Global Market Comments
November 9, 2018
Fiat Lux
Featured Trade:
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
(WHY TECHNICAL ANALYSIS DOESN’T WORK)
(FB), (AAPL), (AMZN), (GOOG), (MSFT), (VIX)
Global Market Comments
November 7, 2018
Fiat Lux
Featured Trade:
(A NOTE ON OPTIONS CALLED AWAY), (SPY), (MSFT)
(TESTIMONIAL)
Thank you so much for meeting with us in Portland!
I hope I didn't monopolize your time at the expense of everyone else. But how often does one get a chance to pick the brain of the Mad Hedge Fund Trader?
You have such an ability to see the big picture on so many fronts and whittle it down into actionable strategies.
I will confess that at one point I considered dropping your service because I couldn't effectively implement your trades, as we discussed.
But the thought of not getting your daily insights made me realize how often I use what you write when talking with clients, making allocation decisions, and selecting industries in which to invest.
So, you're stuck with me!
Again, thanks for taking the time!
Cheryl
Rogue River, Oregon
Global Market Comments
November 7, 2018
Fiat Lux
SPECIAL ELECTION ISSUE
Featured Trade:
(THROWING RED MEAT TO MY BASE)
(RTN), (LMT), (NOC), (HON), (XOM), (CVX), (DVN)
It turned out to be a category two blue wave, not the Category four or five one Democrats had hoped for.
The Democrats picked up 28 seats in the House of Representatives but lost two in the Senate.
The one-liner here is that the most generous corporate tax cuts in US history are frozen in place for two more years. That is good for the economy and good for stocks.
You have to laugh at some of the stories that started filing in on Tuesday. In Brooklyn, NY election, officials called the fire department to break down the door of the polling place because they had the wrong keys. Polls everywhere ran out of ballots, while others suffered voting machine breakdowns.
Not so here in Nevada where everything ran flawlessly. My smiling face was safely stored in the Washoe County voter database and a backup paper ballot was created for good measure. No Russians here! Nevada now has two Democratic Senators for the first time in history.
Fortunately, I am old enough to have taken a civics class in high school which has not been taught in public schools for decades. A year working in the White House Press Corps (during the Reagan era) gives me additional perspective.
It shows. According to a recent survey, only 27% of Americans can identify all three branches of the federal government (executive, legislative, and the judicial).
The responsibility, therefore, falls to me to explain the outcome of yesterday’s midterm election and the trading and investment implications therein.
With the Democrats winning the House of Representatives and the Republicans controlling the Senate, we are about to enter the golden age of gridlock.
It is now impossible for any new law to be passed at the federal level. The only way it could is if they agreed on something, but so far, the two parties have shown little propensity to do so. They might as well be chalk and cheese.
Even if they did jointly pass a bill, it could still be vetoed by president Trump. Can you really see Donald Trump signing a bill sponsored by Nancy Pelosi? Given his preference for disruption, I would say there is a little chance of that happening.
The Democrats now have a crucial power and that is complete control of the purse strings. If Trump wants to spend anything at all, it can only be with Democratic approval.
It is highly unlikely that the Democrats will not approve ANY expansion of the debt ceiling, given the enormous increases in government spending Trump has inspired.
You can certainly expect the growth of defense spending to slow, if not stop completely, so avoid these stocks like the plague, like Raytheon (RTN), Lockheed Martin (LMT), Northrop Grumman (NOC), and Honeywell (HON).
This perfectly sets up a number of government shutdowns in the coming two years. Each one of these will bring a 10% stock market correction, but probably not much more. This was the case when Republicans shut down the government under President Obama sometime for weeks.
Control of the Senate isn’t really all that important. Once one branch of government is gone, the legislative calendar grinds to a halt. It does retain for the president the right to appoint judges. But that really involves social issues, not market ones, and will have no market impact. I can’t think of any big business issues coming up before the Supreme Court.
You can count on the House to resurrect the investigation of Russian influence in the 2016 election which was put to sleep with no findings by the Republicans nearly a year ago. On the first day in office, the new Democratic majority will subpoena Donald Trump’s tax returns. Long in hiding like the Loch Ness monster and bigfoot, they will finally see the light of day.
An impeachment motion against Trump will almost certainly pass the House but it won’t be anything more than a symbolic gesture. Without a two-thirds vote in the Senate, it will go nowhere. I doubt it will even come up for a vote.
The House can also use the Congressional Review Act to roll back any Trump administration rule it doesn’t like, which is pretty much all of them. Just last week, Trump said he could overturn a constitutional amendment with an executive order.
Expect the courts to get clogged with litigation on everything. Oil companies will be the big victims here. Avoid Exxon (XOM), Chevron (CVX), and Devon Energy (DVN). Their free pass on environmental regulation is about to end.
And while the tax cuts have been frozen on place, so is the steep upward trajectory of the growth of government debt. Borrowing is expected to top $1.4 trillion next year, levels not seen since the Great Recession. That means the Golden Age of short selling in the bond market, now 2 ½-year-old, has many more years to run. Keep selling the United States Treasury Bond Fund (TLT) on rallies and buy the (TBT) on dips.
The figures belie the massive leftwing swing that has taken place in the nation. West Virginia went for Trump by 43 points in 2016 but just reelected a Democratic Senator, Joe Manchin. In Colorado, they elected the first openly gay governor. The Republicans only won the Senate in Arizona because the Green Party split the vote, taking 2.2%.
Where Republicans did win, it was only by razor-thin margins, seeing 2016 leads disappear from double digits to tenths of a percent across the country, as we saw in Florida and Texas. That sets up and interesting 2020 where demographic change alone should be enough to tip the balance leftward. Oh, and we will be in recession by then too.
Fortunately, you will be rewarded for your long suffering during the campaign which saw an unwelcome 46% increase in negative advertising. Markets have delivered an average 8.5% return in every fourth quarter since 1980 and are up 89% of the time. Since WWII, every midterm election has generated an eye-popping 14.5% average return in the following 12 months.
And now for the bad news: the 2020 presidential campaign starts tomorrow, and we won’t know who the Democratic candidate is until TWO MONTHS BEFORE THE ELECTION!
Global Market Comments
November 6, 2018
Fiat Lux
Featured Trade:
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD),
(AAPL)
(THANK GOODNESS, I DON’T LIVE IN SWEDEN), (EWD),
(PLEASE USE MY FREE DATA BASE SEARCH)
The original purpose of this letter was to build a database of ideas to draw on in the management of my hedge fund.
When a certain trade comes into play, I merely type in the symbol, name, currency, or commodity into the search box, and the entire fundamental argument in favor of that position pops up.
You can do the same.
Just type anything into the search box with the little magnifying glass found on the Home Page in the upper right-hand side, and a cornucopia of data, charts, and opinions will appear.
Even the price of camels in India should show up.
The database goes back to February 2008, totaling 10 million words, or 12 times the length of Tolstoy’s War and Peace. Watching the traffic over time, I can tell you how the database is being used:
1) Small hedge funds want to see what the large hedge funds are doing.
2) Large hedge funds look to see what they have missed, which is usually nothing.
3) Midwestern advisors to find out what is happening in New York and Chicago.
4) American investors to find out if there are any opportunities overseas (there always are).
5) Foreign investors to find out what the hell is happening in the US (about 1,000 inquiries a day come in through Google’s translation software).
6) Specialist traders in stocks, bonds, currencies, commodities, and precious metals looking for cross-market insights which will give them a trading advantage with their own book.
7) High net worth individuals managing their own portfolios so they don’t get screwed on management fees.
8) Low net worth individuals, students, and the military looking to expand their knowledge of financial markets (lots of free online time in the Navy).
9) People at the Treasury and the Fed trying to find out what the private sector is doing.
10) Staff at the SEC and the CFTC to see if there is anything new they should be regulating.
11) More staff at the Congress and the Senate looking for new hot-button issues to distort and obfuscate.
12) Yet, even more staff in the White House gauging the president’s popularity and the reception of his policies.
13) As far as I know, no justices at the Supreme Court read my letter. They’re all closet indexers.
14) Potential investors/subscribers attempting to ascertain if I have the slightest idea of what I am talking about.
15) Me trying to remember trades which I recommended long ago but have forgotten.
16) Me looking for trades that worked so I can say ‘I told you so.’
It’s there, it’s free, so please use it. You can find the search box on my home page at the bottom of the column on the right.
Global Market Comments
November 5, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE MAD HEDGE FUND TRADER HITS A NEW ALL TIME HIGH),
(AAPL), (FB), (RHT), (GE), (VXX), (AMZN), (SPY), (IWM), (CRM)
I used to do a lot of skydiving from 20,000 feet. There’s nothing like a freefall, feeling the wind rip at your jumpsuit as you plunge towards the earth at terminal velocity of 125 miles per hour. In the beginning, the ground looks very far away. Then it suddenly gets very close, very fast.
I used to do this during the 1960s with WWII surplus silk parachutes with a “double L” cut. You hit the ground like a ton of bricks. Sometimes, we’d swing back and forth from the wings of the airplane before letting go just to have fun and freak out the pilot who had no chute.
Over time, you develop a very accurate sense of how fast the ground is approaching and when to pull the ripcord. If you’re wrong, you die.
That’s how I felt when markets went into freefall last Monday. However, after a half-century of trading, I have a highly developed sense of where the bottom is.
So, I piled on the “bet the ranch” longs in technology stocks and shorts in the bond market right at the absolute bottom. And to make sure everyone to a man got in, shares swooshed down one final time when rumors spread that Trump was escalating the trade war with China once again.
By Wednesday morning, the Mad Hedge Fund Trader model portfolio had booked its largest two day gain since the inception of this letter 11 years ago, some 12%. By miracle of miracles, we ended up positive for October, virtually the only one to do so in the entire hedge fund industry.
I would like to think that 50 years of toil in the markets is finally starting to pay off for me. The truth is, the harder I work, the luckier I get.
Stocks lost $2 trillion in market value in October, off 6.9%. Other than that, how was the play, Mrs. Lincoln? Tech took the worst hit in a decade, with many favorites down 20%-30%.
I am raising as much cash as I can ahead of the Midterm Elections tomorrow. Democrats seizing the House of Representatives is priced into the market already.
If the Republicans end up keeping the House, you can count on at least a 1,000-point rally in the Dow Average in the next few days as the door is now open for more tax cuts, more deregulation, and more deficit spending.
If the Democrats end up taking both the Senate and the House you can look for a 1,000 point drop in the Dow. That would bring on a huge “flight to safety” bid in the bond market and yet another opportunity to sell short at great prices.
Either way, I want more dry powder with which to take advantage of any extreme moves that may take place. “Extreme” seems to be the order of the day.
By the way, we are so far in the money with our remaining positions that even with a 1,000 point drop we should still reap the maximum profit with the November 16 option expiration in only 9 trading days.
Not that it matters, but October Nonfarm Payroll Report came in at a red-hot 250,000. The headline Unemployment Rate remained at a two-decade low at 3.7%. The Broader U-6 “Discouraged worker” unemployment rate fell 0.1% to 7.4%.
For the first time in yonks, no sector lost jobs last month. HealthCare added 36,000 jobs, Manufacturing 32,000 jobs, and Leisure & Hospitality 42,000 jobs.
However, the real blockbuster was that Average Hourly Earnings exploded to a 3.1% YOY rate, the highest in ten years. Yes, ladies and gentlemen, this is what inflation looks like, up close and ugly.
The number immediately knocked the wind out of the bond market taking it to a new low for the year. Yes, this is what double short positions in bonds are all about. I saw this coming a mile off.
The backdrop for the bond market is looking worse than ever. The budget deficit is about to break $1 trillion for the first time since the 2009 crash. Rising interest rates mean the government’s debt burden is about to grow by leaps and bounds, eventually becoming its largest expenditure.
The US Treasury is hitting the markets daily with massive new issuance, and the Chinese are dumping what US bonds they have to support the Yuan, now at a ten-year low. This is what Armageddon looks like in slow motion.
Last week was dominated by a China trade war that was on again, then off, then on one more time. The stock market ratcheted four-digit figures every time this happened.
Apple (AAPL) announced record profits yet again but countered with cautious forward sales guidance. Social media pariah Facebook (FB) delivered an earnings report beyond all expectations popping the stock $10.
IBM took over Red Hat (RHT) for $33 billion, the third largest merger in history. It’s too little too late for Big Blue as the stock falls on the news. It all reeks of a “Hail Mary.”
General Electric (GE) cut its dividend from 12 cents a share to one cent after reporting a breathtaking $22.8 billion loss. The Feds have opened a criminal investigation into accounting practices. This may define the final bottom in the stock. Take another look at those long-term LEAPS.
My year-to-date performance rocketed to a new all-time high of +33.17%, and my trailing one-year return stands at 37.57%. October finished at +1.24% and that includes an ill-fated -4.23% loss in the iPath S&P 500 VIX Short Term Futures ETN (VXX).
And this is against a Dow Average that is up a miniscule 1.9% so far in 2018. So far in November, we are up an eye-popping +3.54%.
Incredible as it may seem, the Mad Hedge Fund Trader has been up 18 consecutive months. That’s what you pay for and that’s what you’re getting. There’s nothing more fulfilling in life than making promises to friends, then delivering in spades.
As the market collapses, I scaled into longs in Amazon (AMZN), the S&P 500 (SPY), the Russell 2000 (IWM), and Salesforce (CRM). I used the flight to safety bid in the bond market to double up my short position there, and am kicking myself for not going triple weight.
My nine-year return ballooned to 309.64%. The average annualized return stands at 34.72%.
All the BSDs are done reporting Q3 earnings and only a few tag ends are left to report. The carnage is over until we restart the cycle once again in February. In any case, economic data pales in comparison to the election in terms of market impact.
On Monday, November 5 at 10:00 AM, the ISM Manufacturing Index is out.
On Tuesday, November 6 is Election Day. Trading will be a subdued affair and the results will start coming out at 11:00 EST after the west coast polls close.
On Wednesday, October 24 we have the election aftermath to deal with. Up 1,000, down 1,000, or unchanged, who knows?
At 10:30 AM the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.
Thursday, October 25 at 8:30, we get Weekly Jobless Claims. The Federal Open Market Committee meets to discuss interest rates but will take no action.
On Friday, October 26, at 8:30 AM, the October Producer Price Index is out, an important read on inflation.
The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I made a massive amount of money personally in the October crash. I am going to plop down $150,000 and buy a brand new Tesla Model X for myself. The ashtrays are full on the old one, and besides, there is a tiny nick in the windshield from driving up to Lake Tahoe. I hear the new one has new “Summon” technology that allows it to drive into a parking lot by itself and drive around until it finds an empty space, then back into it, all untouched by human hands.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Knowing When You Hit the Ground is Crucial
My New Wheels
“If you put the federal government in charge of the Sahara Desert, in five years, there would be a shortage of sand,” said Nobel Prize-winning economist Milton Friedman.
