Global Market Comments
October 26, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or MIXED MESSAGES)
(SPY), (TLT), (UUP), (FCX)
Posts
It was definitely a week of mixed messages in the stock market.
Is Covid-19 going to disappear by itself shortly, or is it the worst thing since the black plague?
Are we going to get a $2 trillion stimulus package out of Washington, or not?
Are stocks too expensive, or still cheap?
We are being told the answers to these questions loud and clear, we just can’t hear them.
For this election looks to set all records on turnout. Every city in the country is seeing lines of voters snaking around the block waiting 2-8 hours. But which way are they voting? Are there hoards of hidden Biden voters coming out of the woodwork, or Trump ones? We won’t know the result for eight more days.
In the meantime, the markets bide their time.
Which raises one last question: how low can stocks fall over the next seven trading days?
In the meantime, some asset classes aren’t willing to sit on their hands any longer. Interest rates have started to rise, hitting a four-month high. This has knocked 15 points off of bond (TLT) prices. Yet, contrary to expectations, the US dollar is hugging a multiyear low (UUP), while commodity prices (FCX) soar.
All of this spell a record economic recovery in 2021. All that remains is for stock prices to play catch-up.
The word is that there is over $1 trillion sitting on the stock market ready to dive in the day after the election, possibly tacking on at least 10% to the major indexes by yearend. There could be one hell of a post-election celebration, no matter who wins.
Baby Boomers are unloading stocks to Gen Xers mostly, but Millennials as well. Of course, they have all the money, with a 53% ownership of all stocks, compared to 27% for Gen Xer’s and a mere 3% for Millennials. The Greatest Generation, born before 1946, have been shrinking their share ownership since 1990 and own only 17% of the total now. A coming jump in capital gains taxes will accelerate the process.
China’s Economy soared by 4.9%, in Q3 YOY with the pandemic in the rear-view mirror. First into the Coronavirus brings first out. Retail sales are through the roof and industrial production and business investment is accelerating.
Goldman Sachs says a Blue Wave will increase spending and boost the stock market. Total one-party control of the government eliminates the haggling that we are currently seeing in Washington and will deliver more Covid-19 aid faster. It should more than offset the ill effects of tax increases.
Beware of the coming Tax Loss Selling. A Biden win could unleash a torrent of selling as investors rush to beat an increase in the capital gains tax. That’s when you buy.
US Housing Permits blow the roof off at 1.553 million, up a staggering 22% YOY and a 13-year high. I wondered why I was suddenly getting a lot of flat tires on the freeway. They’re caused by nails and screws falling off the back up pickup trucks on the way to jobs. The long-term structural housing shortage continues. 30-year money at 2.75% makes a big difference.
Tesla generates a record profit for the fifth consecutive quarter in a row. The company is relying on its China factory to hit its 2020 target of 500,000 million units. Again, $397 million in regulatory credits drive earnings, payments from other carmakers who are lagging on electric car production. Gross margins rose 250 basis points to 23.5%. S&P 500 listing here we come! Next target $2,500!
Weekly Jobless Claims dropped to 787,000, better, but still horrible. California is finally reporting again.
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Global Trading Dispatch hit a new all-time high last week by staying 100% in cash. I was just as grateful for having no positions on the up 600-point days as I was on the down 600-point days. Safe to say that I will be an increasingly more aggressive buyer on ever smaller dips and a seller on bigger rallies. October has now reached to a welcome 1.89% profit.
That keeps our 2020 year-to-date performance at a blistering +36.29%, versus a LOSS of -0.57% for the Dow Average. That takes my eleven year average annualized performance back to +36.21%. My 11 year total return stood at new all-time high at +392.30%. My trailing one year return appreciated to +42.86%.
The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 225,239, which you can find here.
On Monday, October 26 at 10:00 AM EST, New Home Sales are published. Ely Lilly (LLY) and Merck (MRK) report earnings.
On Tuesday, October 27 at 9:00 AM EST, the S&P Case Shiller Home Price Index for August is released. Microsoft (MSFT) and Pfizer (PFE) report earnings.
On Wednesday, October 28, at 2:00 PM EST, the EIA Cushing Crude Oil Stocks are out. Boeing (BA) and Visa (V) report earnings.
On Thursday, October 29 at 8:30 AM EST, the Weekly Jobless Claims are announced. At the same time, we get the first read on Q3 GDP. Alphabet (GOOGL) and Amazon (AMZN) report earnings.
On Friday, October 30, at 8:30 AM, Personal Income for September is printed. Exxon (XOM) reports earnings. At 2:00 PM we learn the Baker-Hughes Rig Count.
As for me, I’ll be charging up every electronic device I have as the San Francisco Bay Area is expected to suffer a complete power blackout for the next three days. PG&E is shutting off the juice because winds are expected to reach 70 miles per hour and it hasn’t raised in six months.
I won’t be affected because I am totally off the grid with my own solar and battery network. You can easily find me because mine will be the only house in the mountains with the lights on.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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
October 8, 2020
Fiat Lux
Featured Trade:
(IF BONDS CAN’T GO DOWN, STOCKS CAN’T EITHER),
($NIKK), (TLT), (TBT), ($TNX)
(TESTIMONIAL)
The U.S. Treasury bond market has suddenly ground to a halt, puzzling traders, investors, and hedge fund managers alike.
Today, the yield on the 10-year Treasury bond (TLT), (TBT) traded as low as 0.77%.
This is despite the U.S. economy delivering a horrific negative GDP growth during Q2. Growth is expected to rebound to 2-5% in Q3, depending on if there is another stimulus package from Washington, or not. 2021 could bring economic growth as high as an astronomical 10%.
If I blindfolded any professional money manager, told him the above and asked him where the 10-year Treasury yield should be, most would come in at around the 5% level.
So what gives?
I have put a great deal of thought into this and the answer can be distilled down to two letters: QE.
Global quantitative easing has created about $30 trillion in new money over the past 10 years. It has not been spent, it hasn’t disappeared, nor has it gone to money heaven. It is still around.
The U.S. Federal Reserve, the first to start QE in November 2008 during the Great Recession, ended it in October 2014. From start to finish, it created $4.5 trillion in new money. Over the past five years was wound down to $3.8 trillion by letting debt on its balance sheet mature.
Enter the pandemic. The expectation is that the new round of QE could exceed another $10 trillion or more.
Japan actually began its QE program in 2001, long before anyone else, to deal with the aftermath of the 1990 Japanese stock market crash and a massive demographic headwind (they’re not making Japanese anymore).
Some 20 years later, the Japanese government now owns virtually all of the debt in the country. When you hear about Japan’s prodigious 240% debt to GDP ratio, it’s all nonsense. Net out government holdings and there is no national debt in Japan at all. That’s why the Japanese yen is consistently strong.
After the 2008 crash, the Japanese government expended its QE to include equities as well. As a result, the government is now the largest single buyer of stocks in the Land of the Rising Sun. The Nikkei Average has risen by 234% since the 2009 bottom despite a miserable economic performance, and the yield on 10-year JGBs stand at a lowly 0.03%.
The European Central Bank got into the QE game very late, not until 2015, and its program continues anew, although at half its peak rate. The ECB has just renewed its plan to print a ton of new money.
Part of the problem is that the ECB is running out of bonds to buy, as it already owns most of the paper issued by European entities. That’s why 10-year German bunds are yielding a paltry -0.50%.
As a result, there is excess liquidity everywhere and this has broad implications for your investment or retirement portfolio. It could take as long as a decade before all of this artificial cash is removed from the global financial system.
For a start, bonds may not fall much from here, even if the Fed continues its near-zero interest rate policy for three more years, as promised.
Stocks can’t fall either with this much cash underpinning the market, at least not for a while and not by much. While company share buybacks have virtually disappeared this year, foreign investors have stepped in to pick up the slack.
It also means you can’t have a global contagion leading to a financial crisis. There is ample money available to refinance your way out of any problem when 70% of the world’s debt is still yielding close to zero.
The bottom line here is that global excess liquidity can cover up a multitude of sins. It means the price of everything has to go up, or at least stay level until that liquidity runs out. That includes stocks, bonds, your home, classic cars, and even that rare coin collection of yours gathering dust in a safe deposit box somewhere.
Yes, when the excess free cash runs out in a decade, there will be hell to pay. Until then, make hay while the sun shines.
Hay
Global Market Comments
October 7, 2020
Fiat Lux
Featured Trade:
(THE ROARING TWENTIES HAVE JUST BEGUN),
(SPY), (TLT), (TBT), (VIX)
I just about fell out of my chair when the national election poll numbers were released over the weekend.
After remaining stuck at a 49% to 41% lead for the past year, Joe Biden picked up 5% to reach a commanding 54% to 39% lead. These are the most decisive polling numbers since the 1972 Nixon-McGovern contest, when the former carried 49 states in the Electoral College.
A blue wave is now a certainty, where the democratic party gains control of the White House and Congress for at least the next two years.
The enormous swing is no doubt a response to the president’s performance at last week’s debate, which most viewers found wanting. We now know that he was infected with Covid-19 at the time, which among its many symptoms include delusion and poor decision-making.
We don’t know Trump’s academic record because he has sued his alma mater to prevent their release. However, it is safe to say he failed his debate class. You never attack the moderator.
The change in the election outlook has enormous implications for investors. It puts to rest and chance of a Trump win or a contested election. Biden’s lead is now so enormous that it is impossible to overturn through legal challenges, widespread voter suppression, or disabling of the US Post Office.
Differences in vote counts in the hundreds, as we saw in Florida in 2000, are fertile ground for challenges, extended outcomes, and uncertainty. Differences in the tens or hundreds of thousands aren’t.
Don’t take my word for it, listen to Mr. Market. The near three-point plunge in the bond market (TLT) yesterday tells us that good times are coming, demand for new funds will be unprecedented, and interest rates will rise. 2021 could see an unprecedented 10% US GDP growth rate.
As a result, the stock market now has before it the task of backing out a lot of fear and uncertainty that was priced in. Translation: stocks go up.
Horrendous multi thousand-point plunges are now a thing of the past. It is now unlikely that the S&P 500 (SPY) will even fall back to the 200-day moving average at $308, a near certainty only a week ago.
It’s time for you to step up your aggressiveness in returning to risk in general and the stock market specifically. We are about to see another tidal wave of cash to move into technology stocks. Rapid rotation into domestic recovery stocks, banks, and small caps will also ensue.
Your next entry point on the long side will be next Monday after Trump returns to the hospital as his Covid-19 peaks. That is supposed to be what happens 7-10 days after an initial infection. That should be worth 500 or a thousand points of downside.
The Roaring Twenties have just begun, if they hadn’t already last March. My forecast of another 400% gain over the next decade on top of the existing one just received another dollop of credibility.
Oh yes, and don’t forget to vote.
Global Market Comments
October 6, 2020
Fiat Lux
Featured Trade:
(HOW THE RISK PARITY TRADERS ARE RUINING EVERYTHING!),
(VIX), (SPY), (TLT),
(TESTIMONIAL)
I received a call from a hedge fund manager on Friday warning me of what was about to hit the market.
So much money had poured into "risk parity” strategies that it was starting a long-term secular trend up in market volatility (VIX). It was a classic case of too many people bunching up at one end of the canoe.
Witness last week’s failure of stimulus talks on every front. Even though stocks kept going up, the Volatility Index did, too. That is never a good sign.
Investment advisors everywhere are bemoaning the shenanigans of high-frequency traders, offshore hedge funds, and congress for the recent volatility of the market that has been scaring the living daylights out of their clients.
But they have a new enemy that few outside the trading community are aware of: "Risk Parity" managers.
Risk parity is being blamed for the September explosion of volatility that took it from 22% to 36% in a matter of days.
The industry is thought to have $400 billion to $600 billion in assets under management now, with hedge funds Bridgewater and AQR in the lead.
Potentially, they could unload as much as $100 billion worth of stocks in days.
What's more, the fun and games aren't confined to just equities. Risk parity strategies have spread like a pandemic virus to bonds (TLT), foreign exchanges, commodities, and even precious metals.
Risk Parity is an esoteric new investment strategy that targets a specific volatility level, rather than a return relative to a convention benchmark such as Treasury bonds or the S&P 500 (SPY).
When volatility (VIX) is low, they add risk, hoping to beat the returns of competitors. When volatility is high, they cut back positions, hoping they miss the losses of others.
The goal is to come out on top of the money manager league tables, sucking in tons of new assets and countless riches in management fees.
You can see right now where this is going.
In rising markets, they increase buying, and in falling ones, they greatly step up selling.
I'm sure there was a day several years ago when this approach made money hand over fist.
That was probably back when only its inventor was implementing it alone in a back room using an undisclosed hedge fund with a tiny amount of capital.
The problem with risk parity and all other strategies of its ilk is that they become victims of their own success. New capital pours in, returns fall until they inevitably dive into negative numbers.
I have seen this occur time and again, from the portfolio insurance of the 1980s (think October 1987 when the Dow plunged 20% in a single day), to Japanese warrant arbitrage, to high-frequency trading and the flash crashes.
The proof is in the pudding.
An index of 17 risk parity funds tracked by JP Morgan has fallen by 8.2% since the beginning of May. More losses are to come. It sounds like the great unwind of risk parity assets has already started.
Like all investment fads that promise great, risk-free returns, this one will come and go.
In the meantime, fasten your seat belt.
