Global Market Comments
July 8, 2019
Fiat Lux
Featured Trade:
(STANDBY FOR THE COMING GOLDEN AGE OF INVESTMENT),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)
Global Market Comments
July 8, 2019
Fiat Lux
Featured Trade:
(STANDBY FOR THE COMING GOLDEN AGE OF INVESTMENT),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)
I believe that the global economy is setting up for a new Golden Age reminiscent of the one the United States enjoyed during the 1950s, and which I still remember fondly.
This is not some pie in the sky prediction.
It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million “Gen Xers”.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, health care, and “RISK OFF” assets like bonds.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward six years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xers being chased by 85 million of the “millennial” generation trying to buy their assets.
By then, we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes.
The middle-class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.
The stock market rockets in this scenario.
Share prices may rise very gradually for the rest of the teens as long as tepid 2-3% growth persists.
After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 100,000 by 2030.
If I’m wrong, it will hit 200,000 instead.
Emerging stock markets (EEM) with much higher growth rates do far better.
This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well.
The 100-year supply of natural gas (UNG) we have recently discovered through the new “fracking” technology will finally make it to end users, replacing coal (KOL) and oil (USO).
Fracking applied to oilfields is also unlocking vast new supplies.
Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC’s share of global reserves is collapsing.
This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.
Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five-year low.
Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation by 2020.
I now have an all-electric garage with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow.
The net result of all of this is lower energy prices for everyone.
It will also flip the US from a net importer to an exporter of energy with hugely positive implications for America’s balance of payments.
Eliminating our largest import and adding an important export is very dollar-bullish for the long term.
That sets up a multiyear short for the world’s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.
Accelerating technology will bring another continuing positive. Of course, it’s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos.
But at the enterprise level, this is enabling speedy improvements in productivity that is filtering down to every business in the US, lower costs everywhere.
This is why corporate earnings have been outperforming the economy as a whole by a large margin.
Profit margins are at an all-time high.
Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development.
When the winners emerge, they will have a big cross-leveraged effect on economy.
New health care breakthroughs will make serious disease a thing of the past which are also being spearheaded in the San Francisco Bay area.
This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented.
It raised $3 billion through a bond issue to fund its own research even though it couldn’t afford it.
I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years, they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday.
What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver’s seat on these innovations? The USA.
There is a political element to the new Golden Age as well. Gridlock in Washington can’t last forever. Eventually, one side or another will prevail with a clear majority.
This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for.
That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don’t need the maximum $30,156 annual supplement. Nor do I.
The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cut defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.
I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up.
A Pax Americana would ensue.
That means China will have to defend its own oil supply, instead of relying on us to do it for them for free. That’s why they have recently bought a second used aircraft carrier. The Middle East is now their headache.
The national debt then comes under control, and we don’t end up like Greece.
The long-awaited Treasury bond (TLT) crash never happens.
The reality is that the global economy is already spinning off profits faster than it can find places to invest them, so the money ends up in bonds instead.
Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won’t kick in for another decade.
But some individual industries and companies will start to discount this rosy scenario now.
Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.
Global Market Comments
June 17, 2019
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE SCARY THING ABOUT THE MARKETS)
(SPY), (TLT), (GLD), (TSLA)
There’s one big scary thing about the markets right now. As I mentioned last week, the major indexes are sitting on a precipice of a right shoulder of a ‘Head and Shoulders” top.
Traders are expecting a trade war settlement and a Fed interest rate cut in July. While the economy in no way needs a rate cut, stock markets desperately do. In fact, they need another dose of steroids just to remain level. It reminds me of a certain recent California governor (I’ll be back).
If we get them, markets will grind up a few percentage points to a new all-time high. If we don’t, the top is in, possibly for this entire economic cycle, and a 25% swan dive is in the cards.
It's what traders call “Asymmetric risk.” If we get the bull case, you make sofa change. If we don’t, you lose dollars. It’s what I call picking up pennies in front of a steamroller. But in the 11th year of a bull market, that’s all you get. The truly disturbing part of this is that this setup is happening with valuation close to a historic high at a 17.5X price earnings multiple.
We’ll get a better read on Wednesday at 2:00 PM EST when the Fed announces its decision on interest rates. The post meeting statement will be more crucial than usual. What’s in a word, Shakespeare might have asked? If the Fed drops the word “Patient”, then a July interest rate cut is a sure thing. The algos reading the release at the speed of light will be the first to know.
It was initially off to the races last Monday when the one-week trade war with Mexico came to an end and some immigration issues were settled.
The tariffs are off, even though the Mexicans say the terms were already agreed to months ago.
There is no big ag buy either. The economy is still sliding into a recession, and the bond market has already discounted three of the next five quarter point rate cuts.
US exports are in free fall, with Long Beach, America’s busiest port, seeing seven straight months of declines in shipping volumes. They were off 19.5% in May alone. Recession indicator no. 199.
Buy bonds (TLT), gold (GLD), and short the US dollar (UUP), says my old friend, hedge fund legend Paul Tudor Jones. He is certainly reading the writing on the wall. The legendary trading billionaire believes that plunging interest rate cuts are going to dominate the scenery for the rest of 2019.
Tanker attacks sent oil soaring. After 50 years of waiting, it finally happened, torpedo attacks against two tankers in the Straits of Hormuz bound for China. Oil rocketed 4%, then gave up the rally, and stocks are amazingly up on the day.
Go figure. A decade ago, this would have been a down 1,000-point day for stocks and Texas tea would have soared to $100. Clearly, tensions in the Middle East are ratcheting up, but with the US now the swing oil producer, why bother?
With US oil production climbing to 17 million barrels a day by 2024, up from 5 million b/d in 2005, the Middle East can blow itself up and nobody cares. The US by then will have created an entire Saudi Arabia’s worth of new oil production over a 20-year period. US troops there are defending China’s oil supply, not ours.
The US budget deficit soared by 38.7% YOY, to $739 billion. It’s the fastest growth in government borrowing since WWII. Much of today’s economic growth in on credit and this can only end in tears. Enjoy the good times while they last.
Major semiconductor maker Broadcom (AVGO) disappointed hugely on earnings, tanking the market, and the stock plunged a heartbreaking 12%. The trade war gets the entire blame. It turns out that Broadcom’s biggest customer is the ill-fated Huawei whose CFO is now sitting in a Canadian jail awaiting extradition to the US. Other semiconductor stocks especially got slammed. The canary in the coal mine just died.
China’s industrial production hit a 17 year low, and yes, it’s because of the trade war, trade war, trade war. When your biggest customers come down with the Asian flu, you at the very least catch a severe cold. Start shopping for Robitussin.
Global Trading Dispatch closed the week up 15.38% year-to-date and is down by -0.34% so far in June. That’s show business. You work your guts out trying to understand this market and it turns out to be for free. Or worse yet, you get a bill without an amount due. This is something that regular salary earners don’t understand.
My nine and a half year profit appreciated to +315.52%, pennies short of a new all-time high. I think I’ll be flatlining at a high for a while to create a base from which I can jump to new highs. The average annualized return ticked up to +33.21%. With the trade war with China raging, I am now 100% in cash with Global Trading Dispatch and 100% cash in the Mad Hedge Tech Letter.
My twin bets on Tesla (TSLA) worked out very nicely and I took profits on both. It was an option play whereby I expected that (TSLA) shares would not fall below $150 or rise above $240 by the June 21 option expiration.
Several followers have seen good success using every Tesla dip below $200 to go naked short August $100 or $125 Tesla puts in small quantities for a decent amount of change.
The long view here is to wait for some kind of summer meltdown and then go long into a year-end rally as 2020 election-related turbochargers start to hit the market.
The coming week will be all about waiting for the Fed to jump. We also get some important updates on housing data.
On Monday, June 17 at 8:30 AM EST the Empire State Manufacturing Index is out.
On Tuesday, June 18, 8:30 AM EST, the May Housing Starts are released.
On Wednesday, June 19 at 2:00 PM EST, the Federal Reserve decision on interest rates is announced. Vital is whether the word “Patient” remains in their statement.
On Thursday, June 20 at 8:30 AM, the Weekly Jobless Claims are printed. We also get the Philadelphia Fed Manufacturing Index.
On Friday, June 21 at 10:00 AM, we learn May Existing Home Sales. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, by the time you read this, I will be winging my way somewhere over the Pacific Ocean. It’s a 14-hour flight from California to New Zealand, and the plane carries two crews.
It’s a genuine four movie flight. I’ll take off on Sunday and don’t arrive until Tuesday because I’ll be crossing the International Dateline. When I arrive, I’ll feel like death warmed over. It’s all in the name of research and finding that next great trading idea.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
June 4, 2019
Fiat Lux
Featured Trade:
(WEDNESDAY, JUNE 26 SYDNEY, AUSTRALIA STRATEGY LUNCHEON)
(TEN UGLY MESSAGES FROM THE BOND MARKET),
(TLT), (TBT), (USO), (GLD), (GS), (SPY)
Global Market Comments
June 3, 2019
Fiat Lux
Featured Trade:
(MONDAY, JUNE 24 MELBOURNE, AUSTRALIA STRATEGY LUNCHEON)
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR WHAT A WASTE OF TIME!),
(SPY), ($INDU), (JPM), (MSFT), (AMZN), (TSLA)
Global Market Comments
May 24, 2019
Fiat Lux
Featured Trade:
(MONDAY JULY 8 VENICE, ITALY GLOBAL STRATEGY LUNCHEON)
(FROM THE FRONT LINE OF THE TRADE WAR)
(SPY), (AAPL), (TLT)
Poke your hand into a hornet's nest and you can count on an extreme reaction, a quite painful one.
As California is the growth engine for the entire US economy, accounting for 20% of US GDP, it is no surprise that it has become the primary target of Chinese retaliation in the new trade war.
The Golden State exported $28.5 billion worth of products to China in 2017, primarily electronic goods, with a host of agricultural products a close second.
In the most devious way possible, the Middle Kingdom targeted Trump supporters in the most liberal state in the country with laser-like focus. California exports 46% of its pistachios to China, followed by 35% of its exported plums, 20% of exported oranges, 12% of its almonds.
By comparison, California imported gargantuan $160.5 billion worth of goods from China last year, mostly electronics, clothing, toys, and other low-end consumer goods.
Some $16 billion of this was recycled back into the state via investment in real estate and technology companies.
Anecdotal evidence shows that figure could be dwarfed by the purchase of California homes by Chinese individuals looking for a safe place to hide their savings. Local brokers report that up to one-third of recent purchases have been by Chinese nations paying all cash.
The Chinese tried to spend more. Their money is thought to be behind Broadcom’s (AVGO) $105 billion bid for QUALCOMM (QCOM), which was turned down for national security reasons.
The next big chapter in the trade war will be over the theft of intellectual property, and that one will be ALL about the Golden State.
Also at risk is virtually Apple’s (AAPL) entire manufacturing base in China where more than one million workers at Foxconn assemble iPhones, Macs, iPads, and iPods. It took Apple 20 years to build this facility. It will take 20 more years to move it.
The Cupertino giant could get squeezed from both sides. The Chinese could interfere with its production facilities, or its phones could get slapped with an American import duty.
By comparison, in 2017 the US imported a total of $505.6 billion in goods from China and exported $130.4 billion. Against this imbalance, the US runs the largest surplus in services.
The last Chinese escalation will involve a 25% tariff on American pork and recycled aluminum. Who is the largest pork producer in the US? Iowa, with $4.2 billion worth, the location of an early presidential election primary.
Beyond that, Beijing has darkly hinted that is will continue to boycott new US Treasury bond auctions, as it has done for the past six months, or unload some of its massive $1.6 trillion in bond holdings.
Given the price action in the bond market today, with the United States Treasury Bond Fund (TLT) at a two-year high, I would say that the market doesn’t believe that for two seconds. The Chinese won’t cut off their nose to spite their face.
The administration is discovering to its great surprise that its base is overwhelming against a trade war. And as business slows down, it will become evident in the numbers as well.
The US was the big beneficiary of the global trading system. Why change the rules of a game we are winning?
Still, national pride dies hard.
How soon will the trade war end? Does China want to help Donald Trump get elected in 2020, or his opponent?
It looks like it is going to be a long slog.
Global Market Comments
May 13, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR A GAME OF CHICKEN),
(SPY), (TLT), (UBER), (BA), (SOYB)
In summarizing the global financial system today, I recall the classic fifties James Dean movie, Rebel Without a Cause. Two cars are racing towards a cliff and the chicken has to bail out first. But the chicken gets his jacket sleeve stuck on a door knob, and his car dives over the cliff and crashes and burns.
Thus, here we are entranced by the world’s two largest economies in a race towards a cliff, but this time, it’s an economic one. Will rational minds prevail, or will our leaders miscalculate and plunge the world into a Great Depression? In other words, will the crashing car land on us?
That’s what happened during the 1930s when after the 1929 stock market crash lead to tit for tat tariffs that eliminated economic growth for a decade. It was only after the massive defense spending of WWII that the slump ended. This time the script is playing out exactly the same way.
Certainly, the stock market believes in the rosier scenario. The Dow average only fell 1,278 points last week. In a real “NO DEAL” case, it would have given up the full 4,500 points it gained since December.
A prolonged trade war until the next election would take us well into a recession and back to down the 18,000 that prevailed before the last presidential election.
For the short term, the S&P 500 (SPY) is clearly gunning for the 200-day moving average at $275. That would take us down 6.78% from the recent high. I have been using soybean prices (SOYB) as an indicator of China trade negotiation success. It hit a seven-year low this morning.
It's all about trade talks all the time now and nobody has the slightest idea of what is coming next. So, I’ll sit back and wait until the Volatility Index (VIX) hits $30, or the (SPY) drops to $275 before entertaining another trade alert. Until then, I’ll maintain my 100% cash position.
I reach all these conclusions after two days of solid sleep, recovering from four days of bacchanalia at the SALT conference in Las Vegas. I'll write more about this when the market stops crashing long enough for me to write it up.
Long term followers of this letter are laughing because they recall that two years ago I predicted that the next bear market would start precisely on May 10 at 4:00 PM EST. That estimate was arrived at by an intricate calculation of the timing of a coming yield curve inversion and recession.
The S&P 500 (SPY) hit an all-time high of $295 on May 2 at 4:00 PM EST, seven trading days early. Who knew that it would be a Tweet that did it?
Uber went public last week, likely at an $82 billion valuation which sucked $10 billion out of the market. Not helping was a stock market crash and an Uber driver’s strike that spread from the US to London. After car operating expenses are taken out, drivers only net a paltry $5 an hour.
The Fed warned about high stock prices, and business borrowing is at an all-time high just two days before the market dumped. Maybe we should listen to our central bank?
US Job Openings soared in March, by a stunning 346,000 to 7.5 million. This is what tops look like.
Bonds exploded to the upside on stock market panic, as the world stampedes to “RISK OFF.” There’s a great (TLT) short sale setting up here, but not quite yet.
The US trade deficit hit a five-year low in March, down 16.2% to $20.7 billion. This is due to a big 23.7% jump in US exports to China, thanks to China’s massive economic stimulus program, not ours. But at what cost?
The Mad Hedge Fund Trader dumped its last position Monday morning and, as a result, was completely up 50 basis points on the week. You may have noticed that I have been stopping out of positions must faster than usual recently and now you know the reason why.
Global Trading Dispatch closed the week up 14.59% year to date and is down -1.13% so far in May. My trailing one-year retreated to +18.96%.
Mad Hedge Technology Letter gave back some ground with two new very short-term positions in Intuit (INTU) and Google (GOOG) which expire on Friday
Some 11 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.
My nine and a half year profit rose slightly to +314.73%. With the markets in free fall, I am now 100% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter. I’ll wait until the markets find their new range and then jump in on the long side.
The coming week will be pretty boring on the data front.
On Monday, May 13 at 11:00 AM, the April Survey of Consumer Sentiment is announced.
On Tuesday, May 14, 6:00 AM EST, the NFIB Small Business Index is out.
On Wednesday, May 15 at 8:30 AM, March Retail Sales are released
On Thursday, May 16 at 8:30 AM, Weekly Jobless Claims are published. March Housing Starts to come out at the same time.
On Friday, May 17 at 10:00 AM, March Consumer Sentiment is printed.
As for me, I will be flying back from Las Vegas over the weekend having attended the SALT conference and my own Mad Hedge Fund Trader strategy luncheon. The highlight of the week was listening to Woodstock veterans Credence Clearwater Revival. I’ll write more about it next week.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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