Global Market Comments
September 11, 2020
Fiat Lux
Featured Trade:
(WHY SOLID-STATE BATTERIES ARE THE “NEXT BIG THING”)
(TSLA)
Posts
“Battery Day” is coming up soon on September 22.
This is Elon Musk’s equivalent to Apple’s developers' conference when he announces his latest products and technological advances with great fanfare. I have been to many of these.
However, this year, Elon may outdo himself, no mean feat, emboldened by last week’s meteoric $450 billion market capitalization for Tesla (TSLA).
Most expect Musk to announce his “Million Mile Battery”, doubling the lifetime of batteries installed in new Teslas. That would increase lifetime recharges from 2,000 to 4,000.
But Elon being Elon, he could also go a giant step forward in battery technology, taking a great leap forward to solid-state technology.
For the last 30 years, the cutting edge of battery design has been trapped in lithium-ion liquid or gel states. This originally Japanese technology took us from the first generation of smartphones in the 1990s to the 1,200-pound, 402-mile range behemoths of today.
Now it’s time to move on.
Solid-state batteries, made of oxide, sulfide, and phosphate ceramics, have existed in labs for decades and are currently used in pacemakers. But economic mass production has remained elusive.
That may be about to change.
Last week, Bill Gates-backed QuantumScape gained a listing on the New York Stock Exchange via a SPAC (special purpose acquisition corporation) with Kensington Capital Acquisition Corp. (KCAC). The deal valued the company at $3.3 billion, a high figure for a firm with no salable product.
QuantumScape is a decade-old San Jose, CA-based startup which has been pioneering solid-state battery technology. It obtained a $100 million investment from Volkswagen in 2018. QuantumScape’s goal is to supply the batteries for an all-electric VW Golf by 2025.
And here is the big deal about solid state. It offers energy densities 2.5 greater than existing lithium-ion batteries. It also presents far less risk of catching fire when punctured, as we have seen dramatically on TV a few times over the last couple of years.
With such technology, Tesla can cut battery sizes from 1,200 pounds to 500 pounds, chop $6,000 off the cost of production of each car, and further extend ranges because of less weight.
That would enable Tesla to enter the mass market with a $36,000 entry-level Tesla 3 or small SUV Model Y with minimal fuel cost and maintenance for the life of the car. This is how Tesla boosts production from this year’s 500,000 units to 5 million units annually by 2025. This is what the $500 share price was all about.
There are even more advanced battery technologies on the horizon. Samsung is working on graphene technology for its smart phones. The University of Chicago has developed a lithium dioxide battery seven times more powerful than those currently available. Silicon nanowire technology will become viable in three years that offers a further multiplication of ranges.
In the end, Elon Musk may surprise us all. In 2019, Tesla bought Maywell Technologies and their dry battery technology which can produce batteries at 16 times greater energy density at 20% less cost, giving a 20-fold improvement in battery performance.
That is a greater leap in energy densities than we have seen over the past decade when costs dropped by 80%.
As a long time Tesla owner, I can tell you that it has been a battle to keep up with Tesla’s technology. As soon as I bought a Model X two years ago with a 275-mile range, a new 351-mile range was announced. I did get a great deal on the car though and I’ll never drive another vehicle.
For a YouTube video of Bill Gates explaining his involvement in QuantumScape, please click here.
Global Market Comments
September 8, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHY CASH IS STILL TRASH),
(JPM), (AAPL), (AMZN), (V), (TLT), (SPY), (GOOGL),
(BAC), (C), (FCX), (VIX), (VXX), (TSLA), (FB)
(JPM), (AAPL), (AMZN), (V), (TLT), (SPY), (GOOGL),
(BAC), (C), (FCX), (VIX), (VXX), (TSLA), (FB)
This isn’t the “Big One.”
This isn’t even a Middle One.”
This is no more than a 10%-15% correction typical for long term bull markets.
Sure, we saw every technical indicator known to man scream “SELL” in the run-up to the recent market top. There were other factors at play as well.
The bulk of the buying focused on only the top six stocks, more concentrated than seen during the Dotcom Bubble Top in 2000.
There really was only one buyer. That would be my friend Masayoshi Son’s Softbank (SFTBY). He bought $4 billion worth of big tech call options in the run-up to the top with an exercise value of $30 billion. When he started to sell last Monday, the market for these options vaporized and stocks plunged.
The fact that both Apple (AAPL) and Tesla (TSLA) shares split the same day also defined a market top that I have been warning readers about for weeks.
This is all in the face of the incredible reality that 50% of all S&P 500 (SPY) stocks are down over the past two years. It really has been a stock picker’s market with a turbocharger.
And this isn’t just any old bull market. We are in fact 11 ½ years into a bull market that started in March 2009 that has another decade to run. We have completed the first 400% gain. What lies ahead of us is another stock market increase of 400%, taking us up to 120,000 in the Dow Average by 2030.
And this is a bull market that has suffered plenty of 10%-15% corrections since its inception. The one that began in Thursday is no different. The sole exception to this analysis was the COVID-19-induced 37% meltdown that began in February. That little event only lasted six weeks.
For you see, the fundamentals have not changed one iota. No, I’m not talking about earnings, valuations, or sales growth. That is so 20th century.
No, I’m referring to the only fundamental that counts in the 21st century: Liquidity.
And liquidity isn’t shrinking, it is in fact increasing. That includes the unprecedented expansion of quantitative easing by the Federal Reserve, massive deficit spending by the US government, and zero interest rates, which Fed governor Jay Powell has promised us will continue for another five years.
During the last Dotcom Bubble top, the FAANGs and Tesla (TSLA) did not even exist. Apple was just coming out of its flirtation with bankruptcy and Amazon (AMZN) had just barely gone public. Google (GOOGL) and Facebook (FB) were still but glimmers in their founders’ eyes.
Except now we have a new bullish fundamental to discount: a Biden win in November. Since Biden decisively pulled ahead in the polls in May, the stock market has risen almost every day. He is 4%-10% ahead in every battleground state poll.
Even if Trump were to win every red and red-leaning state accounting for 163 electoral college votes, plus all 63 votes from toss-up states (AZ, NC, IA, FL, GA, OH), he would still lose the election, where 270 votes are needed to win. Just THAT is a 1:100 event, on the scale of Harry Truman’s historic 1948 compact, and Trump is no Harry Truman.
So what of Biden wins?
You can count on the $3 trillion stimulus bill passed by the House in March to go through, which primarily allocates money to keep states and local municipalities from firing policemen, firemen, and teachers.
Next to come are another $3 trillion in infrastructure spending. And I absolutely know from past experience that markets love this kind of stuff. It enhanced liquidity even more.
As I say, cash is still trash, and it may remain so for years.
The Top is in, with a horrific two-day 1,500-point selloff in the Dow Average ($INDU) coming out of the blue on no news and signaling the end of the current rally. Whatever went up the most is now going down the most as the Robinhood traders flee in panic. This was long overdue. Margin calls are running rampant.
Volatility (VIX) soared to $38, up 70% in two days, meaning that we may be close to the end of this correction. The (SPX) is down 24 points, 6.7% from the Wednesday high. The last (VIX) peak was at $44 in June and $80 in March. Time to start buying stocks for a yearend rally? Look at the banks.
Was Apple (AAPL) really up 400%? Did Tesla gain 500%? You might be fooled if you didn’t know that these stocks just split, Apple at 4:1 and Tesla for 5:1. In fact, both stocks posted robust gains in real terms, Apple up 5% and Tesla up 10%. Tesla just hit my five-year split-adjusted target of $2,500. Every other analyst had a much lower target or were bearish. Time to run a mile as splits often herald intermediate market tops.
Apple hit a $2.3 trillion in market cap at the peak, up a staggering $300 billion in days. We are truly in La La Land here. The price-earnings multiple has soared from 9X to 40X. That 5G iPhone better deliver. Didn’t you hear that 5G was causing Coronavirus, a popular internet conspiracy theory?
The Dow Average just lost its Apple turbocharger. Some 1,000 of the 2,000 points the Dow Average gained in August were due to Apple alone. With the Dow rebalancing today, with (XOM), (PFE), and (RTX) out and (CRM), (AMGN), and (HON) in, Apple’s influence has been greatly diluted. With the (VIX) back up above $26, the worst is yet to come. The stock market is screaming for a correction.
Copper (FCX) hit a new 3-year high, with demand soaring in China. They were the first to cap Covid-19 and restore their economy. The red metal is a great call on the recovery of the global economy. Those who bought the Freeport McMoRan (FCX) LEAPS I recommended in March are sitting pretty. The shares are up 228% since then.
Tesla to sell $5 billion in stock to finance the construction of new factories in Nevada, TX, and Germany. (TSLA) fell 5% on the news. I had been advising clients to sell all week. It won’t be a conventional secondary stock offering but an effort to sell into every stock spike. More proof that Elon hates Wall Street as if we needed more. With a market cap of $450 billion, investors are finally viewing Tesla as a data company rather than a car company.
US car sales recover to 15.2 million in August on an annualized basis. That brings us almost back to pre-pandemic levels. This is the best indicator yet that the US is returning to a semi-normal economy. Of course, zero interest rates and other unprecedented incentives are a big help.
Consumer Spending popped, up 1.9% in July, which accounts for two-thirds of the US economy. Those who have money are spending like there’s no tomorrow, and with a global pandemic, maybe there won’t be. New car purchases were a big winner as buyers take advantage of 0% financing everywhere.
Weekly Jobless Claims dropped to 880,000, still terrible, but less terrible than last week. California claims have topped 8 million since the pandemic began. Continuing claims drop to 13.3 million, down from the 25 million peak in May.
US Unemployment Rate plunged to 8.4% in August, from 10.2%. The August Nonfarm Payroll report jumps by 1.37 million. It’s a much faster improvement than expected. Retail gained 248,000, Education & Health Services were up 147,000, and Leisure & Hospitality were up 174,000, Government was up 344,000. It’s all thanks to the miracle of government spending. The Dow Average is down 500 points anyway.
China to dump US Treasury bonds in response to Trump's escalating trade war, putting $200 billion in paper up for sale. They hold $1.07 trillion in total and is our largest single creditor. The (TLT) is down two points on the news, where I am running a double short position. Who is going to fund America’s massive borrowing?
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.
My Global Trading Dispatch bounced back hard with some super aggressive buying of stocks right at the Thursday and Friday market bottoms and selling short of bonds at the top.
By going full speed ahead, damn the torpedoes, I brought in the best two-day return in the 13-year history of the Mad Hedge Fund Trader, up a heroic 8.27%.
It started out as a terrible week, getting flushed out of one of my short positions in the (SPY) for a big loss as the market hit a new all-time high.
Then I got long banks (JPM), Apple (AAPL), Amazon (AMZN), Visa (V), and went triple short bonds (TLT). I still retain one short in the (SPY), which is now profitable. I would have bought Bank of America (BAC) and Citigroup (C), but the market ran away before I could write the trade alerts.
The instant crash was yet another gift. Right after I shorted bonds, the Chinese hinted that they would unload $200 million worth of their US Treasury bond holdings. The harder I work, the luckier I get.
If these positions expire at max profit in eight trading days, I will be back at new all-time highs. Notice that I am shifting my longs away from tech and toward domestic recovery plays.
You only need 50 years of practice to know when to bet the ranch.
That takes our 2020 year to date back up to 30.99%, versus -0.70% for the Dow Average. September stands at 4.44%. That takes my eleven-year average annualized performance back to 36.27%. My 11-year total return returned to 386.90%. My trailing one-year return popped back up to 51.60%.
It is a quiet week as always following the fireworks of the jobs data.
The only numbers that really count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, September 7, it is Labor Day in the US, and markets are closed.
On Tuesday, September 8 at 10:00 AM EST, the Economic Optimism Index for September is released.
On Wednesday, September 9, at 8:13 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, September 10 at 8:30 AM EST, the Weekly Jobless Claims are announced. US Core Producer’s Price Index for August is also out.
On Friday, September 4, at 8:30 AM EST, the US Inflation Rate for August is printed. At 2:00 PM The Bakers Hughes Rig Count is released.
As for me, I am headed back to Lake Tahoe to flee the horrific smoke in the San Francisco Bay Area drifting our way from the rampant California wildfires. If people don’t believe in global warming, they should come here where we have it in spades. We’ll even give you some.
At least we’ve been getting spectacular sunsets.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
September 4, 2020
Fiat Lux
Featured Trade:
(SEPTEMBER 2 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (SPY), (GLD), (GDX), (JPM), (BAC), (C), (WFC), (VIX), (VXX), (TLT), (TBT), (USO), (INDU), (SDS),
(TSLA), (SPY), (GLD), (GDX), (JPM), (BAC), (C), (WFC), (VIX), (VXX), (TLT), (TBT), (USO), (INDU), (SDS),
Below please find subscribers’ Q&A for the September 2 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: Tesla (TSLA) is down 25% today from the Monday high. What are your thoughts?
A: Yes, I've been recommending to people all last week that they dump their big leverage positions, like their one- and two-year LEAPS in Tesla and quite a few people got out at the absolute highs near $2,500 just before the new stock issue was announced. People who bought the Tesla convertible bonds ten years ago got an incredible tenfold return, plus interest!
Q: Are we at-the-money at the bear put spread in (SPY)?
A: Yes, and if we go any higher, you are going to get a stop loss in your inbox because I have good performance this year to protect. I do this automatically without thinking about it. In this kind of crazy market, you cannot run shorts indefinitely. Hope is not a strategy. And it’s easy to stop out of a loser when 90% of the time you know the next one is going to be a winner.
Q: Doesn’t gold (GLD) normally go up in falling stock markets?
A: Yes, in a normal market that’s what it does. The problem is that all asset classes have produced identical charts in the last 2.5 years, and when they all go up in unison, they all go down in unison. This time around, gold will sell off with the stock market and gold miners (GDX) will go down three times as fast. Remember gold miners are stocks first and gold plays second, so when a big stock dive hits, will see big dives in gold miners as well, as we saw in February and March.
Q: Why is JP Morgan (JPM) a good buy?
A: JP Morgan is the quality play in the banks. And once inflation starts to kick in and interest rates rise, and you get a positive yield curve and a strengthening economy—that is fantastic news for banks. They are also one of the few underperforming sectors left in the market, so in any stock market selloff banks will rise. And that’s JP Morgan (JPM), Bank of America (BAC), Citigroup (C) that will lead the charge. Avoid Wells Fargo (WFC). It’s still broken.
Q: I see iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) starting to move up. Should we buy it?
A: Only on dips and only if you expect a dramatic selloff in the stock market very soon, which I do. The (VXX) trade is very high risk. The contango is huge. I tried making money on it a couple of times this year and failed both times; this really is for professional intraday traders in Chicago with an inside look at customer order flows. Retail traders rarely make money on the (VXX) trade—usually, they get killed.
Q: Will gold hold up as interest rates rise?
A: No, it won’t. Rising interest rates are death for gold and other precious metals. Your gold theory is that interest rates stay lower for longer, which the Fed has essentially already promised us.
Q: What do you think of the United States Treasury Bond Fund (TLT)?
A: I’m looking to sell shorts in big size as I did in the spring and I’m looking for five-point rallies to sell into. I missed the last one last week because it just rolled over so fast on an opening gap down that you couldn’t get any trade alerts out, and that’s happening more and more. So, if we get going up to $166-$167, that will be a decent short and then you want to be doing something like the $175-$178 vertical bear put spread in October. I don’t think bonds are going to go to 0% interest rates, I think the real range is 50-95 basis points in a 10-year treasury yield. That is your trading range.
Q: Do you think big oil (USO) will transform into a low carbon energy industry if Biden wins?
A: I’ve been telling big oil that that’s what they’re going to have to do for 20 years. They all read Mad Hedge Fund Trader. And, they always laugh, saying oil will be dominant at least until 2050. Since then, they have become the worst-performing sector of the S&P 500 on a 20-year view, and my thought is that eventually, big oil takes over and buys the entire alternative energy industry, and slowly pulls out of oil. They have the engineering talent to pull it off and they have the cash to make the acquisitions. They will have to reinvent themselves or go out of business, just like everybody else.
Q: What could trigger the stock market pullback you mention in your slides? Because the bullish Fed quantitative easing trade is hard to stop.
A: It’s like the 2000 top, there was no one thing or even a couple things, that could trigger the top. It’s just the sheer weight of prices and exhaustion of new buyers, and that is impossible to see in advance, so all you can do is watch your charts. One down out of the blue the Dow Average ($INDU) will suddenly drop 1,000 points for no reason.
Q: When you say Europe is recovering, which data indicates this?
A: Well, when you look at Q2 GDP growth in Europe, they were only down 10% while the US was down 26%. That is purely a result of Europe having a much more aggressive COVID-19 response than the United States. There is no mask debate in Europe, it’s like 100% compliance. Here you have blue states wearing masks and red states not. The result of that, of course, is that the death rate in the red states is about five times higher than it is in blue states, on a per capita basis. That is why the US has the highest infection rate in the world, the highest death rate, and is why we lost an extra 16% of GDP growth in Q2.
Q: Will you trade a short Tesla again?
A: No, I’ve been hit twice on Tesla shorts in the last six months and we are now in La La land—it’s essentially untradable. I got a lot of people out of Tesla earlier this week, and then they announced their share new $5 billion issue, which they should have done a while ago
Q: Is there any way to play the home mortgage refi boom in the stock market with the 30-year mortgages at a record low 2.88%?
A: You buy the banks. If you call your bank and ask for a refi quote, it might be a week before they get back to you, they are so busy. Banks are also getting enormous subsidies from all these various lending and stimulus type programs, so money is raining down on them right now. Banks are now the cheapest sector in the market, selling at 6x earnings. It is probably the single greatest sector in the stock market right now to buy.
Q: I’ve been holding the ProShares UltraShort 20 year Plus Treasury fund (TBT) and it is moving up and down in the short-range. Should I sell?
A: No, I think we have more room to go on the (TBT), I think we could get to $18, which is about a 0.90% yield in the US Treasury bond market.
Q: Do you have a target on Tesla?
A: Well, my downside target would be its old breakout level. So, divide by five and you get $300. That equates to $1450 in the pre-split price. So, we could have a real monster selloff, like 40%, once this market loses momentum. It’s safe to say don’t buy Tesla up here.
Q: Is the ProShares UltraShort S&P 500 ETF (SDS) offering a good entry point here?
A: It is as soon as we rollover. In these momentum-driven markets, it’s best to wait for proof of a top before you start getting fancy with short plays. You can see how I got hammered several times in the last month by being too early on my shorts; and fortunately, I was able to hedge out most of those losses. You might not be able to do so.
Q: Are you planning on keeping your Fortinet spread?
A: Yes, to expiration, which is only 11 days off, unless we get an out-of-the-blue meltdown.
Q: Do you like Ali Baba (BABA)?
A: Yes; that is essentially a play on a Biden win in the election. If he wins, our war with China will cease and all of the China plays will go ballistic as we return to international trade, which has been powering our economy for the last 70 years.
Q: What about cruise lines like Carnival (CCL)?
A: I know they’re cheap. They’re selling out their 2021 summer cruises with customers betting that there will be a corona vaccine by then, or simply not caring whether there is a pandemic or not. The dedicated cruisers are desperate to cruise. That’s one reason why these stocks are holding up, but I don’t want to touch them. I think the recovery will take much longer than people realize.
Q: When do you buy gold?
A: Wait for a bigger dip.
Q: Should I be holding gold for the long term?
A: Yes; if you don’t want to trade it, just sitting on your position is fine. I think gold eventually goes to 3,000 after hitting an initial target of 2,200.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
September 2, 2020
Fiat Lux
Featured Trade:
(THE 2020 TECH BUBBLE)
(TSLA), (APPL), (AMZN), (NFLX)
It was February 19 when the tech comprised Nasdaq index swan dived from a liquidity crisis of epic proportions triggered by the virus only to recover the 30% of loss gains in 3 months.
When the Nasdaq made a V-shaped recovery, experts were shocked by the pace of the recovery as the Fed deployed every tool in the toolbox at saving the stock market.
Well, three months on from the Nasdaq index pulling level year to date, tech stocks are 20% higher as main street still labors under an economy that has seen net job losses of 10s of millions.
The liquidity poured into the system has been overwhelming, but many investors aren’t complaining.
Insane price action is the crucial signal to this market frothiness and can be seen in Tesla (TSLA) whose stock has gone from $85 in March to almost $500.
Apple (AAPL) has surpassed the $2 trillion mark.
The market is “looking through” any bad news and is putting a high premium on tech shares that have usurped the mojo of the rest of the broader economy.
Investors need to be in tech because it’s not only where the growth is, but it is where business models are mostly protected.
Last time I checked, computers and smartphones cannot get the coronavirus.
Billionaire Mark Cuban, team owner of Dallas Mavericks in the NBA, sees a huge tech bubble reminiscent of the infamous dot.com fiasco in the late 1990s and early 2000s.
Suddenly, the get-rich-quick crowd is investing with reckless abandon. It seems these upstarts have a fear of missing out and are chasing the market. Cuban is skeptical about the market rally and the bubble could burst in a couple of years.
Unlike the tech debacle at the turn of the millennium, Cuban opines that this year’s version has the Federal Reserve’s help. The U.S. central bank is pumping money into the pandemic-battered economy, but unintentionally supporting risk appetite on Wall Street. Bolder investors are even picking up shares of bankrupt companies.
People have a newfound interest in the stock market and hopping on the bandwagon because the Feds are injecting money to prop up the economy.
Cuban has investments in Amazon (AMZN) and Netflix (NFLX).
Shopify happens to be the largest publicly-listed company in Canada as of July 31, 2020, besting bank giant Royal Bank of Canada.
The 16-year old e-commerce company year-to-date gain is 170%.
I believe in the wisdom of crowds, and that markets have gotten it right far more often than they’ve been wrong.
Ultimately, there are simply too many dollars chasing too few trades.
Tech stocks have driven much of the U.S. market’s gains since March. Were it not for a handful of them, the S&P 500 may have performed more in line with other economies’ stock indices.
Between the market bottom on March 23 and August 20, shares of Apple, Amazon, Microsoft, Facebook, Alphabet, and graphics processor designer NVIDIA were responsible for a heart-stopping 33 percent—an entire third—of the uptrend in the S&P 500.
Apple alone was responsible for more than 11 percent of the market’s moves. Last week, the iPhone-maker became the first U.S. company to surpass $2 trillion in market capitalization, nearly as much as all the companies in the Russell 2000 Index of small-cap stocks combined. Apple is now valued more highly, in fact, than German stocks in the Deutsche Boerse Index and is closing in on Canadian stocks in the S&P/TSX Composite Index.
We are seeing unprecedented price action in the tech sector with the old normal of 1% gains in one trading day turning into 3% or 5%.
We will need some type of liquidity prevention event to experience a real major sell-off in technology and it is true, the higher we go, the harder we will fall.
Global Market Comments
August 31, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or A TALE OF FOUR CHARTS),
(NASD), (TLT), (GLD), (JPM), (FB), (AAPL), (AMZN), (TSLA)
Listening to 27 presentations during the Mad Hedge Traders & Investors Summit last week (click here for the replays), I couldn’t help but notice something very interesting, if not alarming.
All the charts are starting to look the same.
You would expect all the technology charts to be similar on top of the historic run we have seen since the March 23 bottom.
But I wasn’t only looking at technology stocks.
Analyzing the long-term charts for stock indexes, bonds, real estate, and gold, it is clear that they ALL entered identical parabolic moves that began during the notorious Christmas bottom in December 2018.
With the exception of the pandemic induced February-March hiccup this year, it has been straight up ever since.
The best strategy of all for the past three years has been to simply close your eyes and buy EVERYTHING and then forget about it. It really has been the perfect idiot’s market.
This isn’t supposed to happen.
Stocks, bonds, real estate, and gold are NEVER supposed to be going all in the same direction at the same time. The only time you see this is when the government is flooding the financial system with liquidity to artificially boost asset prices.
This latest liquidity wave started when the 2017 Trump tax bill initiated enormous government budget deficits from the get-go. It accelerated when the Federal Reserve backed off of quantitative tightening in mid-2019.
Then it really blew up to tidal wave proportions with the Fed liquidity explosion simultaneously on all fronts with the onset of the US Corona epidemic.
Asset classes have been going ballistic ever since.
From the March 23 bottom, NASDAQ is up an astounding 78%, bonds have gained an unprecedented 30%, the US Homebuilders ETF has rocketed a stagging 187%, and gold has picked up an eye-popping 26%.
That’s all well and good if you happen to be long these asset classes, as we have been advising clients for the past several months.
So, what happens next? After all, we are in the “What happens next?” business.
What if one of the charts starts to go the other way? Is gold a good hedge? Do bonds offer downside protection? Is there safety in home ownership?
Nope.
They all go down in unison, probably much faster than they went up. If fact, such a reversal may be only weeks or months away. If you live by the sword you die, by the sword.
Assets are now so dependent on excess liquidity that any threat to that liquidity could trigger a selloff of Biblical proportion, possibly worse than what we saw during February-March this year.
And you wouldn’t need simply a sudden tightening of liquidity to prompt such a debacle. A mere slowdown in the addition of new liquidity could bring Armageddon. The Fed in effect has turned all financial markets into a giant Ponzi scheme. The second they quit buying, they all crash.
The Fed and the US Treasury have already started executing this retreat surreptitiously through the back door. Some Treasury emergency loan programs were announced with a lot of fanfare but have yet to be drawn down in size because the standards are too tight.
The Fed has similarly shouted from the rooftops that they would be buying equity convertible bonds and ETFs but have yet to do so in any meaningful way.
If there is one saving grace for this bull market, it's that it may get a second lease on life with a new Biden administration. Now that the precedent for unlimited deficit spending has been set by Trump, it isn’t going to slow down anytime soon under the Democrats. It will simply get redirected.
One of the amazing things about the current administration is that they never launched a massive CCC type jobs program to employ millions in public works as Roosevelt did during the 1930s to end that Great Depression. Instead, they simply mailed out checks. Even my kids got checks, as they file their own tax returns to get a lower tax rate than mine.
I think you can count on Biden to move ahead with these kinds of bold, expansionist ideas to the benefit of the nation. We are still enjoying enormously the last round of such spending 85 years ago, the High Sierra trails I hiked weeks ago among them.
Stocks soared on plasma hopes. Trumps cited “political” reasons at the FDA for the extended delay. Scientists were holding back approval for fears plasma was either completely useless and would waste huge amounts of money or would kill off thousands of people. At best, plasma marginally reduces death rates for those already infected, but you’re that one it’s worth it. Anything that kills Covid-19 is great for stocks.
Existing Home Sales were up the most in history in July, gaining a staggering 24.7% to 5.86 million units. Bidding wars are rampant in the suburbs. Investors are back in too, accounting for 15% of sales. Inventories drop 21% to only 3.1 months. These are bubble type statistics. Can’t hold those Millennials back! This will be a lead sector in the market for the next decade. Buy homebuilders on dips.
Goldman said a quarter of job losses are permanent, as the economy is evolving so fast. Many of these jobs were on their way out before the pandemic. That could be good news for investors as those cost cuts are permanent, boosting profits. At least, that’s what stocks believe.
Hedge funds still love big tech, even though they are now at the 99th percentile of historic valuation ranges. Online financials, banks, and credit card processors also rank highly. Live by the sword, die by the sword.
Massive Zoom crash brought the world to a halt for two hours on Monday morning. It looked like a Chinese hack attack intended to delay online school opening of the new academic year. Unfortunately, it also delayed the start of the Mad Hedge Traders & Investors Summit.
The Dow Rebalancing is huge. Dow Jones rarely rejiggers the makeup of its famed but outdated index. But changing three names at once is unprecedented. One, Amgen (AMGN) I helped found, working on the team the discovered its original DNA sequencing. All of the founding investors departed yonks ago. The departure of Exxon (XOM) is a recognition that oil is a dying business and that the future is with Salesforce (CRM), whose management I know well. One big victim is Apple (AAPL) whose weighting in the index has shrunk.
The end of the airline industry has begun, with American (AAL) announcing 19,000 layoffs in October. That will bring to 40,000 job losses since the pandemic began. The industry will eventually shrink to a handful of government subsidized firms and some niche players. Avoid like a plat in a spiral dive.
30 million to be evicted in the coming months, as an additional stimulus bill stalls in Congress. It will no doubt be rolling evictions that stretch out over the next year. This will be the true cost of failing to deal with the virus.
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.
My Global Trading Dispatch suffered one of the worst weeks of the year, giving up most of its substantial August performance. If you trade for 50 years, occasionally you get a week like this. The good news is that it only takes us back to unchanged on the month.
Longs in banks (JPM) and gold (GLD) and shorts in Facebook (FB) and bonds (TLT) held up fine, but we paid through the nose with shorts in Apple (AAPL), Amazon (AMZN), and Tesla (TSLA).
That takes our 2020 year to date down to 26.56%, versus +0.05% for the Dow Average. That takes my eleven-year average annualized performance back to 35.58%. My 11-year total return retreated to 382.47%.
It is jobs week so we can expect a lot of fireworks on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, August 31 at 10:30 AM EST, the Dallas Fed Manufacturing Index for August is released.
On Tuesday, September 1 at 9:45 AM EST, the Markit Manufacturing Index for August is published.
On Wednesday, September 2, at 8:13 AM EST, the August ADP Employment Change Index for private-sector job is printed.
At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, September 3 at 8:30 AM EST, the Weekly Jobless Claims are announced.
On Friday, September 4, at 8:30 AM EST, The August Nonfarm Payroll Report is released.
At 2:00 PM The Bakers Hughes Rig Count is released.
As for me, I’ll be catching up on my sleep after hosting 27 speakers from seven countries and entertaining a global audience of 10,000 from over 50 countries and all 50 US states. We managed to max out Zoom’s global conferencing software, and I am now one of their largest clients.
It was great catching up with old trading buddies from decades past to connect with the up-and-coming stars.
Questions were coming in hot and heavy from South Africa, Singapore, all five Australian states, the Persian Gulf States, Saudi Arabia, East Africa, and every corner of the United Kingdom. And I was handling it all from my simple $2,000 Apple laptop from nearby Silicon Valley.
It is so amazing to have lived to see the future!
To selectively listen to videos of any of the many talented speakers, you can click here.
See you there.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
