Global Market Comments
February 26, 2019
Fiat Lux
Featured Trade:
(ABOUT THE TRADE ALERT DROUGHT),
(SPY), (GLD), (TLT), (MSFT),
(THE NEW OFFSHORE CENTER: AMERICA)
(TESTIMONIAL)
Posts
Long term subscribers are well aware that I sent out a flurry of Trade Alerts at the beginning of the year, almost all of which turned out to be profitable.
Unfortunately, if you came in any time after January 17 you watched us merrily take profits on position after position, whetting your appetite for more.
However, there was nary a new Trade Alert to be had, nothing, nada, and even bupkiss. This has been particularly true with particular in technology stocks.
There is a method to my madness.
I was willing to bet big that the Christmas Eve massacre on December 24 was the final capitulation bottom of the whole Q4 move down, and might even comprise the grand finale for an entire bear market.
So when the calendar turned the page, I went super aggressive, piling into a 60% leverage long positions in technology stocks. My theory was that the stocks that had the biggest falls would lead the recovery with the largest rises. That is exactly how things turned out.
As the market rose, I steadily fed my long positions into it. As of today we are 80% cash and are up a ballistic 13.51% in 2019. My only remaining positions are a long in gold (GLD) and a short in US Treasury bonds (TLT), both of which are making money.
So, you’re asking yourself, “Where’s my freakin' Trade Alert?
To quote my late friend, Chinese premier Deng Xiaoping, “There is a time to fish, and there is time to mend the nets.” This is now time to mend the nets.
Stocks have just enjoyed one of their most prolific straight line moves in history, up some 20% in nine weeks. Indexes are now more overbought than at any time in history. We have gone from the best time on record to buy shares to the worst time in little more than two months.
My own Mad Hedge Market Timing Index is now reading a nosebleed 74. Not to put too fine a point on it, but you would be out of your mind to buy stocks here. It would be trading malpractice and professional negligent to rush you into stocks at these high priced level.
Yes, I know the competition is pounding you with trade alerts every day. If they work, it is by accident as these are entirely generated by young marketing people. Notice that none of them publish their performance, let alone on a daily basis like I do.
You can’t sell short either because the “I’s” have not yet been dotted nor the “T’s” crossed on the China trade deal. It is impossible to quantify greed in rising markets, nor to measure the limit of the insanity of buyers.
When I sold you this service I promised to show you the “sweet spots” for market entry points. Sweet spots don’t occur every day, and there are certainly none now. If you get a couple dozen a year, you are lucky.
What do you buy at market highs? Cheap stuff. That would include all the weak dollar plays, including commodities, oil, gold, silver, copper, platinum, emerging markets, and yes, China, all of which are just coming out of seven-year BEAR markets.
After all, you have to trade the market you have in front of you, not the one you wish you had.
So, now is the time to engage in deep research on countries, sectors, and individual names so when a sweet spot doesn’t arrive, you can jump in with confidence and size. In other words, mend your net.
Sweet spots come and sweet spots go. Suffice it to say that there are plenty ahead of us. But if you lose all your money first chasing margin trades, you won’t be able to participate.
By the way, if you did buy my service recently, you received an immediate Trade Alert to by Microsoft (MSFT). Let’s see how those did.
In December, you received a Trade Alert to buy the Microsoft (MSFT) January 2019 $90-$95 in-the-money vertical BULL CALL spread at $4.40 or best.
That expired at a maximum profit point of $1,380. If you bought the stock it rose by 10%.
In January, you received a Trade Alert to buy the Microsoft (MSFT) February 2019 $85-$90 in-the-money vertical BULL CALL spread at $4.00 or best.
That expired last week at a maximum profit point of $1,380. If you bought the stock it rose by 12%.
So, as promised, you made enough on your first Trade Alert to cover the entire cost of your one-year subscription ON THE FIRST TRADE!
The most important thing you can do now is to maintain discipline. Preventing people from doing the wrong thing is often more valuable than encouraging them to do the right thing.
That is what I am attempting to accomplish today with this letter.
Global Market Comments
February 25, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or THE BEST OF TIMES AND THE WORST OF TIMES),
(SPY), (TLT), (TLT), (VIX), (KHC), (MAT), (MMT), (GLD)
It is truly the best of times and the worst of times. And it's not a stretch to apply Charles Dickens’ line from the Tale of Two Cities to the stock market these days.
On the one hand, stocks have just delivered one of the sharpest rallies in market history, up a staggering 20% in nine weeks. Everyone is swimming in money once again. It is the kind of move that one sees once a generation, and usually presages the beginning of long term bull markets.
On the other hand, the bull market in stocks is nearly ten years old. Some 13 months ago, the market traded at a lofty multiple of 20X, but earnings were growing at an incredible 26% a year. Today, multiples are at a very high 18X, but earnings growth is zero! This only ends in tears.
Furthermore, the low level of interest rates with the ten year US Treasury bond (TLT) at a subterranean 2.65% suggests that we are on the verge of entering a recession. Warning: bonds are always right.
Of course, it is speculation of a ‘beautiful” trade deal with China that has been driving share prices higher on an almost daily basis. Unfortunately, 90% of the deal has already been discounted in the market. We could be setting up the biggest “Sell on the news of all time.”
If instead, we get a delay of 45-90 days while details are hashed out, markets could move sideways for months. That would be death for Volatility Index (VIX) players which have already seen prices collapse this year from $36 to $13. A return visit to the $9 handle is possible. Yes, the short volatility trade is back in size.
Far and away the most important news of the week was that the Fed Pause Lives! Or so the minutes from the January FOMC meeting imply. Lower interest rates for longer offer more benefits than risks. Less heat from the president too.
Perhaps this is response to economic data that has universally turned bad. Durable Goods dove 1.2%, in January in a big surprise. Recession, here we come!
Europe is falling into recession, and they will likely take us with them. February Eurozone Manufacturing PMI fell to 49.2, a three-year low. You obviously haven’t been buying enough Burberry coats, Mercedes, or French wine.
It was a very rough week for some individual stocks.
The Feds subpoenaed Kraft Heinz (KHC), and stock dove 27% over accounting problems. Warren Buffet took a one-day $4 billion hit. What is really in that ketchup anyway besides sugar and red dye number two? Avoid (KHC).
No toys for Mattel (MAT) which saw the worst stock drop in 20 years on the back of poor earnings and worse guidance. Another leading indicator of a weak economy. Barbie isn’t putting out.
It wasn’t all bleak.
Walmart (WMT) delivered online sales up 46% in Q4. Are they the next FANG? Same-store sales jump at the fastest pace in ten years on soaring grocery sales. The Wall family certainly hopes so. Buy (WMT) on dips.
Gold hit a ten-month high, and we are long. The new supercycle for commodities has already started. Get on board before the train leaves the station. Buy (GLD).
February has so far come in at a hot +4.07% for the Mad Hedge Fund Trader. My 2019 year to date return ratcheted up to +13.55%, boosting my trailing one-year return back up to +27.54%.
My nine-year return clawed its way up to +313.69%, another new high. The average annualized return appreciated to +33.89%.
I am now 80% in cash, 10% long gold (GLD), and 10% short bonds (TLT). We have managed to catch every major market trend this year loading the boat with technology stocks at the beginning of January, selling short bonds, and buying gold (GLD). I am trying to avoid stocks until the China situation resolves itself one way or the other.
It’s real estate week on the data front. An additional data delayed by the government shutdown is trickling out.
On Monday, February 25, at 8:30 AM EST, the Chicago Fed National Activity Index is out.
On Tuesday, February 26, 8:30 AM EST, January Housing Starts are published. At 9:00 the latest Case Shiller Corelogic National Home Price Index is published.
On Wednesday, February 27 at 10:00 AM EST, January Pending Home Sales are updated.
Thursday, February 28 at 8:30 AM EST, we get Weekly Jobless Claims. We also get an updated estimate on Q4 GDP. At 10:00 AM Fed governor Jerome Powell speaks.
On Friday, March 1 at 8:30 AM, we get data on January Personal Spending delayed by the government shutdown. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’ll be watching the Academy Awards on Sunday night. As I grew up near Hollywood, have dated movie stars my whole life, and even appeared as an extra in a couple of movies, I have always felt close to this industry.
My first pick for Best Picture is Green Book since I recall traveling through the deep south during this period. It was actually much worse than portrayed by the film. Roma is the favorite, but I thought it was boring. I guess I’m not the politically correct art film type.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 19, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or ALARM BELLS ARE RINGING)
(SPY), (TLT), (GLD), (AMZN)
There is not a single hedge fund manager out there today who doesn’t believe that stock markets are on the verge of a very sharp selloff.
Earnings are falling. Europe is tipping into recession. The money supply is shrinking at a dramatic pace (see chart below). And government borrowing will double this year as compared to last. Yet the major indexes are 5% of an all-time high with valuations at an 18X multiple, the high end of the historic range.
You may be wondering why a correction, if not a new bear market, hasn’t already started yet. Every trader on Wall Street is nervously awaiting a China trade deal, possible weeks away, that they can all sell into, including me. The China negotiations have robbed traders of a decent short side entry point for a year now.
You may think I am being excessively cautious with these views. However, US equity mutual funds have suffered eleven straight weeks of outflows worth $80 billion, an all-time record. You really wonder what is supporting the market here. Are we in for a “Wiley Coyote” moment?
Who is left to buy the market? Short coverers, algorithms, and corporations buying back their own shares. There are in effect no real net investors.
One can’t help but notice the constantly worsening in the economic data that took place last week. Was this all happening in response to the December stock market crash? Or is it heralding a full-blown recession that has already started?
This is all backward-looking data, in some cases as much as two months. But what followed the December crash? The January government shut down which we already know pared 75 basis points off of Q1 GDP growth. That’s why companies announced middling earnings for Q4 but horrendous guidance for Q1.
December Retail Sales came in at a disastrous ten-year low. If you’re looking for an early recession indicator, this is a big one. Maybe it’s because the prices are falling so fast?
The NY Fed slashed Q1 GDP estimates to below 2% with more cuts to come. Trade war uncertainty cited as the number one reason.
Consumer Spending is slowing. That means the recession is near. Fund managers are universally moving into defensive and value stocks. So, should you.
Car Sales fell at the fastest rate in a decade, as US Manufacturing Output drives off a cliff. There is also a subprime crisis going on here, if you haven’t heard.
Amazon (AMZN) told New York City to drop dead as it canceled plans to build a second headquarters in New York, thanks to opposition from a local but vociferous minority. Some 25,000 jobs went down the toilet. More likely, they don’t want to expand their business right ahead of a recession. Jeff Bezos can see into the future infinitely better than you and I can.
You have to take Jeff’s thoughts seriously. Amazon added more square feet in the US than any other company last year, bringing the total to 288 million square feet. That is a staggering 28 World Trade Centers. Do they know something we don’t?
In the meantime, American Personal Debt is soaring, hitting a new apex at $13.5 trillion. Some 9.1% of this is already delinquent, and credit cards are being canceled at an alarming pace.
Business Confidence hit a two-year low, and Consumer Confidence hits an eight-year low. It seems a government shutdown and a stock market crash are not good for business. Now that stocks are up, will confidence return?
Inflation hit a one year low, with the Consumer Price Index coming in at only 1.9%. It means the next recession will bring deflation.
The Mad Hedge Market Timing Index is entering danger territory with a reading of 70 for the first time in five months. Better start taking profits on those aggressive leveraged longs you bought in early January. Your best performers are about to take a big hit. The market has since sold off 500 points proving its value.
There wasn’t much to do in the market this week, given that I am trying to wind my portfolio down to 100% cash as the market peaks.
February has so far come in at a hot +3.31%. My 2019 year to date return leveled out at +12.79%, boosting my trailing one-year return back up to +34.12%.
My nine-year return clawed its way up to +312.93%, another new high. The average annualized return ratcheted up to +34.12%.
I am now 90% in cash and 10% long gold (GLD), a perfect downside hedge in a “RISK OFF”. We have managed to catch every major market trend this year, loading the boat with technology stocks at the beginning of January, selling short bonds, and buying gold (GLD).
Government data is finally starting to trickle out now that the government shutdown is over.
On Monday, February 18 was Presidents Day and the markets were closed.
On Tuesday, February 19, 10:00 AM EST, the Homebuilders Index is released.
On Wednesday, February 20 at 2:00 AM EST, Minutes from the January FOMC meeting are released. How dovish are they really?
Thursday, February 21 at 8:30 AM EST, we get Weekly Jobless Claims. At 10:00 AM, Existing Home Sales are out.
On Friday, February 22, there will be a half a dozen public Fed speakers suggesting that interest rates will go up, down, or sideways. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’ll be digging out from the massive series of snowstorms that hit me at my Lake Tahoe Estate. Snowfall this season has so far hit 50 feet and is challenging the 70-foot record from three years ago.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 14, 2019
Fiat Lux
Featured Trade:
(WHY I’M AVOIDING PFIZER LIKE THE PLAGUE)
(PFE), (MRK), (MVS),
(THE LIQUIDITY CRISIS COMING TO A MARKET NEAR YOU),
(TLT), (TBT), (MUB), (LQD),
(TESTIMONIAL)
I had the great pleasure of having breakfast the other morning with my longtime friend, Mohamed El-Erian, former the co-CEO of the bond giant, PIMCO.
Mohamed argues that there has been a major loss of liquidity in the financial markets in recent decades that will eventually come home to haunt us all, and sooner than we think.
The result will be a structural increase in market volatility and wild gyrations in the prices of financial assets that will become commonplace.
We have already seen a few of these. Look no further than superstar NVIDIA (NVDA), which announced earnings in line with expectations in November but nevertheless responded with a 50% decline. It was a classic “Buy the rumor, sell the news” type move.
The worst is yet to come.
It is a problem that has been evolving for years.
When I started on Wall Street during the early 1980s, the model was very simple. You had a few big brokers servicing millions of small individual customers at fixed, non-negotiable commissions.
The big houses made so much money they could spend some dough facilitating counter cycle customers trades. This means they would step up to bid in falling markets and make offers in rising ones.
In any case, volatility was so low then that this never cost all that much, except on those rare occasions, such as the 1987 crash (we at Morgan Stanley lost $75 million in a day! Ouch!).
Competitive, meaning falling, commissions rates wiped out this business model. There were no longer profits to subsidize losses on the trading side, so the large firms quit risking their capital to help out customers altogether.
Now you have a larger number of brokers selling to a greatly shrunken number of end buyers, as financial assets in the US have become concentrated at the top.
Assets have also become institutionalized as they are piled into big hedge funds and a handful of very large index mutual funds and ETFs. These assets are managed by people who are also much smarter too.
The small individual investor on which the industry was originally built has almost become an extinct species.
There is no more “dumb money” left in the market, at least until this month.
Now those placing large orders were at the complete mercy of the market, often with egregious results.
Enter volatility. Lot’s of it.
What is particularly disturbing is that the disappearance of liquidity is coming now, just as the 35-year bull market in bonds is ending.
An entire generation of bond fund managers, almost two generations worth, have only seen prices rise, save for the occasional hickey that never lasted for more than a few months. They have no idea how to manage risk on the downside whatsoever.
I am willing to bet money that you or your clients have at least some, if not a lot of your money tied up in precisely these kinds of funds. All I can say is, “Watch out below.”
When the flash fire hits the movie theater, you are unlikely to be the one guy who gets out alive.
You hear a lot about when the Federal Reserve finally gets around to raising interest rates in earnest this year. They say it will make no difference as rates are coming off such a low base.
You know what? It may make a difference, maybe a big one.
This is because it will signify a major trend change, the first one for fixed income in more than three decades. Almost all of these guys really understand are trends and the next one will have a big fat “SELL” pasted on it for the fixed income world.
El-Erian has one of the best 90,000-foot views out there. A US citizen with an Egyptian father, he started out life at the old Salomon Smith Barney in London and went on to spend 15 years at the International Monetary Fund.
He joined PIMCO in 1999 and then moved on to manage the Harvard endowment fund.
He regularly makes the list of the world’s top thinkers. A lightweight Mohamed is not.
His final piece of advice? Engage in “constructive paranoia” and structure your portfolio to take advantage of these changes, rather than fall victim to them.
See the Long Term “Head and Shoulders” Top in the (TLT)?
Global Market Comments
February 13, 2019
Fiat Lux
Featured Trade:
(BIDDING MORE FOR THE STARS),
(SPY), (INDU), (NVDA)
(NOW THE FAT LADY IS REALLY SINGING FOR THE BOND MARKET),
(TLT), (TBT)
Global Market Comments
February 12, 2019
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, APRIL 20 OPTIONS EXPIRATION), (TLT),
(PLEASE SIGN UP NOW FOR MY FREE TEXT ALERT SERVICE NOW),
(BRING BACK THE UPTICK RULE!),
