Global Market Comments
January 26, 2021
Fiat Lux
Featured Trade:
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)
Posts
Lately, I have been getting a lot of calls from concerned readers worried that we might be going into another 2008-2011 style real estate crash, when home prices cratered by 50%-70%, once the pandemic ends.
It’s not going to happen and there are a dozen reasons why. Worst case, I expect a short, shallow pause in the market, followed by a ballistic move to new all-time highs.
If you had any doubt, look no further than the superheated bond market which took interest rates to new all-time lows, sparking a refi boom in the process.
You see, there is a method to my madness.
Apple (AAPL) is planning on building a second new research and development campus that will need 20,000 new high-tech workers. Google (GOOGL) plans to spend $13 billion on real estate acquisitions, and Amazon (AMZN) just flushed out of New York, will move those 25,000 jobs to more hospitable climates.
It is all fresh fuel for a continuation in the bull market for US residential real estate, not just for this year, but for another decade, or more. More high paying jobs means more big spending home buyers.
Although prices seem high now, I am convinced that we are only at the beginning of a long-term secular bull market in housing. If you don’t believe me, check out the sky-high prices in Shanghai, Vancouver, and Sydney Australia.
Anything you purchase now is going to make you look like a genius ten years down the road.
The best is yet to come.
The big driver will be demographics, of course.
From 2022 onward, 65 million Gen Xers will be joined by 85 million late-blooming Millennials in a bidding war for the same houses. That will create a market of 150 million buyers, unprecedented in the history of the American real estate market.
In the meantime, 80 million baby boomers, net sellers, and downsizers of homes for the past decade will slowly die off and disappear from the scene as a negative influence. Only one-third are still working.
The first boomer, Kathleen Casey-Kirschling, born seconds after midnight on January 1, 1946, just turned 75 years old. A former schoolteacher, she took early retirement at 62.
The real fat on the fire here is that 10 million homes went missing in action this decade, thanks to the financial crisis. They were never built.
This is the result of the bankruptcy of several homebuilding companies and the new-found ultra-conservatism of the survivors, like DR Horton (DHI), Lennar Homes (LEN), and Pulte Group (PHM).
Did I mention that all of this makes this sector a screaming “BUY”?
Talk to any real estate agent and they will complain about the shortage of inventory (except in Chicago, the slowest growing market in the country).
Prices are so high already that flippers have been squeezed out of the market for good. Bottom feeders, like hedge funds buying at the bankruptcy auctions, are a distant memory. Some, like BlackRock (BLK), now own more than 40,000 homes and are the biggest landlords in the county.
And let’s face it, ultra-low interest rates aren’t going to be here forever. Borrow at 3.0% today against a long-term 3.0% inflation rate, and you are essentially getting your house for free.
The rising rents that are turning Millennials from renters to buyers may be the first sign of real inflation beyond the increasingly dear healthcare and higher education that we’re are already seeing.
And Millennials are having kids that demand a bigger living space! Who knew?
Have I Got a Fixer-Upper for You!
Global Market Comments
October 15, 2020
Fiat Lux
Featured Trade:
(OCTOBER 14 BIWEEKLY STRATEGY WEBINAR Q&A),
(VXX), (INDU), (TLT), (GLD), (IB), (XPEV),
(TSLA), (MRNA), (AMD), (SDS), (ITB)
Below please find subscribers’ Q&A for the October 14 Mad Hedge Fund Trader 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: Do you think Interactive Brokers (IB) will give better executions?
A: No, these executions are all done by identical computers with identical programs now, across eleven differences of electronic exchanges. It’s like trying to decide whether to buy Exxon or Mobile gas. It’s all the same stuff. The only real difference in brokers these days is in customer service; and you really have to shop around there and find what you like. Even on customer service, most brokers have cut back staff to a minimum. In the end, the only difference among brokers may be “hold” times.
Q: What are your thoughts on Xpeng, Inc. (XPEV), the Chinese electric car manufacturer?
A: The Chinese have actually had electric cars longer than Tesla (TSLA) has and I have visited their factories in China, like BYD Auto (https://en.wikipedia.org/wiki/BYD_Auto). The problem has always been quality—the batteries tend to catch on fire, the cars fall apart—and that’s why they have never exported an electric car to the U.S. I don't expect that to change. What’s more likely is Tesla building more factories in China, where they overwhelmingly have the technology, brand, and quality lead. I don't think any electric car company can threaten Tesla now that they’re so far ahead.
Q: Is it a good time to buy the iPath S&P 500 VIX Short Term Futures ETN (VXX)?
A: No, because you only make money on the (VXX) when you get a volatility increase almost immediately after you buy it. So, if you have some great insight on the next volatility explosion, try it; otherwise, the time decay will kill you. By the way, everyone knows there is going to be a presidential election in three weeks so it’s already in the price.
Q: What is the likelihood of a financial transaction tax, and how would it affect our trading?
A: It wouldn't hurt our trading, because we’re mostly small fry. It would wipe out high-frequency trading where they’re trading for a penny with no transaction costs. And that, in fact, would be the goal: to wipe out high-frequency trading. Unfortunately, they’re about 80% of the market now, so I’m not sure who would step in and fill in that space. But there’s always someone.
Q: What about Moderna (MRNA)?
A: Yes, I like it for the long term. I think next year will be another golden age for biotech, and they have had a great rally so I’d be looking to buy on dips. MRNA is certainly going to participate. After Corona, there are 100 other diseases they could be working on. It’s not a COVID-19-only story, which is what some of the short sellers got wrong.
Q: How far does Gold (GLD) go down before it goes up?
A: Probably not much more; we have had a decent 10% correction. I was actually thinking about buying gold today, but I also hate leaning into a downtrend. So, any downtrends are temporary, we're looking at new highs in gold next year. This is a QE (quantitative easing) trade, not a risk-off trade like it used to be. So, the continuation of QE for years means that gold goes higher.
Q: When is it time to trade bonds (TLT) again?
A: Bonds just had their narrowest trading range in years in the last month. We only want to play on the short side; it broke down last week so we don't want to do anything here.
Q: Is a 1% drop in Advanced Micro Devices (AMD) a dip?
A: No, a 10% drop in AMD is a dip. Buying a 1% drop is a chase, which is an invitation to a lot of pain.
Q: Have SPACs (Special Purpose Acquisition Corporation) replaced IPOs?
A: I think SPACs are one of the greatest scams of all time. Everybody will get ripped off after paying enormous fees, and once these things go illiquid, no one will be able to get out, so I would not chase the SPAC game. They are only created to dodge the investor protections in the IPO process, I've seen too many of these fads happen over the last 50 years. They always end in tears.
Q: I think there will be another surprise Trump win similar to 2016. How would the market react to a Trump win?
A: It would crash because the market has built in a Biden win and chased up Biden sectors. So, if that doesn’t happen, the market has to give up all those gains and reorient itself. Trump had a 2-3-point polling deficit last time, and now he has to overcome a 17-point deficit or whatever the number is depending on the poll you look at. So, I don’t think so. Remember, Trump only won the election by 78,000 votes in three states. The 220,000 who have died from the pandemic are definitely NOT voting for Trump, nor are their 10X family members. That’s 2.2 million votes lost. Remember, the Corona death rate in red states is far higher than in blue states.
Q: Do you think a Bollinger Band squeeze is forming in Tesla right now?
A: Yes, even though this stock has had a prolific run, it looks like it wants to go higher. I wouldn’t go short.
Q: What about over issuance of US debt?
A: Any concerns about over issuance of debt won’t hit for a while because the Fed is going to keep the short-term rates at zero, which will anchor everything else at low levels. The initial heat will be felt in the ten- and 30-year bonds where you should be permanently short.
Q: Reminder that 4 years ago, you said a Trump win would crash the market.
A: Yes, I did say that, and it did crash the market—it dropped 1,000 points overnight and made it all back the next morning. I spent that entire night rebuilding portfolios which then had a massive run, so I remember that very well. That is the only election I was wrong on in 50 years. So, the lesson is don’t bet against the guy who's only wrong once in 50 years and count on him being wrong again. There are hundreds of data points now which show that Trump has no chance of winning and he’s acting in a way that backs that up.
Q: Is there a second COVID wave priced in yet?
A: No, the way these things work is scientists predict waves, traders say no it will never happen, then it happens and the traders puke out. And if that happens, we will know that is the buying opportunity of the century because that is exactly what we got on the last puke out in March. And yes, I was wrong; I said the stocks would double in two years and instead they doubled in three months.
Q: Do you think a real estate bubble is forming?
A: Yes, but it may not pop for another 10 years because we have 85 million millennials trying to buy housing right now, with interest rates near zero. I just refinanced my home at 2.75%. And only 65 million Gen Xers have homes to sell them, which is being expressed in higher home prices. That’s why I love the homebuilders (ITB).
Q: What about ProShares Ultra Short S&P 500 2X bear ETF (SDS)?
A: I would bail on that because the long-term trend is still up. Dow 120,000 here we come! You only want to use the (SDS) on short term dips, and then come out at the bottom.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
January 6, 2019
Fiat Lux
2020 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE), (AMLP), (USO), (UNG),
(GLD), (GDX), (SLV), (ITB), (LEN), (KBH), (PHM)
Global Market Comments
December 19, 2019
Fiat Lux
Featured Trade:
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)
(PLAY IT SAFE WITH ANTHEM), (ANTM), (CI)
Global Market Comments
September 11, 2019
Fiat Lux
Featured Trade:
(HAS THE VALUE OF YOUR HOME JUST PEAKED?),
(ITB), (PHM), (KBH), (LEN), (DHI), (NVR), (TOL),
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA CONFERENCE, OCTOBER 25-26, 2019)
Lately, my inbox has been flooded with emails from subscribers asking how to hedge the value of their homes. This can only mean one thing: the residential real estate market has peaked.
They have a lot to protect. Since prices hit rock bottom in 2011 and foreclosures crested, the national real estate market has risen by 50%.
I could almost tell you the day the market bounced. That’s when a couple of homes in my neighborhood that had been for sale for years suddenly went into escrow.
The hottest markets, like those in Seattle, San Francisco, and Reno, are up by more than 125%, and certain neighborhoods of Oakland, CA have shot up by 400%.
The concerns are confirmed by data that started to roll over in the spring and have been dismal ever since. It is not just one data series that has rolled over, they have all gone bad. One bad data point can be a blip. An onslaught is a new trend. Let me give you a dismal sampling.
*Home Affordability hit a decade low, thanks to rising prices and interest rates and trade war-induced soaring construction costs
*July Housing Starts have been in a tailspin as tariff-induced rocketing costs wipe out the profitability of new homes
*New Home Sales collapsed YOY.
*14% of all June Real Estate Listings saw price cuts, a two-year high
*Chinese Buying of West Coast homes has vaporized over trade war fears
Fortunately, investors have a lot of options for either hedging the value of their own homes or making a bet that the market will fall.
In 2006, the Chicago Mercantile Exchange (CME) started trading futures contracts for the Corelogic S&P/Case-Schiller Home Price Index, which covered both U.S. residential and commercial properties.
The Case-Shiller index, originated in the 1980s by Karl Case and Robert Shiller, is widely considered to be the most reliable gauge to measure housing price movements. The data comes out monthly with a three-month lag.
This index is a widely-used and respected barometer of the U.S. housing market and the broader economy and is regularly covered in the Mad Hedge Fund Trader biweekly global strategy webinars.
The composite weight of the CSI index is as follows:
- Boston 7.4%
- Chicago 8.9%
- Denver 3.6%
- Las Vegas 1.5%
- Los Angeles 21.2%
- Miami 5%
- New York 27.2%
- San Diego 5.5%
- San Francisco 11.8%
- Washington DC 7.9%
However, these contracts suffer from the limitations suffered by all futures contracts. They can be illiquid, expensive to deal in, and you probably couldn’t get permission from your brokers to trade them anyway.
If you want to be more conservative, you could take out bearish positions on the iShares US Home Construction Index (ITB), a basket of the largest homebuilders (click here for their prospectus). Baskets usually present half the volatility and therefore half the risk of any individual stock.
If real estate is headed for the ashcan of history, there are far bigger problems for your investment portfolio than the value of your home. Real estate represents a major part of the US economy and if it is going into the toilet, you could too.
It is joined by the sickly auto industry. Thanks to the trade wars, farm incomes are now at a decade low. As we lose each major segment of the economy, the risk is looming that the whole thing could go kaput. That, ladies and gentlemen, is called a recession and a bear market.
On the other hand, you could take no action at all in protecting the value of your home.
Those who bought homes a decade ago, took a ten-year cruise and looked at the value of their residence today will wonder what all the fuss is about. By the way, I met just such a person on the Queen Mary 2 last summer. Yes, ten years at sea!
And the next recession is likely to be nowhere near as bad as the last one, which was a twice-a-century event. So it’s probably not worth selling your home and buying it back later, as I did during the Great Recession.
See you onboard!
In Your Future?
Global Market Comments
March 8, 2019
Fiat Lux
Featured Trade:
(MARCH 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (SDS), (TLT), (TBT), (GE), (IYM),
(MSFT), (IWM), (AAPL), (ITB), (FCX), (FXE)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 3 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Are you sticking to your market top (SPY), (SDS) by mid-May?
A: Yes, at the rate that economic data is deteriorating, and earnings are falling, there’s no prospect of more economic stimulation here, my May top in the market is looking better than ever. Europe going into recession will be the gasoline on the fire.
Q: Where do you see interest rates (TLT) in 1-2 years?
A: Interest rates in 2 years could be at zero. If interest rates peaked at 3.25% last year, then the next move could be to zero, or negative numbers. The world is awash in cash, and without any economic growth to support that, you could have massive cuts in interest rates.
Q: Will (TLT) be going higher when a market panic sets in?
A: It will, which is why I’m being cautious on my short positions and why I’m only using tops to sell. You can be wrong in this market but still make money on every put spread, as long as you’re going far enough in the money. That said, when the stock market starts to roll over big time, you want to go long bonds, not short, and we may do that someday.
Q: Do you see a selloff to stocks similar to last December?
A: As long as the Fed does not raise interest rates, I don’t expect to get a selloff of more than 5% or 6% initially. If we do get a dramatic worsening of economic data and it looks like we’re headed in that direction, the Fed will start cutting interest rates, the recession signal will be on and only then will we drop to the December lows—and possibly as low as 18,000 in the Dow.
Q: General Electric has gone from $6 to $10; what would you do now?
A: Short term, sell with a 66% gain in a stock. Long term, you probably want to hold on. However, their problems are massive and will take years to sort out, probably not until the other side of the next recession.
Q: Microsoft (MSFT): long term hold or sell?
A: Absolutely long-term hold; look for another double in this company over the next 3 years. This is the gold standard in technology stocks today. Short term, you’re looking at no more than $15 of downside to the December low.
Q: Would you short banks (IYF) here since interest rates have failed to push them higher?
A: I would not; they’ve been one of the worst performing sectors of the market and they’re all very low, historically. You want to short highs like I’m doing now in the (SPY), the (IWM), and Apple (AAPL), not lows.
Q: Is the China trade deal (FXI) a ‘sell the news’ event?
A: Absolutely; there’s not a hedge fund out there that isn’t waiting to go short on a China trade deal. The weakness this week is them front-running that news.
Q: Do you see emerging markets (EEM) pushing higher from the 42 level, or will a global recession bring it back to earth?
A: First of all, (EEM) will go higher as long as interest rates in the U.S. are flatlining, so I expect a rally to last until the spring; however, when a real recession does become apparent, that sector will roll over along with everything else.
Q: Would you buy homebuilders (ITB) if this lower interest rate environment persists?
A: I wouldn’t. First of all, they’ve already had a big 28% run since the beginning of the year— like everything else—and second, low-interest rates don’t help if you can’t afford the house in the first place.
Q: Would you short corporate bonds if you think there’s going to be a recession next year?
A: I’m glad you asked. Absolutely not, not even on pain of death. I would buy bonds because interest rates going to zero takes bond prices up hugely.
Q: Should you buy stocks in front of a blackout period on corporate buybacks?
A: Absolutely not. Corporate buybacks are the number one buyers of shares this year, possibly exceeding $1 trillion. Companies are not allowed to buy their own stocks anywhere from a couple of weeks to a month ahead of their earnings release. By removing the principal buyer of a share, you want to sell, not buy.
Q: What are the chances the China trade deal (FXI) breaks down this month and no signing takes place?
A: I have a feeling Trump is desperate to sign anything these days, and I think the Chinese know that as well, especially in the wake of the North Korean diplomatic disaster. He has to sign the deal or we’ll go to recession, and that would be tough to run on for reelection.
Q: Which stock or ETF would you short on real estate?
A: If you short the iShares US Home Construction ETF (ITB), you short the basket. Shorting individual stocks is always risky—you really have to know what’s going on there.
Q: What’s the best commodity play out there?
A: Copper. If China is the only country that’s stimulating its economy right now, and China is the largest consumer of copper, then you want to buy copper. The electric car boom feeds into copper because every new vehicle needs 20 pounds of copper for wiring and rotors. Copper is also cheap as it is coming off of a seven-year bear market. What do you buy at market tops? Only cheap stuff.
Q: Why did you go so far in the money in the Freeport-McMoRan (FCX) call spread with only a 10% profit on the trade in five weeks?
A: In this kind of market, I’ll take 10% in 5 weeks all day long. But additionally, when prices are this high, I want to be as conservative as possible. Going deep in the money on that is a very low-risk trade. It’s a bet that copper doesn’t go back to the December lows in five weeks, and that’s a bet I’m willing to make.
Q: Will a new round of QE in Europe affect our stock market?
A: Yes, it’s terrible news. It will weaken the Euro (FXE), strengthen the dollar (UUP), and force US companies to lower earnings guidance even further. That is bad for the market and is a reason why I have been selling short.
