Years ago, if you asked traders what one event would destroy financial markets, the answer was always the same: China dumping its $1 trillion US treasury bond hoard.
It looks like Armageddon is finally here.
Once again, the Chinese boycotted this week’s US Treasury bond auction.
With a no-show like this, you could be printing a 2.90% yield in a couple of weeks. It also helps a lot that the charts are outing in a major long term double top.
You may read the president’s punitive duties on Chinese solar panels as yet another attempt to crush California’s burgeoning solar installation industry. I took it for what it really was: a signal to double up my short in the US Treasury bond market.
For it looks like the Chinese finally got the memo. Exploding American deficits have become the number one driver of all asset classes, perhaps for the next decade.
Not only are American bonds about to fall dramatically in value, so is the US dollar (UUP) in which they are denominated. This creates a double negative hockey stick effect on their value for any foreign investor.
In fact, you can draw up an all assets class portfolio based on the assumption that the US government is now the new debt hog:
Stocks – buy inflation plays like Freeport McMoRan (FCX) and US Steel (X) Emerging Markets – Buy asset producers like Chile (ECH) Bonds – run a double short position in the (TLT) Foreign Exchange – buy the Euro (FXE), Yen (FXY), and Aussie (FXA) Commodities – Buy copper (CU) as an inflation hedge Energy – another inflation beneficiary (USO), (OXY) Precious Metals – entering a new bull market for gold (GLD) and silver (SLV)
Yes, all of sudden everything has become so simple, as if the fog has suddenly been lifted.
Focus on the US budget deficit which has soared from $450 billion a year ago to over $1 trillion today on its way to $2 trillion later this year, and every investment decision becomes a piece of cake.
This exponential growth of US government borrowing should take the US National Debt from $22 to $30 trillion over the next decade.
I have been dealing with the Chinese government for 45 years and have come to know them well. They never forget anything. They are still trying to get the West to atone for three Opium Wars that started 180 years ago.
Imagine how long it will take them to forget about washing machine duties?
By the way, if I look uncommonly thin in the photo below it’s because there was a famine raging in China during the Cultural Revolution in which 50 million died. You couldn’t find food to buy in the countryside for all the money in the world. This is when you find out that food has no substitutes. The Chinese government never owned up to it.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/05/Man-in-China-story-2-image-6.jpg225336Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-02-27 01:07:462019-07-09 04:06:37Why China’s US Treasury Dump Will Crush the Bond Market
Long term subscribers are well aware that I sent out a flurry of Trade Alerts at the beginning of the year, almost all of which turned out to be profitable.
Unfortunately, if you came in any time after January 17 you watched us merrily take profits on position after position, whetting your appetite for more.
However, there was nary a new Trade Alert to be had, nothing, nada, and even bupkiss. This has been particularly true with particular in technology stocks.
There is a method to my madness.
I was willing to bet big that the Christmas Eve massacre on December 24 was the final capitulation bottom of the whole Q4 move down, and might even comprise the grand finale for an entire bear market.
So when the calendar turned the page, I went super aggressive, piling into a 60% leverage long positions in technology stocks. My theory was that the stocks that had the biggest falls would lead the recovery with the largest rises. That is exactly how things turned out.
As the market rose, I steadily fed my long positions into it. As of today we are 80% cash and are up a ballistic 13.51% in 2019. My only remaining positions are a long in gold (GLD) and a short in US Treasury bonds (TLT), both of which are making money.
So, you’re asking yourself, “Where’s my freakin' Trade Alert?
To quote my late friend, Chinese premier Deng Xiaoping, “There is a time to fish, and there is time to mend the nets.” This is now time to mend the nets.
Stocks have just enjoyed one of their most prolific straight line moves in history, up some 20% in nine weeks. Indexes are now more overbought than at any time in history. We have gone from the best time on record to buy shares to the worst time in little more than two months.
My own Mad Hedge Market Timing Index is now reading a nosebleed 74. Not to put too fine a point on it, but you would be out of your mind to buy stocks here. It would be trading malpractice and professional negligent to rush you into stocks at these high priced level.
Yes, I know the competition is pounding you with trade alerts every day. If they work, it is by accident as these are entirely generated by young marketing people. Notice that none of them publish their performance, let alone on a daily basis like I do.
You can’t sell short either because the “I’s” have not yet been dotted nor the “T’s” crossed on the China trade deal. It is impossible to quantify greed in rising markets, nor to measure the limit of the insanity of buyers.
When I sold you this service I promised to show you the “sweet spots” for market entry points. Sweet spots don’t occur every day, and there are certainly none now. If you get a couple dozen a year, you are lucky.
What do you buy at market highs? Cheap stuff. That would include all the weak dollar plays, including commodities, oil, gold, silver, copper, platinum, emerging markets, and yes, China, all of which are just coming out of seven-year BEAR markets.
After all, you have to trade the market you have in front of you, not the one you wish you had.
So, now is the time to engage in deep research on countries, sectors, and individual names so when a sweet spot doesn’t arrive, you can jump in with confidence and size. In other words, mend your net.
Sweet spots come and sweet spots go. Suffice it to say that there are plenty ahead of us. But if you lose all your money first chasing margin trades, you won’t be able to participate.
By the way, if you did buy my service recently, you received an immediate Trade Alert to by Microsoft (MSFT). Let’s see how those did.
In December, you received a Trade Alert to buy the Microsoft (MSFT) January 2019 $90-$95 in-the-money vertical BULL CALL spread at $4.40 or best.
That expired at a maximum profit point of $1,380. If you bought the stock it rose by 10%.
In January, you received a Trade Alert to buy the Microsoft (MSFT) February 2019 $85-$90 in-the-money vertical BULL CALL spread at $4.00 or best.
That expired last week at a maximum profit point of $1,380. If you bought the stock it rose by 12%.
So, as promised, you made enough on your first Trade Alert to cover the entire cost of your one-year subscription ON THE FIRST TRADE!
The most important thing you can do now is to maintain discipline. Preventing people from doing the wrong thing is often more valuable than encouraging them to do the right thing.
That is what I am attempting to accomplish today with this letter.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/10/John-Thomas-London-SE.png514577Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-02-26 07:08:472019-07-09 04:06:48About the Trade Alert Drought
It is truly the best of times and the worst of times. And it's not a stretch to apply Charles Dickens’ line from the Tale of Two Cities to the stock market these days.
On the one hand, stocks have just delivered one of the sharpest rallies in market history, up a staggering 20% in nine weeks. Everyone is swimming in money once again. It is the kind of move that one sees once a generation, and usually presages the beginning of long term bull markets.
On the other hand, the bull market in stocks is nearly ten years old. Some 13 months ago, the market traded at a lofty multiple of 20X, but earnings were growing at an incredible 26% a year. Today, multiples are at a very high 18X, but earnings growth is zero! This only ends in tears.
Furthermore, the low level of interest rates with the ten year US Treasury bond (TLT) at a subterranean 2.65% suggests that we are on the verge of entering a recession. Warning: bonds are always right.
Of course, it is speculation of a ‘beautiful” trade deal with China that has been driving share prices higher on an almost daily basis. Unfortunately, 90% of the deal has already been discounted in the market. We could be setting up the biggest “Sell on the news of all time.”
If instead, we get a delay of 45-90 days while details are hashed out, markets could move sideways for months. That would be death for Volatility Index (VIX) players which have already seen prices collapse this year from $36 to $13. A return visit to the $9 handle is possible. Yes, the short volatility trade is back in size.
Far and away the most important news of the week was that the Fed Pause Lives! Or so the minutes from the January FOMC meeting imply. Lower interest rates for longer offer more benefits than risks. Less heat from the president too.
Perhaps this is response to economic data that has universally turned bad. Durable Goods dove 1.2%, in January in a big surprise. Recession, here we come!
Europe is falling into recession, and they will likely take us with them. February Eurozone Manufacturing PMI fell to 49.2, a three-year low. You obviously haven’t been buying enough Burberry coats, Mercedes, or French wine.
It was a very rough week for some individual stocks.
The Feds subpoenaed Kraft Heinz (KHC), and stock dove 27% over accounting problems. Warren Buffet took a one-day $4 billion hit. What is really in that ketchup anyway besides sugar and red dye number two? Avoid (KHC). No toys for Mattel (MAT) which saw the worst stock drop in 20 years on the back of poor earnings and worse guidance. Another leading indicator of a weak economy. Barbie isn’t putting out.
It wasn’t all bleak.
Walmart (WMT) delivered online sales up 46% in Q4. Are they the next FANG? Same-store sales jump at the fastest pace in ten years on soaring grocery sales. The Wall family certainly hopes so. Buy (WMT) on dips.
Gold hit a ten-month high, and we are long. The new supercycle for commodities has already started. Get on board before the train leaves the station. Buy (GLD).
February has so far come in at a hot +4.07% for the Mad Hedge Fund Trader. My 2019 year to date return ratcheted up to +13.55%, boosting my trailing one-year return back up to +27.54%.
My nine-year return clawed its way up to +313.69%, another new high.The average annualized return appreciated to +33.89%.
I am now 80% in cash, 10% long gold (GLD), and 10% short bonds (TLT). We have managed to catch every major market trend this year loading the boat with technology stocks at the beginning of January, selling short bonds, and buying gold (GLD). I am trying to avoid stocks until the China situation resolves itself one way or the other.
It’s real estate week on the data front. An additional data delayed by the government shutdown is trickling out.
On Monday, February 25, at 8:30 AM EST, the Chicago Fed National Activity Index is out.
On Tuesday, February 26, 8:30 AM EST, January Housing Starts are published. At 9:00 the latest Case Shiller Corelogic National Home Price Index is published.
On Wednesday, February 27 at 10:00 AM EST, January Pending Home Sales are updated.
Thursday, February 28 at 8:30 AM EST, we get Weekly Jobless Claims. We also get an updated estimate on Q4 GDP. At 10:00 AM Fed governor Jerome Powell speaks.
On Friday, March 1 at 8:30 AM, we get data on January Personal Spending delayed by the government shutdown. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’ll be watching the Academy Awards on Sunday night. As I grew up near Hollywood, have dated movie stars my whole life, and even appeared as an extra in a couple of movies, I have always felt close to this industry.
My first pick for Best Picture is Green Book since I recall traveling through the deep south during this period. It was actually much worse than portrayed by the film. Roma is the favorite, but I thought it was boring. I guess I’m not the politically correct art film type.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-02-25 02:06:132019-07-09 04:07:00The Market Outlook for the Week Ahead, or The Best of Times and the Worst of Times
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: If there is a China trade deal, should I buy China stocks, specifically Alibaba?
A: To a large extent, both Chinese and US stocks have already fully discounted a China trade deal, so buying up here could be very risky. The administration has been letting out a leak a day to support the stock market, so I don’t think there will be much juice left when the announcement is actually made. The current high levels of US stocks make everything risky.
Q: Is it time to buy NVIDIA (NVDA)?
A: The word I’m hearing from the industry is that you don’t want to buy the semiconductor stocks until the summer when they start discounting the recovery after the next recession (which is probably a year off from this coming summer). The same is true for Micron Technology (MU), Advanced Micro Devices (AMD), and Lam Research (LRCX).
However, if you’re willing to take some heat in order to own a stock that’s going to triple over the next three years, then you should buy it now. If you’re a long-term investor, these are the entry points you die for. Looking at the charts it looks like it is ready to take off.
Q: Should I be shorting the euro (FXE), with the German economy going into recession?
A: No. We’re at a low for the euro so it’s a bad time to start a short. It’s interest rates that drive the euro more than economies. With the U.S. not raising interest rates for six months, maybe a year, and maybe forever, you probably want to be buying the currencies more than selling them down here.
Q: Would you buy the British pound (FXB) on Brexit fears?
A: I would; my theory all along has been that Brexit will fail and the pound will return to pre-Brexit levels—30% higher than where we are at now. I have always thought that the current government doesn’t believe in Brexit one iota and are therefore executing it as incompetently as possible.
They have done a wonderful job, missing one deadline after the next. In the end, Britain will hold another election and vote to stay in Europe. This will be hugely positive for Europe and would end the recession there.
Q: What do we need to do for the market to retest the highs?
A: China trade deal would do it in a heartbeat. If this happens, we will get the 5% move to the upside initially. Then we’re looking at a double top risk for the entire 10-year bull market. That’s when the short players will start to come in big time. You’d be insane to new positions in stocks here. There is an easy 4,500 Dow points to the downside, and maybe more.
Q: Do you think earnings growth will come in at 5%, or are they looking to be zero or negative?
A: Zero is looking pretty good. We know companies like to guide conservative then surprise to the upside; however, with Europe and China slowing down dramatically, that could very well drag the U.S. into recession and our earnings growth into negative numbers. The capital investment figures have been falling for three months now. US Durable Goods fell by 1.2% in January.
This explains why companies have no faith in the American economy for the rest of this year. This was a big reason why Amazon (AMZN) abandoned their New York headquarters plans. They see the economic data before we do and don’t want to expand going into a recession.
Q: When will rising government debt start to hurt the economy?
A: It already is. Foreign investors have been pulling their bids for fear of a falling US dollar. They have also become big buyers of gold (GLD) in order to avoid anything American, so we have a new bull market there. In the end, the biggest hit is with business confidence.
Nothing good ever comes from exploding US deficits and companies are not inclined to invest going into that. That is a major factor behind the sudden deterioration in virtually all data points over the past month.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
(THE NEXT COMMODITY SUPER CYCLE HAS ALREADY STARTED),
(COPX), (GLD), (FCX), (BHP), (RIO), (SIL),
(PPLT), (PALL), (GOLD), (ECH), (EWZ), (IDX),
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)
There is not a single hedge fund manager out there today who doesn’t believe that stock markets are on the verge of a very sharp selloff.
Earnings are falling. Europe is tipping into recession. The money supply is shrinking at a dramatic pace (see chart below). And government borrowing will double this year as compared to last. Yet the major indexes are 5% of an all-time high with valuations at an 18X multiple, the high end of the historic range.
You may be wondering why a correction, if not a new bear market, hasn’t already started yet. Every trader on Wall Street is nervously awaiting a China trade deal, possible weeks away, that they can all sell into, including me. The China negotiations have robbed traders of a decent short side entry point for a year now.
You may think I am being excessively cautious with these views. However, US equity mutual funds have suffered eleven straight weeks of outflows worth $80 billion, an all-time record. You really wonder what is supporting the market here. Are we in for a “Wiley Coyote” moment?
Who is left to buy the market? Short coverers, algorithms, and corporations buying back their own shares. There are in effect no real net investors.
One can’t help but notice the constantly worsening in the economic data that took place last week. Was this all happening in response to the December stock market crash? Or is it heralding a full-blown recession that has already started?
This is all backward-looking data, in some cases as much as two months. But what followed the December crash? The January government shut down which we already know pared 75 basis points off of Q1 GDP growth. That’s why companies announced middling earnings for Q4 but horrendous guidance for Q1.
December Retail Sales came in at a disastrous ten-year low. If you’re looking for an early recession indicator, this is a big one. Maybe it’s because the prices are falling so fast?
The NY Fed slashed Q1 GDP estimates to below 2% with more cuts to come. Trade war uncertainty cited as the number one reason.
Consumer Spending is slowing. That means the recession is near. Fund managers are universally moving into defensive and value stocks. So, should you.
Car Sales fell at the fastest rate in a decade, as US Manufacturing Output drives off a cliff. There is also a subprime crisis going on here, if you haven’t heard.
Amazon (AMZN) told New York City to drop dead as it canceled plans to build a second headquarters in New York, thanks to opposition from a local but vociferous minority. Some 25,000 jobs went down the toilet. More likely, they don’t want to expand their business right ahead of a recession. Jeff Bezos can see into the future infinitely better than you and I can.
You have to take Jeff’s thoughts seriously. Amazon added more square feet in the US than any other company last year, bringing the total to 288 million square feet. That is a staggering 28 World Trade Centers. Do they know something we don’t?
In the meantime, American Personal Debt is soaring, hitting a new apex at $13.5 trillion. Some 9.1% of this is already delinquent, and credit cards are being canceled at an alarming pace.
Business Confidence hit a two-year low, and Consumer Confidence hits an eight-year low. It seems a government shutdown and a stock market crash are not good for business. Now that stocks are up, will confidence return?
Inflation hit a one year low, with the Consumer Price Index coming in at only 1.9%. It means the next recession will bring deflation.
The Mad Hedge Market Timing Index is entering danger territory with a reading of 70 for the first time in five months. Better start taking profits on those aggressive leveraged longs you bought in early January. Your best performers are about to take a big hit. The market has since sold off 500 points proving its value.
There wasn’t much to do in the market this week, given that I am trying to wind my portfolio down to 100% cash as the market peaks.
February has so far come in at a hot +3.31%. My 2019 year to date return leveled out at +12.79%, boosting my trailing one-year return back up to +34.12%.
My nine-year return clawed its way up to +312.93%, another new high.The average annualized return ratcheted up to +34.12%.
I am now 90% in cash and 10% long gold (GLD), a perfect downside hedge in a “RISK OFF”. We have managed to catch every major market trend this year, loading the boat with technology stocks at the beginning of January, selling short bonds, and buying gold (GLD).
Government data is finally starting to trickle out now that the government shutdown is over.
On Monday, February 18 was Presidents Day and the markets were closed.
On Tuesday, February 19, 10:00 AM EST, the Homebuilders Index is released.
On Wednesday, February 20 at 2:00 AM EST, Minutes from the January FOMC meeting are released. How dovish are they really?
Thursday, February 21 at 8:30 AM EST, we get Weekly Jobless Claims. At 10:00 AM, Existing Home Sales are out.
On Friday, February 22, there will be a half a dozen public Fed speakers suggesting that interest rates will go up, down, or sideways. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’ll be digging out from the massive series of snowstorms that hit me at my Lake Tahoe Estate. Snowfall this season has so far hit 50 feet and is challenging the 70-foot record from three years ago.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2019/02/average-annualized-feb19.png587899Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-02-19 01:06:222019-07-09 04:07:31The Market Outlook for the Week Ahead, or Alarm Bells are Ringing
Legal Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.
Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.
Essential Website Cookies
These cookies are strictly necessary to provide you with services available through our website and to use some of its features.
Because these cookies are strictly necessary to deliver the website, refuseing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.
We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.
We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.
Google Analytics Cookies
These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.
If you do not want that we track your visist to our site you can disable tracking in your browser here:
Other external services
We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.
