Global Market Comments
December 20, 2019
Fiat Lux
Featured Trade:
(DECEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(BA), (CRSP), (BABA), (GLD), (PANW), (VIX), (VXX)
Posts
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader December 18 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What is the status of Boeing (BA) and when should I buy it?
A: Their 737 production was shut down because they literally ran out of space to park completed planes. They have something like 400 of them now sitting around on tarmacs all around northern Washington state. This is the worst-case scenario so it is a very tempting place to buy; I would do something like a February 2020 $250-$270 vertical bull call spread, make 10% in a month, and be conservative. If it weren't year-end, and I didn't already have my year in the bag, I would probably buy Boeing right here.
Q: Do you recommend CRISPR (CRSP) therapeutics as a buy?
A: Yes, but on a dip. I always hate buying stocks after they doubled. At some point in 2020, we will see correction in biotech stocks, and then you want to load the boat again. Here, I’m buying nothing.
Q: Is Palo Alto Networks (PANW) a buy at these levels?
A: Yes, it’s already had its correction—it's one of the few stocks that are buyable at these levels. But I would do something like a call spread, which is limited risk. As far as a pairs trade with Palo Alto vs Nvidia...I would not touch that with a ten-foot pole, because you can’t know the internal nature of two companies like that well enough to buy one and sell short the other against it. You could really get destroyed on that pairs trade, so don’t make that mistake.
Q: Do you think the US dollar (UUP) will head higher or lower next year?
A: It will go a lot lower, as the chickens from all the government borrowing come home to roost. More borrowing brings a lower dollar, which brings lower everything in the US; all US dollar-denominated assets will get hurt, and this may be what eventually kills off the bull market in stocks. Start buying the Euro (FXE) on dips.
Q: What do you think about Boris Johnson winning the UK election?
A: It is a disaster and will lead to the end of Great Britain. Scotland will go independent, Northern Ireland will join the Republic of Ireland, and even Wales may break off and form its own country. So, England will be reduced to a tiny rump of a country with a much lower standard of living. It may take 10 years to happen, but that’s where it’s going.
Q: Does the recent positive housing data mean we aren’t having a recession in 2020?
A: Yes, in fact the market has been backing out of a 2020 recession for the last three months; and the leading sector in the recovery has been housing, caused partly by extremely low-interest rates but also partly by millions of new millennials pouring into the housing market for the first time. Finally, my basement is empty. That explains why the entry-level and middle level of the market are strong, and the high end is still decreasing in price.
Q: Back in August, the global economy looked to be stalling, yet it was a great time to buy stocks.
A: That is exactly when to buy stocks—when the economy is terrible. If you get used to buying on the bad news and selling on the good news you will do very well as a trader. Most people do the opposite—people were dumping stocks in August. And that of course was when we went with one of our rare 100% longs. By the way, this happens every August, which is why I take my vacations in July.
Q: Do you see a global slowdown during the melt-up?
A: Well, the economy is still slowing down. It never stopped slowing down—we’re probably looking at a 1.5% GDP this quarter. However, in liquidity-driven markets, you don’t look at fundamentals; you look at the amount of cash that is available to buy equities, that’s why you buy equities. That said, if we ever do get a real economic recovery, you might actually have stocks going down because a price-earnings multiple of 20X is not an ideal place to buy stocks.
Q: What do you prefer for a Volatility Index (VIX) trade?
A: An option on the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) is one. Go long dates, like a year, and deep out-of-the-money, like the $18 strike price, to minimize the hot from Time decay. If your (VIX) goes back up to $25 the (VXX) will soar to $27 and you will make a fortune.
However, if you have the facility to trade futures, then options on the futures in the VIX is how most professionals will trade that.
Q: Should we be worried about the Repo crisis as we approach the end of the quarter?
A: Absolutely, you should be worried—the Fed might have to come through with another round of quantitative easing in order to prevent a surprise overnight pop in interest rates to 5%. That’s what happened last quarter; it could certainly happen again. The basic problem is that the structure of the US debt markets aren't built to handle the volume of borrowing that’s coming through from the US government, so with debt at an all-time high, we’re kind of in new territory here in terms of whether or not markets can actually handle that amount of borrowing. Total government borrowing next year will probably be $1.75 trillion dollars.
Q: What do you make of gold (GLD) at these levels?
A: Cheap but getting cheaper. You want to buy it the day the stock market peaks out in Q1 2020.
Q: Are Chinese equities a buy after the phase one trade deal?
A: Yes, and Alibaba (BABA) is probably your first pick in the Chinese area. During the whole trade war, the Chinese took significant action to stimulate their economy in order to offset the drag on trade. That stimulus is still out there, so we could see a reacceleration in the economy now that the trade war is no longer worsening.
Global Market Comments
December 16, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOOD NEWS IS OUT)
(FXI), (AAPL), (FXB), (VIX), (USO), (BABA), (NSC), (MSFT), (GOOGL)
After a China trade deal, UK election and a NAFTA 2.0 are announced, what is left to drive the stock market?
That is a very good question and explains why the Dow Average was up only a microscopic 3.33 points on Friday. It had spent much of the day down.
It’s not a pretty picture.
Not only is the market running out of drivers, the economic data is still decelerating, with the GDP running a 1.5% rate, inflation rising, and corporate earnings growth at zero, with earnings multiples at 17-year high.
A Wiley Coyote moment comes to mind.
And while we are finishing a great 27% year (56% for the Mad Hedge Fund Trader), we are in effect getting three years of performance packed into one. Not only did we pull forward a good chunk of 2020’s performance, we borrowed heavily from 2018 as well, coming in at such a low start as we did.
Thus 2019 might well get bookended by an 8% gain in 2018 and another 8% year in 2020, with dividends. Blame it all on the massive liquidity burst we got from the Fed that started last December and continues unabated.
Stocks have been floated by a tidal wave of new money creation worldwide. Globally, new money creation is running at a $1 trillion a month rate and much of that is ending up in the US stock market, especially in technology shares.
The rush was enough to drive Apple (AAPL) to a new all-time high at $275, pushing its market capitalization up to a staggering $1.2 trillion. It could surpass Saudi ARAMCO’s $2 trillion valuation in a year or two.
Steve Jobs’ creation now accounts for a mind-blowing 6% of the S&P 500 and 4% of total US stock market capitalization. It’s the best argument I’ve ever heard for becoming a hippy and dropping out of college after one quarter.
Which leads us to paint a picture for the 2020 stock market. Even the most optimistic outlook for next year, that of Ed Yardeni, is calling for only a 10% gain. Many prognostications are calling for negative numbers next year.
You might be better off parking your money in a 2% CD and taking a cruise around the world. I’ve done that before, and it works fantastically well.
You’re only going to have one shot at making money in 2020. Wait for a 10%-20% nosedive to go long. My guess is that happens when it becomes clear that the Democrats are dominating in the polls (Joe Biden is currently 14 points ahead in swing state Pennsylvania). No matter who wins, less borrowing, less spending, and higher taxes will prevail.
Then stocks will rally 10% AFTER the election because the uncertainty is gone. That will get you a 20%-30% profit in 2020, but only of you are a trader and follow the Mad Hedge Fund Trader. After basking in their own brilliance in 2019, 2020 might be a year when indexers wish they never heard of the term.
In the end, corporate earnings growth always wins, especially in tech, which is still growing at 20% a year. Remember, my 2030 forecast for the Dow Average is 125,000.
China (FXI) won big in mini trade deal. We rolled back a tariff increase that was never going to happen and the Chinese buy $50 billion worth of soybeans they were going to buy anyway, except at half the price that prevailed two years ago. All of it will come out of stockpiles built up during the trade war. Only the ag sector is affected, which is 2% of the US economy. The ag markets aren’t buying it. If this were a real trade deal, stocks would be up 1,000 points, not 89.
Conservatives won big in UK election. The British pound (FXB) is up 2% and stocks are soaring. A hard Brexit is coming, so look for Scotland to secede and Northern Ireland to join the Republic. The UK will be gone as we know it. Britain’s standard of living will plummet. Great Britain will no longer be great, and the Russians financed the whole thing.
Volatility crashed, as complacency rules supreme. Don’t buy (VIX) until we see the $11 handle again.
Chinese copper purchases hit a 13-month high, up 12.1% in November, to 483,000 metric tonnes. It explains the 78% move up in Freeport McMoRan (FCX) since October, the world’s largest producer. Obviously, someone believes a trade deal is coming. My long LEAP players love it.
US Consumer inflation expectations rebounded, up 0.1% to 2.5%, accounting to the New York Fed. That’s crawling up from a five-year low, a slightly positive economic note.
Saudi ARAMCO went public, with a 10% pop in the shares on the first two days, providing a $24 billion fund raise. This is one of the top three largest IPOs in history after Alibaba (BABA) and Softbank. It values the company at $1.88 trillion. Oil (USO) is down a dollar on the news, no longer needing artificial support to get the deal done. This could be one of the seminal shorts of our generation.
NAFTA 2.0 was signed, removing a potential negative from the market. It is 90% of the original NAFTA, not the “greatest trade deal in history” as claimed. Buy the main North/South railroad, Norfolk Southern (NSC) on the news.
Weekly Jobless Claims soared to a two-year high, by 49,000 to 252,000. Are stores laying people off from Christmas early this year, or did they never hire in the first place because the retail businesses are gone? Peak jobs are in. US job growth is now far slower than in the Obama era, as is GDP growth.
Most US companies will have fewer staff in 2020, except Mad Hedge Fund Trader. More automation and algos mean fewer humans. Only a capital spending freeze caused by the trade war kept a low of low-skilled people in their jobs.
This was a week for the Mad Hedge Trader Alert Service to catapult to new all-time highs.
My long positions have shrunk to my core (MSFT) and (GOOGL), which expire with the coming December 20 option expiration.
My Global Trading Dispatch performance ballooned to +356.00% for the past ten years, a new all-time high. My 2019 year-to-date catapulted back up to +55.86%. December stands at an outstanding +4.85% profit. My ten-year average annualized profit rebounded to +35.59%.
The coming week will be a noneventful one on the data front, with some housing data and the Q3 GDP on the menu. Anyway, everyone else will be out Christmas shopping or attending parties.
On Monday, December 16 at 9:30 AM, New York Empire State Manufacturing Index for December is out.
On Tuesday, December 17 at 9:30 AM, Housing Starts for November are released.
On Wednesday, December 18 at 11:30 AM, US EIA Crude Stocks for the previous week are announced.
On Thursday, December 19 at 8:00 AM Existing Home Sales are published. At 8:30 AM, we get Weekly Jobless Claims.
On Friday, December 20 at 9:30 AM, the final read on US Q3 GDP is printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, after blowing out 1,200 Christmas trees, the Boy Scouts will be taking down the tree lot for the year. And who do they turn to when it comes to wielding a chain saw or sledge hammer?
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
December 6, 2019
Fiat Lux
Featured Trade:
(DECEMBER 4 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TSLA), (TLT), (BABA), (CCI), (VIX)
Global Market Comments
October 9, 2019
Fiat Lux
Featured Trade:
(HOW FINTECH IS EATING THE BANKS’ LUNCH),
(BAC), (C), (WFC), (SQ), (PYPL),
(WCAGY), (FISV), (INTU), (BABA),
It was another dreadful DAY for the banks. All bank shares are now down in 2019 with the sole exception of JP Morgan, which is up a modest 10% since January 1. Although their core business is good, the share price hasn’t even bothered to mail it in.
So, I thought it would be time to take another look at what is disrupting the 200-year-old business model of this sector. And that would be Fintech, shorthand for Financial Technology.
To say that fintech was gobbling up the financial industry’s lunch would be a vast understatement. But here’s the problem. Fintech is taking over the world one transaction at a time in an industry that sees billions of transactions a year. The change is almost invisible. If someone were blowing up bank branches on a large scale this would be a far easier trend to see, but the net effect is the same.
The potential market is enormous. While the world’s physical money totals $5 trillion, actual assets controlled by banks today total a staggering $90 trillion.
Why this is all happening now is due to a confluence of several independent technologies. The number of people on the Internet has soared from 1.8 billion in 2010 to 4 billion today, to 8 billion by 2024.
Smartphone usage is diffusing at a similar rate. The roll out of 5G wireless assures that all communications will occur seamlessly, quickly, including financial transactions. Blockchain is enabling encryption on an industrial scale.
This has enabled the rise of a number of online firms over just the last few years that are rapidly taking over a number of traditional banking functions.
So far, the greatest impact has been overseas. Many countries that lack banking infrastructure are leapfrogging straight to mobile. It makes a ton of sense. Poor countries lack the capital to build expensive branch networks to raise fund, and the expertise on how to invest the deposits once in hand.
Good Money (https://goodmoney.com ) is an example of the new online banks that have burst onto the scene. The company offers depositors a generous 1.8% interest rate on overnight funds. Legacy banks are still paying close to zero, even though the Fed has raised rates seven times in three years.
US banks charge an average of $400 in fees a year for a full-service account. Good Money charges nothing.
You will never know where the money goes when you place it with Citibank (C), Bank of America (BAC) or Wells Fargo (WFC). At Good Money, you can specify that your funds be lent to a certain industry or even a specific company. While this means nothing to you or me, it is important issue to oriented Millennials.
Such efforts are called Crowdlending. It first took off in the US with startups like Prosper and Lending Club in the mid 2000s. We’re not talking small potatoes here, or a market that might develop someday. In 2018, some 22,000 businesses extended $380 billion in such loans.
There are other big markets ripe for disruption. I had to pay a Filipino developer $500 for some work he did on my website. Wells Fargo wanted to charge me $50 and the wire transfer would have taken a week. An outfit called Payoneer, Israel-based, did it for $5 and it took 5 seconds.
Wire transfer fees are in fact a global industry worth billions of dollars a year that is there for the taking. The SWIFT international transfer network alone processes some 24 million transactions per day.
It may not surprise many of you that China already has a huge lead in this area. It’s logical since their established banking system is primitive at best. China has three times more mobile phones than the US, five times more Internet customers, sees 10 times more eat-out orders, and 50 times more mobile transactions. In a future where data is currency, this is huge.
Ant Financial, an affiliate of Alibaba (BABA), is in the forefront, facilitating an eye-popping $8 trillion worth of transactions in 2017. Using artificial intelligence to scour public records for past borrowing, income, education, web surfing preferences, and even political leanings, smart finance can use artificial intelligence to gin up a quickie FICO score and generate a new $200 micro loan in as little as eight seconds.
Bank of America eat your heart out.
What gives the Chinese such an advantage here is their huge market, with some 800 million online participants. The money Ant Financial makes isn’t important now. It’s the digitized data they’re collecting and the way it can be manipulated with artificial intelligence. That gives them immense market power. Remember, in the new world, data is the new currency and the Chinese are creating more than we ever will.
The problem with early, under-the-radar but broad-ranging trends, it can be tough to flesh out pure investment plays. Listed liquid tradable stocks are few and far between. You can simply go out and buy Square (SQ) and PayPal (PYPL) and you’d be half the way there in getting some good exposure.
Here’s the problem with that plan. PayPal has tripled in the last two years, while Square has gone ballistic with a 2,000% gain. I expect further appreciation from here, but those ships have already sailed.
A better way to participate might be the Global X Fintech Thematic ETF (FINX), granted you have all the usual problems with specialized ETFs here such as liquidity, high management fees, and tracking error. But you do get exposure to a number of companies that are either domiciled abroad or are not yet publicly listed.
The five largest holdings of (FINX) include Square (SQ), Wirecard AG (WCAGY), Temenos Group AG, Fiserve Inc (FISV), and Intuit (INTU).
You could also simply buy Alibaba. However, as long as America’s trade war with China continues, all Chinese stocks will perform poorly. Given the stubbornness of both sides, the earliest that can happen is January, 2021.
To learn more about (FINX), please go to the manager’s website by clicking here.
Days Gone By
Global Market Comments
October 1, 2019
Fiat Lux
Featured Trade:
(LAUNCHING THE NEW MAD HEDGE BIOTECH AND HEALTHCARE LETTER)
(THE NEW AI BOOK THAT INVESTORS ARE SCRAMBLING FOR),
(GOOG), (FB), (AMZN), MSFT), (BABA), (BIDU),
(TENCENT), (TSLA), (NVDA), (AMD), (MU), (LRCX)
Global Market Comments
September 20, 2019
Fiat Lux
Featured Trade:
(SEPTEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (FDX), (FB), (HYG), (JNK), (EEM), (BABA), (JD), (TBT), (FXE), (UUP), (AMZN), (FB), (DIS), (MSFT), (USO), (INDU),
(THE GREAT TRADING GURU SPEAKS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 18 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What would happen to the United States Treasury Bond Fund (TLT) if the Fed does not lower rates?
A: My bet is that it would immediately have a selloff—probably several points—but after that, recession worries will take bond prices up again and yields down. I don’t think we have seen the final lows in interest rates by a long shot. That’s why I bought the (TLT) last week.
Q: Is it good to buy FedEx (FDX) considering the 13% fall today?
A: I use the 3-day rule on these situations. That's how long it takes for the dust to settle from an earnings shock like this and find the real price. The problem with FedEx is that it’s a great early recession predictor. When the number of delivered packages decreases, it’s always an indicator that the economy as a whole is slowing down, which we know has been happening. It’s one of the most cyclical stocks out there, therefore one of the most dangerous. I wouldn’t bother with FedEx right now. Go take a long nap instead.
Q: Would you be a buyer of Facebook (FB) here, given they seem to have weathered all the recent attacks from Washington?
A: Not here in particular, but I would buy it 20% down when it gets to the bottom edge of its upward channel—it still looks like it’s going crazy. They’re literally renting or buying buildings to hire an additional 50,000 people in San Francisco anticipating huge growth of their business, so that’s a better indicator of the future of Facebook than anything.
Q: Will junk bonds be more in demand now that rates are cratering?
A: Junk bonds (HYG), (JNK) are driven more by the stock market than the bond market, as you can see in the huge rally we just had. Junk bonds are great because their default ratios are usually far below that which the interest rate implies, but you really have to trade them like stocks. Think of them as preferred stocks with really high dividends. When the stock market tops, so will junk bonds. Remember in 2008, junk yields got all the way up to 15% compared to today’s 5.6%.
Q: What will happen to emerging markets (EEM) as rates lower?
A: If lower interest rates bring a weaker US dollar, that would be very positive for emerging markets over the long term and they would be a great buy. However, emerging markets will take the hardest hit if we actually do go into a recession. So, I would pass for now.
Q: What are your thoughts on Alibaba (BABA) and JD.com (JD)?
A: They are great for the long term. However, expect a lot of volatility in the short term. As long as the trade war is going on, these are going to be hard to trade until we get a settlement. (JD) is already up 50% this year but is still down 40% from pre trade war levels. These things will all be up 20-30% when that happens. If you can take the heat until then, they would probably be okay for a long-term portfolio globally diversified.
Q: What do you have to say about the ProShares Ultra Short 20+ Year Treasury ETF (TBT)—the short bond ETF?
A: If you have a position, I’d be selling now. We just had a massive 20%, 4-point rally from $22 to $27 and now would be a good time to take a profit, or at least get out closer to your cost. The zero interest rates story is not over yet.
Q: Would you short the US dollar?
A: I would most likely short it against the euro (FXE), which now has a massive economic stimulus and quantitative easing program coming into play which should be positive for it and negative for the US dollar (UUP). That’s most likely why the euro has stabilized over the last couple of weeks. That said, the dollar has been unexpected high all year despite falling interest rates so I have been avoiding the entire foreign exchange space. I try to stay away from things I don’t understand.
Q: If all our big tech September vertical bull call spreads are in the money, what should we do?
A: You do nothing. They all expire at the Friday close in two trading days. Your broker should automatically use your long call position to cover your short call position and credit your account with the total profit on the following Monday, as well as release the margin for holding that position. After that, we’ll probably wait for another good entry point on all the same names, (AMZN), (FB), (DIS), (MSFT).
Q: If the US fires a cruise missile at Iran, how would the market react?
A: It would selloff pretty big—markets hate wars. And the US wouldn’t send one missile at Iran; it would be more like 100, probably aimed at what little nuclear facilities they have. I doubt that is going to happen. The world has figured out that Trump is a wimp. He talks big but there is never any action or follow through. Inviting the Taliban to Camp David while they were still blowing up our people? Really?
Q: Will the housing market turn on the turbochargers after this dip in rates?
A: It wouldn't turn on the turbochargers, but it might stabilize the market because money is available now at unprecedentedly low interest rates. However, we still have the loss of the SALT deductions—the state and local taxes and real estate taxes that came in with the Trump tax bill. Since then, real estate has been either unchanged or has fallen on both the East and West coast where the highest priced houses are. It’s the most expensive houses that take the loss of the SALT deduction the hardest. Don’t expect any movement in these markets until the SALT deduction comes back, probably in 16 months.
Q: What catalyst do you think would cause a 10% correction in the next 2-3 months?
A: Trump basically saying “screw you” to the Chinese—a tweet saying he’s going to bring another round of tariff increases. That’s worth a minimum of 2,000 points in the Dow Average (INDU), or about 7% percent. Either that or no move in Fed interest rates—that would also create a big selloff. My guess is that and adverse development in the trade war will be what does it. That’s why my positions are so small now.
Q: We have a big short position in the United States Oil Fund (USO) now. Are you going to run this into expiration until October $18?
A: Even though oil has already collapsed by 10% since we put this position on last Friday, premiums in oil options are still close to record levels. So, it pays us to hang on for the time decay. The world is still massively oversupplied in oil and the Saudis were able to bring half of the lost production back on in a day. Oil will keep falling unless there is another attack and it is unlikely we will see one again on this scale. And, we only have 20 more days to go to capture the full 14.8% profit.
Good luck and good trading.
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader
