Global Market Comments
February 8, 2018
Fiat Lux
Featured Trade:
(MAD HEDGE MARKET TIMING INDEX SHOWING "EXTREME BUY"),
(SPY), (TLT), (VIX)
(A NOTE ON OPTIONS CALLED AWAY),
(AAPL), (TLT)
I found a new great way to predict the stock market. Launch a new technology research and trade mentoring newsletter and it will crash within days. It works 100% of the time.
It is often said that that the stock market has discounted 11 out of the last five recessions.
This is one of those times that the stock market has discounted a recession that isn't going to happen, not for at least two years anyway.
With my Mad Hedge Market Timing Index at a very rare "Extreme Buy" reading of 18, I have to buy stocks here or shoot myself in the head.
Not only is the index shouting out its strongest "BUY" signal in three years, all 30 of the data inputs are individually at the lowest levels in three years, or in nine years!
I believe the bottom in the stock market is in.
We may see continued high volatility. May see a terrifying marginal new low. We may see the Mad Hedge Market Timing Index bounce around here in the teens for a couple of weeks.
But for grizzled veterans like me it is now time to back up the truck and load up on the high-quality names which are on sale. The risk/reward of adding new positions here is overwhelmingly in favor of RISK.
It's "RISK ON" baby.
This is why I stopped out of my gold (GLD) long position with a small loss with only seven trading days to go. There is no need for a hedge in a rising market. Watching gold's price action today, other traders obviously feel the same way as me.
If you CAN'T bring yourself to hoover up stocks here, you better get out of the business.
Let me give you a few reasons why.
The short volatility industry is now completely gone. It disappeared in a few frantic hours on Monday night, leaving investors with some $8 billion in losses.
Never again will we see (VIX) short covering on such a massive scale, which then feeds into the stock market, triggering these massive 1,000 point air pockets we saw (more pilot talk here).
Not only that, all of the hot money is out of the market as well, stopped out when shares cratered. There is now a ton of money looking to get back in.
We also still have three more months of seasonal strength for shares, which usually ends in May.
Finally, the economy is getting stronger, not weaker. The last two weeks have been similar to 1987, when the Dow Average collapsed by 22% in a single day, but the economy just kept blithely powering on.
Those who held on in October, 1987, as I did, made back all their losses by the end of the year.
Even though the "BUY" signals are among the highest I have ever seen, I am still remaining my usually cautious, circumspect self.
As they teach you at the Marine Corps Flight School in Pensacola, "There are old pilots, and there are bold pilots, but there are no old, bold pilots."
All of my options spreads I am adding here will remain at their maximum potential profit point, even if the underlying shares fall another 10%-20%. You have to allow them room to breathe.
Keep in mind that I am taking a "Tiffany's approach to investment here. All of these companies I have been sending Trade Alerts on I have either been covering for 45 years, or with the tech names, since they were founded in the seventies, eighties, nineties, or 2000's.
In other words, I know them extremely well. You are only getting the best of the best.
So load the boat, fill your boots, and go pedal to the metal. If these stocks go wrong, they can always move in with you.
An Old Pilot
"The bubble is in the bond market, not the stock market" said Leon Cooperman, CEO of Omega Advisors, an original investor in my 1990's hedge fund.
Global Market Comments
February 7, 2018
Fiat Lux
Featured Trade:
(HOW CREDIT SUISSE BLEW UP THE (XIV)
(VIX), (XIV), (ZIV), (SVXY)
(MAD HEDGE FUND TRADER CELEBRATES ITS TEN-YEAR ANNIVERSARY)
I feel like I have been robbed, and then robbed again.
I received notice today from Credit Suisse, the issuer of the Velocity Shares Daily Inverse VIX Short term ETN (XIV), that it is resorting to a forced liquidation of the fund (see note from the company below).
All investors will receive cash value for their holdings sometime after February 20. The last NAV they had on their screen was $4.00 a share, compared to the previous day's close of $99.00. (XIV) is currently trading at $6.50.
Credit Suisse has the right to commit this theft thanks to a "poison pill" provision buried in the prospectus. This provides for a forced call of the shares during any single 80% decline of the net asset value in a single day.
And here's the part that makes you want to break down and cry and throw your empty beer can at the TV set.
It was Credit Suisse itself that triggered the overnight (VIX) spike from $39 to $52.50 through their own panic buying of futures. Credit Suisse, in effect, blew up their own fund.
I sent out a Trade Alert for Investors to buy the (XIV) at the close on Monday at $97.08. My expectation was that the Volatility Index was peaking, and that the (XIV) was due for a huge snap back rally. It closed at $99.00. and I was looking like a star.
On Tuesday morning, the Dow Average open down 700 points, and the (VIX) peaked at $52.50. Stocks then rallied to be up on the day, and the (VIX) collapsed all the way down to $22.50, some 57%.
The (VIX) should have increased in value enormously. It would have been a trade for the ages.
By closing the fund at the low for the day in the middle of the night Credit Suisse made it impossible for investors to profit from this rally.
Instead, it chose to wipe out thousands of investors in its fund. After 50 years in the financial markets, it is the dumbest thing I have ever seen.
In fact, the entire short volatility industry got obliterated last night.
Other closing funds include the Velocity Shares Daily Inverse VIX Medium Term ETN (ZIV), the ProShares Short VIX Short Term Futures ETN (SVXY), and a Tokyo Stock Exchange listed S&P 500 VIX Inverse ETN issued by Nomura Securities. The combined losses are several billion dollars.
This shouldn't have happened. I picked the (XIV) because they held 66% of their portfolio in short March expiration VIX futures, which have barely moved, and closed last night at only $18.88.
My guess is that the management of Credit Suisse panicked when they saw the February (VIX) double from $17 to $39 on Monday. If it had doubled again from $39 to $78, it might have taken the (XIV) NAV below zero, putting them on the hook of the balance.
I'm sorry, but I used to work for a Swiss bank, and this is how they think.
There are two other possibilities here.
One is that an algorithm went rogue, accidently wiping out the value of the fund with some kind of hedging mismatch. The other is that criminal mismanagement has taken place that will become obvious with the passage of time.
The math certainly does not add up. Credit Suisse should have completely hedged the move in the (VIX) from $9 to $39 with their end of the day rebalancing's.
That would have fully hedged for them the decline in the (XIV) from $146 to $93. This leads me to believe that someone at Credit Suisse made a tremendous mistake.
You can almost certainly bet there will be a class action suit against Credit Suisse on behalf of all (XIV) shareholders. You will be contacted by email when this is initiated by the plaintiff lawyers and you will have to sign a stack of papers.
Once the discovery is done showing that it was Credit Suisse's own actions that caused the destruction of the (XIV) they are going to be on the hook for the losses.
There will be a settlement substantially higher than the current $6.50. You might even get a shot at recovering the Monday close of $99.00 when the Credit Suisse malfeasance ensued. I think given the choice of jail time and paying up they'll pick the latter.
But it may take years to realize this. It took MF Global three years to pay off account holders. I know because I was one of them.
You can also bet that the SEC will take a magnifying glass to the whole affair, especially since it was a foreign bank that defrauded American individual investors.
The only consolation here is that Credit Suisse was the largest investor in their own fund and lost over $500 million of their own money. Their shares are down 3.70% today just on this one incident.
To collect your remaining $4, please contact your broker. Don't call today, as no one knows anything. I spent an hour on the phone with Interactive Brokers to learn this.
We should be able to make back the loss on this very quickly, as long as volatility remains high.
The Diary of a Mad Hedge Fund Trader is now celebrating its tenth year of publication.
During this time, I have religiously pumped out 1,500 words a day, or eight double spaced typed pages, of original, independent minded, hard hitting, and often wickedly funny research.
I've been covering stocks, bonds, commodities, energy, precious metals, real estate, and agricultural products.
You've been kept up on my travels around the world and listened in on my conversations with those who drive the financial markets.
I also occasionally opine on politics, but only when it has a direct market impact, such as with the recent administration economic and trade policies.
The site now contains over 10 million words, or 12 times the length of Tolstoy's epic War and Peace.
Unfortunately, it feels like I have written on every possible topic at least 100 times over.
So, I am reaching out to your, the reader, to suggest new areas of research that I may have missed until now which your believe justify further investigation.
Please send any and all ideas directly to me at support@madhedgefundtrader.com, and put "RESEARCH IDEA" in the subject line.
The great thing about running an online business is that I can evolve it to meet your needs on a daily basis.
Many of the new products and services that I have introduced since 2008 have come by way of your suggestions. That has enabled me to improve the product's quality, to your benefit.
This originally started out as a daily email to my hedge fund investors giving them an update on fast market moving events. This was at a time when the financial markets were in free fall, and the end of the world seemed near.
Here's a good trading rule of thumb: Usually, the world doesn't end. History doesn't repeat itself, but it certainly rhymes.
The daily emails gave me the scalability that I so desperately needed. Today's global mega enterprise grew from there. Today, the Diary of a Mad Hedge Fund Trader and its Global Trading Dispatch is read in over 140 countries.
I'm weak in North Korea and Mali, in both cases due to the lack of electricity.
If you want to read my first pitiful attempt at a post, please click here for my February 1, 2008 post.
It urged readers to buy gold at $950 (it soared to $1,920), and buy the Euro at $1.50 (it went to $1.60).
Now you know why this letter has become so popular.
Unfortunately, I also recommended that they sell bonds short. I wasn't wrong on that one, just early, about eight years too early.
I always get asked how long will I keep doing this?
The government tells me that the latest I can start drawing down on my retirement funds and Social Security is 70 1/2.. That's some 4 1/2 years off for me.
Then I'll reassess whether I want to carry on for another decade, or find something else more fun to do.
Given the absolute blast I have doing this job, that is highly unlikely. Take a look at the testimonials I get only an almost daily basis and you'll see why this business is so hard to walk away from (click here for those).
Fiat Lux (let there be light).
Other than that, Mrs. Lincoln, how was the play?
I thought I'd never see a 1987 crash again. But my problem is that I lived too long.
Welcome to the first flash crash of 2018, and probably not the last. And here's the really good news. It's not over!
As I write this, the Volatility Index (VIX) is trading in the aftermarket at $53, up 36% from the close. The Short Volatility ETN that I bought right a the close at $93 is now trading at $16!
Clearly a major short (VIX) player has gone bust, triggering a forced liquidation in the aftermarket. We'll find out who in a couple of days.
This could market the top of the (VIX) and the bottom in stocks once we endure one more horrific opening.
When looking for the guilty party in the mass murder, you have to vote for "All of the above."
The president declassified a memo, despite the FBI announcing in advance that it was false, prompting foreign concerns of an American right wing coup 'd etat. He preceded this with a State of the Union address which could have been lifted from George Orwell's Animal House.
Notice that every selloff started with a big share dump from Europeans concerned about American political risk. Gee, I can't believe I'm saying that.
Fed governor Janet Yellen, the greatest stock market booster of all time, retired on Friday. Markets have a history of greeting new Fed governors with a slap in the face.
The yield on the ten-year Treasury bond yield popped 45 basis points to 2.85% in a month, taking away the punch bowl for many highly leveraged traders.
Then the January Nonfarm Payroll Report revealed the highest wage growth in many years, unleashing inflation fears.
And what about all those share buy backs, a major prop to the market? Sorry, they ain't happening baby, not during the earnings quiet period. Apple shareholders will just have to wait for $270 billion in buying to hit the market.
While you can't swing a dead cat without hitting a victim of the Dow Average's 2,800-point, 10.5% decline, there were several winners.
ETF's traded remarkably well, except for the above noted volatility plays. There were no forced liquidations into penny bids, as we saw with the last flash crash.
And I have to say, the trading strategy of the Mad Hedge Fund Trader has been totally vindicated. Our Trade Alert performance has lost only 3.09% so far in February and is still up +1.00% on the year. And we'll be up in February at the options expiration on Friday next week.
I went into the meltdown with a 50% cash position, and 50% in hedged spreads in options with only 9 days to expiration. I then cut all my higher risk positions right after the Monday opening, when the market was briefly up. My long positions in gold (GLD) and bonds (TLT) actually rose today.
It looks like the harder I work, the luckier I get.
To show you how crazy things got, Yahoo mail was up and down all day, the Interactive Brokers platform regularly crashed every ten minutes, and the data inputs for the Mad Hedge Market Timing Index froze when it hit 40.
When the dust settles, we will be set up for the best buying opportunity of 2018. The market price earnings multiple has just fallen from 19X to 16X, and it may be at 15X before it is all over. That could be right after theTuesday opening.
It is hard to imagine that institutions left behind by the January melt down will ignore this opportunity.
The best thing you can do now is to make lists of stocks to buy at the bottom, focusing on the premier technology names. Recent research names provided by the Mad Hedge Fund Trader would be a good place to start.
Sorry for the short letter today, but I have been working the phones trying to get to the root of things.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 5, 2018
Fiat Lux
Featured Trade:
(STOCK TRADERS DISCOVER INTEREST RATES),
(SPY), (TLT), (GLD), (AMZN), (AAPL), (MSFT),
(THE NASCENT BULL MARKET IN GOLD),
(GLD), (GDX), (ABX)
Finally, finally, the stock market noticed that interest rates are rising, although they have been doing so unrelentingly since July. Call stock traders slow learners. All I can say is that no one here at the Mad Hedge Fund Trader is surprised, not even the furniture.
At the peak today, the ten-year Treasury yield (TLT) hit 2.855%, a four-year high, up a steep 45 basis points since December 31. My 2018 target of a 3.0%-3.50% range beckons.
I think we are either AT the bottom of this move down in the S&P 500 (SPY), or within a day of the final bottom.
Right here we have a 3.5% correction in the (SPY) and 3.7% in the Dow Average from the January 28 top.
I just don't see a true crash happening in the face of the 14% corporate earnings growth we are seeing in the current quarter.
To get a crash you would have to believe that the recently passed tax cut will have no net effect on the economy, with the short term benefits offset by rising interest rates, labor, and commodity costs.
Ooops!
Ironically, I think that the rising rates that triggered this week's debacle may be about to take a rest. That's why I covered all by bonds shorts. Will the coming rally in bonds bring a rally in stocks? We shall see.
When you look at the entirety of the big tech earnings announced last week, you have to be dazzled, astonished, stupefied, and absolutely gob smacked.
The diluted earnings per share for Alphabet (GOOGL) soared by 33.05% Apple by 22.49%, and Microsoft by 13.31%. The dollar value of these profit increases are the largest in the history of global capitalism.
Not only were the high double-digit figures more than impressive, these are gigantic half trillion or nearly one trillion dollar companies that are showing the growth rates of small caps.
The Department of Labor Bureau of Labor Statistics added fuel to the fire today dropped their monthly bombshell with the January Nonfarm Payroll report at 200,000. Headline unemployment rate stayed steady at 4.1%. The reports for November and December were revised down 24,000.
Construction was the big gainer at up +36,000, followed by Food Services, up +31,000, and Health Care, up +21,000. The only losses came with Information Technology at -6,000. The U-6 "discouraged worker" unemployment rate is at 8.2%.
All that is fine and good. What really set the cat among the pigeons was the
Average Hourly Earnings growth at 0.3%. This is the first real sign of wage inflation we have seen in decades and immediately triggered a selloff in the bond market for the ages.
The ten-year US Treasury bond yield spiked up to 2.85%, prompting a gut churning $400 plunge in the Dow Average. Of course, your gut WASN'T churned if you were running a double short in bonds and a double long in gold (GLD) as I begged, pleaded, and beseeched you to do. A loss of a limb for others means only a mosquito bite for you.
As for the Mad Hedge Fund Trader Alert Service, we keep grinding up from one new all-time high to the next. We were up +4.09% in January, +0.96% so far In February, with a trailing 12 month return of +53.16%. Our eight-year profit stacks up to +281.52%.
I have been going pedal to the metal on the debt explosion theme, with a double short in Treasury bonds (TLT), double longs in gold (GLD), (NEM), and a long in commodities (FCX).
we are rolling out our new Mad Hedge Technology Letter in the coming week to take up the slack.
This week will be all about jobs data, which rolls out in rapid succession from Wednesday morning.
We are now into Q4 earnings season so those should be the dominant data points of the coming weeks.
On Monday, February 5, at 10:00 AM, the week kicks off with the January ISM Non-Manufacturing Index, a survey of 375 private firms across the country. Cirrus Logic (CRUS) reports earnings.
On Tuesday, February 6 the jobs data parade starts with the JOLTS Report of Job openings for January. Walt Disney (DIS) and SNAP (SNAP) reports earnings.
On Wednesday, February 7, at 7:00 AM EST, we get MBA Mortgage Applications for the previous week, which should be down because of sharply higher rates. Rio Tinto (RIO) Reports earnings.
Thursday, February 8 leads with the 8:30 EST release of the Weekly Jobless Claims. Cyber software company FireEye (FEYE) reports earnings.
On Friday, February 9 at 1:00 PM we receive the Baker-Hughes Rig Count, which should keep ticking up thanks to high oil prices.
Long-term gold bugs have at last been handed a new reason to love their favorite metal.
The recently passed tax cut bill.
If the new President's tax cutting and deregulating policies become law, risk assets will take off like a scalded chimp.
If he proves unable to navigate the tricky byways of the Washington swamp, they will crash. And it may be 6-18 months until we get a real answer.
So in the meantime, institutional investors and individuals have quietly been scaling up their ownership of gold as a hedge against Armageddon.
Hedge funds longs in gold, gold ETF's, gold futures, and the gold miners have suddenly shot up to new all-time highs.
Can I point out here that my long positions in gold options are all nicely profitable?
If it turns out that the new administration policies succeed, inflation will rocket, sending gold through the roof.
Bottom line: gold and other precious metals have become a "Heads I win, tails you lose" trade.
A number of other fundamental factors are coming into play that will have a long-term positive influence on the price of the barbarous relic.
The only question is not if, but when the next bull market in the yellow metal will accelerate.
All of the positive arguments in favor of gold all boil down to a single issue: they're not making it anymore.
Take a look at the chart below and you'll see that new gold discoveries are in free fall. That's because falling prices from 2011 to 2016 caused exploration budgets to fall off a cliff.
Gold production peaked in the fourth quarter of 2015 and is expected to decline by 20% in the following four years.
The industry average cost is thought to be around $1,400 an ounce, although some legacy mines, such as at Barrack Gold (ABX), can produce it for as little as $600.
That is a heartbreaking 3.48% below today's spot price.
So why dig out more of the stuff if it means losing more money?
It all sets up a potential turn in the classic commodities cycle. Falling prices demolish production, and wipe out investors. This inevitably leads to supply shortages.
When the buyers finally return for the usual cyclical macro-economic reasons, there is none to be had, and price spikes can occur which can continue for years.
In other words, the cure for low prices is low prices.
Worried about new supply quickly coming on-stream and killing the rally?
It can take ten years to get a new mine started from scratch by the time you include capital rising, permits, infrastructure construction, logistics and bribes.
It turns out that the brightest prospects for new gold mines are all in some of the world's most inaccessible, inhospitable, and expensive places.
Good luck recruiting for the Congo!
That's the great thing about commodities. You can't just turn on a printing press and create more, as you can with stocks and bonds.
Take all the gold mined in human history, from the time of the ancient pharaohs to today, and it could comprise a cube 63 feet on a side.
That includes the one-kilo ($38,720) Nazi gold bars with stamped German eagles upon them, which I saw in Swiss bank vaults during the 1980's when I was a bank director there.
In short, there is not a lot to spread around.
The long-term argument in favor of gold never really went away.
That involves emerging nation central banks, especially those in China and India, raising gold bullion holdings to western levels. That would require them to purchase several thousand tonnes of the yellow metal!
Sovereign wealth funds from the Middle East have recently been dumping gold to raise money. The 2014 collapse of oil prices has made it impossible to meet their wildly generous social service obligations.
Hint: governments in that part of the world that fail to deliver promises are often taken out and shot.
Venezuela has also been a huge gold seller to head off an economic collapse thanks to the disastrous domestic policies there.
When this selling abates, it also could well shatter the ceiling for the yellow metal.
That's why I have been strongly advising readers to watch the price of Texas tea careful, as both it and gold often move in tandem.
Let me throw out one more possibility for you to cogitate over. Another big winner of rising precious metal prices is residential real estate, which people rush to buy as an inflation hedge. Remember inflation?
Tally ho!
