Global Market Comments
September 13, 2018
Fiat Lux
Featured Trade:
(EXPANDING MY “TRADE PEACE” PORTFOLIO),
(BABA), (BIDU), (TCTZF) (MU), (LRCX), (KLAC), (EEM),
(FXI), (EWZ), (SOYB), (CORN), (WEAT), (CAT), (DE),
(THE LEAGUE OF EXTRAORDINARY TRADERS)
This morning, U.S. Treasury Secretary Steven Mnuchin mentioned that an effort was being made to get trade talks with China back on track. The Dow soared 160 points in a heartbeat.
Past murmurings by the Treasury Secretary demonstrate that his musings have zero credibility in the marketplace and the move vaporized in minutes. However, given the extreme moves made by the shares of trade war victims, I think it is time to review my “Trade Peace” portfolio and make some additions.
The shares have been so beaten up that I think you can start scaling in now with limited downside and a ton of potential upside.
It’s not a matter of if, but when Trump has to run up the white flag with his wildly unpopular trade wars. As they now stand the new tariffs are threatening to chop $10 off of S&P 500 earnings in 2018, from $168 down to $158, according to J.P. Morgan. Some two-thirds of all U.S. companies have been negatively impacted.
Tariffs have effectively wiped out the benefits of the corporate tax cuts for most companies enacted last December. Who has been the worst hit? Thousands of small manufacturers in Midwest red states that can’t function because they are missing crucial cheap parts they can only obtain from the Middle Kingdom.
At last count there are a staggering 37,000 applications for exemptions from tariffs filed with the U.S. Treasury and only a dozen people to process them. A mere 10% have been granted. It is a giant bureaucratic nightmare.
With the midterm elections now only 37 trading days away, the clock is ticking. If Trump doesn’t cut trade deals with all of our major counterparties around the world before then, the Republican Party stands to lose both the House of Representatives and the Senate on November 6. That will make Trump a “lame duck” president for two more years.
China Technology Stocks – Includes Alibaba (BABA), Baidu (BIDU), and Tencent (TCTZF). It’s not often that you get to buy a company with 61% sales growth, which has seen its shares plunge by 27% in three months, as is the case with (BABA). Just to get (BABA) back up to its June level it has to rise by 37%. This is a stock that will easily double or triple over the long term.
U.S. Semiconductor Stocks – With China buying 80% of its chips from the U.S., stocks such as Micron Technology (MU), Lam Research (LRCX), and KLA-Tencor (KLAC) have been taken out to the woodshed and beaten senseless. Micron is off a withering 41% since the trade war began in earnest in May.
Emerging Markets – China is the largest trading partner for most of the world, and a recession there sparks a global contagion effect. Reverse that, and you stimulate not only emerging markets, but the U.S. economy, too. Look at the charts for the iShares MSCI Emerging Markets ETF (EEM), the iShares China Large-Cap ETF (FXI), and the iShares MSCI Brazil ETF (EWZ) and you will salivate.
Oil – Boost the global economy and oil demand (USO) also. China is the world’s largest incremental buyer of new oil, and it will absorb all of the Iranian crude freed up by the U.S. abrogation of the treaty there.
Agricultural – No sector has been punished more than agriculture, where profit margins are small, lead times stretch into years, and mother nature plays her heavy hand. In this area you can include soybeans (SOYB), corn (CORN), and wheat (WEAT), as well as equipment makers Caterpillar (CAT) and Deere (DE).
Some 20 years of development efforts in China by American farmers have gone down the toilet, and much of this business is never coming back. Trust and reliability are gone for good. Storage silos across the country are full. Did I mention that red states are taking far and away the biggest hit? There are not a lot of soybeans grown in California, New York, or New Jersey.
Even if Trump digs in and refuses to admit defeat, as is his way, there is still a light at the end of the tunnel. Sometime in 2019, the World Trade Organization will declare virtually all of the new American tariffs illegal and hit the U.S. with its own countervailing duties. This is the Chinese strategy. Waiting for them to fold could be a long wait, a very long wait.
Global Market Comments
September 12, 2018
Fiat Lux
THE FUTURE OF AI ISSUE
Featured Trade:
(THE NEW AI BOOK THAT INVESTORS ARE SCRAMBLING FOR),
(GOOG), (FB), (AMZN), MSFT), (BABA), (BIDU),
(TENCENT), (TSLA), (NVDA), (AMD), (MU), (LRCX)
Global Market Comments
September 7, 2018
Fiat Lux
Featured Trade:
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA,
GLOBAL STRATEGY LUNCHEON),
(SEPTEMBER 5 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (MU), (MSFT), (LRCX), (GOOGL), (TSLA),
(TBT), (EEM), (PIN), (VXX), (VIX), (JNK), (HYG), (AAPL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 5 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: Do you think the collapse of commodity prices in the U.S. will affect the U.S. election?
A: Absolutely, it will if you count agricultural products as commodities, which they are. We have thousands of subscribers in the Midwest and many are farmers up to their eyeballs in corn, wheat, and soybeans. It won’t swing the entire farm vote to the Democratic party because a lot of farmers are simply lifetime Republicans, but it will chip away at the edges. So, instead of winning some of these states by 15 points, they may win by 5 or 3 or 1, or not at all. That’s what all of the by-elections have told us so far.
Q: What will be the first company to go to 2 trillion?
A: Amazon, for sure (AMZN). They have so many major business lines that are now growing gangbusters; I think they will be the first to double again from here. After having doubled twice within the last three years, it would really just be a continuation of the existing trend, except now we can see the business lines that will actually take Amazon to a much bigger company.
Q: Is this a good entry point for Micron Technology (MU)?
A: No, the good entry point was in the middle of August. We are at an absolute double bottom here. Wait for the tech washout to burn out before considering a re-entry. Also, you want to buy Micron the day before the trade war with China ends, since it is far and away its largest customer.
Q: Is Micron Technology a value trap?
A: Absolutely not, this is a high growth stock. A value trap is a term that typically applies to low price, low book to value, low earning or money losing companies in the hope of a turnaround.
Q: I didn’t get the Microsoft (MSFT) call spread when the alert went out — should I add it on here?
A: No, I am generally risk-averse this month; let’s wait for that 4% correction in the main market before we consider putting any kind of longs on, especially in technology stocks which have had great runs.
Q: How do you see Lam Research (LRCX)?
A: Long term it’s another double. The demand from China to build out their own semiconductor industry is exponential. Short term, it’s a victim of the China trade war. So, I would hold back for now, or take short-term profits.
Q: Is this a good entry point for Google (GOOGL)?
A: No, wait for a better sell-off. Again, it’s the main market influencing my risk aversion, not the activity of individual stocks. It also may not be a bad idea to wait for talk of a government investigation over censorship to die down.
Q: Would you buy Tesla (TSLA)?
A: No, buy the car, not the stock. There are just too many black swans out there circling around Tesla. It seems to be a disaster a week, but then every time you sell off it runs right back up again. Eventually, on a 10-year view I would be buying Tesla here as I believe they will eventually become the world’s largest car company. That is the view of the big long-term value players, like T. Rowe Price and Fidelity, who are sticking with it. But regarding short term, it’s almost untradable because of the constant titanic battle between the shorts and the longs. At 26% Tesla has the largest short interest in the market.
Q: I’m long Microsoft; is it time to buy more?
A: No, I would wait for a bit more of a sell-off unless you’re a very short-term trader.
Q: What would you do with the TBT (TBT) calls?
A: I would buy more, actually; preferably at the next revisit by the ProShares Ultra Short 20 Year Plus Treasury ETF (TBT) to $33. If we don’t get there, I would just wait.
Q: What’s your suggestion on our existing (TLT) 9/$123-$126 vertical bear put spread?
A: It expires in 12 days, so I would run it into expiration. That way the spread you bought at $2.60 will expire worth $3.00. We’re 80% cash now, so there is no opportunity cost of missing out with other positions.
Q: Do you like emerging markets (EEM)?
A: Only for the very long term; it’s too early to get in there now. (EEM) really needs a weak dollar and strong commodities to really get going, and right now we have the opposite. However, once they turn there will be a screaming “BUY” because historically emerging nations have double the growth rate of developed ones.
Q: Do you like the Invesco India ETF (PIN)?
A: Yes, I do; India is the leading emerging market ETF right now and I would stick with it. India is the next China. It has the next major infrastructure build-out to do, once they get politics, regulation, and corruption out of the way.
Q: Do you trade junk bonds (JNK), (HYG)?
A: Only at market tops and market bottoms, and we are at neither point. When the markets top out, a great short-selling opportunity will present itself. But I am hiding my research on this for now because I don’t want subscribers to sell short too early.
Q: With the (VXX), I bought the ETF outright instead of the options, what should I do here?
A: Sell for the short term. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) has a huge contango that runs against it, which makes long-term holds a terrible idea. In this respect it is similar to oil and natural gas ETFs. Contango is when long-term futures sell at a big premium to short-term ones.
Q: How much higher for Apple (AAPL)?
A: It’s already unbelievably high, we hit $228 yesterday. Today it’s $228.73, a new all-time high. When it was at $150, my 2018 target was initially $200. Then I raised it to $220. I think it is now overbought territory, and you would be crazy to initiate a new entry here. We could be setting up for another situation where the day they bring out all their new phones in September, the stock peaks for the year and sells off shortly after.
Global Market Comments
August 16, 2018
Fiat Lux
SPECIAL ARTIFICIAL INTELLIGENCE ISSUE
Featured Trade:
(NEW PLAYS IN ARTIFICIAL INTELLIGENCE),
(NVDA), (AMD), (ADI), (AMAT), (AVGO), (CRUS),
(CY), (INTC), (LRCX), (MU), (TSM)
Global Market Comments
August 15, 2018
Fiat Lux
Featured Trade:
(WHY BONDS CAN'T GO DOWN),
(TLT), (TBT), ($TNX), (TUR), (TSLA),
(HOW TO MAKE MORE MONEY THAN I DO),
(AMZN), (LRCX), (ABX), (AAPL), (TSLA), (NVDA)
By now, most of you have figured out that I love calling readers every day and milking them for ideas on how to improve my service.
Often, they think I am an imposter, a telephone salesman, a machine, or an algorithm. It's only after listening for a few seconds that they recognize my voice from the biweekly strategy webinars and realize that it's the real me.
I don't do this to get renewals, because everyone renews anyway. Where else do you get a 62% annual return with no serious drawdowns?
No, I do it because the information I pick up from subscribers is golden. Some of my best Trade Alerts are inspired by reader questions.
One of my favorite Einstein quotes is that "There are no stupid questions, only stupid answers."
In fact, I have discovered that a lot of subscribers are making much more money from my service than I do.
I'll tell you how they do it.
First, let me remind readers that every Trade Alert I send out includes recommendation for a call or put option spread, a single stock, or an ETF.
The trading performance charts that we published are based on the options spread positions only.
WARNING: What worked swimmingly over the past 10 years is no guarantee that it will work next year, but I thought you'd like to know anyway.
1) Raise the Strike Prices
Move the strike prices up by a dollar. So instead of buying the Barrick Gold (ABX) September $15-$16 deep in-the-money vertical bull call spread, you pick up the $16-$17 call spread instead.
Generally, you make a profit that is 50% greater on this higher spread than with the original recommendation. But you are also taking on higher risk.
When 90% or more of our Trade Alerts are successful this has been a pretty good bet to make.
2) Buy the Call Options Only
Instead of buying the call spread, you buy the call option only in half the size.
When it works, your upside is unlimited. When it doesn't, you just write off the total value of your investment.
This is a great approach when the stocks I recommend take off like a rocket and double or more, as have Apple (AAPL), Amazon, (AMZN), Tesla (TSLA), Lam Research (LRCX), and NVIDIA (NVDA).
Option spread buyers leave a lot of money on the table with this scenario, but get lower performance volatility.
I have observed that many of my Australia readers pursue this approach, as they are fighting a 14-hour time zone disadvantage with the New York Stock Exchange. Not many civilians want to trade at 4:00 AM no matter how much it pays.
The payoff is that they earn about double what I do trading the same stocks.
3) Buy a 2X or 3X Leveraged ETF
This is moving out even further off the risk curve.
Almost every one of the 101 S&P 500 sectors have listed for them 2X and 3X bull and bear ETF's. In theory, the best-case scenario for one of these funds is that they will rise three times as fast as the underlying basket.
In theory, I said.
By the time you take out management fees, tracking error, and execution costs, and wide spreads, you are more likely to get 2.5 times the basket appreciation, if not 2X.
I normally steer investors away from 3X funds. But 401k traders, who are not allowed to deal in stock options, swear by them.
4) Trade Futures
This is a favorite of foreign exchange, precious metals, and bond traders. A futures contract can deliver up to 100 times the performance of the underlying currency, metal, or Treasury bond.
Get a good entry point, run a tight stop loss, and the potential gains can be astronomical.
Every year we get a couple of followers who earn 1,000% profits using our market timing for entry and exit point, and they always do it through the futures markets. Yes, that is a 10X return.
This is also a much higher risk, but higher return strategy. Your broker will present greater disclosure requirements and need a higher clearance level.
But potentially retiring in a year is ample bait for many professionals to go through with this.
5) Read the Research
I know a lot of you only buy this service only for our industry beating Trade Alert service.
But my decade-long experience in watching readers succeed, or fail, in their executions is that the more research they read, the more money they make.
Don't try to skim though with a minimal effort.
It's really very simple. The more work you put into this, the more profit you take out.
Understanding fully what is happening in the markets, indeed the entire global economy, will give you the confidence you need to take on bigger positions and make A LOT more money.
There is no free lunch. There is no Holy Grail.
Having said all that, good luck and good trading.
Global Market Comments
August 10, 2018
Fiat Lux
Featured Trade:
(AUGUST 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TBT), (PIN), (ISRG), (EDIT), (MU), (LRCX), (NVDA),
(FXE), (FXA), (FXY), (BOTZ), (VALE), (TSLA), (AMZN),
(THE DEATH OF THE CAR),
(GM), (F), (TSLA), (GOOG), (AAPL)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader August 8 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: What should I do about my (SPY) $290-295 put spread?
A: That is fairly close to the money, so it is a high-risk trade. If you feel like carrying a lot of risk, keep it. If you want to sleep better at night, I would get out on the next dip. The market has 100 reasons to go down and two to go up, the possible end of trade wars and continuing excess global liquidity, and the market is focusing on the two for now.
Q: What are your thoughts on the ProShares Ultra Short Treasury Bond Fund (TBT)?
A: Short term, it's a sell. Long term it's a buy. It's possible we could get a breakout in the bond market here, at the 3% yield level. If that happens, you could get another five points quickly in the TBT. J.P. Morgan's Jamie Diamond thinks we could hit a 5% yield in a year. I think that's high but we are definitely headed in that direction.
Q: What are your thoughts on the India ETF (PIN)?
A: It goes higher. It's been the best-performing emerging market, and a major hedge fund long for the last five years. The basic story is that India is the next China. Indicia is the next big infrastructure build-out. Once India gets regulatory issues out of the way, look for more continued performance.
Q: What are your thoughts on Intuitive Surgical (ISRG)?
A: Intuitive is a kind of microcosm in the market right now. It's trading well above a significant support level, which happens to be $508. I don't typically like Intuitive Surgical stock because the options are very inefficient, and therefore very pricey. I think, at this point, there is a bigger possibility of it breaking down than continuing to head higher. In other words, it's overbought. Buy long term, the sector has a giant tailwind behind it with 80 million retiring baby boomers.
Q: What are your thoughts on the entire chip sector, including Micron (MU), Lam Research (LRCX) and NVIDIA (NVDA)?
A: NVIDIA is the top of the value chain in the entire sector, and it looks like it wants to break to a new high. My target is $300 by the end of the year, from the current $240s. I think the same will happen with Lam Research (LRCX), which just had a massive rally. All three of these have major China businesses; China buys 80% of its chips from the U.S. You can do these in order in the value chain; the lowest value-added company is Micron, followed by Lam Research, followed by NVIDIA, and the performance reflects all of that. So, I think until we get out of the trade wars, Micron will be mired down here. Once it ends, look for it to get a very sharp upside move. Lam is already starting to make its move and so is NVIDIA. Long term, Lam and NVIDIA have doubles in them, so it's not a bad place to buy right here.
Q: You once recommended the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ) which is now down 10%, one of your few misses. Keep or sell?
A: Keep. It's had the same correction as the rest of Technology. All corrections in Technology are short term in nature--the long-term bull story is still there. (BOTZ) is a huge play on artificial intelligence and automation, so that is going to be with us for a long time, it's just enduring a temporary short-term correction right now, and I would keep it.
Q: What do you have to say about the CRISPR stocks like Editas Medicine Inc. (EDIT)?
A: The whole sector got slammed by a single report that said CRISPR causes cancer, which is complete nonsense. So, I would use this sell-off to increase your current positions. I certainly wouldn't be selling down here.
Q: What could soften the strong dollar?
A: Only one thing: a recession in the U.S. and an end to the interest-raising cycle, which is at least a year off, maybe two. Keep buying the U.S. dollar and selling the currencies (FXE), (FXY), (FXA) until then.
Q: What are your thoughts on Baidu and Alibaba?
A: I thought China tech would get dragged down by the trade wars, but they behaved just as well as our tech companies, so I'd be buying them on dips here. Again, if we do win the trade wars, these Chinese tech companies could rocket. The fundamental stories for all of them is fantastic anyway, so it's a good long-term hold.
Q: Have you looked at Companhia Vale do Rio Doce (VALE)? (A major iron ore producer)
A: No, I've kind of ignored commodities all this year, because it's such a terrible place to be. If we had a red-hot economy, globally you would want to own commodities, but as long as the recovery now is limited to only the U.S., it's not enough to keep the commodity space going. So, I would take your profits up here.
Q: With Tesla (TSLA) up $100 in two weeks should I sell?
A: Absolute. If the $420 buyout goes through you have $40 of upside. If it doesn't, you have $140 of downside. It's a risk/reward that drives like a Ford Pinto.
Q: How long will it take global QE (quantitative easing) to unwind?
A: At least 10 years. While we ended our QE four years ago, Europe and Japan are still continuing theirs. That's why stocks keep going up and bonds won't go down. There is too much cash in the world to sell anything.
Q: Apple (AAPL)won the race to be the first $1 trillion company. Who will win the race to be the first $2 trillion company?
A: No doubt it is will be Amazon (AMZN). It has a half dozen major sectors that are growing gangbusters, like Amazon Web Services. Food and health care are big targets going forward. They could also buy one of the big ticket selling companies to get into that business, like Ticketmaster.
Good Luck and Good trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
