Global Market Comments
August 24, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or ON FIRE EVERYWHERE)
(INDU), (JPM), (GLD), (GDX), (GOLD), (FB),
(TLT), (AAPL), (AMZN), (TSLA)
I am no longer able to breathe. The pandemic demands that I wear a mask. The wildfires prevent me from going outside, as the air is so heavy from smoke.
So, I decided to flee the San Francisco Bay Area south to Big Sir for a couple of days to catch up on my writing. On the way, I passed dozens of sadly abandoned schools as the pandemic has moved all of California to online distance learning.
By the second day, I was surrounded by fire. At an afternoon wine tasting, I tipped the waiter to hurry up as my glass was filling with ash and fire trucks were passing every five minutes.
By the next morning, I was surrounded by out-of-control wildfires and there was only one open road out of town. What really lit a fire under my behind was a text message from Tesla stating they would shut down charging at the Monterey station after 3:00 PM to help head off rolling blackouts.
The Golden State was not the only place on fire last week. Stocks were en flagrante as well, led by Tesla, Amazon, and Apple. The S&P 500 hit a new high for the year. It is the most concentrated market in history, with only 12 technology names accounting for 85% of the 2020 gains. Yet, 57% of shares are showing losses for 2020.
With a 33X multiple, Apple is pricing in only a 3% annual gain in the coming years. The price of Tesla at $2,100 a share is assuming the 2040 earnings have already arrived. We are firmly in bubble territory.
Having been in many bubbles over my half-century of trading, I can tell you they all have one thing in common. They run a lot longer than anyone imagines possible. In the meantime, traders, analysts, and investors are tearing their hair out wondering why they are so underweight stocks.
So trade if you must. But understand that the risk/reward here is terrible. You are better off here buying gold and banks and selling short US Treasury bonds and the US dollar.
Much has been made about share splits, which were the primary drivers of markets last week. However, the history of these things as that share prices fade shortly after the splits are completed. That was last Friday for Tesla and this Friday for Apple.
Apple may run a little longer, as it typically sees shares peak right after new generational cell phone launches, due in October.
Weekly Jobless Claims topped 1.1 million, ending a four-month downtrend. New Jersey, New York, and Texas were worst hit. Without further stimulus, they should continue to rise from here. These are Great Depression levels, and now massive layoffs from state and local governments are starting to kick in.
Apple topped $2 trillion in market cap. It is hard for those of us to believe it who bought the stock under $1 in 1998. It looks like more gains are to come. The coming 5G iPhone is going to market the peak in the shares this year, as new generational phones always do.
Uber and Lyft received a stay of execution, for 60 days, over whether they must treat drivers as full-time employees with benefits. Looks like I won’t have to take BART until October.
The U.S. Economy is falling back into the abyss. Last week’s total for new claims was well above the pre-pandemic Great Recession high of 665,000. Over 57.4 million Americans have now filed new unemployment insurance claims.
The airline industry is about to implode. With six months of operating at 20% capacity, how can they not? At least 75,000 in layoffs are imminent. Avoid the sector at all costs. You won’t recognize what comes out the other end. The next administration won’t be so generous to shareholders.
US Corona cases are slowing, even though we’ve just seen five consecutive days above 1,000 deaths. It’s the temporary ebb in the epidemic I was expecting that would rally the “recovery” stocks and sink the bond market. It’s sad, but we are celebrating suffering another 9/11 every three days instead of two.
Warren Buffet hates gold (GLD), but loves gold miners (GDX), loading the boat on Barrick Gold (GOLD) in Q2. It’s a rare move for the Oracle of Omaha into precious metals and the only way the cash flow king can collect a dividend in the sector. Warren seems to share my own long-term view on rising inflation caused by massive government bond issuance and spending.
U.S. Housing Starts mushroomed, surging 22.6% on the month to a seasonally adjusted annual rate of 1.496 million. Building permits also came in ahead of expectations, up 18.8% to 1.495m. Migration to the suburbs may explain some of the increase in activity but record-low mortgage rates and tight existing home inventory are the primary drivers. Soaring lumber prices mean growth in single-family starts will slow over the remainder of the year, not to mention the extra 0.50% fee on refinances.
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.
My Global Trading Dispatch suffered one of the worst weeks of the year, giving up most of its substantial August performance. If you trade for 50 years, occasionally you get a week like this. The good news is that it only takes us back to unchanged on the month.
Longs in banks (JPM) and gold (GLD) and shorts in Facebook (FB) and bonds (TLT) held up fine, but we paid through the nose with shorts in Apple (AAPL), Amazon (AMZN), and Tesla (TSLA).
That takes our 2020 year to date down to 28.88%, versus -2.00% for the Dow Average. That takes my eleven-year average annualized performance back to 36.06%. My 11-year total return retreated to 384.79%.
It's a relatively low rent week on the data front. The only numbers that count for the market are the number of US Corona virus cases and deaths, which you can find here.
On Monday, August 24 at 8:30 AM EST, the Chicago Fed National Activity Index is out.
On Tuesday, August 25 at 9:00 AM EST, the S&P Case Shiller National Home Price Index for June is released.
On Wednesday, August 26, at 8:30 AM EST, Durable Goods for July are printed. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, August 27 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get the second estimate for Q2 GDP.
On Friday, August 28, at 8:30 AM EST, US Personal Spending is announced. At 2:00 PM, the Bakers Hughes Rig Count is released.
As for me, I am reading up on bios and generally preparing for my upcoming Mad Hedge Traders & Investors Summit, which I will be hosting for three days and starts on Monday morning at 9:00 AM EST. The attend please click here.
See you there.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“The stock market is not expensive at 0% Fed funds and 0.60% government bonds,” said my old investor and mentor Leon Cooperman of Omega Advisors.
Global Market Comments
August 21, 2020
Fiat Lux
Featured Trade:
(COME JOIN THE JOHN THOMAS-HARRY DENT DEBATE ON AUGUST 25)
(JOIN THE AUGUST 24-26 MAD HEDGE TRADERS & INVESTORS SUMMIT
I have been arguing with Harry Dent over the future of all asset classes longer than I can remember.
Online, on stage, in the US, Australia, and around the world, it has been a never-ending debate about who has been right and who has been wrong on where best to invest.
It is a perfect example of two intensive researchers, analysts, and strategists looking exactly at the same data and coming to totally opposite conclusions….sometimes.
The only certainty is that listeners receive a great education on how to look at investments while being wildly entertained.
Harry Dent is one of the early founders of demographic investment. With 40 years in the financial markets, there is much to learn from his many published books on the topic.
Harry is not exactly a shrinking violet and is vociferous in expressing his views. No Marquis of Queensbury rules here.
After decades of searching, I am the only one Harry has found who can stand up against him.
Our debate, or call it a knockdown drag-out brawl, begins at 5:00 PM EST on Tuesday, August 25. To attend, please click this link at XXX.
I’ll see you there.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
I have spent the last 50 years looking for the best traders and investors around the world. Now, I have assembled the cream of the crop to share their wealth of knowledge with you.
These are individuals who can make money in any market conditions, including a global Covid-19 pandemic. Listen to these speakers and they will enhance your earning power mightily.
As much as I loved hosting my annual Mad Hedge Lake Tahoe Conferences, the Coronavirus had other ideas. I doubt followers are racing to get on airplanes and stay in hotels anytime soon. The desire to sit shoulder to shoulder with your fellow investors has also probably waned as well, no matter how fascinating they may be.
I am therefore hosting the online Thursday, August 24-26 Mad Hedge Traders & Investors Summit.
The event will be far bigger and better than the old analog bricks and mortar version. I will be hosting 27 expert traders from all over the world over three days. They will be speaking on the hour every hour starting from Monday, August 24 at 9:00 AM EST.
Some of these speakers I have known for decades. Every trading style and asset class will be covered, including stocks, options, bonds commodities, foreign exchange, precious metals, energy, and real estate. It will be your best investment educational opportunity of the year.
I will also be offering $100,000 in prizes to attendees in the form of free subscriptions to speaker newsletters, as well as those of the other speakers.
To spice things up, I have invited some real heavyweights. On Monday at 5:00 PM EST, my old friend and SALT host, former White House Press Secretary Anthony Scaramucci and I will discuss the current state of the investment world as well as the outlook for the November presidential election.
On Tuesday, August 25, my buddy Harry Dent, one of the founding fathers of long term demographic investing, will slug it out with me over the outlook for every asset class coming out of the current Great Depression. My colleague, Tom Sosnoff, founder of Tastytrade, will provide a tutorial on using online trading platforms.
I will be at Lake Tahoe, and you will be wishing you were here. As far as I know, human viruses can’t travel over the Internet….yet.
To register for the event, please click here.
To view the list of speakers and their topics, please click here.
Global Market Comments
August 20, 2020
Fiat Lux
Featured Trade:
STORAGE WARS),
(MSFT), (IBM), (CSCO), (SWCH),
Global Market Comments
August 19, 2020
Fiat Lux
Featured Trade:
(THE DEATH OF THE FINANCIAL ADVISOR)
Global Market Comments
August 18, 2020
Fiat Lux
Featured Trade:
(HOW TO HEDGE YOUR CURRENCY RISK),
(FXA), (UUP),
Let’s say you absolutely love a stock but despise the currency of the country it comes from.
The United States comes to mind.
The US Federal Reserve has announced they don’t expect to raise interest rates for three years. The US government is running record budget deficits. Debt to GDP is now at the highest level since WWII.
That means the greenback is about to become the weakest currency in the world. Look at the ten-year chart below and you’ll see that a major double bottom for the Aussie may be taking place.
Most American technology stocks are likely to gain 30% or more over the next two years. However, it’s entirely possible that the US dollar declines by 30% or more against the Australian (FXA) and Canadian (FXC) dollars during the same period. Making 30% and then losing 30% leaves you with precisely zero profit.
There is a way to avoid this dilemma that would vex Solomon. Simply hedge out your currency risk. I’ll use the example of the Australian dollar, as we have recently had a large influx of new subscribers from the land down under.
Let’s say you want to buy AUS$100,000 worth of Apple (AAPL), the world’s most widely owned stock.
Since Apple is listed on the New York Stock Exchange, its shares are denominated in US dollars. When you buy Apple in Australia, your local broker will automatically buy the US dollars for your account to settle this trade in the US, taking out a small commission along the way. You are now long US dollars, thus creating a currency risk.
Getting rid of this currency risk is quite simple. You need to offset your US dollar long with a US dollar short of equal value. Long dollars/short dollars give the Australian investor a currency-neutral position. The US dollar can go to hell in a handbasket and you won’t care.
There are several financial instruments with which you can do this. Buying Invesco Currency Shares Australian Dollar Trust ETF (FXA) is the easiest. This ETF invests 100% of its assets in long Australian dollar/short US dollar futures and overnight cash positions.
I’ll do the math for you on the final hedged position assuming that the Australian dollar is worth 70 US cents.
BUY AUS$100,000 long US dollars X US$0.70 cents/dollar = US$70,000.
US$70,000/$210 per share for Apple = 333 Apple shares
BUY US$70,000/$70 (FXA) price = US$1,000 shares of the (FXA)
Thus, by owning AUS$100,000 shares of Apple shares and 1,000 shares of the (FXA) you have completely removed the currency risk in owning Apple. You have, in effect, turned Apple into an Australian dollar-denominated stock. Apple can rise, the US dollar will fall, and you will make twice as much money in Australian dollars.
There are a few problems with this precise trade. The liquidity in the (FXA) is not great, especially during US trading hours. Understandably, the bulk of Aussie liquidity takes place during Australian business hours.
There are other instruments with which you can hedge out the currency risk of Apple, or any other US dollar-denominated investment.
You can take out your own short dollar position in the futures market. You can ask your bank to create a short position in the US dollar in the cash market. Or, you can simply ask your broker to hedge out your US dollar currency risk, for which they will charge you another small commission.
Hedging out currency risk not only is free, the market will pay you to do it. That’s because Australian dollar overnight interest rates at 1.00% are lower than US dollar overnight interest rates at 2.50%. By shorting Aussie against the buck, you get to keep this 1.50% interest differential.
You don’t have to be Australian to want your Apple shares denominated in Australian dollars. In fact, hedge funds do this all day long. They pursue a strategy of keeping their long position in the world’s strongest securities (Apple), and their shorts positions in the world’s weakest securities (the US dollar). This, by the way, is also the strategy of the Mad Hedge Fund Trader. It’s called “global long/short macro.”
The better ones often make money on both sides of the equation, with the longs rising and the shorts falling. You can do the same in your own personal online trading platform.
I should urge a word of caution here. What happens if you hedge out your US dollar risk, and the dollar continues to appreciate? Then you will get none of the gains from that appreciation and will end up losing money in Australian dollars if Apple shares remain unchanged.
In the worst case, if both Apple and the Aussie could go down, this accelerates your losses. So, currency hedging can be a double-edged sword. Yes, this may be irrational given the fundamentals of the Aussie and Apple. But as any experienced long term trader will tell you, “Markets can remain irrational longer than you can remain liquid.”
Many thanks to John Maynard Keynes.
Looks Like a Good Bet to Me