Hey John and the MAD Team, here's a late Happy New Years!
You really nailed and keep nailing great reversals and trends that are just beginning to deserve a watchful eye.
I'm still a bit stuck on futures, but I realize the safety in your spreads is a lot smarter...Thx for all you know and for all you do.
Rod
Alberta, Canada
Global Market Comments
February 6, 2019
Fiat Lux
Featured Trade:
(MY 20 RULES FOR TRADING IN 2019)
Global Market Comments
February 5, 2019
Fiat Lux
Featured Trade:
(A NOTE ON OPTIONS CALLED AWAY)
(TLT), (AAPL),
(THE GOVERNMENT’S COMING WAR ON MONEY)
I bought a tall caramel macchiato at Starbucks the other day. When I handed over a crisp $100 bill, the cashier’s response set me back.
“Oh, dinosaur money.”
I have to tell you that after speaking to US Treasury officials for a half-century, there is one thing I know for sure. The government absolutely hates money.
Now they finally have an alternative.
The government has been attempting to regulate Bitcoin almost since its inception. The SEC already successfully fought off several attempts to give it respectability by denying approval of several cryptocurrency-based securities.
The next step is for the government to get into the cryptocurrency business itself and snuff out the competition banning private issuance of online money.
It wouldn’t be the first time this has happened. Private issuance of paper money preceded government issuance by hundreds of years.
When I lived as a student in West Berlin during the 1960s, I had a nice little side business.
I organized weekend walking tours through the Berlin Wall at Checkpoint Charlie to visit East Berlin for American students too afraid to go alone.
To pay for it, I smuggled Ostmarks in my boots which I had purchased at a 75% discount in the west and used them to pay for everything in the east, booking a nice profit on the day. $10 for a lavish lunch for ten? No problem!
That would be much more difficult to pull off today as governments around the world have launched a war on cash that will not end until its ultimate demise.
This became clearly apparent when the government of India withdrew circulation of its two largest banknotes in 2017. Some 50% of Indian GDP is thought to take place in the underground economy in cash only.
The move caused a financial panic as consumers sold gold (GLD) and other hard assets to meet bills because they were unable to settle accounts with the large denomination notes they had hoarded.
As we move towards an all-electronic economy, the few remaining purposes where cash is essential are largely illegal.
Waitresses, babysitters, hookers, and bookies don’t report income to the IRS. Nor do drug dealers or illegal immigrants.
This is a big deal because eight states legalized marijuana in the last election.
Since banks are still banned from handling pot proceeds, this booming business has to take place entirely in cash, or more lately, bitcoin. Tales of dealers making their runs with gym bags full of $100 bills are rampant. States are reporting that while drunk driving is down, robberies are up.
The IRS estimates that $460 billion in tax revenue is lost every year through unreported income which is largely earned in cash.
Some half of the entire US paper money supply is held by foreigners or some $3.8 trillion where it is used to evade taxes, bribe foreign officials, and finance terrorism.
The US government’s war on cash is not a new thing. In 1929, it cut the size of US banknotes by one third to save money on the cost of high-grade paper.
In 1970, the US Treasury banned the circulation of the $10,000, $5,000, $1,000, and $500 bills to halt mafia money laundering. Since then, the IRS has been the biggest beneficiary of the move by catching tax cheaters.
Large denomination US bills are now solely the domain of collectors.
The US government would love to get out of the cash business entirely as it is so expensive to run. It spends about $737.4 million a year just to print American $1, $2, $5, $10, $20, $50, and $100 notes.
Paper dollar bills, which are actually made of 75% cotton and 25% linen, are completely worn out and have to be returned in only 18 months.
Coins are even a bigger loser. It costs more than two cents to make a penny.
Since the advent of color printers, counterfeiting has exploded. North Korea runs almost its entire economy on fake $100 bills which are said to be the best in the world.
Today, some 80% of the entire $3.8 trillion M1 notes and coins in circulation in America are in the form of $100-dollar bills. That works out to $4,200 per person. Where has all that money gone?
The US is now considering eliminating even this convenient denomination. While $1 million in $100s can fit into a tote bag, that quantity of $10 bills would weigh 220 pounds, a quantity much more difficult to sneak around.
An all-electronic economy would certainly pose some privacy problems as it would leave a massive paper trail on everything you do.
When you get audited by the IRS, the first thing they do is obtain your past three years of bank and credit card records detailing your every transaction.
State authorities will pursue phone records to establish your physical presence to verify residency. So how long did you really spend in tax-free Florida last year? Your cell phone carrier and credit card companies both know.
It would also pare back illegal immigration as this is another industry that runs entirely on cash. Once here, undocumented workers are often paid in cash in restaurants and on construction sites.
There is truly no place to hide.
Other countries are already well ahead in the war of cash. In Belgium, some 93% of all financial transactions take place electronically.
Sweden has also been pushing hard on this front taking the M1 money supply there down by 27% over the past two years.
Many small businesses there now post signs saying they don’t accept cash. The goal is to move to an all-electronic economy.
The preferences of Millennials are also moving us towards the cashless economy.
Have you ever been in line at Starbucks and noticed that the kid in front of you just paid $2 for a cup of coffee with his credit card? Or maybe he swiped his Apple Pay account on his iPhone?
Global Market Comments
February 4, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or FROM PANIC TO EUPHORIA),
(SPY), (TLT), (AAPL), (GLD),
What a difference a month makes!
In a mere 31 days, we lurched from the worst December in history to the best January in 30 years. Traders have gone from lining up to jump off the Golden Gate Bridge to ordering Dom Perignon Champaign on Market Street.
However, not everything is as it appears. The suicide prevention hotline on the bridge has been broken for years, and you can now pick up Dom Perignon at Costco for only $120 a bottle.
Clearly, investors are enjoying the show but are keeping one eye on the exit. Perhaps that’s why gold (GLD) hit an 8-month high as nervous investors Hoover up a downside hedge against their long positions.
In fact, it has been the best January since 1987, with a ferocious start. The problem with that analogy is that I remember what followed that year (see chart below). After a robust first nine months of the year, the Dow Average (INDU) broke the 50-day moving average. It looked like just another minor correction and a buying opportunity.
The market ended up plunging 42% in weeks including a terrifying 20% capitulation swan dive on the last day. I tried actually to buy the stock at the close that day. The clerk just burst into tears and threw the handset on the floor. I didn’t get filled. Since the tape was running two hours late, NOBODY got filled on any orders entered after 12:00 PM.
It doesn’t help that markets have been rising in the face of a collapsing earnings picture. Look at the chart below and you’ll see that after peaking out at an annualized 26% a year ago in the wake the passage of the new tax bill, earnings have been rolling over like the Bismarck on their way to zero.
If you own stocks anywhere in the world, this chart should have made the hair on the back of your neck stand up. It’s almost as if the tax bill was delivering the OPPOSITE of its intended outcome.
How multiple expansion will we get in the face of fading earnings? How about none? How about negative!
A totally red-hot January Nonfarm payroll Report on Friday at 304,000 confirmed that the economy was still alive and well, at least on a trailing basis. Headline Unemployment Rate rose to 4.0%.
The Labor Department said that the government shutdown had no impact on the numbers because federal employees were furloughed and not unemployed. Tomato, tomahto.
However, 175,000 workers were laid off in the private sector and that is why the Unemployment Rate ticked up to a multi-month high. Noise from the shutdown is going to be affecting all data for months.
That’s also why part-time workers jumped 500,000 in January. A lot of federal employees started working as Uber drivers and pizza delivery guys to put food on the table without a paycheck.
Further confusing matters was the fact that December was revised down by 90,000.
Leisure & Hospitality led the way with 74,000 new jobs, followed by Construction with 52,000 and Health Care by 42,000 jobs.
The shutdown is over, but how much did it cost us? Standard & Poor’s says $6 billion but the restart costs will be greater. More recent estimates run as high as $11 billion.
Weekly Jobless Claims were up a stunning 53,000, to 253,000, an 18-month high. While government workers can’t claim, their private subcontractors can, hence the massive shutdown-driven jump.
Bitcoin hits a new one-year low at $3,400. Some $400 billion has gone to money Heaven since 2017. Only $113 billion in market capitalization remains. I told you it was a Ponzi scheme. US coal production hits a 39-year low as it is steadily replaced by natural gas and solar. Could there be a connection? Talk about data mining.
Earnings were mixed, with some companies coming out hero’s, others as goats.
Apple (AAPL) slightly beat expectations with revenues at $84.31 billion versus $83.97 billion expected, and earnings at $4.18 per share versus $4.17 expected. Guidance going forward is very cautious of a slowing China.
Good thing I saw the ambush coming and covered my short two days ago. A penny beat is the most managed earnings I have ever seen. To warn about earnings and then surprise to the upside is classic Tim Cook.
December Pending Home Sales cratered, down 2.2% in December and 9.8% YOY. Despite the dramatically lower mortgage interest rates, buyers fled the crashing stock market.
“PATIENCE” is still the order of the day at the Federal Reserve with its Open Market Committee Meeting ordering no interest rate rise. It was a trifecta for the doves. The free pass for stocks continues. That’s why I covered all my shorts starting from last week. Even a blind squirrel occasionally finds an acorn.
Tesla reported another profit for the second consecutive quarter, and the company is about to reach escape velocity. Model 3 production in 2019 is to reach 75% of the total output and we can expect a new pickup truck. A second factory in Shanghai will take the “3” to over a half million units a year. That $35,000 Tesla is just over the horizon.
Why are all major companies reporting good earnings but cautious guidance? Are they reading the newspapers, or do they know something we don’t? Not a great sign of a continuing bull market. Sell the next capitulation top.
This week was a classic example of how the harder I work, the luckier I get, and I have been working pretty hard lately.
I came out of a near money Apple (AAPL) put spread at cost, then rolled into a far money put spread just before the stock sold off. That little maneuver made me $1,030 in two days.
Then, I spotted a perfect “head and shoulders” top in the bond market set up by a three-point rally in the (TLT). When the red hot January Nonfarm Payroll report printed the next day at 5:30 AM PCT, bonds immediately gave back a full point.
It was all enough to boost my performance to a new all-time high after a hiatus of two months. Those who recently signed up for my service must think that I am some kind of freakin' genius! They’ll learn the truth soon enough.
My January and 2019 year-to-date return soared to +9.66%, boosting my trailing one-year return back up to +29.24%. The is my hottest start to a New Year in a decade. Sometimes you have to make a sacrifice to the trading gods to get rewarded and that is what December was all about.
My nine-year return climbed up to +309.80%, a new pinnacle. The average annualized return revived to +33.79%.
I am now 80% in cash, short the bond market, and short Apple.
The upcoming week is still iffy on the data front because of the government shutdown. Some government data may be delayed and other completely missing. Private sources will continue reporting on schedule. All of the data will be completely skewed for at least the next three months. You can count on the shutdown to dominate all media until it is over.
Jobs data will be the big events over the coming five days along with some important housing numbers. We also have several heavies reporting earnings.
On Monday, February 4 at 10:00 AM, we get the much delayed December Factory Orders. Alphabet (GOOGL) reports.
On Tuesday, February 5, 10:00 AM EST, we learn the January ISM Non-Manufacturing Index.
On Wednesday, February 6 at 8:30 AM EST, the November Trade Balance is published.
Thursday, February 7 at 8:30 AM EST, we get Weekly Jobless Claims. December Consumer Credit follows at 9:30 AM and should be a humdinger. Intercontinental Exchange (ICE) reports.
On Friday, February 8, at 10:00 AM EST, Wholesale Inventories are out. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’ll be sitting down with a case of Modelo Negro and a big bag of Cheetos to watch the commercials during the Super Bowl with my family. (My dad played for USC Varsity in 1948). I never forgave the Rams for defecting from Los Angeles, and Boston is too far away to care about.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 1, 2019
Fiat Lux
Featured Trade:
(THE DEATH OF KING COAL),
(KOL), (PEA),
(THE BRAVE NEW WORLD OF ONLINE RETAILING),
(SNAP), (GPRO), (APRN), (SFIX)
Global Market Comments
January 31, 2019
Fiat Lux
Featured Trade:
(MARKET GETS A FREE PASS FROM THE FED),
(SPY), ($INDU), (TLT), (GLD), (FXE), (UUP),
(APPLE SEIZES VICTORY FROM THE JAWS OF DEFEAT),
(AAPL)
When the Oxford English Dictionary considers the Word of the Year for 2019, I bet “PATIENCE” will be on the short list.
That was the noun that Federal Reserve governor Jerome Powell had in mind when describing the central bank's current stance on interest rates.
Not only did Powell say he was patient, he posited that the Fed was currently at a neutral interest rate. The last time he opened on this matter four months ago, the neutral rate was still 50 basis point higher, suggesting that more rate hikes were to come.
What a difference four months makes! The last time Powell spoke, the stock market crashed. Today, he might as well fire a flare gun signaling the beginning of a stampede by investors.
The Dow ($INDU) average at one point gained 500 points. Lower rates for longer term meant that bonds took it on the kisser. And gold (GLD) absolutely loved it as they now have less competition from interest-bearing instruments.
The US dollar (UUP) was taken out to the woodshed and beaten senseless paving the way for a nice pop in the euro (FXE). Even oil (USO) took the cue as cheaper interest rates mean a stronger global economy that will drink more Texas tea.
I believe that the Fed move today will definitely take a retest of the December 24 lows off the table for the time being. Now, if we can only get rid of that damn trade war with China, it will be off to the races for risk in general and stocks specifically.
After an almost 40% swan dive, Apple has found solid footing at these levels for the time being. 40% seems to be the magic number. Declines ALWAYS end at 40% with Apple.
About time!
It’s been an erratic last few months for the company that Steve Jobs built and this last earnings report will go a long way to somewhat stabilize the short-term share price.
The miniscule earnings beat telegraphs to investors that the bad news has been sucked out.
That is what Tim Cook wants the investor community to think.
But is he right?
I would argue that the bad news is over for the short-term but could rear its ugly head again later – it all rides on China’s shoulders.
Let’s take a look at the numbers.
Chinese revenue was down 27% YOY locking in $13.17 billion in quarterly revenue compared to $17.96 billion the prior year.
There is no two ways about this – it’s an awful number and a hurtful manifestation of the Chinese economy decelerating.
The unrelenting pressure of the geopolitical trade war has handcuffed Beijing’s drive to deleverage its balance sheet and steer its economy to a more consumption-supportive model.
China is lamentably back to its traditional ways - the old economy - infusing $2.2 trillion into its balance sheet along with cutting the reserve ratio for state banks hoping to incite economic growth.
Positive short-term catalyst but negative long-term consequences.
This is why I urged Apple lovers to stay away from this stock earlier because of the uncertainty of its current strategic position.
It makes no sense to place an indirect on the current Washington administration navigating a China soft landing.
As it stands, most of Apple’s supply chain is in China and moving it out will be done in piecemeal which is happening behind the scenes and will cause massive job loss in China further hurting the Chinese economy.
The ratcheting up of tensions signals the untenable end of American tech supply chains in China and no new foreign investment will pour into China.
Maybe even never.
I wholeheartedly blame CEO of Apple Tim Cook for not foreseeing this development.
That is what he is paid to do.
Then there is the issue of iPhone sales in China.
Chinese citizens aren’t buying iPhones because of three reasons.
The cohort of wealthy Chinese who can afford a $1,000 iPhone might think twice if they want to be seen outside with a product from a country that is becoming adversarial. Apple has incurred hard-to-quantify brand damage to its once pristine brand in a land that once worshipped the company.
The refresh cycle has elongated because Apple manufactures great smartphones and iPhone holders are waiting it out on the sidelines two or even three iterations down the road to upgrade because that is when they can unearth the relative value of the product.
Lastly, local Chinese smartphone markers have greatly enhanced their products because of a function of time and borrowed Western technology. It is now possible to buy a smartphone that offers around 80% of performance and functionality of an iPhone but for less than half the price.
The customers on the fence who once viewed iPhones as a must-buy are now migrating to the local Chinese competitor because they are a relatively good deal.
I can surmise that these three headwinds are just beginning and will become more entrenched over time.
If the trade war becomes worse, the brand damage will accelerate. iPhones are becoming incrementally better which will delay new iPhone upgrades unless something revolutionary comes out that requires customers to upgrade to be a part of the new technology.
And sadly, Chinese competition is catching up quicker than Apple can innovate and that will not stop.
However, the silver lining is that the worst-case scenario won’t happen in the next quarter and the market won’t get wind of this until the second half of the year.
Instead of a meaningful sell-off because of this earnings report, Cook chose to front-run the weakness by reporting the hideous performance at the beginning of January.
Cook knew he needed to come clean with the negative news and the reformulated projections that were re-laid a few weeks ago were the same ones that Apple barely beat by one cent on the bottom line by posting EPS of $4.18 and marginally on the top line by $420 million.
I am in no way saying that this was a great earnings report – it wasn’t.
Apple mainly delivered on the mediocrity that they discussed a few weeks ago lowering the bar to the point where it would be a failure of epic proportions if Apple couldn’t beat significantly revised down earnings.
Then the outlook for the next quarter wasn’t as bad as people thought, but that doesn’t mean it was good.
When you start playing the game of not as bad as the market thought – it is a slippery slope to head down and halfway to the CEO getting sacked down the road.
I mentioned before that the macro headwinds came 2 years too early for Cook and pegging 60% of company revenue to a smartphone which has trended towards mass commoditization is a bad bet.
Cook has been painstakingly slow rewriting Apple as a service company which is his current get-out-of-jail-free card dangling in front of him like a juicy carrot.
iPhone gross margin is now 34.3% which is lower than the other Apple products whose margins are 38%.
Their flagship product isn’t as profitable on a per-unit basis as it once was highlighting the necessity for refreshing the product lines with not just new iterations but game-changing products.
The type of products that Steve Jobs used to mushroom popularity would suffice.
Gross margins will continue to come down as the smartphone market is saturated and customers won’t buy iPhones now unless they receive a drastic price reduction.
The result is that Apple no longer publishes iPhone unit sales to conceal the worst number for their most important and volume-heavy product.
A little too late if you tell me and irresponsible to investor transparency if you ask me.
Apple Pay, Apple Music, and iCloud storage eclipsed $10.9 billion demonstrating a 19% YOY increase.
This shows that this company still has strengths, but don’t forget that services are still less than 15% of total revenue even though they are the fastest growth part of their portfolio.
Cook isn’t doing enough to supercharge the content and services at Apple.
The top line number was $84.3 billion, a 5% YOY decline in revenue – a YOY decline hasn’t happened in 18 years and this is deeply troublesome.
Let me explain why Cook is the center of the problem.
The underlying issue is Cook doesn’t know what product should be next for Apple.
Apple dabbled with the Apple TV which didn’t pan out.
Then the autonomous vehicle unit just closed down sacking 200 employees.
And the content side of it hasn’t been developed fast enough relative to the slowing down of iPhone sales which is why you can blame Cook for being reactive instead of proactive.
It’s not like he can claim that his head was in the sand and couldn’t take note of what Netflix was doing and had gotten into that original content game sooner.
The hesitation is exactly what worries me with Cook. Cook is a great operations guy and can take an existing product, beef up margins, shave down expenses, streamline execution and boost top and bottom line profits.
Cook is being painfully exposed now that he is out of his comfort zone and must aggressively move in a direction that doesn’t have a red carpet laid out for him.
Even though the pre-earnings red flag raised many questions, Cook only satisfied these red flags on a short-term basis and Apple still needs to reconfigure its product roadmap for the long term.
If Cook plans to milk more out of the iPhone story, Apple becomes a sell the rallies stock, but the market will give the benefit of the doubt to Apple for a quarter or so.
The 800-pound gorilla in the room is the Chinese economy which could go into a hard landing if the stimulus fails to deliver economic respite or if the trade war tensions are exacerbated.
At the bare minimum, the waterfall of downgrades should be over for the time being, but this will come to the fore in a quarter or so when Apple will need to shine light on its plans moving forward.
I wouldn’t bet the ranch on Cook being innovative.
It looks like Apple will start to trade in a range.
It’s hard to believe any bad news superseding what came out at the beginning of this month in the short-term, but at the same time, there are no idiosyncratic catalysts to cause this stock to bullishly break out.
We are at an inflection point in Cook’s career and he is finding out that it's not as easy to be Apple as it used to, and mammoth decisions are on the horizon that must be addressed or possibly become the next IBM.
If you ask me, I’ve been calling on Apple to replace Cook for a while with Jack Dorsey as the signal caller, I still believe this is the only way to stay in the heavyweight division of tech titans five years from now.
Such is the competitive nature of the tech landscape these days.
