Q: Why haven’t you added any short positions?
A: My floor is littered with trade alerts on short positions that didn’t get executed because the market fell apart too fast. In fact, that happened just yesterday; I tried to buy the Russel 2000 June $155-$160 vertical bear put spread but the rally only lasted essentially 10 minutes so there was no way to get it off.
Q: Would you buy United States US Treasury Bond Fund (TLT) at this point?
A: Please, have you learned nothing? A ten-point move up in weeks is where you sell, not buy! We last bought the (TLT) at $118 and we’re now at $130. The idea of buying on top of a ten-point rally is a great way to simply throw away money. So, no, I would not buy the (TLT) at this point.
Q: What is your opinion on the Fed backstopping the market with accommodative policy stance?
A: The bond futures are already indicating a 50% chance of a half-point rate cut by the end of the year, and an 88% chance of a 25-basis point cut by the end of the year. So, the market is already doing what the Fed should do and it’s having no impact whatsoever. If we’re really going into a recession, the Fed can take interest rates to zero and still it will provide no support for stocks because 1) Interest rates have been so low for so long, they’re no longer much of a factor in the economy 2) Falling stocks trump cheap money all day long, and if earnings are collapsing because of the trade war (which they are), even negative interest rates from the Fed wouldn’t support the market. I have a feeling that’s what we’re rolling into this summer.
Q: What is your target for the bond on the upside and the downside on yield?
A: My immediate target is $133 on the (TLT). That’s where I might entertain a short position, but even then, it would be something very cautious like the June $137-$140 vertical bear put spread. And my downside yield target is 2.05%—that’s only 15 basis points away, or three full points in the (TLT). So, we’re getting close to the most extreme upside targets in the bond market.
Q: Would you buy the ProShares Ultra Short S&P 500 ETF (SDS)?
A: Yes, but only on a rally—now would be a terrible time. We could get a rally into the month's end on Friday. If we do, selling the close or buying the -2X inverse bear (SDS) would be a good idea. If the (SPX) recovers one third of its recent loss, or 65 points from yesterday’s low, that would be a good entry point on the short side. Up two-thirds and you double up. Above that and you’re wrong.
Q: Copper producer Freeport McMoRan (FCX) is lagging again; is it time to buy?
A: No, FCX is getting slaughtered by collapsing copper demand from a slowing Chinese economy. You should note that if the Chinese say growth is at 6%, what you’re really looking at is more likely growth of about 3%. These are some of the lowest growth rates China has seen 20-25 years.
Q: CNBC and FOX are claiming today’s drop was caused by the Mueller statement on his report. Do you buy that?
A: No, absolutely not. That’s absolute garbage. The only important or relevant news for me right now is the whole trade war news flow.
Q: I know you’re not crazy about selling naked options, but I just sold 50 X Tesla (TSLA) August $100 puts for $20,000 in premium. I like this trade for income and would gladly own Tesla at a $100 long-term.
A: I would do that trade all day long. The only issue there is whether you have the margin to hold the position like this if you get a move all the way down to say $150 or $125, because margin requirements tend to double and triple when markets start to fall sharply. Sounds like you are a Tesla owner. The S, the X, or the 3?
Q: What is your gut feeling on which trade issues will actually resolve?
A: None. The Chinese (FXI) are actually in a very strong position. They would settle for going back to the status quo as of two years ago and nothing else. The U.S. is only 25% of the world economy, and China is still trading with the other 75%; they feel they can withstand the rest of the current presidential term.
Q: Banks are performing terribly—is this a chance to get in?
A: No, banks will continue to perform terribly. We now have an inverted yield curve during which banks basically lose money hand or fist. They’re also being replace by Fintech, which is PayPal (PYPL), Square (SQ), and all the credit card companies. I would much rather own a Visa (V), American Express (AMEX), or Mastercard (MC) than Goldman Sachs (GS), JP Morgan (JPM) or Citibank (C). That’s where the money is going.
Q: Is it time to start adding chip stocks like Nvidia (NVDA), Micron Technology (MU) and Advanced Micro Devices (AMD)?
A: No, this sector really looks like it wants to retest the December lows—chip prices are falling off a cliff, and the Chinese are banning the import of specific American made chips. It’s a major predictor of global recession and victim of the global trade war. Given that companies like Micron get 50% of their business from China, that is not good news. This has the makings of a major meltdown.
Q: Would you put on the same Tesla vertical bull call spread right here? The June $140-$150?
A: Yes, I would. Now it’s even lower risk because you have only 17 days left until the June 21 expiration.
Q: When will gold start to perform?
A: I’m not sure. With all the horrible things going on in the world right now, it’s just not happening. I don’t know why, but I think it eventually will. Gold is now trading like a commodity and not a precious metal. It’s tracking perfectly with other commodities like copper (COPX), which have been terrible. I think the market is wrong, but I don’t know when it will turn around.
Q: How can one short the Chinese currency, the yuan?
A: Very simple. The Wisdom Tree Chinese Yuan Strategy Fund (CYB) is the ETF on yuan, so just sell short the (CYB).
Q: If Trump caves on the trade deal, what effect will that have on things?
A: If the cave comes in the form of a treaty-like agreement that gets signed, the market will rally. Presumably, all the 25% punitive tariffs will disappear immediately, and we should have a big resurgence in the economy. Otherwise, it will continue to weaken. We need a Chinese trade deal to pull the US economy out of an imminent recession.
Q: What happens to the pound (FXB) in a hard Brexit?
A: If there is a “No Deal”, Brexit the United Kingdom would be committing economic suicide. It would gain no preferential tariffs outside the European Community. In that case, the pound goes to parity against the dollar, or 1:1. The last time that happened in 1984, I bought a mansion in London next door to Jacob Rothschild for $500,000. Today it is worth $20 million. Maybe you should do the same.
Q: Is it a good time to invest in rare earth metals?
A: Yes, but the second the trade war ends, those things are going to collapse. And as we’ve learned during the last 8-year bear market in the rare earths, liquidity is terrible on the down side. Take a look at the Van Eck Vectors rare Earth/Strategic Metals ETF (REMX). It was issued at the top of the last bubble and is up 15.67% since the trade war escalated.
Good luck and Good trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
