Global Market Comments
April 26, 2019
Fiat Lux
Featured Trade:
(HOW TO RELIABLY PICK A WINNING OPTIONS TRADE)
Global Market Comments
April 25, 2019
Fiat Lux
Featured Trade:
(2019 MAD HEDGE WORLD TOUR)
(THE REAL ESTATE MARKET IN 2030), (XHB)
Come join me for lunch at the Mad Hedge Fund Trader’s World Tour strategy luncheons which I will be conducting in June and July this summer.
A three-course lunch will be followed by an extended question and answer period.
I’ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, energy, and real estate.
And to keep you in suspense, I’ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week.
I’ll be arriving early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.
The lunches will be held at a dozen five-star hotels around the world. The exact location for each lunch will be emailed with your purchase confirmation.
I look forward to meeting you and thank you for supporting my research. I’ll be posting the lunches individually in the coming weeks. You won’t be able to buy tickets until then.
Here is my schedule:
Friday, June 21 12:30 PM Auckland, New Zealand
Monday, June 24 12:30 PM Melbourne, Australia
Tuesday, June 25 12:30 PM Sydney, Australia
Wednesday, June 26 12:30 PM Brisbane, Australia
Friday, June 28 12:30 PM Perth, Australia
Sunday, June 30 12:30 PM Manila, Philippines
Tuesday, July 2 12:30 PM New Delhi, India
Friday, July 5 12:30 PM Cairo, Egypt
Monday, July 8 12:30 PM Venice, Italy
Wednesday, July 10 12:30 PM Budapest, Hungary
Global Market Comments
April 24, 2019
Fiat Lux
Featured Trade:
(WHY ARE BOND YIELDS SO LOW?)
(TLT), (TBT), (LQD), (MUB), (LINE), (ELD),
(QQQ), (UUP), (EEM), (DBA)
(BRING BACK THE UPTICK RULE!)
Investors around the world have been confused, befuddled, and surprised by the persistent, ultra-low level of long-term interest rates in the United States.
At today’s close, the 30-year Treasury bond yielded a parsimonious 2.99%, the ten years 2.59%, and the five years only 2.40%. The ten-year was threatening its all-time low yield of 1.33% only three years ago, a return as rare as a dodo bird, last seen in the 19th century.
What’s more, yields across the entire fixed income spectrum have been plumbing new lows. Corporate bonds (LQD) have been fetching only 3.72%, tax-free municipal bonds (MUB) 2.19%, and junk (JNK) a pittance at 5.57%.
Spreads over Treasuries are approaching new all-time lows. The spread for junk over of ten-year Treasuries is now below an amazing 3.00%, a heady number not seen since the 2007 bubble top. “Covenant light” in borrower terms is making a big comeback.
Are investors being rewarded for taking on the debt of companies that are on the edge of bankruptcy, a tiny 3.3% premium? Or that the State of Illinois at 3.1%? I think not.
It is a global trend.
German bunds are now paying holders 0.05%, and JGBs are at an eye-popping -0.05%. The worst quality southern European paper has delivered the biggest rallies this year.
Yikes!
These numbers indicate that there is a massive global capital glut. There is too much money chasing too few low-risk investments everywhere. Has the world suddenly become risk averse? Is inflation gone forever? Will deflation become a permanent aspect of our investing lives? Does the reach for yield know no bounds?
It wasn’t supposed to be like this.
Almost to a man, hedge fund managers everywhere were unloading debt instruments last year when ten-year yields peaked at 3.25%. They were looking for a year of rising interest rates (TLT), accelerating stock prices (QQQ), falling commodities (DBA), and dying emerging markets (EEM). Surging capital inflows were supposed to prompt the dollar (UUP) to take off like a rocket.
It all ended up being almost a perfect mirror image portfolio of what actually transpired since then. As a result, almost all mutual funds were down in 2018. Many hedge fund managers are tearing their hair out, suffering their worst year in recent memory.
What is wrong with this picture?
Interest rates like these are hinting that the global economy is about to endure a serious nosedive, possibly even re-entering recession territory….or it isn’t.
To understand why not, we have to delve into deep structural issues which are changing the nature of the debt markets beyond all recognition. This is not your father’s bond market.
I’ll start with what I call the “1% effect.”
Rich people are different than you and I. Once they finally make their billions, they quickly evolve from being risk takers into wealth preservers. They don’t invest in start-ups, take fliers on stock tips, invest in the flavor of the day, or create jobs. In fact, many abandon shares completely, retreating to the safety of coupon clipping.
The problem for the rest of us is that this capital stagnates. It goes into the bond market where it stays forever. These people never sell, thus avoiding capital gains taxes and capturing a future step up in the cost basis whenever a spouse dies. Only the interest payments are taxable, and that at a lowly 2.59% rate.
This is the lesson I learned from servicing generations of Rothschilds, Du Ponts, Rockefellers, and Gettys. Extremely wealthy families stay that way by becoming extremely conservative investors. Those that don’t, you’ve never heard of because they all eventually went broke.
This didn’t use to mean much before 1980, back when the wealthy only owned less than 10% of the bond market, except to financial historians and private wealth specialists, of which I am one. Now they own a whopping 25%, and their behavior affects everyone.
Who has been the largest buyer of Treasury bonds for the last 30 years? Foreign central banks and other governmental entities which count them among their country’s foreign exchange reserves. They own 36% of our national debt with China in the lead at 8% (the Bush tax cut that was borrowed), and Japan close behind with 7% (the Reagan tax cut that was borrowed). These days they purchase about 50% of every Treasury auction.
They never sell either, unless there is some kind of foreign exchange or balance of payments crisis which is rare. If anything, these holdings are still growing.
Who else has been soaking up bonds, deaf to repeated cries that prices are about to plunge? The Federal Reserve which, thanks to QE1, 2, 3, and 4, now owns 13.63% of our $22 trillion debt.
An assortment of other government entities possesses a further 29% of US government bonds, first and foremost the Social Security Administration with a 16% holding. And they ain’t selling either, baby.
So what you have here is the overwhelming majority of Treasury bond owners with no intention to sell. Ever. Only hedge funds have been selling this year, and they have already done so, in spades.
Which sets up a frightening possibility for them, now that we have broken through the bottom of the past year’s trading range in yields. What happens if bond yields fall further? It will set off the mother of all short-covering squeezes and could take ten-year yield down to match 2012, 1.33% low, or lower.
Fasten your seat belts, batten the hatches, and down the Dramamine!
There are a few other reasons why rates will stay at subterranean levels for some time. If hyper accelerating technology keeps cutting costs for the rest of the century, deflation basically never goes away (click here for “Peeking Into the Future With Ray Kurzweil” ).
Hyper accelerating corporate profits will also create a global cash glut, further levitating bond prices. Companies are becoming so profitable they are throwing off more cash than they can reasonably use or pay out.
This is why these gigantic corporate cash hoards are piling up in Europe in tax-free jurisdictions, now over $2 trillion. Is the US heading for Japanese style yields, of zero for 10-year Treasuries?
If so, bonds are a steal here at 2.59%. If we really do enter a period of long term -2% a year deflation, that means the purchasing power of a dollar increases by 35% every decade in real terms.
The threat of a second Cold War is keeping the flight to safety bid alive, and keeping the bull market for bonds percolating. You can count on that if the current president wins a second term.
Why Are They So Low?
Global Market Comments
April 23, 2019
Fiat Lux
Featured Trade:
(LAS VEGAS MAY 9 GLOBAL STRAGEGY LUNCHEON)
(APRIL 17 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXI), (RWM), (IWM), (VXXB), (VIX), (QCOM), (AAPL), (GM), (TSLA), (FCX), (COPX), (GLD), (NFLX), (AMZN), (DIS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 17 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What will the market do after the Muller report is out?
A: Absolutely nothing—this has been a total nonmarket event from the very beginning. Even if Trump gets impeached, Pence will continue with the same kinds of policies.
Q: If we are so close to the peak, when do we go short?
A: It’s simple: markets can remain irrational longer than you can remain liquid. Those shorts are expensive. As long as global excess liquidity continues pouring into the U.S., you’ll not want to short anything. I think what we’ll see is a market that slowly grinds upward until it’s extremely overbought.
Q: China (FXI) is showing some economic strength. Will this last?
A: Probably, yes. China was first to stimulate their economy and to stimulate it the most. The delayed effect is kicking in now. If we do get a resolution of the trade war, you want to buy China, not the U.S.
Q: Are commodities expected to be strong?
A: Yes, China stimulating their economy and they are the world’s largest consumer commodities.
Q: When is the ProShares Short Russell 2000 ETF (RWM) actionable?
A: Probably very soon. You really do see the double top forming in the Russell 2000 (IWM), and if we don’t get any movement in the next day or two, it will also start to roll over. The Russell 2000 is the canary in the coal mine for the main market. Even if the main market continues to grind up on small volume the (IWM) will go nowhere.
Q: Why do you recommend buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXXB) instead of the Volatility Index (VIX)?
A: The VIX doesn’t have an actual ETF behind it, so you have to buy either options on the futures or a derivative ETF. The (VXXB), which has recently been renamed, is an actual ETF which does have a huge amount of time decay built into it, so it’s easier for people to trade. You don’t need an option for futures qualification on your brokerage account to buy the (VXXB) which most people don’t have—it’s just a straight ETF.
Q: So much of the market cap is based on revenues outside the U.S., or GDP making things look more expensive than they actually are. What are your thoughts on this?
A: That is true; the U.S. GDP is somewhat out of date and we as stock traders don’t buy the GDP, we buy individual stocks. Mad Hedge Fund Trader in particular only focuses on the 5% or so—stocks that are absolutely leading the market—and the rest of the 95% is absolutely irrelevant. That 95% is what makes up most of the GDP. A lot of people have actually been caught in the GDP trap this year, expecting a terrible GDP number in Q1 and staying out of the market because of that when, in fact, their individual stocks have been going up 50%. So, that’s something to be careful of.
Q: Is it time to jump into Qualcomm (QCOM)?
A: Probably, yes, on the dip. It’s already had a nice 46% pop so it’s a little late now. The battle with Apple (AAPL) was overhanging that stock for years.
Q: Will Trump next slap tariffs on German autos and what will that do to American shares? Should I buy General Motors (GM)?
A: Absolutely not; if we do slap tariffs on German autos, Europe will retaliate against every U.S. carmaker and that would be disastrous for us. We already know that trade wars are bad news for stocks. Industry-specific trade wars are pure poison. So, you don't want to buy the U.S. car industry on a European trade war. In fact, you don’t want to buy anything. The European trade war might be the cause of the summer correction. Destroying the economies of your largest customers is always bad for business.
Q: How much debt can the global economy keep taking on before a crash?
A: Apparently, it’s a lot more with interest rates at these ridiculously low levels. We’re in uncharted territory now. We really don't know how much more it can take, but we know it’s more because interest rates are so low. With every new borrowing, the global economy is making itself increasingly sensitive to any interest rate increases. This is a policy you should enact only at bear market bottoms, not bull market tops. It is borrowing economic growth from futures year which we may not have.
Q: Is the worst over for Tesla (TSLA) or do you think car sales will get worse?
A: I think car sales will get better, but it may take several months to see the actual production numbers. In the meantime, the burden of proof is on Tesla. Any other surprises on that stock could see us break to a new 2 year low—that's why I don’t want to touch it. They’ve lately been adopting policies that one normally associates with imminent recessions, like closing most of their store and getting rid of customer support staff.
Q: Is 2019 a “sell in May and go away” type year?
A: It’s really looking like a great “Sell in May” is setting up. What’s helping is that we’ve gone up in a straight line practically every day this year. Also, in the first 4 months of the year, your allocations for equities are done. We have about 6 months of dead territory to cover from May onward— narrow trading ranges or severe drops. That, by the way, is also the perfect environment for deep-in-the-money put spreads, which we plan to be setting up soon.
Q: Is it time to buy Freeport McMoRan (FCX) in to play both oil and copper?
A: Yes. They’re both being driven by the same thing: China demand. China is the world’s largest new buyer of both of these resources. But you’re late in the cycle, so use dips and choose your entry points cautiously. (FCX) is not an oil play. It is only a copper (COPX) and gold (GLD) play.
Q: Are you still against Bitcoin?
A: There are simply too many better trading and investment options to focus on than Bitcoin. Bitcoin is like buying a lottery ticket—you’re 10 times more likely to get struck by lightning than you are to win.
Q: Are there any LEAPS put to buy right now?
A: You never buy a Long-Term Equity Appreciation Securities (LEAPS) at market tops. You only buy these long-term bull option plays at really severe market selloffs like we had in November/December. Otherwise, you’ll get your head handed to you.
Q: What is your outlook on U.S. dollar and gold?
A: U.S. dollar should be decreasing on its lower interest rates but everyone else is lowering their rates faster than us, so that's why it’s staying high. Eventually, I expect it to go down but not yet. Gold will be weak as long as we’re on a global “RISK ON” environment, which could last another month.
Q: Is Netflix (NFLX) a buy here, after the earnings report?
A: Yes, but don't buy on the pop, buy on the dip. They have a huge head start over rivals Amazon (AMZN) and Walt Disney (DIS) and the overall market is growing fast enough to accommodate everyone.
Q: Will wages keep going up in 2019?
A: Yes, but technology is destroying jobs faster than inflation can raise wages so they won’t increase much—pennies rather than dollars.
Q: How about buying a big pullback?
A: If we get one, it would be in the spring or summer. I would buy a big pullback as long as the U.S. is hyper-stimulating its economy and flooding the world with excess liquidity. You wouldn't want to bet against that. We may not see the beginning of the true bear market for another year. Any pullbacks before that will just be corrections in a broader bull market.
Good Luck and Good Trading
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader
Global Market Comments
April 22, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE WORLD OF TWO’S),
(SPY), (TLT), (AAPL), (QCOM), (XLV)
We now live in a world of twos. Economic growth is at 2%. Unemployment rate is at 2%. Inflation is at 2%.
And we may soon be facing the cruelest two on all. The stock market may only gain 2% this year, next year, and the year after that. For that’s what a world of twos creates: a stock market that goes virtually nowhere.
This is why I have lately been advising my concierge clients to start checking out one-year CD rates at their local bank, which are now paying 3%-4%. In a world where the stock market offers 2% of upside versus 20% of the downside, you buy CDs all day long.
Certainly, my Mad Hedge Market Timing Index leads one to such a sobering conclusion, which now reads at a very high 70. Another way of describing this highly successful algorithmically driven indicator is that there are new longs now that have only a 30% chance of making money, while 70% of short positions should end up in the green.
That’s not enough for me to go either way. Above 80 or below 20 are the sweet spots for me. And topping processes can run as long as three months. We are only two months into the current one (there’s that damn number two again!).
Let me elaborate. On the one hand, I am loathed to buy a market that has just risen 22% in four months and has a multiple at a three year 18 high in the face of falling earnings during a global synchronized slowdown with a Volatility Index t $12. That’s why equity mutual fund redemptions are proceeding at record highs this year.
On the other hand, I’m not in a rush to sell short a market that has had all four 2019 interest rate hikes canceled and has seen $2.5 trillion in new liquidity pumped into the economy.
As a result, the rate of new Trade Alerts will slow down from Q1’s torrid pace. There’s just nothing to do. And yes, I can already hear the complaints coming. Of course, you expect Trade Alerts if you just paid $3,000 for a service that then tells you to do nothing.
But telling you to do nothing is far more valuable than telling you to do something that is wrong. There is no law that says you have to trade every day of the year. After all, you’re trying to pay for your own yacht, not your broker’s.
There are other services out there that DO give you Trade Alert a day and are even cheaper than mine. But they lose money hand over fist and don’t publish their results as I do. Caveat Emptor. You pay peanuts, you get monkeys.
There is one Goldilocks scenario that’s not impossible to unfold this year. Massive Chinese economic stimulus is working, which is why stocks in the Middle Kingdom have outperformed those in the US by 2:1. That strength spills over to Europe, which then ratchets up US multinational earnings and a sharp rebound in US stocks.
That’s why big tech has been leading the market all year, and why we have been running leveraged longs in that sector. It could happen, but I’m remaining cautious anyway. Being up 14% in three months MAKES me cautious, and I know that stock-only buyers made a lot more.
Earnings are coming in better than expected for Q1. It is looking like companies excessively cut forecasts during the dark days of December. But is it already in the price? Cut risk.
Bright US retail sales give the market a boost, up 1.6% in March, the most in 18 months. A rare positive data point on an otherwise dull economy.
Global PMIs are still weak, with dismal reports from Asia and Europe. The US is still the bright shining light on the hill. Bad news for US exporters through.
Home mortgage demand is soaring. It looks like an ultra-low 4.03% 30-year fixed rate mortgage is going to rescue the residential real estate market from the jaws of defeat this spring.
Broker earnings in free fall, as collapsing trading volumes take a bite. It seems investor faith in this rally is almost nil. Risk is high. Take profits you lucky bastard.
Oil hit a new 2019 high. OPEC discipline also hits a record. Gas at the pump will top $4.00 just as the summer driving hits and it's already there in high-taxed California. Maybe it’s time for a “staycation” this year? Take that long cross-country trip during the next global recession.
Apple (AAPL) and QUALCOMM ended their epic legal battle, over smartphone chip patent dispute. It finally became a high distraction of (AAPL). Buy (QCOM) on the dip.
The Mad Hedge Fund Trader treaded water this year, up 13.92% year to date, as we took profits on the last of our technology long positions.
We took profits on a six-month peak of 13 positions across the Global Trading Dispatch and the Mad Hedge Technology Letter services and will wait for markets to tell us what to do next.
April is so far down -1.50. My 2019 year to date return retreated to +13.92%, paring my trailing one-year down to +21.62%.
My nine and a half year return backed off to +314.06%. The average annualized return appreciated to +33.64%. I am now 100% in cash on both services.
The coming week will be the biggest for the entire Q1 earnings cycle.
On Monday, April 22 at 10:00 AM, we get March Existing Home Sales.
Kimberly Clark and Whirlpool report.
On Tuesday, April 23, 10:00 AM EST, we learn March New Home Sales.
Coca Cola (K) and Verizon (VZ) report.
On Wednesday, April 24, it’s a big day for earnings with Facebook (FB), Microsoft (MSFT), Boeing (BA), and Tesla (TSLA) reporting.
On Thursday, April 25 at 8:30 the Weekly Jobless Claims are produced. We also obtain March Durable Goods. Amazon (AMZN) and Intel (INTC) report.
On Friday, April 26 at 8:30 AM, we get the number we have been waiting for all month, the first Read on Q1 GDP. How mad will it be? Chevron (CVX) and Exxon (XOM) report.
As for me, I’m back out of my deathbed, finally catching up with a backlog of admin and on the lookout for new Trade Alerts. Health Care (XLV) is starting to look interesting, now that it has been slaughtered by the coming election promises of Medicare for all.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 18, 2019
Fiat Lux
Featured Trade:
(SIX STOCKS TO BUY THAT ALWAYS MAKE MONEY),
(SPY), (IXUS), (EEM), (VNQ), (TLT), (TIP)