Global Market Comments
December 16, 2016
Fiat Lux
Featured Trade:
(MANAGING YOUR RISK INTO YEAR END),
(XLF), (XLE), (XLB), (CAT), (IWM),
(TLT), (GLD), (FXE), (FXY), (VXX),
(TESTIMONIAL),
(SIGN UP NOW FOR FREE TRADE ALERT TEXTS)
Financial Select Sector SPDR ETF (XLF)
Energy Select Sector SPDR ETF (XLE)
Materials Select Sector SPDR ETF (XLB)
Caterpillar Inc. (CAT)
iShares Russell 2000 (IWM)
iShares 20+ Year Treasury Bond (TLT)
SPDR Gold Shares (GLD)
CurrencyShares Euro ETF (FXE)
CurrencyShares Japanese Yen ETF (FXY)
iPath S&P 500 VIX ST Futures ETN (VXX)
To say this was a challenging year would be a disservice to the word ?understatement.?
To beat the indexes, you had to correctly call the outcome and the market impacts of ?the China meltdown, Brexit, the bond crash, and the presidential election.
Virtually no one did this. If they say they did it, they?re telling porky pies.
As a result, more than 95% of active managers and mutual funds are under performing the S&P 500 (SPY) which is up 11.27% on the year.
As much as I hate to admit it, indexers easily beat professional mangers this year, including almost all hedge funds. Once again, sloth and laziness were rewarded, while hard work and diligence were punished.
I hate it when that happens.
Smell the roses while you can all you indexers, closet or otherwise. For to quote a recent Nobel Prize winner, ?The times they are a changing.?
One of the major changes to investing going forward that you?ve heard nothing about so far is that the game is about to change.
Just as we are seeing ?out with the new and in with the old? in stock selection, we are also about to witness a sea change from passive to active investing.
Such are the consequences of the brave new world.
In the coming year, individual asset class, sector, and stock selection will be much more important than in the past. Active managers should have no problem outperforming.
For me, it will be like shooting fish in a barrel with a shotgun filled with number 12 birdshot.
It figures that passive investment in index funds is at an all time high. I have spent a lifetime watching investors buy tops and sell bottoms, and this time is no different.
I dive into writing my 2017 Annual All Asset Class Review over the next two weeks. It will be published on January 5th.
I can?t help but notice that 2016 offers some unusual challenges going into year end. Almost all asset classes are sitting on top of extreme market moves.
Financials (XLF), energy (XLE), materials (XLB), construction stocks (CAT), and small capitalized stocks (IWM) are sitting on top of monster moves up.
Bonds (TLT), gold (GLD), and foreign currencies (FXE), (FXY) have been absolutely slaughtered.
Volatility (VIX) is flat lining.
All tax selling has been cancelled and rolled into the beginning of 2017.
Does that mean we get a slap in the face in the form of a market crash on the first trading day of next year? Or will the selling be offset by new equity allocations from slow moving investors waiting for the New Year to start?
I believe it will be the latter.
To make things really easy, I think that trends in place at the end of 2016 will continue well into 2017, possibly all the way until the spring.
And you can probably tell by the testimonials now pouring in daily that followers were pretty happy with my performance in 2016.
I am up 26.57% on the year, taking me to a new all time high, and up 25.26% YOY.
I am now posting a positive +0.53% for December, bringing in six consecutive profitable months. It is a nice comeback from that big volatility hit I took last week.
Some 17 out of the last 20 Trade Alerts have been profitable, producing a success ratio of 85%. Most of the trades were immediately profitable.
My six-year return now stands at 218.25%, bringing the average annualized return up to 36.37%.
So, given these outsized, industry beating numbers, I am inclined to be cautious here, minimize trading, and keep my positions small.
Remember, I am trying to pay for my own yacht, not my broker?s.
Markets have a nasty habit of turning back and biting the hand that feeds them, seizing recently granted rewards.
I?ll still be watching the markets over the next two weeks. The problem will be execution.
When it?s ten below zero at 10,000 feet in a snow drift in the High Sierras with 50 knot winds, your hand tends to immediately freeze the second you take your glove off.
That makes the typing of Trade Alerts an effort, to say the least. Better to just take a break.
25.26% Trailing 12-Month Return
218.25% Six-Year Total Return
Dear John,
I missed the Boeing (BA) trade last week.? So, I now have "Trump's Tweets Today" on my bookmarks list.?
On Monday, I read Trump's tweet blasting Lockheed (LMT) and bought 200 December, 2016 $247.5 calls. At the end of the day I had a 250% return.?
Also, I did find some of your past letters that I found very interesting, including "The Case against Treasury Bonds" on November 27, 2011, " Trading for the non-Trader" on November 10, 2015 and? ?Janet Yellen's Dirty Little Secret" on July 7, 2016.?
I get a lot of older folks asking me if they should buy Treasuries for their retirement.? When I explain that one percent increase in yield results in a 20% loss in value they think I'm crazy.?
A lot of older folks don't understand that annuities with fixed income (6%) are less than break-even when you consider inflation.?
I sure think there is a large market for a reasonable investment service that has your format.?
Thanks again for the heads up.? You are the best.
Kurt,
Wrinkle City, California
I know I ran this piece only a few days ago, but since then we have taken in over 50 new paying subscribers, and I need to bring them up to date.
Paid subscribers are now able to receive instantaneous texts of my proprietary Trade Alerts.
This eliminates frustrating delays caused by traffic surges on the Internet itself and by your local server.
To activate your FREE service, please log in to your account at www.madhedgefundtrader.com, look under your name on the right, and click on the blue hyperlink that says ?Update My Account?.
Then check on the box next to ?Do you want to receive Trade Alerts via text message? and enter your cell phone number below.
Please also enter your city, state, country, and zip code. Click on ?save changes? at the bottom of the page. A lime green message should appear indicating ?profile updated successfully?.
Time is of the essence in these volatile markets. Individual traders need to grab every advantage they can. This is an important one.
By doing so, you will be able to duck the periodic outages our countless service providers spring on us without warning.
See one below from AWeber which decided to engage in routine maintenance DURING THE LAST TWO HOURS OF TRADING ON THE NEW YORK STOCK EXCHANGE!
When this happens, texts are the ONLY way to communicate Trade Alerts with subscribers.
If you still have an antique flip phone, IT IS TIME TO TRADE IT IN!
Good luck and good trading.
Global Market Comments
December 15, 2016
Fiat Lux
Featured Trade:
(THE TOP SIX CHINESE RETALIATION TARGETS),
(AAPL), (GM), (WMT), (TGT), (BA), (SBUX), (CAT),
(BECOME MY FACEBOOK FRIEND)
Apple Inc. (AAPL)
General Motors Company (GM)
Wal-Mart Stores, Inc. (WMT)
Target Corporation (TGT)
The Boeing Company (BA)
Starbucks Corporation (SBUX)
Caterpillar Inc. (CAT)
I don?t think there will be a trade war between the US and China.
Please forgive me, but I am new at this. I have only been covering China for 45 years now, since the Cultural Revolution was sweeping an impoverished, starving country.
With $659 billion in bilateral trade in goods and services in 2015, we have gone too far down the road to attempt any kind of substantial reversal.
Thousands of businesses in the US would go bankrupt and millions would be unemployed. Trans Pacific transportation would grind to a halt, filling up harbors with hundreds of redundant ships.
Trillions of dollars of direct investment in the two countries would be held hostage.
So, it?s not going to happen. It would be like cutting off our nose to spite our face.
However, I DO believe there will be some serious saber rattling, and suffer ample potholes down the road, as big as those found during a winter in San Francisco.
We may all laugh at Donald Trump?s moronic tweets. The Chinese take them deadly seriously.
Just as America has its Tea Party and right wing conspiracy theorists, so does the Middle Kingdom.
Their entire worldview revolves around the merciless exploitation of China by the western powers that took place during the 19th century.
British trading companies, like Jardine Matheson, imported cheap opium from India and sold it to the Chinese at the point of a gun, triggering three wars. With only primitive weapons at hand, the Chinese were powerless to resist.
By the time of the fall of the Qing Dynasty in 1912, the entire country had been carved up into spheres of influence dominated by the West and Japan.
Then, the Japanese invaded in 1937, and 29 million Chinese died. As recently as 1938, my Marine Corps uncle, Colonel Mitchell Paige, was charged with protecting American gunboats cruising the Yangtze River.
To us, this is all ancient history inhabiting dusty textbooks in libraries never visited. Patriotic Chinese feel like this happened yesterday.
You could dismiss all this as academic musings.
But national pride and sovereignty are really big deals in China today.
During China?s last trade war with Japan, only three years ago, several Japanese facilities were burned down by angry, uncontrollable mobs, and visiting businessmen were assaulted on the street. Trade ground to a halt.
It became so dangerous that my son switched from using his Japanese passport to using his American one, lest he be fired from his job as a university teacher.
So it behooves us to analyze which companies will suffer the most from any deterioration in the US-Chinese relationship before markets figure this out. The Chinese are not interested in any ?America First? policy in any way, shape, or form.
Here is my hit list:
1) Apple (AAPL) ? Yes, Cupertino, CA based Apple has a big fat bull?s eye on its back. The company is a vast, finely tuned machine that needs everything to work perfectly in order to deliver 180 million iPhones a year around the world.
The number of things that can go wrong here are beyond calculation. What if the one million workers at its Foxconn subcontractor fail to show up for work some day? What if they are not allowed to go to work?
Another problem is that Chinese growth is a key part of Apple?s long-term sales strategy. A Chinese boycott would put a huge dent in those plans.
Remember, Apple is getting it from both sides, with Trump promising a 35% import duty on all Apple products. That would certainly hurt sales.
I?m sure Apple management is on tenterhooks as to how all this will play out in the coming months.
There is no back up plan here. Apple is just too big and too sophisticated to change any part of its incredibly complex supply chain in less than a decade.
2) General Motors (GM) ? Is one of the most globalized US companies. GM can?t build a car in Detroit without 40% of its parts coming from Japan, Mexico, South Korea or dozens of other countries.
General Motors is also hugely dependent on Chinese sales. In November, it sold an eye popping 371,740 cars there, up 7% YOY, compared to only 252,644 in the US. That is one third of GM?s total worldwide sales.
Now the company plans to sell Chinese made Buicks in America.
And with the new, super strong dollar, the price advantage of those Chinese made cars is improving by the day.
While we weren?t looking, General Motors has become a Chinese company, and many others are following suit.
3) Wal-Mart (WMT) ? Imagine walking into your local Wal-Mart one day and finding out that all of the prices have been marked up by 35%?
This is a reason why the company is called the ?Chinese Embassy.? I dare you to find anything there that is NOT made in China, except for the food and the flowers (a dozen long stem red roses are only $10!).
Like Apple, the company is so big that any change in its supply chain would take years. You can add Target (TGT) to this hit list for the same reasons.
On top of that, Wal-Mart has 432 stores operating in China. Imagine the effect that a boycott would have there.
4) Boeing (BA) - The local flight school that maintains my plane has been totally taken over by Chinese students. That is because China needs to buy $1 trillion worth of aircraft over the next 20 years, some 6,800 jetliners in all.
Boeing expects to provide the lion?s share of these. The company has already entered the planning phases for the construction of a giant new aircraft assembly plant in China.
It would be really easy for China to switch a major part of these orders over to Europe?s Airbus Industries, which has been aggressively competing to accomplish exactly that.
Boeing didn?t get the business because of the advanced technology seen in the 787 Dreamliner. China was simply attempting to even out the trade balance.
5) Starbucks (STBX) ? Starbucks founder, Howard Schultz, made no secret of his dislike for Donald Trump before the election. With 2,500 stores in China, and plans to double that figure, he had little other choice.
With relations between the US and China turning colder than the firm?s overpriced iced espresso, sales, growth plans, and share prices could take a big hit. Chinese may have to postpone their caffeine addiction until the next Democratic administration.
6) Caterpillar (CAT) ? You can?t have an infrastructure boom anywhere in the world without Caterpillar, whose heavy machinery is the gold standard for large public works projects. I have been covering the company for 40 years.
As a result of the upcoming US round of massive deficit spending, Caterpillar?s share have been one of the best performers since the November 8th presidential election, up some 21.87%.
The shares are now trading at a positively stratospheric dotcom valuation level of 93.7 times 2016 earnings.
Unfortunately, this time the company is so heavily invested in China that it has also built a large assembly plant there. China accounts for 20% of the firm?s worldwide sales.
Time for a short?
The net effect on the impairment of business at all of these companies will be lower profits, higher volatility of profits, and continued uncertainty. The shares will be forced to trade at a discount.
When you are running a mammoth global business, the last thing in the world you want is unpredictability.
It will also bring a rapid rise in inflation, as prices are raised to offset higher costs and a strong dol
lar.
Who will be the biggest victims?
Working class Trump voters in rust belt states, least able to afford price hikes, especially those who already have jobs in Midwest manufacturing.
Where is the ?REFUND? Button?
Global Market Comments
December 14, 2016
Fiat Lux
Featured Trade:
(CATCHING DINNER WITH ENERGY SECRETARY NOMINEE, RICK PERRY),
(USO), (XLE), (TSLA)
United States Oil (USO)
Energy Select Sector SPDR ETF (XLE)
Tesla Motors, Inc. (TSLA)
Given that my friend, former Texas Governor, Rick Perry, was nominated for the position of Secretary of Energy yesterday, I thought I would recount a dinner I had with him.
The irony is great since Rick promised to close down the agency while campaigning for president in 2012.
It confirms my suspicion that many of the people Trump is appointing have the mission to destroy the agencies they will head.
As a precondition to joining a dinner with the former Texas governor, I had to promise a few things.
I was not allowed to bring up the fact that he shoots coyotes while jogging. I couldn?t mention statistics proving that 70% of the jobs created in his state during his 12-year tenure as governor were government, not private.
Having agreed to all of that, I was told, ?Sure, come along, we?d love to hear your questions and your insights.?
Perry was making his 12th?visit to the Golden State in the past two years to convince local companies, plagued with onerous taxes, stringent regulations and high operating costs, to pull up stakes and move camp to the Lone Star State.
When I first shook hands with the governor, I was surprised at how short he was. But then he wasn?t wearing the three-inch heeled cowboy boots that normally elevated him at home.
Then I mentioned my secret words: ?Go Aggies.? He recoiled.
?How did you know?? he demanded.
I told him that during the early 1970s, I drove my sister from California to his home state so she could attend Texas A&M University. Perry was a cadet then, and I speculated that they had probably dated.
He answered, ?Nah, I didn?t play around much in those days.?
Probably not.
But after that, he melted, only engaging me in serious conversation, while sticking to canned, stock answers to questions from everyone else.
I was Rick Perry?s new best friend.
As he spoke, I realized that he was much more reasonable in his views than when appealing to his ultra conservative base back home. That is simply the mark of a savvy and successful politician.
Perry said that the country needs both states to lead change and succeed, and that he rooted for California to do well.
The governor was still basking in the glow of Toyota?s recent announcement that it was moving 3,000 jobs from Long Beach, California to Texas.?
It has been a controversial win for him, as his state is paying $10,000 in subsidies per person to lure the white-collar work force.
I spoke to Toyota USA CEO, Jim Lentz, about this recently. He said the real reason had to do with working in the same time zone as the company?s large manufacturing facilities in Kentucky and Tennessee.
A lower cost of living, cheaper rents, and discount labor costs were also issues. Lower taxes were at the bottom of a list of ten priorities.
Past experience has shown that most departing workers, fleeing from California, return after three years. It seems the summer heat and humidity kill them.?
Thus chastened, they are more than willing to pay a premium for the lifestyle here, despite the higher taxes and earthquakes.
Perry says the US needs an ?all of the above? solution to its energy problems. It is not a good idea to be dependent on foreign energy sources, especially from unstable countries.
Despite its stereotype as an oil-based economy, Texas was now the top producer of wind power in the country. The installed base there now exceeds 12 gigawatts, making it the fifth largest in the world.
My friend, T. Boone Pickens, has been a major investor in wind power generation there.
An aggressive approvals process made possible the construction of long distance transmission lines needed to send it to other states and eventually to California itself, thus creating a national market for wind power.
The governor says that Texas will become a major exporter for liquefied natural gas within the next two years. Cheniere Energy (LNG), the front-runner in the field, has been a favorite recommendation of mine for the past five years, and? Trade Alert followers have chased the shares up from $6 to $70.
Despite the controversy over fracking wells polluting fresh water supplies, Perry says there has not been a single incidence of this occurring in Texas. This is no doubt a result of the state?s ferocious regulation of the energy industry, of which I, myself, have no small amount of experience.
Thanks in part to new federal regulations, air pollution has fallen dramatically in Texas. Ozone emissions have dropped by 23% since 2000, while nitrous oxides are off by 57%.
These, and other measures have enabled the US to cut its dependence on foreign oil imports from 33% to 15% since 2000. During the same period, natural gas production, which produces half the carbon of oil based fuels, has soared by 57%.
At that point, another guest raised his hand and asked his stance on gay rights. Perry opined that sexuality was a choice that could be controlled, and that gay marriage would never get his support. An audible hiss was heard in the roomwhich Perry stonily ignored.
That invited the question about the legalization of marijuana. He simply said that it would never be legalized in his state, and, ?If people want to get high, they can go to Colorado.?
Finally, a woman at the table asked about reproductive rights. When Perry said that he was proud to sign a Texas law limiting termination to the first five months of pregnancy, murmurs were heard. The law is not expected to survive a pending challenge at the Supreme Court.
Another attendee queried his view of Hillary Clinton. I braced myself. He then surprised me by saying that he thought she was ?a very capable Secretary of State and a great public servant.?
That spoke volumes to me. It meant that with access to all his private polling data, Rick Perry thought that Hillary would win the 2016 presidential election. As the astute politician that he is, Perry doesn?t want to burn his bridges.
Perry likes to tell people that he is probably the last governor who used an outhouse on a dry cotton farm near Abilene, West Texas.
He became an Eagle Scout and I confirmed this with the secret scout handshake.
He earned a degree in animal science at Texas A&M where he was also a Corps Cadet and a yell leader. His first part-time job was as a door-to-door salesman. When he graduated, he joined the Air Force and became a C-130 pilot.
Perry originally started in politics as a Democrat, getting elected to the Texas House of Representatives in 1984.
He worked on Al Gore?s presidential campaign in 1988. This was back when Southern Democrats were more conservative than the right wing of the Republican Party.Perry became a Republican in 1989.
He moved up to the governorship in 2000, when sitting governor George W. Bush was elected president. Perry has been reelected three times, making him the longest tenured Texas governor in history.
Perry said that his time spent as the front runner in the 2012 presidential election ?were the three most exhausting hours of my life.?
He then repeated his ?Oops? moment when, if elected, he couldn?t remember the third government department he would close (it was the Department of Commerce, in addition to Energy and Education). That was probably to head off someone else bringing it up first.
I told the governor I knew two facts about our respective states which I bet he didn?t know. He asked what they were.
I responded that California and Texas were the only two states that had been independent countries before joining the Union. California had been the Bear Flag Republic for six months until mid 1848, while the Republic of Texas stood on its own for a decade, until 1846. Texans have been regretting joining the Union ever since.
Today, the two states make up 19.1% of America?s GDP, and 20.4% of its population.
The other mystery fact was that while Texas was independent, it maintained an embassy in London, England on St. James Street.Today, the space is occupied by a pub and is across the street from the Ritz Hotel and next door to my old office at The Economist?magazine headquarters. Perry said he?d check it out on his next visit there.
As the dinner wound down, I asked the governor if he had ever driven a Tesla Model S-1. He said he hadn?t. I asked if he would like to because my own high performance model was conveniently parked out front. He said he?d love to.
At that point, the plain clothed Texas Rangers who accompany him as bodyguards noticeably tensed up.
I have some experience providing quick tutorials for the uninitiated on how to drive this incredible electric car from the future. My chassis number is 125 out of a fleet of 45,000 and is one of the oldest S-1s around.
Newcomers invariably underestimate the car?s power and acceleration, which works out to about 450 horsepower in the carbon world. This can be unexpectedly dangerous for newbies.
With some careful coaching, Perry gingerly drove the car a few times around San Francisco?s Huntington Park, atop Nob Hill with two nervous, but heavily armed, Rangers in the back seat.
When we carefully turned back onto California Street and came to a stop in front of the Mark Hopkins Hotel, Perry pronounced the vehicle ?a marvelous piece of technology?.
With that, Perry invited me to visit the governor?s mansion the next time I visited Austin, Texas.
I said I?d be honored, and silently drove my Tesla off into the night, thus christened by a true Texan.
You Want Me to Do What?
Legal Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.