Global Market Comments
April 13, 2018
Fiat Lux
Featured Trade:
(ANNOUNCING THE MAD HEDGE LAKE TAHOE, NEVADA, CONFERENCE, OCTOBER 26-27, 2018),
(APRIL 11 GLOBAL STRATEGY WEBINAR Q&A),
(TLT), (TBT), (GOOGL), (MU), (LRCX), (NVDA) (IBM),
(GLD), (AMZN), (MSFT), (XOM), (SPY), (QQQ)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader April Global Strategy Webinar with my guest 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: Many of your April positions are now profitable. Is there any reason to close out before expiration?
A: No one ever got fired for taking a profit. If you feel like you have enough in hand - like 50% of the maximum potential profit in the position, which we do have in more than half of our current positions - go ahead and take it.
I'll probably run all of our April expirations into expiration day because they are very deep in the money. Also, because of the higher volatility and because of higher implied volatility on individual stock options, you're being paid a lot more to run these into expiration than you ever have been before, so that is another benefit.
Of course, one good reason to take profits now is to roll into another position, and when we find them, that may be exactly what we do.
Q: What do you think will be the impact of the US hitting Syria with missiles?
A: Initially, probably a 3-, 4-, or 500-point drop, and then a very rapid recovery. While the Russians have threatened to shoot down our missiles, in actual fact they can't hit the broad side of a barn. When Russians fired their cruise missiles at Syrian targets, half of them landed in Iran.
At the end of the day, it doesn't really impact the US economy, but you will see a big move in gold, which we're already starting to see, and which is why we're long in gold - as a hedge against all our other positions against this kind of geopolitical event.
Q: Will 2018 be a bull market or a bear market?
A: We are still in a bull market, but we may see only half the returns of last year - in other words we'll get a 10% profit in stocks this year instead of a 20% profit, which means it has to rise 12% from here to hit that 10% up by year-end.
Q: What is your take on the ProShares Ultra Short 20+ Year Treasury Bond Fund (TBT)?
A: I am a big buyer here. I think that interest rates (TLT) are going to move down sharply for the rest of the year. The (TBT) here, in the mid $30s, is a great entry point - I would be buying it right now.
Q: How do you expect Google (GOOGL) to trade when the spread is so wide?
A: It will go up. Google is probably the best-quality technology company in the market, after Facebook (FB). We'll get some money moving out of Facebook into Google for exactly that reason; Google is Facebook without the political risk, the regulatory risk, and the security risks.
Q: Are any positions still a buy now?
A: All of them are buys now. But, do not chase the market on any conditions whatsoever. The market has an endless supply of sudden shocks coming out of Washington, which will give you that down-400-points-day. That is the day you jump in and buy. When you're buying on a 400-down-day, the risk reward is much better than buying on a 400-point up day.
Q: What is "sell in May and go away?"
A: It means take profits in all your positions in May when markets start to face historical headwinds for six months and either A) Wait for another major crash in the market (at the very least we'll get another test of the bottom of the recent range), or B) Just stay away completely; go spend all the money you made in the first half of 2018.
Q: Paul Ryan (the Republican Speaker of the House) resigned today; is he setting up for a presidential run against Trump in 2020?
A: I would say yes. Paul Ryan has been on the short list of presidential candidates for a long time. And Ryan may also be looking to leave Washington before the new Robert Mueller situation gets really unpleasant.
Q: What reaction do you expect if Trump resigns or is impeached?
A: I have Watergate to look back to; the stock market sold off 45% going into the Nixon resignation. It's a different world now, and there were a lot more things going wrong with the US economy in 1975 than there are now, like oil shocks, Vietnam, race riots, and recessions.
I would expect to get a decline, much less than that - maybe only a couple 1,000 points (or 10% or so), and then a strong Snapback Rally after that. We, in effect, have been discounting a Trump impeachment ever since he got in office. Thus far, the market has ignored it; now it's ignoring it a lot less.
Q: Thoughts on Micron Technology (MU), Lam Research (LRCX), and Nvidia (NVDA)?
A: It's all the same story: a UBS analyst who had never covered the chip sector before initiated coverage and issued a negative report on Micron Technology, which triggered a 10% sell-off in Micron, and 5% drops in every other chip company.
He took down maybe 20 different stocks based on the argument that the historically volatile chip cycle is ending now, and prices will fall through the end of the year. I think UBS is completely wrong, that the chip cycle has another 6 to 12 months to go before prices weaken.
All the research we've done through the Mad Hedge Technology Letter shows that UBS is entirely off base and that prices still remain quite strong. The chip shortage still lives! That makes the entire chip sector a buy here.
Q: Can Trump bring an antitrust action against Amazon?
A: No, no chance whatsoever. It is all political bluff. If you look at any definition of antitrust, is the consumer being harmed by Amazon (AMZN)?
Absolutely not - if they're getting the lowest prices and they're getting products delivered to their door for free, the consumer is not being harmed by lower prices.
Second is market share; normally, antitrust cases are brought when market shares get up to 70 or 80%. That's what we had with Microsoft (MSFT) in the 1990s and IBM (IBM) in the 1980s. The largest share Amazon has in any single market is 4%, so no there is basis whatsoever.
By the way, no president has ever attacked a private company on a daily basis for personal reasons like this one. Thank the president for giving us a great entry point for a stock that has basically gone up every day for two years. It's a rare opportunity.
Q: How will the trade war end?
A: I think the model for the China trade war is the US steel tariffs, where we announced tariffs against the entire world, and then exempted 75% of the world, declaring victory. That's exactly what's going to happen with China: We'll announce massive tariffs, do nothing for a while, and then negotiate modest token tariffs within a few areas. The US will declare victory, and the stock market rallies 2,000 points. That's why I have been adding risk almost every day for the last two weeks.
Q: Would you be buying ExonMobil (XOM) here, hoping for an oil breakout?
A: No, I think it's much more likely that oil is peaking out here, especially given the slowing economic data and a huge onslaught in supply from US fracking. We're getting big increases now in fracking numbers - that is very bad for prices a couple of months out. The only reason oil is this high is because Iran-sponsored Houthi rebels have been firing missiles at Saudi Arabia, which are completely harmless. In the old days, this would have caused oil to spike $50.
Q: Would you be selling stock into the rally (SPY), (QQQ)?
A: Not yet. I think the market has more to go on the upside, but you can still expect a lot of inter-day volatility depending on what comes out of Washington.
Q: Do you ever use stops on your option spreads?
A: I use mental stops. They don't take stop losses on call spreads and put spreads, and if they did they would absolutely take you to the cleaners. These are positions you never want to execute on market orders, which is what stop losses do. You always want to be working the middle of the spread. So, I use my mental stop. And when we do send out stop loss trade alerts, that's exactly where they're coming from.
Q: Will the Middle East uncertainty raise the price of oil?
A: Yes, if the Cold War with Iran turns hot, you could expect oil to go up $10 or $20 dollars higher, fairly quickly, regardless of what the fundamentals are. It's tough to be blowing up oil supplies as a great push on oil prices. But that's a big "if."
Hello from the Italian Riviera!
Global Market Comments
April 9, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE'S THE BIG CALL),
(JPM), (GOOGL), (GLD), (TLT), (VXX),
(HOW TO "SNOWBALL" YOUR FORTUNE WITH BENJAMIN FRANKLIN)
Well that tears it!
Flamethrowers! Yes, on the list of 125 products that China is imposing new 25% import duties are flamethrowers.
And I was so looking forward to getting a flamethrower of my own with which to singe lazy and errant stock analysts from whom we all are afflicted.
I guess I'll just have to buy American, which I already do with my cars (Teslas).
The real call here is that the NASDAQ has entered a well-defined trading range, from 6,600 to 7,600, where it will remain trapped for six months until the November midterm congressional elections. After that, we will rally 10% in year-end rally.
The deep in-the-money call spread strategy I employ is ideally suited to this kind of go-nowhere market. While other traders are tearing their hair out, you'll be raking in the money every month as if you've just been adopted by a new rich uncle.
The president, absolutely cacophonous about the riches created by a rising stock market, has developed lockjaw in a falling one.
The reason was provided by trade advisor Peter Navarro, who said quite simply that the markets were wrong in their belief that trade wars decimate share prices.
My half century of trading tells that markets are never wrong, only people are.
And while the chief architect of our China trade policy has never been there, I managed to find it in 1974. It's easy. You just head east.
Here are some harsh numbers to show you how quixotic the administration policies are. By imposing $25 billion in import duties to protect dying American industries, investors cut $3 trillion off of US stock market capitalization.
That is a 120:1 risk reward AGAINST us. That's NOT the kind of trade I'm used to strapping on.
I'm sure the Chinese are thinking, "How would you like to lose another $3 trillion?" "How about a recession and bear market?" and "See you $25 billion and raise you $50 billion!"
Here is a number that gets lost in translation of the $1 trillion in two-way trade between the US and China. Some 90% of the profits accrue to the US. It is an issue that officials in Beijing have been complaining to me about for decades, which essentially makes them the low-waged manufacturing colony.
That iPhone X that Foxconn makes for $100 Apple (AAPL) sells for $1,000 in the US.
One then has to ask the cogent question, "If you're winning the game, why change the rules?"
The Chinese are not a nation you want to antagonize. They endured 2 million casualties in Korea just to inflict 50,000 on us. Chosin Reservoir looms large in my family - the best fighting retreat in history carried out by the Marine Corp.
The Chinese can also suffer more pain than Americans, with most only one or two generations out of a $300 annual per capita income.
Will the US November congressional election affect economic fundamentals" I doubt it. The mere fact that the election is out of the way is worth a 10% stock market rally into year-end.
The March Nonfarm Payroll Report was a disappointment for the second month in a row, coming in at a feeble 103,000. The headline unemployment rate remains at a decade low of 4.1%.
The stock market didn't care, with the overwhelming focus now on trade issues.
The really important numbers now, Average Hourly Earnings, were up a slightly inflationary 0.3%, but no one noticed.
The January and February reports we revised downward by a steep 50,000.
Manufacturing gained 22,000 jobs, Health Care was up 22,000, and Professional and Business Services up 33,000. Construction lost 15,000 jobs, thanks to raising interest rates.
The Broader U-6 "Discouraged Worker" unemployment rate dropped 0.2% to 8.0%, a new decade low.
As a stand-alone number, the report is not important. However, look at it in the context of a rising tide of recent, slightly negative economic data reports and one has to start to get concerned. Is it the weather, or the beginning of something larger?
We are only a week off from when the Q1, 2018 earnings season kicks off, which will probably deliver some of the strongest reports in US history.
Until then, the data reports will be relatively benign.
On Monday, April 9, nothing of note is announced.
On Tuesday, April 10, we receive March NFIB Small Business Optimism Index.
On Wednesday, April 11, at 8:30 AM EST, we learn the all-important Consumer Price Index, the most important read on inflation. Bed Bath & Beyond (BBBY) reports.
Thursday, April 12, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a dramatic rise of 24,000 last week (another bad number). BlackRock (BLK) reports.
On Friday, April 13, at 10:00 AM EST, we get the JOLTS Report on private sector job openings. It is the big day for bank earnings, with Citigroup (C), JP Morgan (JPM), and Wells Fargo (WFC) all reporting.
The week ends as usual with the Baker Hughes Rig Count at 1:00 PM EST. Last week brought a drop of 2.
Followers of the Mad Hedge Trade Alert Service enjoyed one of their best weeks in years. Executing on the views above, I nailed the market bottom, hauling in an eye-popping 5.06% in performance in a single day.
I artfully used the huge sell-off days to pile on long positions in Google (GOOGL) and JP Morgan (JPM), and sell short US Treasury bonds and volatility (VXX). On the up days I bought gold (GLD).
It all worked like a charm, and every position is now profitable.
That brings April up to a +4.76% profit, my trailing one-year return to +49.72%, and my eight-year average annualized return up to 34.55%. We are an eyelash short of a new all-time performance high.
As for me, I'll be shutting down my Lake Tahoe estate for a while, not that the snow has turned to rain. The lake level is at a 118-year high, and Reno, NV, is worried about flooding. All the floodgates are open.
What a winter! I barely had time to tear myself away from my screens to visit the slopes.
Good Luck and Good Trading.
Global Market Comments
April 6, 2018
Fiat Lux
Featured Trade:
(FRIDAY, JUNE 15, DENVER, CO, GLOBAL STRATEGY LUNCHEON)
(DON'T MISS THE APRIL 11 GLOBAL STRATEGY WEBINAR),
(A NOTE ON OPTIONS CALLED AWAY),
(TLT), (GOOGL), (JPM), (VXX)
I'm sure that most of you are spending your free time devouring the utterly fascinating pages of "Fire and Fury" these days, now in its 12th week on the New York Times best-seller list.
I, however, am reading slightly different subject matter.
As obscure, academic, and abstruse the "Global Dollar Credit: Links to US Monetary Policy and Leverage" may sound, published by the Bank for International Settlements (BIS), it has been an absolute blockbuster among strategists at the major hedge funds.
And given the apocalyptic conclusions of the report, it might well rank as one of the best horror stories of the year, worthy of the bloodiest zombie flick.
I'll give it to you in a nutshell.
Corporate borrowers outside the US have ramped up their borrowing astronomically over the past 17 years, from $2 trillion to $9 trillion.
This makes them extraordinarily sensitive to any rise in US interest rates and the dollar. Emerging market debt alone has doubled to $4.5 trillion.
Easy money has encouraged mal investment and overinvestment in projects that never would have seen the light of day if unlimited financing were not available at 1%. In other words, it is all a giant house of cards ready to collapse.
I know a lot of you thrive on folk-based economic theories you picked up on the Internet based on monetarism, Austrian economics, and the theories of Friedrich August von Hayek, that all have the dollar collapsing under a mountain of debt.
In fact, the complete opposite has come true. The global economy has become "dollarized," with companies and governments in almost all nations relying on the buck as their principal means of financing.
The end result of all this has been to vastly expand the power of the Federal Reserve far beyond America's borders. Even the smallest rise in US interest rates, such as the 1/4% hike mooted for June, could trigger a cascade of corporate defaults around the world.
Think of subprime, with a turbocharger, running on pure nitro.
This is having a huge deflationary effect on the economies of many emerging nations.
Malaysia's sovereign wealth fund has almost gone under after a series of bad bets against the dollar. There is thought to be another troubled dollar short coming out of Hong Kong worth $900 million.
This is forcing countries to liquidate their US Treasury Bonds to cover local losses.
Further exacerbating the situation has been the crash of the price of oil, which has turned producing countries from suppliers to takers of liquidity to the global credit markets. Even after last year's monster rally, oil is still trading at 60% below the 2011 peak.
The net net of all of this is to increase the risk of surprise blowups overseas, both by banks and the private borrowers. This will increase the volatility of financial instruments everywhere.
The Bank for International Settlements is an exclusive club of the world's central banks. It is based in Basel, Switzerland (great swimming in the Rhine there), with further offices in Hong Kong and Mexico City. Its goal is it to coordinate policies among different nations.
The BIS was originally founded in 1930 to facilitate payment of German reparations following the Versailles Treaty ending WWI.
As a regular groupie on the central banking scene, I have been reading the research publications for many decades.
It All Started Here in Versailles
Global Market Comments
April 3, 2018
Fiat Lux
Featured Trade:
(TUESDAY, JUNE 12, NEW ORLEANS, LA, GLOBAL STRATEGY LUNCHEON),
(MARCH 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (TBT), (FXY), (GS), (FCX), (CSCO), (INTC), (NEM),
(RIGHTSIZING YOUR TRADING)
Global Market Comments
March 28, 2018
Fiat Lux
Featured Trade:
(FRIDAY, APRIL 6, INCLINE VILLAGE, NEVADA, STRATEGY LUNCHEON)
(FROM THE FRONT LINES OF THE TRADE WAR),
(AAPL), (AVGO), (QCOM), (TLT),
(HOW THE MAD HEDGE MARKET TIMING ALGORITHM TRIPLED MY PERFORMANCE)
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, and 12% of its almonds.
By comparison, California imported a 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 nationals 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 1 million workers at Foxconn assemble iPhones, Macs, iPads, and iPods.
The Cupertino, CA, 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.
So far, the trade war has been more bluff than bite. The US duties announced come to only $3 billion on $50 billion worth of trade. China responded with incredible moderation, only restricting $3 billion worth of imports.
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 a largest surplus in services.
The next 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, and 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 if 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-month high, I would say that the market doesn't believe that for two seconds. The Chinese won't cut off its nose to spite its face.
In the end, I think not much will come of this trade war. That's what the stock market told us yesterday with a monster 700-point rally, the biggest in three years.
The administration is discovering to its great surprise that its base is overwhelmingly against a trade war. And as business slows down, it will become evident in the numbers as well.
The US was the big beneficiary from the global trading system. Why change the rules of a game we are winning?
Still, national pride dies hard.
Global Market Comments
March 27, 2018
Fiat Lux
Featured Trade:
(DON'T MISS THE MARCH 28 GLOBAL STRATEGY WEBINAR),
(TEN MORE UGLY MESSAGES FROM THE BOND MARKET),
(TLT), (TBT), (USO), (GLD), (GS), (SPY)
(FRIENDS WHO WILL EXECUTE MY TRADE ALERTS FOR YOU)