Global Market Comments
June 25, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR IS THIS A 1999 REPLAY?),
(AAPL), (FB), (NFLX), (AMZN), (GE), (WBT),
(JOIN ME ON THE QUEEN MARY 2 FOR MY JULY 11, 2018 SEMINAR AT SEA),
(JUNE 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(SQ), (PANW), (FEYE), (FB), (LRCX), (BABA), (MOMO), (IQ), (BIDU), (AMD), (MSFT), (EDIT), (NTLA), Bitcoin, (FXE), (SPY), (SPX)
Global Market Comments
June 1, 2018
Fiat Lux
SPECIAL REAL ESTATE ISSUE
Featured Trade:
(TUESDAY, JUNE 12, 2018, NEW ORLEANS, LA, GLOBAL STRATEGY LUNCHEON),
(WHY YOUR FANG STOCKS ARE ABOUT TO DOUBLE IN VALUE),
(FB), (AAPL), (NFLX), (GOOGL), (LMT), (ROKU),
(HERE IS YOUR TOP-PERFORMING INVESTMENT FOR THE NEXT FIVE YEARS),
(ITB), (PHM), (KBH), (DHI), (AVB), (CPS)
Having been in this market for yonks, ages, and even a coon?s age, I have seen trading strategies come and go.
First, there was the nifty fifty during the 1960?s. Junk bonds had their day in the sun. Then portfolio insurance was all the rage.
Oops!
While the dollar was weak, international diversification was the flavor of the day. After foreign stocks turned bitter, the IPO mania and the Dotcom bubble of the nineties followed.
Macro trading dominated the new Millennium until the high frequency traders took over.
What is the cutting edge management strategy today?
According to my friend, Anthony Scaramucci, of Skybridge Capital, activist shareholder trading now has the unfair advantage.
Anthony, known as the ?Mooch? to his friends, is so convinced of the merit of this bold, in-your-face approach that he has devoted nearly 40% of his assets to this aggressive posture.
That is no accident.
Have you ever heard the term ?unintended consequences?? Scaramucci argues that The Financial Stability Act of 2010, otherwise known as Dodd-Frank produced that effect with a turbocharger.
The Act brought in a raft of new shareholder rights intended to help Mom & Pop. But activist investors have, so far, been the prime beneficiaries of the reform, using the new regulations to shake down companies for quick profits.
Historic low interest rates are allowing them to leverage up at minimal cost, increasing their firepower.
These include known sharks (once spurned as ?green mailers?) like my former neighbor, Carl Icahn, and his younger, more agile competitor, Bill Ackman.
They can simply buy a small number of shares in a target company and demand a management change, share buy backs, the spinning off of assets, several seats on the board, and even making allegations of criminal activity, which are often unfounded.
A message from Icahn on the voicemail is not something management is eager to hear.
He even shook down Apple (AAPL) last year, with great success, harvesting a near double on the trade.
This is why names like Herbalife (HLF), Netflix (NFLX), and JC Penny?s (JCP) are constantly bombarding the airwaves.
The net result of this is that savvy activist shareholders have effectively replaced the traditional ?buy and hold? strategy as a way to add alpha, or outperformance.
This has enabled activist oriented hedge funds to beat the pants off of traditional macro hedge funds because many historical cross asset relationships they follow have broken down.
Tell me about it!
Suddenly, the world no longer makes sense to them and has apparently gone mad, at the investors? expense. Long/short equity managers, which comprise 43% of the funds out there, are also underperforming for the sixth consecutive year.
The activist managers themselves justify their often harsh actions by arguing that individual shareholders can ride to riches on their coattails. Shaking up management can result in better-run companies, even if it is at the point of a gun.
Activism accelerates evolution, breaks up clubby boards of insiders, and enhances the bottom line. Corporations can be forced to retool and restructure.
How does the individual investor get involved in the new wave of activist investors? The short answer is that they don?t. There are few, if any, such exchange traded funds (ETFs) in existence.
Doing the quantitative screens to generate short lists of potential activist targets, and then listening to the jungle telegraph regarding who is coming into play, are well beyond the resources of your average Joe.
You can try to give your money to the best activist managers. But they are either closed to new investors, or have very high minimum initial investments, often in the $1-$10 million range.
If you are lucky enough to get your dosh in, you will find the talent very expensive. Activist funds are one of the last redoubts of the old 2%/20% management fee and performance bonus structure. And ?hockey stick? bonus schedules are not unheard of.
When I ran my old hedge fund, we made 40% a year like clockwork. I took the first 10%, the limited partners the remaining 30% and they were thrilled to get it.
And you wonder why the small guys feel the market is rigged.
The activist trend won?t last forever. Interest rates will inevitably rise, making the strategy expensive to finance. If the stock market keeps rising, as I expect, then cheap targets will become as scarce as hen?s teeth.
Eventually, gobs of money will pour into the strategy, compressing returns as the Johnny-come-latelys pile in. In the end, trading around activist shareholders will get tossed into the dustbin of history, along with all the other investment fads.
Checking in With the ?Mooch?
It?s fall again, when my most loyal readers are to be found taking transcontinental railroad journeys, crossing the Atlantic in an a first class suite on the Queen Mary 2, or getting the early jump on the Caribbean beaches.
What better time to spend your trading profits than after all the kids have gone back to school, and the summer vacation destination crush has subsided.
It?s an empty nester?s paradise.
Trading in the stock market is reflecting as much, with increasingly narrowing its range since the August 24 flash crash, and trading volumes are subsiding.
Is it really September already?
It?s as if through some weird, Rod Serling type time flip, August became September, and September morphed into August. That?s why we got a rip roaring August followed by a sleepy, boring September.
Welcome to the misplaced summer market.
I say all this, because the longer the market moves sideways, the more investors get nervous and start bailing on their best performing stocks.
The perma bears are always out there in force (it sells more newsletters), and with the memories of the 2008 crash still fresh and painful, the fears of a sudden market meltdown are constant and ever present.
In fact, nothing could be further from the truth.
What we are seeing unfold here is not the PRICE correction that people are used to, but a TIME correction, where the averages move sideways for a while, in this case, some five months.
Eventually, the the moving averages catch up, and it is off to the races once again.
The reality is that there is a far greater risk of an impending market melt up than a melt down. But to understand why, we must delve further into history, and then the fundamentals.
For a start, most investors have not believed in this bull market for a nanosecond from the very beginning. They have been pouring their new cash into the bond market instead.
Now that bonds have given up a third of 2015?s gains in just a few weeks, the fear of God is in them, and dreams of reallocation are dancing in their minds.
Some 95% of active managers are underperforming their benchmark indexes this year, the lowest level since 1997, compared to only 76% in a normal year.
Therefore, this stock market has ?CHASE? written all over it.
Too many managers have only three months left to make their years, lest they spend 2016 driving a taxi for Uber and handing out free bottles of water. The rest of 2015 will be one giant ?beta? (outperformance) chase.
You can?t blame these guys for being scared. My late mentor, Morgan Stanley?s Barton Biggs, taught me that bull markets climb a never-ending wall of worry. And what a wall it has been.
Worry has certainly been in abundance this year, what with China collapsing, ISIL on the loose, Syria exploding, Iraq falling to pieces, the contentious presidential elections looming, oil in free fall, , the worst summer drought in decades, flaccid economic growth, and even a rampaging Donald Trump.
We also have to be concerned that my friend, Fed governor Janet Yellen, is going to unsheathe a giant sword and start hacking away at bond prices, as she has already done with quantitative easing (I?ve been watching Game of Thrones too much).
This will raise interest rates sooner, and by more.
Let me give you a little personal insight here into the thinking of Janet Yellen. It?s all about the jobs. Any hints about rate rises have been head fakes, especially when they come from a small, anti QE Fed minority.
When in doubt, Janet is all about easy money, until proven otherwise. Until then, think lower rates for longer, especially on the heels of a disappointing 173,000 August nonfarm payroll.
So I think we have a nice set up here going into Q4. It could be a Q4 2013 lite--a gain of 5%-10% in a cloud of dust.
The sector leaders will be the usual suspects, big technology names, health care, biotech (IBB), and energy (COP), (OXY). Banks (BAC), (JPM), (KBE) will get a steroid shot from rising interest rates, no matter how gradual.
To add some spice to your portfolio (perhaps at the cost of some sleepless nights), you can dally in some big momentum names, like Tesla (TSLA), Netflix (NFLX), Lennar Husing (LEN), and Facebook (FB).
You Mean it?s September Already?
Mad Day Trader, Jim Parker, thinks that the next three to six months will be a tough time for the financial markets. They won?t crash, but won?t break out to new highs either.
Instead, they will stay confined to technically driven, narrow, low volume ranges that will cause traders to tear their hair out. It will be an environment where it will be tough for anyone to make money. The long only crowd will be particularly challenged. Better to take your summer vacation early this year, and make it a long one.
Jim uses a dozen proprietary short-term technical and momentum indicators to generate buy and sell signals, which he has developed over 40 years of trading in the Chicago futures markets. Last year Jim?s Trade Alerts generated returns for followers well into triple digits. He absolutely nailed the performance of every asset class this year in his Q1 Medium Term Outlook (click here for the link at http://madhedgefundradio.com/january-2-2014-mdt-medium-term-outlook-1st-qtr-2014/ . Ignore him at your peril.
Parker has been using NASDAQ (QQQ) as his lead contract for 2014. When it rolled over two weeks ago, it broke momentum across asset classes. Look no further than the biotech area, formerly the hottest in the market. It?s dramatic, sudden reversal, along with the losses seen in other speculative names, like Tesla (TSLA), Netflix (NFLX), and Herbalife (HLF), indicate that the easy money is gone.
The big confirming move for this cautious stance has been in the Treasury bond market (TLT). Its failure to break down has amazed many strategists. Instead of the ten-year bond yield exploding to a 3.05% yield as expected, it ran all the way down to 2.58%. This was the tell that the bull markets days were numbered. Bond prices are now threatening to break to new highs, taking yields to 2.50% or lower.
The other clue to the behavior of this years markets has been the Japanese yen. While the yen was plunging, stocks and other risk assets soared. That came to an abrupt halt on the last trading day of 2013. Notice that since then, the major stock indexes have not been able to hold on to any gains whatsoever.
This is because traders borrow, and then sell the Japanese currency, to fund any new positions. A flat lining yen means that risk taking has ceased, and that?s exactly what we have seen so far in 2014.
It won?t always be this bad. A long period digesting the meteoric gains of the past two and five years could be followed by a bang up fourth quarter, much like we saw in 2013. The key to success will be not to lose all your money before then.
Here is Jim?s Q2 forecast for each major asset class:
Stocks ? The leadership of NASDAQ is dead and buried for now. Don?t go back in until it closes above 3,745 and holds it. The same is true for the S&P 500 (SPX), which must surpass 1,880 to buy.
Bonds ? It?s alright to hold them here (TLT). If we break the years high at $109.60, it could race up to $114. At that point get out, as risk will be high.
Foreign Currencies - $139.50 has got to be the top in the Euro (FXE). As long as the yen (FXY) is comatose, he doesn?t want to touch it. You want to buy the Australia dollar (FXA) on a break above $91.50. Until then, it will remain trapped in an $88.50-$91.50 range.
Commodities ? The fireworks are over for now for oil. We need some digestion of the $15 move from $92 before we can revisit the upside. Hands off, until we break above $101.50. Copper (CU) is at the bottom of an extended range. You would be nuts to go short here, unless of course, we slice through $2.95.
Precious Metals ? Gold (GLD), (GDX) is toast. To see the sell off accelerate when geopolitical risk remains high has to be especially disheartening for the bulls. A retest of the $1,265 low, then $1,180 is in the cards. Unless you went short the barbarous relic the day it peaked last week, avoid.
Agricultural ? Jim called the bottom on this one (DBA), (CORN) at the New Year. Since then, the ags have raced to an intermediate high. The Crimea crisis gave it an added boost. His long side targets for soybeans (SOYB) have all been hit.? Nothing to do here, unless the weather suddenly turns bad.
While the Diary of a Mad Hedge Fund Trader and Global Trading Dispatch focus on investment over a one week to six-month time frame, Mad Day Trader will exploit moneymaking opportunities over a ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. During normal trading conditions, you should receive two to five market updates and Trade Alerts a day.
As with our existing service, you will receive ticker symbols, entry and exit points, targets, stop losses, and regular real time updates. At the end of each day, a separate short-term model portfolio will be posted on the website.
Jim is a 40-year veteran of the financial markets and has long made a living as an independent trader in the pits at the Chicago Mercantile Exchange. He has worked his way up from a junior floor runner, to advisor to some of the world?s largest hedge funds. We are lucky to have him on our team and gain access to his experience, knowledge, and expertise.
I have been following his alerts for the past five years, and his market timing has become an important part of the ?unfair advantage? that I provide readers.
A trading service with this degree of success and sophistication normally costs $20,000 a year. As a client of The Mad Hedge Fund Trader, you can purchase Mad Day Trader alone for $699 a quarter, or $2,000 a year. Or you can buy it as a package together with Global Trading Dispatch, which we call Mad Hedge Fund Trader PRO, for $4,000 a year, a 20% discount to the full retail price.
To learn more about The Mad Day Trader, please visit my website at http://madhedgefundradio.com/mad-day-trader-service/. To subscribe, please click here.
If you want to get a pro rata upgrade from your existing Newsletter or Global Trading Dispatch subscription to Mad Hedge Fund Trader Pro, which includes Mad Day Trader, just email Nancy in customer support at support@madhedgefundtrader.com.
Ignore Him at Your Peril
Let me give you my thinking here. I am a long-term bull, expecting the S&P 500 to be up 10% or more to over 2,000 by yearend, and possibly 20,000 by 2030. But yearend is a long time off (even though every year seems to go by faster). We have just had a massive 11 point pop in the (SPY) during my two week trip to Australia. So a period of digestion is called for.
My (BAC) $15-$16 bull call spread is now naked long, so a little bit of downside protection is justified. Keep in mind that this is only a partial hedge, not a full one. But the additional potential profit from this SPDR S&P 500 March, 2014 $189-$192 bear put spread does lower the breakeven price of the (BAC) position by a respectable 46 cents.
The present dynamics of the market favor this trade. All of the action is now in speculative, momentum driven names like Tesla (TSLA), Netflix (NFLX), Facebook (FB), Priceline (PCLN), and Yelp (YELP), which are not even in the (SPY) index. The big leadership names, like financials (XLF) and energy (XLE) are pretty much dead in the water. As long as this is the case, don?t expect any big moves in the (SPY).
And with a short dated March 21 expiration, we only have 15 trading days where we need to be right on this.
As a rule of thumb, don?t chase this spread trade if the price has already moved more than 2% by the time you get the Trade Alert. Just put in a limit order and if it gets done, great. If not, wait for the next Trade Alert. There will be plenty of fish in the sea.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the trade to come to you. The middle market is the halfway point between the bid and the offered prices that you see on your screen with your online broker.
The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don?t execute the legs individually or you will end up losing much of your profit. Keep in mind that these are ballpark prices only. Spread pricing can be very volatile especially on expiration months farther out.
AT&T (T), or Telephone as we used to call it on the floor on the New York Stock Exchange when we hand traded its shares, enjoyed a nice little 50-cent pop yesterday, to $34, only the second day it managed to rise this year.
The move comes after a federal appeals court in Washington DC ruled that the FCC exceeded its authority when it told Verizon Communication (VZ) that it could not charge different prices to different content providers based on their bandwidth and numbers of users.
This is a reversal of the FCC's "net neutrality" rule and should allow both Verizon and AT&T to increase revenues and help protect their profits from customers who are costing them more money to service. ?Big users of broadband, like Netflix (NFLX) and Amazon (AMZN), saw their shares suffer accordingly.
You would think it would be off to the races for (T). But it won?t, as not all is well with Ma Bell. One of my first jobs at Morgan Stanley some 32 years ago was to break this company up into the seven ?baby bells? at the direction of the Antitrust Division of the Justice Department (I carried the shareholder ballots from one floor of our building to another). The company traded off its local telephone exchanges for the right to go into the computer business. I have been following it ever since.
For a start, (T) is suffering from some major internal cash flow problems. Revenues have been stagnant for years. Its hard-wired infrastructure has been corroding away for years. The capital spending needed to fix this will be a drag on any future earnings, and is unlikely to generate any real payoff. Do you know anyone under the age of 30 who owns a landline? It?s a wireless world, baby. Did I mention that their service sucks beyond belief?
Every pension fund manager in the country already owns this stock for its generous 5.30% dividend yield. One has to ask how long the company can maintain this in the face of a stagnant business in a highly competitive industry. Now that we are in a world of rising long-term interest rates, this yield will provide much less support than it has in the past.
The hedge fund community has been aware of these difficulties for a while, and has been pounding every rally. This is why (T) completely missed out on last year?s ferocious, record setting bull market, posting a zero return for 2013, versus a 26% increase in the main indexes.
AT&T is the oldest stock to inhabit the Dow 30, being a successor to a company founded by Alexander Graham Bell, the inventor of the telephone. It has long been a pillar of the investment establishment (it took a brief vacation from the index after the breakup). Its history mirrors that of American capitalism.
With 100 million customers and a market capitalization of $179 billion, it certainly occupies a big footprint. Time to put this beast out of its misery and retire it to the dustbin of history.
Looks like AT&T is Dialing a Wrong Number
By now, you have figured out that I executed a major ?derisking? of my model trading portfolio today, cutting my exposure by two thirds. Most of these positions only had a few basis points in maximum profit left, so bailing here was a no brainer, a case of ?Basic Risk Control 101.? Better to laugh about the market in a few days or weeks, than cry. My profits this year are so huge that they are well worth defending.
There is an eerie silence going on in the markets now. All real news has ceased. The government data releases that dictate the short-term direction of prices have come to a complete halt, thanks to the government shutdown. The rest of the news is all political, which is to say that it is useless. When markets are driven by opinions instead of facts and data, you want to run a mile.
I recently spoke to some Tea Party activists, and the extent to which they hate President Obama is frightening. They would happily subject the country to another Great Depression if it meant they could be rid of the community activist from Chicago for good.
The debt ceiling crisis gives them the means to do exactly that. Therefore, I believe that the current impasse in Washington will last longer than the market expects. What the Tea Party doesn?t understand is that once you shatter confidence, it is very hard to get it back.
As a result, my friends in the high frequency trading community tell me that the risk of a flash crash is rising. All you need is for the wrong comment at the wrong technical point in the charts on the wrong day and a deluge of cascading selling could result. That day could be October 17.
This is clearly a minority view, but it is not impossible. Take a look at how the momentum names, like Netflix (NFLX) and Herbalife (HLF) are getting hammered today and you?ll see what I mean. This was further confirmed by the volatility index (VIX) breaking through $20 today, up more than 50% from a month ago.
So I?ll let valor be the better part of judgment here and move from a serious ?RISK ON? trading book, to one that is more clearly market neutral. That demands I cash in my winnings in short positions in the Japanese yen (FXY), and my long in Apple (AAPL).
As for my long in the Japanese stock market (DXJ), I?ll have to settle for a stop out with a moderate loss. It?s not the first time that I have lost money in Japan, nor certainly the last. This was the ?Bridge Too Far? among my trades this year.
I still am sticking with my medium term bull case, which sees us moving to new highs by yearend. But we could see one big final flush before we turnaround. That?s when I want to jump in wit both hands and go fully invested once again. To best profit from such a scenario, you have to go into the next dump with the most cash possible. Today?s action gets us close to that point.
