Global Market Comments
January 30, 2019
Fiat Lux
Featured Trade:
(WHY WATER WILL SOON BE WORTH MORE THAN OIL),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR),
(WHY WARREN BUFFETT HATES GOLD),
(GLD), (GDX), (ABX),
Posts
Global Market Comments
January 25, 2019
Fiat Lux
Featured Trade:
(JANUARY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (EDIT), (NTLA), (CRSP), (SJB), (TLT), (FXB), (GLD),
(THE PRICE OF STARDOM AT DAVOS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 23 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Would you buy Tesla (TSLA) right now?
A: It’s tempting; I’m waiting to see if we take a run at the $250-$260 level that we saw at last October’s low. If so, it’s a screaming buy. Tesla is one of a handful of stocks that have a shot at rising tenfold in the next ten years.
Q: CRISPR stocks are getting killed. I know you like the science—do you have a bottom call?
A: What impacted CRISPR stocks was the genetic engineering done on unborn twins in China that completely freaked out the entire industry and killed all the stocks. That being said, CRISPR has a great long-term future. They will either become ten-baggers or get taken over by major drug companies. The first major CRISPR generated cure will take place for childhood blindness later this year. The ones you want to own are Editas (EDIT), Intellia Therapeutics (NTLA), and CRISPR Therapeutics (CRSP).
Q: Do you ever reposition a trade and add contracts?
A: I very rarely double up. I’d rather go on to a new trade with different strike prices. A bad double up can turn a small loss into a big one. Sometimes I will do a “roll down,” or buy back one spread for a loss to earn back that loss with a spread farther in-the-money.
Q: For us newbies, can you please explain your trading philosophy regarding purchasing deep in the money call spreads and how that translates to risk management?
A: I did a research piece in Global Trading Dispatch yesterday on deep in-the-money call spreads, and today on deep-in-the-money put spreads. The idea is to have a position where you make money whether the market goes up, down, or sideways. Your risk is defined, and you always have time decay working for you, writing you a check every day. Here are the links: Vertical Bull Call Spread and Vertical Bear Put Spread.
Q: What’s the risk reward of floating rate corporate debts?
A: Number one: interest rates go down—if we go into recession, rates will fall. That wipes out the principal value of the security. Number two: with corporate debts, you run the risk of the corporation going bankrupt or having their business severely impacted in the next recession and their credit rating cut. It’s far safer to invest in a bank deposits yielding 2-2.5% right now. Some smaller banks are offering certificates of deposit with 4% yields.
Q: What are your thoughts on the British pound (FXB)?
A: I think Brexit will fail eventually and the pound will increase 25%; so play from the long side on the (FXB). It would be economic suicide for Britain to leave the EC and eventually people there will figure this out. If the Brexit vote were held today, it would lose and that may be how they eventually get out of this.
Q: Is it a bear market for bonds (TLT)?
A: Yes, it’s back on again. I expect we will visit $112 in the (TLT) sometime this year, down from the current $121. That brings us back up to the 3.25% yield on the ten-year US Treasury bond. That is down nine points from here, so it’s certainly worth taking a bite out of.
Q: What’s the best time to buy the ProShares Short High Yield (SJB)?
A: At the top of the next equity market run. It rose a whopping 10% during the December stock market meltdown so that gives you a taste of what can happen. Junk bonds are called “junk” for a reason.
Q: How do you see gold (GLD)?
A: Take profits now and buy back on the next dip. If we dip 5%-10% in gold, that would be a good entry point for a larger move later on in the year. To get a real move in gold, we need to see real inflation and that will eventually come. Another stock market crash will also gain you another 10% in gold.
Q: When will the government shutdown end?
A: I think it will go a lot longer than anyone realizes because Trump needs a deal worse than the Democrats do. Trump is basically saying pay for my wall or I’ll keep shooting another of MY supporters in the head every day. The Democrats can wait a really long time in that circumstance. Trump’s standing in the polls has also collapsed to new lows. By the way, the Chinese are using the same approach in the trade talks so that could be a long wait as well.
Q: There’s been a big shift in the MHFT Profit Predictor in the last 30 days—does this mean we should not be adding any positions?
A: Absolutely; this is a terrible place to be adding any new positions. The index went from 2 to 57 which shows you how valuable it is at calling market bottoms. Now we are at the top end of the middle of the range. All markets are now dead in the middle of very wide trading ranges which means the best thing you can do is take profits on existing positions, which I have been doing. Or watch Duck Dynasty and Pawn Stars replays. As for me, I am an Antiques Roadshow guy.
Q: What percentage should you be invested in the market now?
A: I’ve gone from 60% to 30% and have only 3 weeks left on my remaining position. I’m looking to go 100% cash as long as we’re stuck in the middle of this range. Better to sit on your hands than chase a high risk/low return trade.
Did I mention that we have had the best start to a New Year in a decade?
Global Market Comments
January 15, 2019
Fiat Lux
SPECIAL ARMAGEDDON ISSUE
Featured Trade:
(HERE’S THE WORST-CASE SCENARIO),
($INDU), (SPY), (SDS), (TLT), (TBT), (FXE), (FXY),
(UUP), (DDP), (USO), (SCO), (GLD), (DGZ), (ITB)
Yesterday, I listed my Five Surprises of 2019 which will play out during the first half of the year prompting stocks to take another run at the highs, and then fail.
What if I’m wrong? I’ve always been a glass half full kind of guy. What if instead, we get the opposite of my five surprises? This is what they would look like. And better yet, this is how financial markets would perform.
*The government shutdown goes on indefinitely throwing the US economy into recession.
*The Chinese trade war escalates, deepening the recession both here and in the Middle Kingdom.
*The House moves to impeach the president, ignoring domestic issues, driven by the younger winners of the last election.
*A hard Brexit goes through completely cutting Britain off from Europe.
*The Mueller investigation concludes that Trump is a Russian agent and is guilty of 20 felonies including capital treason.
*All of the above are HUGELY risk negative and will trigger a MONSTER STOCK SELLOFF.
It’s really difficult to quantify how badly markets will behave given that this scenario amounts to five black swans landing simultaneously. However, we do have a recent benchmark with which to make comparisons, the 2008-2009 stock market crash and great recession. I’ll list off the damage report by asset class. I also include the exchange-traded fund you need to hedge yourself against Armageddon in each asset class.
*Stocks – Depending on how fast the above rolls out, you will see a stock market (SPY) collapse of Biblical proportions. You’ll easily unwind the Trump rally that started at a Dow Average of 18,000, down 25% from the current level, and off a gut-churning 9,000 points or 33% from the September top. The next support below is the 2015 low at 15,500, down 11,500 points, or 43% from the top. By comparison, during the 2008-2009 crash, we fell 52%. Everything falls and there is no safe place to hide. Buy the ProShares UltraShort S&P 500 bear ETF (SDS).
*Bonds – With the ten-year US Treasury yield peaking at 3.25% last summer, a buying panic would spill into the bond market. Inflation is nonexistent, we are running at only a 2.2% YOY rate now, so widespread deflation would rapidly swallow up the entire economy. In that case, all interest rates go to zero very quickly. The Fed cuts rates as fast as it can. Eventually, the ten-year yield drops to -0.40%, the bottom seen in Japanese and German debt three years ago. Buy the 2X short bond ETF (TBT) which will rocket to from $35 to $200.
*Foreign Exchange – With US interest rates going to zero, the US Dollar (UUP) gets the stuffing knocked out of it. The Euro soars from $1.10 to $1.60 last seen in 2010, and the Japanese yen (FXY) revisits Y80. Strong currencies then crush the economies of our largest trading partners. Their governments take their interest rates back to negative numbers to cool their own currencies. Cash becomes trash….globally.
*Commodities
Here’s the really ugly part about commodities. They are only just starting to crawl OUT of a seven-year bear market. To hit them with another price collapse now would devastate the industry. Producer bankruptcies would be widespread. The ags would get especially hard hit as they have already been pummeled by the trade war with China. Midwestern regional banks would get wiped out. Buy the DB Commodity Short ETN (DDP).
*Energy
The price of oil (USO) is also just crawling back from a correction for the ages, down from $77 to $42 a barrel in only three months. Hit the sector with a recession now in the face of global overproduction and the 2009 low of $25 becomes a chip shot, and possibly much lower. Those who chased for yield with energy master limited partnerships will get flushed. Several smaller exploration and production companies will get destroyed. And gasoline drops to $1 a gallon. The Middle East collapses into a geopolitical nightmare and much of Texas files chapter 11. Buy the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).
*Precious metals
Gold (GLD) initially rallies on the flight to safety bid that we have seen since September. However, if things get really bad, EVERYTHING gets sold, even the barbarous relic, as margin clerks are in the driver’s seat. You sell what you can, not what you want to, as liquidity becomes paramount. This is what took the yellow metal down to $900 an ounce in 2009. Buy the DB Gold Short ETN (DGZ).
*Real Estate
Believe it or not, real estate doesn’t do all that bad in a worst-case scenario. It is perhaps the safest asset class around if a new crisis financial unfolds. For a start, interest rates at zero would provide a huge cushion. The Dodd-Frank financial regulation bill successfully prevented lenders returning to even a fraction of the leverage they used in the run-up to the last recession. We are about to enter a major demographic tailwind in housing as the Millennial generation become the predominant home buyers. I’ve never seen a housing slump in the face of a structural shortage. And homebuilder stocks (ITB) have already been discounting the next recession for the past year. A lot is already baked in the price.
Conclusion
Of course, it is highly unlikely that any of the above happens. Think of it all as what Albert Einstein called a “thought experiment.” But it is better to do the thinking now so you can do the trading later. There may not be time to do otherwise.
Be Careful, They Bite!
Global Market Comments
January 10, 2019
Fiat Lux
Featured Trade:
(JANUARY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (UUP), (FXE), (FXY), (FXA), (AAPL), (GLD), (SLV), (FCX), (SOYB), (USO), (MU), (NVDA), (AMD), (TLT), (TBT), (BIIB), (TSLA)
(TESTIMONIAL)
Due to technical problems, I was unable to read your questions. However, I was able to get a print out after the fact.
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 9 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
Q: Is the bottom in for stocks?
A: It is for six months to a year. A price earnings multiple at 14X seems to be the line in the sand. The Christmas Eve massacre, which took us down to a (SPY) of $230, was the final capitulation bottom of the entire down move. We may try a few more retests of the lows on bad tweets or data points. But from here on, you’re trying to buy the dip. That’s why I cut my vacation short a week and issued eight emergency trade alerts, five for Global Trading Dispatch and three for the tech letter. By the way, I hope you appreciate those trade alerts because I had to call back staff from vacations in four different countries to get them done. But it was worth it. We’ve had the strongest start to a New Year in a decade, up 5.75%. We made back all our Q4 losses in two days!
Q: Is the strong dollar play (UUP) over? Is it time to start buying Euro (FXE) and Yen (FXE)?
A: Yes, it is. The Fed flipping from hawk to dove sounds the death knell for the dollar. With the expansion of the yield spread between the buck and other currencies stopped dead in its tracks, a massive short covering rally will drive the currencies higher. That’s why I bought the Euro on Monday for the first time in more than a year (FXE). The Japanese yen where the biggest shorts has already moved too far, up 8%. That’s where hedge fund typically finance positions because yen yields have been at zero forever.
Q: How about the Aussie (FXA)? Do we have a shot now?
A: I think so. But the bigger driver with Aussie is the trade war with China. That said, I believe that will get resolved soon too unless Trump wants to run for reelection during a recession. The Aussie also has relatively high-interest rates so it should soar.
Q: Is the government shutdown starting to hurt the economy?
A: Yes, it is. Estimates on the damage the shutdown is doing range from 0.5% to 1% a week. That means at a minimum of 20-week shut down cuts 2019 GDP growth by 1%. If your assumption for growth this year is only 2%, that brings us perilously close to a recession. However, with the big stock market rally of the past week investors clearly believe the shutdown will be over in a week. Buy “Wall” stocks.
Q: What’s the biggest risk to the market now?
A: Companies announced great earnings in October and the stocks promptly collapsed. Q4 earnings start in a few weeks, except this time, the earnings will be smaller. The big one, Apple (AAPL) is reporting on January 29 and will be especially exciting since they already announced a major disappointment. If we get a repeat, you could get another meltdown in February just like we saw last year.
Q: Do you still like gold (GLD)?
A: I did in Q4 as a hedge for a collapsing stock market. Now that stocks are on fire again, I think gold and silver (SLV) will take a rest. You’re not going to get a serious move in gold until we see higher inflation and that is a while off.
Q: Is the bear market in commodities over?
A: I think so, with a flattening interest rate picture and a weakening dollar, the entire commodity complex is looking better. That includes copper (FCX), energy (USO), and the ags (SOYB). What do you buy in an expensive market? Cheap stuff, and all of these are at seven-year lows. I think people are ready to give paper assets a rest. All we need now for these to work is inflation. My cleaning lady just asked for a raise so there’s hope.
Q: The semiconductors have just had a good move. Is it time to get in?
A: You want to buy the semis, like Micron Technology (MU), NVIDIA (NVDA), and Advanced Micro Devices (AMD) when they’ve just had a BAD move. Market conditions have improved, but not to the extent you want to buy the most volatile stocks in the market. That said, if we get another crushing move in February you might dip your toe in with some semis on capitulation day. If you want to buy semis in this environment, you might have a gambling addiction.
Q: If the Fed has stopped raising rates, are you still bearish on the (TLT) and bullish on the (TBT)?
A: I think what governor Jay Powell’s dovish comments will do is put bonds in a six-month range, say 2.45%-3.0% in yield. All of my future bond alerts will trade around those levels. In the option world, we will be setting up a short strangle, betting that interest rates don’t move out of this range for a while. In that case, our two bond positions will be OK, with the nearest money one expiring in only seven trading days.
Q: Is it too late to get into biotech (BIIB)?
A: No, along with technology, biotech will be one of the two leading sectors in the entire market for the next ten years. However, me being an eternal cheapskate, I want to get in again on a decent dip. This is the industry that will cure cancer over the next decade and that will be worth a trillion dollars in profits.
Q: You’ve kept us out of Tesla (TSLA) for a couple of years. Is it time to go back in?
A: I think I would. If production can ramp up from 7,000 to 10,000 a week, the stock should do the same. The ten-year view for this stock is that it goes from today’s $330 to $2,500. That said, this is a notorious trading stock so it is very important to buy it on a dip. Wait for the next tweet from Elon Musk.
Q: If we enter a bear market in May 2019, what would be the appropriate long-term investments at that time?
A: Nothing beats cash, especially now that you are actually getting paid something decent. You can find cash equivalents now yielding all the way up to 4%. In a bear market, stocks either go down a lot, or a whole lot, so there is nothing worth keeping. The only reason to stay in is to avoid a monster tax bill (my cost on Apple is 25 cents) or you still work for the company.
Global Market Comments
January 9, 2019
Fiat Lux
2019 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLI), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE),
(DIG), (RIG), (USO), (UNG), (USO), (OXY),
(GLD), (GDX), (SLV),
(ITB), (LEN), (KBH), (PHM)
Last week saw the sharpest move up in stock prices in seven years. Why doesn’t it feel like it? Maybe it’s because we are all recovering losses instead of posting new profits. The mind has a funny way of working like that.
In fact, 2018 may go down as the year that EVERYTHING went down. Stocks (SPY), bonds (TLT), commodities (COPX), precious metals (GLD), foreign currencies (FXE), emerging markets (EEM), oil (USO), real estate (IYR), vintage cars, fine art, and even my neighbor’s beanie baby collection were all posting negative numbers as of a week ago.
In fact, Deutsche Bank tracks 100 global indexes and 88 of them were posting losses on the year. The normal average in any one year is 27. This is why hedge fund are having their worst year in history (except for this one). When your longs AND your shorts plunge in unison, there is nary a dime to be had. Even gold, the ultimate flight to safety asset has failed to perform.
Theoretically, this is supposed to be impossible. When stocks go down, bonds are supposed to go up and visa versa. So are emerging markets and all other hard assets.
This only happens in one set of circumstances and that is when global liquidity is shrinking. There is just not enough free cash around to support everything. So, the price of everything goes down.
The reason most of you don’t recognize this is that last time this happened was in 1980 when most of you were still a gleam in your father’s eye.
If you don’t believe me check, out the chart below from the Federal Reserve Bank of St. Louis. It shows that after peaking in July 2014, the Adjusted Monetary Base has been going nowhere and recently started to decline precipitously.
This was exactly three months before the Federal Reserve ended the aggressive, expansionary monetary policy known as quantitative easing.
The rot started in commodities and spread to precious metals, agricultural prices, bonds, and real estate. In October, it spread to global equities as well. Beanie babies were the last to go.
Want some bad news? Shrinking global liquidity, which is now accelerating, is a major reason why I have been calling for a recession and bear market in 2019 all year.
They say imitation is the sincerest form of flattery. Perhaps that is why 2019 recession calls are lately multiplying like rabbits. Nothing like closing the barn door after the horses have bolted. I wish you told me this in September.
Disturbing economic data is everywhere if only people looked. The S&P Case-Shiller Home Price Index rate of price rise hit an 18-month low at 5.5%. With housing in free fall nationally further serious price declines are to come. With mortgage rates up a full point in a year and affordability at a decade low, who’s surprised?
General Motors (GM) closed 3 plants and laid off 15,000 workers, as trade wars wreak havoc on old-line industries. It looks like Millennials would rather ride their scooters than buy new cars.
Weekly Jobless Claims soared 10,000, to 234,000, a new five-month high. Not what stock owners want to hear. THE JOBS MIRACLE IS FADING!
October New Home Sales were a complete disaster, down a stunning 8.9% and off 12% YOY. These are the worst numbers since the 2009 housing crash. I told you not to buy homebuilders! They can’t give them away now!
Oil plunged again, off 20% in November alone. Is this punishment for Saudi Arabia chopping up a journalist or is the world headed into recession?
It seems we don’t have quiet weeks anymore. Normally, sedentary Jay Powell ripped it up with a few choice words at the New York Economic Club.
By saying that we are close to a neutral rate, the Fed Governor implied that there will be one more rate rise in December and then NO MORE. Happy president. But the historical neutral range is 3.5%-4.5%, meaning there is room for 2-6 X 25 basis point rate hikes to keep the bond vigilantes at pay. Such a card! Thread that needle!
Cyber Monday sales hit a new all-time high, up to $7.3 billion, with Amazon (AMZN) taking far and away the largest share. The stock is now up $300 from its November $1,400 low.
Salesforce, a Mad Hedge favorite, announced blockbuster earnings and was rewarded with a ballistic move upwards in the shorts. Fortunately, the Mad Hedge Technology Letter was long.
The Mad Hedge Alert Service managed to pull victory from the jaws of defeat in November with a last-minute comeback. Add October and November together and we limited out losses to 0.59% for the entire crash.
This was a period when NASDAQ fell a heart-stopping 17% and lead stocks fell as much as 60%. Most investors will take that all day long. I bet you will too. Down markets is when you define the quality of a trader, not up ones, when anyone can make a buck.
My year to date return recovered to +27.80%, boosting my trailing one-year return back up to 31.56%. November finished at a near-miraculous -1.83%. That second leg down in the NASDAQ really hurt and was a once in 18-year event. And this is against a Dow Average that is up a pitiful +2.9% so far in 2018.
My nine-year return recovered to +304.27. The average annualized return revived to +33.80.
The upcoming week is all about jobs reports, and on Friday with the big one.
Monday, December 3 at 10:00 EST, the November ISM Manufacturing Index is published. All hell will break loose at the opening as the market discounts the outcome of the Buenos Aires G-20 Summit.
On Tuesday, December 4, November Auto Vehicle Sales are released.
On Wednesday, December 5 at 8:15 AM EST, the November ADP Private Employment Report is out.
At 10:30 AM EST the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.
Thursday, December 6 at 8:30 AM EST, we get the usual Weekly Jobless Claims. At 10:00 AM we learned the November ISM Nonmanufacturing Index.
On Friday, December 7, at 8:30 AM EST, the November Nonfarm Payroll Report is printed.
The Baker-Hughes Rig Count follows at 1:00 PM. At some point, we will get an announcement from the G-20 Summit of advanced industrial nations.
As for me, I’ll be driving my brand new Tesla Model X P100D which I picked up from the factory yesterday. I’ll be zooming up and down the hills and dales of the mountains around San Francisco this weekend.
I’ll also be putting to test the “ludicrous mode” to see if it really can go from zero to 60 in 2.9 seconds and give passengers motion sickness. I will go well equipped with air sickness bags which I lifted off of my latest Virgin Atlantic flight.
Talley Ho!
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
November 23, 2018
Fiat Lux
Featured Trade:
(SURVIVING THANKSGIVING)
(SPY), (TLT), (TBT), (GLD), (FXE), (FXY), (USO), (VIX), (VXX), (NVDA), (NFLX), (AMZN)
