you needed another reason for downside risk.
US 15% tariffs hit on Sunday, and the Chinese paused in retaliation. Christmas is about to get more expensive. Many large retailers won’t make it until the new year. Keep selling short Macy’s (M) on rallies.
Bond yields hit new lows, at 1.44% for ten-year US Treasury bonds. The next stop is zero. Fixed income markets are saying that a recession is imminent. “Inversion” will be the world of the year for 2019. Go refi that home if you can get a banker on the phone!
There is no way out of the next recession, says hedge fund titan Ray Dalio. With global rates below zero, you can’t cut to stimulate business. You can’t do any more quantitative easing either, as the world is already glutted with paper. This is the trap Japan has been caught in for the last 30 years. It is all sobering food for thought.
US growth slowed with the second reading of the Q2 GDP marked down from 2.1% to 2.0%. The downturn has continued since the economy peaked 18 months ago. Q3 will be much worse when the trade war and earnings downgrades hit big time. And then there’s the soaring deficit. Sow the wind, reap the whirlwind.
US Consumer Sentiment took a dive from 98.4 to 89.8 in August. Has the spending boom just peaked? If so, we’re all toast. The "tariff cliff" is already taking its toll.
The Mad Hedge Trader Alert Service has posted its best month in two years. Some 22 or the last 23 round trips, or 95.6%, have been profitable, generating one of the biggest performance jumps in our 12-year history.
My Global Trading Dispatch has hit a new all-time high of 334.48% and my year-to-date shot up to +34.35%. My ten-year average annualized profit bobbed up to +34.30%.
I raked in an envious 16.01% in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.
As long as the Volatility Index (VIX) stays above $20, deep in-the-money options spreads are offering free money. I am now 60% invested, 40% long big tech and 20% short Walmart (WMT) and the Russell 2000, with 20% in cash. It rarely gets this easy.
The coming week will be all about jobs, jobs, jobs.
Monday, September 2, markets were closed for the US Labor Day.
Today, Tuesday, September 3 at 10:00 AM, the August ISM Purchasing Manager’s Index is out.
On Wednesday, September 4, at 2:00 PM, the Fed Beige Book for July is published.
On Thursday, September 5 at 8:30 AM EST, the Weekly Jobless Claims are printed. At 10:30, we learn the ADP Report for private hiring.
On Friday, September 6 at 8:30 AM, the August Nonfarm Payroll Report is printed.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be filling out the paperwork for my own home refi. JP Morgan Chase Bank (JPM) is offering the best deals, in my case a 30-year fixed rate no-cash-out jumbo loan for only 3.4%. Now where did I put that tax return?
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
August 30, 2019
Fiat Lux
Featured Trade:
(ALL IS WELL AT THE MOUSE HOUSE), (DIS), (NFLX),
(A VERY BRIGHT SPOT IN REAL ESTATE),
I’ll never forget the first time I met Walt Disney. There he was at the entrance on opening day of the first Disneyland in Anaheim, CA in 1955 on Main street shaking the hand of every visitor as they came in. My dad sold the company truck trailers and managed to score free tickets for the family.
At 100 degrees on that eventful day, it was so hot that the asphalt streets melted. Most of the drinking fountains and bathrooms didn’t work. And ticket counterfeiters made sure that 100,000 people jammed the relatively small park. But we loved it anyway. The band leader handed me his baton and I was allowed to direct the musicians in the most ill-tempoed fashion possible.
After Walt took a vacation to my home away from home in Zermatt, Switzerland, he decided to build a roller coaster based on bobsleds running down the Matterhorn on a 1:100 scale. In those days, each ride required its own ticket, and the Matterhorn needed an “E-ticket”, the most expensive. It was the first tubular steel roller coaster ever built.
And investment in Walt Disney was dead money for years.
The main reason has been the drain on the company presented by the sports cable channel ESPN. Once the most valuable cable franchise, the company is now suffering from multiple fronts, including the acceleration of cord-cutting, the demise of traditional cable, the move to online streaming, and the demographic abandonment of traditional sports like football.
However, ESPN’s contribution to Walt Disney earnings is now so small that it is no longer a factor.
All that changed in March when Wall Street got the first whiff of Disney plans to enter the online streaming business. In quick order, it ended its contract with Netflix (NFLX) to stream its movies and announced plans to launch Disney Plus to compete directly with Netflix.
Since then, the shares have risen by an eye-popping 40% and every institutional investor out there is struggling to double up their position. Personally, I think the stock could hit $200 in the next couple of years. That’s why I am trying to run a recurring long in the stock going forward.
In the meantime, a lot has gone right with Walt Disney. The parks are going gangbusters. With two teenage girls in tow, I have hit three in the past two years (Anaheim, Orlando, and Paris, where they serve wine with their $20 cheeseburgers).
The movie franchise is going from strength to strength. Frozen 2 and Toy Story 4 were blockbusters. A new Star Wars films is due in December, Star Wars: Episode IX – The Rise of Skywalker. Its online strategy is one of the best in the business. And it’s just a matter of time before they hit us with another princess. How many is it now? Nine?
It is about to expand its presence in media networks with the acquisition of 21st Century Fox (FOX) assets, already its largest source of earnings. It will join the ABC Television Group, the Disney Channel, and the aforementioned ESPN.
As for old Walt, he died of lung cancer in 1966, just when he was in the planning stages for the Orlando Disney World. All that chain-smoking finally got to him. Despite that grandfatherly appearance on the Wonderful World of Color weekly TV show, friends tell me he was a complete bastard to work for.
Global Market Comments
August 29, 2019
Fiat Lux
Featured Trade:
(HOW THE MARKETS WILL PLAY OUT FOR THE REST OF 2019),
(SPY), ($INDU), (USO), (TLT), (UUP), (COPX), (GLD),
(HOW THE MAD HEDGE MARKET TIMING ALGORITHM WORKS)
We are currently caught between a rock and a hard place.
The whims of one man will dictate whether after a brutal summer, markets recover to new all-time highs, or plunge into the depths of despair in a bear market and recession.
My bet is that the S&P 500 (SPY) will trade between the 50-day moving average at $294 and the 200-day moving average at $278. Right now, we are dead in the middle of that range.
Then on September 18, the Federal Open Market Committee convenes to deliver a decision on interest rates. I believe that no matter what the decision is, whether they cut rates or leave them unchanged, you will see another sharp selloff in stocks, possibly as much as another 2,000 Dow points. That will bring us a December 2018 repeat.
So why does falling interest rates bring cratering stock prices? For a start, you can take your traditional playbook on how markets are supposed to work and throw it in the trash. Low rates USED to bring high stock prices, but no more.
What is driving markets now is not the absolute level of interest rates today, no matter how low they may be historically. It is how many interest rate cuts are left until we get to zero. So an August 1 25-basis point rate cut meant there are fewer rate cuts in the future so a heart-stopping 2,000-point plunge in the Dow average ensued.
The same twisted logic will apply on September 18, only 16 trading days away. By the way, I plan to be 100% in cash by September 18.
Long term, the outlook gets more complicated.
If the trade war ends in September, then the stock market could rocket up to new all-time highs, surpassing 3,200 by the end of the year, up 14.2% from present levels.
If the trade war drags on, a recession is a sure thing in 12-24 months. That means a bear market in stocks is a sure thing in 6-15 months. And that assumes we are not already in a bear market. After all, the major indexes have been unable to top new highs made in January 2018.
The next bear market will likely take the indexes ($INDU) down 40%. They are, after all, the most overvalued assets in the world.
Oil (USO) will plunge to $25 a barrel. Ten-year US Treasury bond yield (TLT) will collapse to 0%, as I have long been advertising. The US dollar (UUP) leaps, deepening the recession. Commodity prices collapse (COPX) and gold (GLD) soars. We might even get into a shooting war in the South China Sea, as there will be nothing for the Beijing leadership to lose.
Again, it all depends on the whim of one man, one who has never done business in China, and who is constantly surprised by Chinese reactions to his own moves. There is no Trump Hotel in Beijing, nor one planned.
Good luck with that.
Just thought you’d like to know.
Getting Ready for Hard Times
Since we have just taken in a large number of new subscribers from around the world, I will go through the basics of my Mad Hedge Market Timing Index one more time.
I have tried to make this as easy to use as possible, even devoid of the thought process.
When the index is reading 20 or below, you only consider “BUY” ideas. When it reads over 80, it’s time to “SELL.” Everything in between is a varying shade of grey. Most of the time, the index fluctuates between 20-80, which means that there is absolutely nothing to do.
To identify a coming market reversal, it’s good to see the index chop around for at least a few weeks at an extreme reading. Look at the three-year chart of the Mad Hedge Market Timing Index.
After three years of battle-testing, the algorithm has earned its stripes. I started posting it at the top of every newsletter and Trade Alert two years ago and will continue to do so in the future.
Once I implemented my proprietary Mad Hedge Market Timing Index in October 2016, the average annualized performance of my Trade Alert service has soared to an eye-popping 34.61%.
As a result, new subscribers have been beating down the doors trying to get in.
Let me list the highpoints of having a friendly algorithm looking over your shoulder on every trade.
*Algorithms have become so dominant in the market, accounting for up to 90% of total trading volume, that you should never trade without one
*It does the work of a seasoned 100-man research department in seconds
*It runs real-time and optimizes returns with the addition of every new data point far faster than any human can. Imagine a trading strategy that upgrades itself 30 times a day!
*It is artificial intelligence-driven and self-learning.
*Don’t go to a gunfight with a knife. If you are trading against algos alone,
you WILL lose!
*Algorithms provide you with a defined systematic trading discipline that will enhance your profits.
And here’s the amazing thing. My Mad Hedge Market Timing Index correctly predicted the outcome of the presidential election, while I got it dead wrong.
You saw this in stocks like US Steel, which took off like a scalded chimp the week before the election.
When my and the Market Timing Index’s views sharply diverge, I go into cash rather than bet against it.
Since then, my Trade Alert performance has been on an absolute tear. In 2017, we earned an eye-popping 57.39%. In 2018, I clocked 23.67% while the Dow Average was down 8%, a beat of 31%. So far in 2019, we are up 18.10%.
Here are just a handful of some of the elements which the Mad Hedge Market Timing Index analyzes real-time, 24/7.
50 and 200-day moving averages across all markets and industries
The Volatility Index (VIX)
The junk bond (JNK)/US Treasury bond spread (TLT)
Stocks hitting 52-day highs versus 52-day lows
McClellan Volume Summation Index
20-day stock bond performance spread
5-day put/call ratio
Stocks with rising versus falling volume
Relative Strength Indicator
12-month US GDP Trend
Case Shiller S&P 500 National Home Price Index
Of course, the Trade Alert service is not entirely algorithm-drive. It is just one tool to use among many others.
Yes, 50 years of experience trading the markets is still worth quite a lot.
I plan to constantly revise and upgrade the algorithm that drives the Mad Hedge Market Timing Index continuously as new data sets become available.
It Seems I’m Not the Only One Using Algorithms
Global Market Comments
August 28, 2019
Fiat Lux
Featured Trade:
(RIGHT SIZING YOUR TRADING)
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
