Having flip-flopped twice so far in 2016, my bet is that the Federal Reserve flip-flops on its monetary policy, yet again.

Yes, buying bonds may appear like high treason for someone who has been trading stocks for a half century (I?m currently reading the biography of Benedict Arnold, a deeply misunderstood man).

I have made money on the well known ?Sell in May and Go Away? effect for the past ten years.

What?s different this year is that even conservative managers who usually ?poo poo? this seasonal phenomenon are coming around to my way of thinking, and getting extremely nervous.

At last week?s Wednesday afternoon massacre, the central bank suddenly flipped with its April minutes from an easing to a decided tightening mode.

You can therefore count on markets to fully discount a 25 basis point rate rise by the June 17 meeting.

And then you know what? ?Brexit,? weak economies in Europe, Japan, and China, weak corporate sales, the US presidential election, and a strong dollar will suddenly come to the fore, and they?ll sit on their hands for the umpteenth time.

Markets and traders will get caught wrong footed once again. Bond prices and the (TLT) will rocket. Yields will collapse, taking the ten-year Treasury bond yield down to 1.36%, or to new 60 year lows.

If all of this makes me sound like a reverse psychologist, you?d be right. But we have to trade the market we have, not the one we want.

The great irony is that the world will clamor to buy US Treasury bonds because, with a lofty 1.85% yield, they are one of the highest paying government debt issues on the planet.

It?s all proof that if you live long enough, you see everything.

That makes the iShares 20+ Year Treasury Bond Fund ETF (TLT) June 2016 $124-$127 in-the-money vertical bull call spread a great hedge for any other ?RISK ON? assets you may want to hold for the next month, like stocks.

I therefore expect the (TLT) to continue to trade in a sideways range up to the June Fed meeting, which will enable me to max out my profit on this position.

Bonds prices are already hinting this will happen, as the (TLT) has only given back 3.5 points since the Wednesday upset.

You would expect at least a ten point hickey if a rate rise was really going to happen, as we saw with the run up to the December 25 basis point hike.

By the way, bond traders are much smarter than stock traders, as they are backed by much more formidable research departments. Follow their lead with a laser like focus.

That is what a 30-year non-stop bull market buys you these days.

It all traces back to my thesis that this is not a deflationary decade, but a deflationary century.

Did you know that the cost of home lighting fell 1,000 fold from 1850 to 1900 when consumers switched from whale oil to electricity? I learned that little nugget reading Thomas Edison?s bio last week.

The cost of street cleaning in Boston in 1900 was astronomical, as the city then supported 700 horses per square mile, each of which produced 50 pounds of manure a day! Today that cost is effectively zero.

We are in a comparable downshifting of the structural cost of everything now, some 116 years later.

If the wheels fall off of this trade for any reason, I?ll be outta there quickly with a stop loss. Markets are volatile and tempestuous beasts these days, and can produce more manure than the lifetimes of 700 horses.

To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of optionshouse.

If you are uncertain on how to execute an options spread, please watch my training video on ?How to Execute a Bull Call Spread? by clicking here at http://www.madhedgefundtrader.com/ltt-executetradealerts/. You must me logged into your account to view the video.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.

Don?t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.

Expect The Fed to Flip Flop Again

In the wake of the Fed?s Wednesday flip-flop, I?m sitting here looking at my screens.

The dollar, Euro, Yen, US Treasury bonds, commodities, gold, silver, and oil all say interest rates are RISING on June 17.

Stocks are saying they?re FALLING.

The million-dollar question is: Who?s lying?

My bet is that it?s stocks that are telling the porky pies.

Here is the tell. The Federal Reserve April Open Market Committee minutes said that a rate rise was on the table if the economic data justify it.

The problem is that having shown their cards for an imminent rate rise, the global market assumption will be that a rate rise in four weeks is a sure thing.

This pretty much screams at you how all asset classes will trade for the next month.

The US dollar (UUP), lured on by the prospect of an expanding yield advantage over the rest of the world, will continue to appreciate. The Euro (FXE), Yen (FXY), US Treasury bonds (TLT), commodities, gold, silver, and oil (USO) will fall.

It?s that simple.

I have to tell you that having traded stocks for a half century, I learned long ago that stocks are congenital liars. So this is not a new thing.

Look no further than the latest batch of data releases. Even though the S&P 500 (SPY) is just short of an all time high, US equity mutual funds have shown net outflows of nearly $20 billion.

It is corporate buy backs and mergers and acquisitions that are levitating the indexes up here. Take those away, and there is nothing but air supporting prices up here.

Think of it as a Wiley Coyote moment.

That is why I sold short the market once again on Friday, specifically through purchasing the S&P 500 SPDR?s (SPY) June, 2016 $210-$215 in-the-money vertical bear put spread at $4.34. This represents a tactical layering on top of my existing short positions.

To lose money, the S&P 500 has to trade at or above the $210 level at the June 17 expiration in 20 trading days.

To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of optionshouse.

If you can?t do the options, buy the ProShares Short S&P 500 Short Fund ETF (SH) (click here for the prospectus at http://www.proshares.com/funds/sh.html), or the ProShares Ultra Short S&P 500 Short Fund 2X ETF (SDS) (click here for the prospectus at http://www.proshares.com/funds/sds.html).

If you are uncertain on how to execute an options spread, please watch my training video on ?How to Execute a Vertical Bear Put Debit Spread? by clicking here at http://www.madhedgefundtrader.com/ltt-executetradealerts/. You must me logged into your account to view the video.

Then what happens next?

The Fed will stay true to their words, and NOT raise rates in June because, guess what, the economic data don?t justify it. Investors will believe they have a free pass on rates for the rest of 2016 and a global rally ensures.

Having flip-flopped, the Fed will flip-flop again.

That gives my short play here a life of about three weeks, which is just shy ?of the entire maturity of my current trading book.

Then it will be time to step out of the market and let IT tell you what it is going to do next.

Sounds to me like a good time to take a cruise.

Queen Mary 2 anyone?

Not An Investment Strategy

 

At long last, Hillary Clinton has started to make public key planks of her post election policies, which may become law if she is successful in her 2016 presidential bid.

Until now, her run for the Democratic nomination has largely been about what she had for breakfast, her hairstyle, how nice her mom was, or how tough her dad was.

I have known Hillary Clinton for more than 20 years, since not long after she moved into the White House. It is no secret what she stands for, and none of her proposed policies should come as a revelation to anyone.

If you are a member of the ?1%? you are in for some bad news. You are target number uno.

If you own a home, work for a large company, save for your retirement, earn money from capital gains, and toss in a check when they pass the dish around at church every Sunday, you are the biggest beneficiary of the current tax system, by miles.

Therefore, you are about to take a big hit.

I have been compiling data for this piece for months, piecing together conversations with her staff and policy wonks, as well as pulling from her public speeches.

The tax policies will do nothing less than remake the United States of America over the coming decade, beyond all recognition.

The implications for your trading and investment portfolio are huge. I have outlined a summary of coming tax changes below, along with her (not my) rationale behind them.

1) Energy

Moving capital out of carbon based energy sources and into alternative ones will be a big priority for the new President Clinton. The elimination of century old tax breaks for the oil industry will be used to finance a massive expansion into alternative energy, primarily solar.

Her big goal is the oil depletion allowance, long despised by environmentalists, which diverts about $60 billion a year from the US Treasury onto the bottom lines of oil companies.

This measure, pushed through by a Texas senator during the Great Depression, permits energy investors to write off all capital expenses during the first year, while realizing the income over the full life of a well, usually 20-30 years.

After all, why should we be subsidizing more production during a burgeoning oil glut?

Call it a carbon tax by another name.

Hillary? ultimate goal is to increase America?s share of alternative energy production from the present 7% to 33% by 2030. Add in nuclear power, and that raises non-carbon energy to 50% of the US total. She has specifically mentioned installing 500 million solar panels in a decade.

Gee, do you know anyone who has been pounding the table about solar stocks, like Solar City (SCTY) and First Solar (FSLR)?

2) Capital Gains

Hillary?s proposal to raise capital gains rates, effectively taxing all short term gains as regular income will have major implications for all traders and investors alike.

Profits realized on investments held for more than 365 days are currently taxed at a 20% rate for those couples earning over $466,951. This special treatment of investment profits also dates back to the 1930?s. President Carter lowered it to 20%, then George W. Bush took it down to 15%..

Clinton wants to treat short-term gains as ordinary income, thus boosting the tax rate to 43.4%. She also wants to extend the minimum holding period to qualify for long-term gains from one year to two.

Her attack on what she calls ?quarteritis?, the excessive focus by corporate America on short-term results at the expense of long term goals, is laudable.

It could also deal a deathblow to high frequency traders, never popular people, whose holding period of securities rarely extends beyond a nanosecond.

These measures are expected to raise $36 billion a year in new revenues for the federal government.

3) Carried Interest

Instituted by President Carter during the late 1970?s to encourage venture capital investment, the use of the carried interest loophole has grown far beyond its original intention.

It essentially enables hedge fund and private equity managers to convert high tax ordinary income into long-term capital gains, thus creating the famed 15% maximum tax rate for the wealthy.

Carried interest does not have a big impact on federal revenues. Its elimination will raise only about $25 billion. It is more of a ?fairness? issue, targeting the 1%, and leveling the playing field for the middle class.

If you don?t believe that ?fairness? is such a big deal, remember that the American Revolution was ignited over exactly this kind of matter, the preferential treatment of British importers over US ones.

4) Home Mortgage Deduction

Should renters be subsidizing homeowners? Kiss that home mortgage interest deduction goodbye for high-end properties. Ditto for the real estate market as a whole.

Hillary wants to limit home mortgage interest deductibility to loans of only $500,000, half of the present $1 million.

This will have the effect of taxing the coasts, east and west, where the expensive homes are, to the benefit of cheaper housing in the Midwest. That great ocean view is about to get more expensive.
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Ironically, it will funnel cash from blue states to red states. Is Clinton cutting off her nose to spite her face?

Still, it is another ?fairness? issue. It is also a biggie. The move would raise $100 billion in new federal revenues.

5) Ending the Tax Deductibility of Charitable Contributions

Should those who don?t go to church subsidize those who do? Should the public be financing extremist, toxic political campaigns? That?s what ending the tax deductibility of charitable contributions would prevent.

In fact, some 90% of this money currently goes to the fine arts patronized by the well off. Think of this as another tax the rich measure. Universities, churches, and political fund raising will go begging.

But this is another elephant, picking op a further $100 million a year for the feds.

6) Ending 401k Contributions

Should those without savings subsidize those salting away money for retirement? This is the argument that will be made to end tax deductibility of 401k contributions.

Originally engineered by the Reagan administration as a get rich quick scheme for Wall Street, it has proved wildly successful.

Such a measure would boost government revenues by $55 billion a year, and would act as another income leveler for the middle class.

However, don?t expect this to get much traction with the public. A trial balloon was sent up for this a few years ago, and the hue and cry were deafening.

7) Phase Out the Stepped Up Cost Basis

Another Reagan measure, the stepped up cost basis allows surviving spouses to mark their homes to market and use that as their new cost basis, this avoiding punitive capital gains taxes.

It was enacted because high inflation during the seventies and eighties was raising home values so fast that widows and widowers had to sell their homes when bereaved because they couldn?t afford the estate taxes.

I must admit that I cashed in on this when my own spouse passed away, effectively earning millions from the great California property bubble tax free.

The measure will create some $40 billion in new government income. She doesn?t need that McMansion without you anyway.

8) Tax Dividend Income as Regular Income

Guess who this one targets? Approximately 80% of all stocks are owned by Republicans. Treating dividends as ordinary income would raise the rate from 20% to 43.4% for high-income earners.

If you are still breathing, you can now pick yourself up off the floor so I can add a few conditions and provisos.

It will be politically impossible for President Clinton to get any of these changes through a divided congress.

While recapturing th
e Senate is a slam-dunk in 2016 thanks to a friendly calendar, Democratic control of the House is an open issue, thanks to extensive gerrymandering. It really all depends on how much air time Donald Trump gets.

Maybe he should host ?Wheel of Fortune? to boost his numbers?

A divided congress means that only one of these measures might get through as a quid pro quo for Republicans to get one of their favorite tax breaks through.

The most likely candidate would be to allow corporations to bring their $2 trillion stash of foreign profits home tax-free.

I want to end on an upbeat note so you don?t run away and jump off the nearest bridge.

None of these hikes would be necessary if the economy grew at a 4% real rate instead of the present 2-2.5%.

This is exactingly what I have been predicting in my many research pieces, thanks to a massive demographic tailwind that begins during the 2020?s (click here for Get Ready for the Coming Golden Age).

Think goodbye 80 million retiring baby boomers who are a drag on the economy, hello 85 million free spending millennials.

That would balance the federal budget very quickly and thus eliminate the need for any tax increases whatsoever.

A new administration with no tax hikes! That would be one popular president!

You Play, You Pay