Global Market Comments
March 19, 2020
(INVESTING ON THE OTHER SIDE OF THE CORONA VIRUS),
(SPY), (INDU), (FXE), (FXY), (UNG),
(EEM), (USO), (TLT), (TSLA)
Global Market Comments
March 19, 2020
(INVESTING ON THE OTHER SIDE OF THE CORONA VIRUS),
(SPY), (INDU), (FXE), (FXY), (UNG),
(EEM), (USO), (TLT), (TSLA)
The Coronavirus has just set up the investment opportunity of the century.
In a matter of three weeks, stocks have gone from wildly overbought to ridiculously cheap. Price earnings multiples have plunged from 20X to 13X, well below the 15.5X long term historical average. The Dow Average is now 5% lower than when Donald Trump assumed the presidency more than three years ago. The world of investing after Coronavirus is looking pretty good.
I believe that as a result of this meltdown, the global economy is setting up for a new Golden Age reminiscent of the one the United States enjoyed during the 1950s, and which I still remember fondly. In other words, when it comes to investing after Coronavirus, we are on the cusp of a new “Roaring Twenties.”
This is not some pie in the sky prediction.
It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.
For a start, medical science is about to compress 5-10 years of advancement into a matter of months. The traditional FDA approval process has been dumped in the trash. Any company can bring any medicine, vaccine, or anti-viral they want to the market, government be damned. You and I will benefit enormously, but a few people may die along the way.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million “Gen Xer’s”.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, healthcare, and “RISK OFF” assets like bonds.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward two years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xer’s being chased by 85 million of the “millennial” generation trying to buy their assets.
By then, we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes.
The middle-class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.
The stock market rockets in this scenario. And this pandemic has just given us a very low base from which to start, making investing after Coronavirus a promising prospect.
Once the virus is beaten, we could see the same fourfold return we saw from 2009 to 2020. That would take us from The Thursday low of 18,917 to 76,000 in only a few years.
If I’m wrong, it will hit 100,000 instead.
Emerging stock markets (EEM) with much higher growth rates do far better.
This is not just a demographic story. The next ten years should bring a fundamental restructuring of our energy infrastructure as well.
The 100-year supply of natural gas (UNG) we have recently discovered through the new “fracking” technology will finally make it to end users, replacing coal (KOL) and oil (USO), so this sort of energy investing after Coronavirus in particular is looking undoubtedly promising.
Fracking applied to oilfields is also unlocking vast new supplies.
Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC’s share of global reserves is collapsing.
This is all happening while the use of electric cars is exploding, from zero to 4% of the market over the past decade.
Mileage for the average US car has jumped from 23 to 24.9 miles per gallon in the last couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five-year low and collapsing.
Alternative energy technologies will also contribute in an important way in states like California, which will see 100% of total electric power generation come from alternatives by 2030.
I now have an all-electric garage, with a Tesla Model 3 for local errands and a Tesla Model X (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. Both cars are powered by my rooftop solar system.
The net result of all of this is lower energy prices for everyone.
It will also flip the US from a net importer to an exporter of energy, with hugely positive implications for America’s balance of payments.
Eliminating our largest import and adding an important export is very dollar bullish for the long term.
That sets up a multiyear short for the world’s big energy-consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.
Accelerating technology will bring another continuing positive for investing after Coronavirus.
Of course, it’s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos. But at the enterprise level, this is enabling speedy improvements in productivity that are filtering down to every business in the US, lower costs everywhere.
This is why corporate earnings have been outperforming the economy as a whole by a large margin.
Profit margins are at an all-time high.
Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development.
When the winners emerge, they will have a big cross-leveraged effect on the economy.
New healthcare breakthroughs, which are also being spearheaded in the San Francisco Bay area, will make serious disease a thing of the past.
This is because the Golden State thumbed its nose at the federal government 18 years ago when the stem cell research ban was implemented.
It raised $3 billion through a bond issue to fund its own research, even though it couldn’t afford it.
I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years, they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday.
What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver’s seat on these innovations? The USA.
There is a political element to the new Golden Age as well. Gridlock in Washington can’t last forever. Eventually, one side or another will prevail with a clear majority.
This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now but nobody wants to be blamed for.
That means raising the retirement age from 66 to 70 where it belongs and means-testing recipients. Billionaires don’t need the maximum $45,480 Social Security benefit. Nor do I.
The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cut defense spending from $755 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.
I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up.
A Pax Americana would ensue.
That means China will have to defend its own oil supply, instead of relying on us to do it for them for free. That’s why they have recently bought a second used aircraft carrier. The Middle East is now their headache, not ours.
The national debt then comes under control, and we don’t end up like Greece.
The long-awaited Treasury bond (TLT) crash never happens.
The reality is that the global economy will soon spin off profits faster than it can find places to invest them, so the money ends up in bonds instead.
Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won’t kick in for another decade.
But some individual industries and companies will start to discount this rosy scenario now.
Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.
Needless to say, investing after Coronavirus runs it’s course will be a welcome change for both individual investors and the economy as a whole.
I asked Anthony Scaramucci, CEO and founder of Skybridge Capital, why we should attend his upcoming SALT conference point-blank.
“It’s going to be exciting,” he said.
“How exciting?” I enquired.
“I’ve invited former White House chief of staff General John F. Kelley to be my keynote speaker.” General Kelley, an old friend from my Marine Corps days, fired Anthony after only eight days on the job as Donald Trump’s Press Secretary.
“That’s pretty exciting,” I responded. “Humble too.”
This was the answer that convinced me to attend the May 7-10 SkyBridge Alternative asset management conference (SALT) at the Las Vegas Bellagio Hotel. You all know the Bellagio. That is the casino that was robbed in the iconic movie Oceans 11.
That is not all Scaramucci had to offer about the upcoming event, known to his friends since his college days as “The Mooch”.
Among the other headline, speakers are former UN ambassador Nikki Haley, AOL Time Warner founder Steve Case, artificial intelligence guru Dr. Kai-fu Lee who I have written about earlier, and Carlyle Group co-founder David Rubenstein.
SALT will give seasoned investors to update themselves on the hundreds of alternative investment strategies now in play in the market, raise or allocate money, meet fascinating people, and just plain have fun. Some SkyBridge services accept client investments as little as $25,000. Their end of conference party is legendary.
SkyBridge is led by Co-Managing Partners Anthony Scaramucci and Raymond Nolte. Ray serves as the Firm’s Chief Investment Officer and Chairman of the Portfolio Allocation and Manager Selection Committees. Anthony focuses on strategic planning and marketing efforts.
While I had “The Mooch” on the phone, I managed to get him to give me his 30,000-foot view of the seminal events affecting markets today.
The proliferation of exchange-traded funds and algorithms will end in tears. There are now more listed ETFs than listed stocks, over 3,500.
The normalizing of interest rates is unsustainable, which have been artificially low for ten years now. One rise too many and it will crash the market. The next quarter-point rise could be the stick that breaks the camel’s back (an appropriate metaphor for a desert investment conference).
However, rising rates are good for hedge funds as they present more trading opportunities and openings for relative outperformance, or “alpha.”
There has been a wholesale retreat of investment capital from the markets, at least $300 billion in recent years. The end result will be much higher volatility when markets fall as we all saw in the Q4 meltdown until this structural weakness has been obscured by ultra-low interest rates. The good news is that banks are now so overcapitalized that they will not be at risk during the next financial crisis.
Ever the contrarian and iconoclast, Scaramucci currently has no positions in technology stocks. He believes the sector has run too far too fast after its meteoric 2 ½ year outperformance and is overdue for a rest. Earnings need to catch up with prices and multiples.
What is Anthony’s favorite must-buy stock today? Berkshire Hathaway (BRK/A), run by Oracle of Omaha Warren Buffet, is almost a guarantee to outperform the market. Scaramucci has owned the shares in one form or another for over 25 years.
While emerging markets (EEM) are currently the flavor of the day, Anthony won’t touch them either. The accounting standards and lack of rule of law are way too lax for his own high investment standards.
SkyBridge is avoiding the 220 IPOs this year which could total $700 billion. Many of these are overhyped with unproven business models and inexperienced management. The $100 billion in cash they actually take out of the market won’t be enough to crash it.
SkyBridge Capital is a global alternative investment firm with $9.2 billion in assets under management or advisement (as of January 31, 2019). The firm offers hedge fund investing solutions that address a wide range of market participants from individual investors to large institutions.
SkyBridge takes a high-conviction approach to alpha generation expressed through a thematic and opportunistic investment style. The firm manages multi-strategy funds of hedge funds and customized separate account portfolios, and provides hedge fund advisory services. SkyBridge also produces a large annual conference in the U.S. and Asia known as the SkyBridge Alternatives Conference (SALT).
Finally, I asked Anthony, if he were king of the world what change would he make to the US today? “If I could wave a magic wand, I would reduce partisanship,” he replied. “It prevents us from being our best.” Will he ever go back into politics again? “Never say never,” he shot back wistfully.
With that, I promised to give him a hug the next time I see him in Vegas which I have been visiting myself since 1955 during the rat pack days.
To learn more about SkyBridge, please visit their website here.
To obtain details about the upcoming May 7-10 SALT conference at the Bellagio Hotel in Las Vegas, please click here. Better get a move on. Their discount pricing for the event ends on March 15. Institutional Investors are invited free of charge.
Global Market Comments
January 10, 2020
(FRIDAY, FEBRUARY 7 PERTH, AUSTRALIA STRATEGY LUNCHEON)
(JANUARY 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(VIX), (VXX), (TSLA), (SIL), (SLV),
(WPM), (RTN), (NOC), (LMT), (BA), (EEM)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 8 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: If the market is doing so well, why is the Fed flooding the market with liquidity?
A: It’s election year, so their primary focus is to get the president reelected and do everything they can to make sure that happens. If we continue at the current rate, the Fed will have zero ability to get us out of the next recession which will make it much deeper than it would be otherwise. Doing this level of borrowing and keeping interest rates near zero with the stock market going up 30% a year is insane, and we will be severely punished for it in the future.
Q: With the Volatility Index (VIX) near a 12-month low and the Mad Hedge Market Timing Index near an all-time high, is this a good time to put on LEAPs for the (VXX)?
A: Yes, in fact, a (VXX) LEAP (Long Term Equity Participation Security, or one-year-plus option spread), is the only LEAP I would put on right now. I get asked about LEAPs every day because returns on them are so huge, but I am holding back on a trade alert on a (VXX) leap because it seems like in January they really want to run this market high and run volatility down low. On the next move to a (VIX) in the $11 handle, you want to put out a one-year LEAP with a $16 strike. And that is essentially a guarantee that you will make money sometime in the coming year on a big down move in the stock market. (VXX) LEAPs are coming, just not yet.
Q: Do you think Iran is done with their attacks against the US or will there be more?
A: The belief there will be no more attacks is to call the end of a 40-year trend. There will be more attacks, and those are going to be your long side entry points. Every geopolitical crisis for the last 10 years has been a great entry point on the long side and the next one will be no different. Just hope you are not one of the victims.
Q: What would a war with Iran mean for the US economy and should I buy defense stocks?
A: You can take the Iraq war, which cost us about $4 trillion, and multiply that by three times to $12 trillion because Iran’s economy is three times the size of Iraq and has a much more sophisticated military. The Iranians are really in a good position because they know the US has no appetite for another Iraq, Afghanistan, or Vietnam. They just want us out of their neighborhood. As far as defense stocks, those really move on very long-term investments and production for government contracts. When you get an attack like this, you get a one-day pop of 5% and then they usually give it all back. So, I wouldn’t be chasing defense stocks like Lockheed Martin (LMT), Northrop Grumman (NOC), and Raytheon (RTN) at these high levels—it’s a very high-risk trade.
Q: Will Boeing (BA) take heat from the Ukrainian crash in Tehran?
A: Yes. It’s down about $5, and you might even consider running the numbers on a February call spread. This may be the last chance to get into Boeing at those low levels. The 737 MAX will fly this year, their most important product.
Q: What’s your opinion on Thai Baht?
A: This really is the home here for opinion on all asset classes, large and small. The Thai Baht will rise. It’s a weak dollar play. Money is pouring into all the emerging currencies because of the massive overborrowing that’s going on in the U.S. Countries that overborrow and print money like crazy always debase their currencies over the long term. That makes emerging markets (EEM) a great buy, which are trading at half the valuation levels of US ones.
Q: U.S. hog farmers missed the opportunity of a lifetime last year because of African Swine Flu. Any thoughts on the price of pork and commodities for 2020?
A: They should do better now that we’re at least getting relief from an escalation of the trade war. However, I gave up covering agriculture because the American farmer is just too efficient; every year they just produce more and more crops with fewer and fewer inputs—it’s a loser’s game. They occasionally get bad weather and get a big price spike, but that Is totally unpredictable. I’m staying away from ag stocks. In terms of buying soybeans or Apple, or Google, or Amazon, I’ll take the tech stocks any day over ag’s. Plus, the insiders have a big advantage in ag’s.
Q: What is the ticker symbol for the Silver ETFs?
A: The Silver metal ETF is (SLV), Silver miners is (SIL), and the Silver Royalty Trust, Wheaton Precious Metals, is (WPM).
Q: Why has volatility been so minimal even with massive geopolitical risk going up?
A: Liquidity trumps all. This month, the fed is pumping a record $160 billion into the financial system, and all that money is going into stocks, making them go up and making volatility go down. Until that changes, this trend will continue.
Q: Apple just passed $300, is the next stop $400?
A: Yes, and we could get that this year in the run up to 5G in September. By the way, my average cost on my Apple shares split adjusted is 50 cents. I bought it in the late 1990s when the company was weeks away from bankruptcy.
Q: Any thoughts on Tesla (TSLA)?
A: Yes, go out and buy the car, not the stock. Wait for some kind of pullback. We have just had a fantastic run of good news kicking the stock from $180 up to $490. I think we will make it up to $550 on this run. But you don’t want to get involved unless you’re a day trader because now the risk is very high. The next big move for Tesla is going to be the announcement of a production factory in Berlin, where they will try to take on Mercedes, BMW, VW, and Audi on their home turf. Then, they will own Europe.
Good Luck and Good Trading
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 17, 2019
(UPDATING THE MAD HEDGE LONG TERM MODEL PORTFOLIO),
(USO), (XLV), (CI), (CELG), (BIIB), (AMGN), (CRSP), (IBM), (PYPL), (SQ), (JPM), (BAC), (EEM), (DXJ), (FCX), (GLD)
Global Market Comments
September 20, 2019
(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.
CEO & Publisher
Diary of a Mad Hedge Fund Trader
Global Market Comments
August 16, 2019
(DON’T MISS THE AUGUST 21 GLOBAL STRATEGY WEBINAR),
(WHY CRASHING YIELDS COULD BE SIGNALING AN END TO THE STOCK SELLOFF),
(TLT), (QQQ), (DBA), (EEM), (UUP)
Global Market Comments
July 26, 2019
(JULY 24 BIWEEKLY STRATEGY WEBINAR Q&A),
(FCX), (VIX), (VXX), (UUP), (TLT), (EEM), (ELD), (CEW), (GLD),
(FXA), (FXE), (FXC), (FXY), (FXB), (AMZN),
(TESTING TESLA’S SELF DRIVING TECHNOLOGY),