Global Market Comments
March 25, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR GAME CHANGER)
(SPY), (TLT), (BIIB), (GOOG), (BA), (AAPL), (VIX), (USO)
Posts
“When the facts change, I change. What do you do sir?” is a famous quote from the great economist John Maynard Keynes which I keep taped to the top of my monitor and constantly refer to.
The facts certainly changed on Wednesday when the Federal Reserve announced a change in the facts for the ages. Not only did governor Jay Powell announce that there would be no further rate increases in 2019.
He also indicated that the Fed would end its balance sheet unwind much earlier than expected. That has the effect of injecting $2.7 trillion into the US financial system and is the equivalent of two surprise interest rate CUTS.
The shocking move opens the way for stocks to trade up to new all-time high, with or without a China trade deal. Only the resumption of all-out hostilities, like the imposition of new across the board 25% tariffs, would pee on this parade.
As if we didn’t have enough to discount into the market in one shot. I held publication of this letter until Sunday night when we could learn more about the conclusion of the Mueller Report. There was no collusion with Russia and there will be no obstruction of justice prosecution.
However, the report did not end the president’s legal woes as it opened up a dozen new lines of investigation that will go on for years. The market could care less.
At the beginning of the year, I listed my “Five Surprises for 2019”. They were:
*The government shutdown ended and the Fed makes no move to raise interest rates
*The Chinese trade war ends
*The US makes no moves to impeach the Trump, focusing on domestic issues instead
*Britain votes to rejoin Europe
*The Mueller investigation concludes that he has an unpaid parking ticket in
NY from 1974 and that’s it
Notice that three of five predictions listed in red have already come true and the remaining two could transpire in coming weeks or months. All of the above are HUGELY risk positive and have triggered a MONSTER Global STOCK RALLY
Make hay while the sun shines because what always follows a higher high? A lower low.
The Fed eased again by cutting short their balance sheet unwind and ending quantitative tightening early. It amounts to two surprise interest rate cuts and is hugely “RISK ON”. New highs in stocks beckon. This is a game changer.
Bonds soared and rates crashed taking ten-year US Treasury bond yields down to an eye-popping 2.42%, still reacting to the Wednesday Fed comments. This is the final nail in the bond bear market as global quantitative easing comes back with a vengeance. German ten years bonds turn negative for the first time since 2016.
Interest rates inverted with short term rates higher than long term ones for the first time since 2008. That means a recession starts in a year and the stock market starts discounting that in three months.
Interest rates are now the big driver and everything else like the economy, valuations, and earnings are meaningless. Foreign interest rates falling faster than ours making US assets the most attractive in the world. BUY EVERYTHING, including stocks AND bonds.
Biogen blew up canceling their phase three trials for the Alzheimer drug Aducanumab. This is the worst-case scenario for a biotech drug and the stock is down a staggering 30%. Some $12 billion in prospective income is down the toilet. Avoid (BIIB) until the dust settles.
Europe fined Google $1.7 billion, in the third major penalty in three years. Clearly, there’s a “not invented here” mentality going on. It's sofa change to the giant search company. Buy (GOOG) on the dip.
More headaches for Boeing came down the pike. What can go wrong with a company that has grounded its largest selling product? Answer: they get criminally prosecuted. That was the unhappy news that hit Boeing (BA), knocking another $7 off the shares. It can’t get any worse than this, can it? Buy this dip in (BA).
Indonesia canceled a massive 737 order for 49 planes, slapping the stock on the face for $9. Apparently, they are unwilling to wait for the software fix. Buy the dip in (BA).
Oil prices hit a new four-month high at $58 a barrel as OPEC production caps work and Venezuela melts down. At a certain point, high energy prices are going to hurt the economy. Buy (USO) on dips.
The CBOE suspended bitcoin futures due to low volume and weak demand. It could be a fatal blow for the troubled cryptocurrency. Avoid bitcoin and all other cryptos. They’re a Ponzi scheme.
Equity weightings hit a 2 ½ year low as professional institutional money managers sell into the rally. They are overweight long defensive REITs and short European stocks. Watch out for the reversal.
December stock sellers are now March buyers. Expect this to lead to a higher high, then a lower low. Volatility is coiling. Don’t forget to sit down when the music stops playing.
Volatility hits a six-month low with the $12 handle revisited once again down from $30. (VIX) could get back to $9 before this is all over. Avoid (VIX) as the time decay will kill you.
Weak factory orders crush the market, down 450 points at the low. Terrible economic data is not new these days. But it ain’t over yet. Buy the dip.
The Mad Hedge Fund Trader was up slightly on the week. That’s fine, given the horrific 450 point meltdown the market suffered on Friday. We might have closed unchanged on the day but for rumors that the Mueller Report would be imminently released.
March is still negative, down -1.54%. My 2019 year to date return retreated to +11.74%, boosting my trailing one-year return back up to +24.86%.
My nine-year return recovered to +311.88%. The average annualized return appreciated to +33.71%. I am now 40% in cash, 40% long and 20% short, and my entire portfolio expires at the April 18 option expiration day in 14 trading days.
The Mad Hedge Technology Letter used the weakness to scale back into positions in Microsoft (MSFT), Alphabet (GOOGL), and PayPal (PYPL), which are clearly going to new highs.
The coming week will be a big one for data from the real estate industry.
On Monday, March 25, Apple will take another great leap into services, probably announcing a new video streaming service to compete with Netflix and Walt Disney.
On Tuesday, March 26, 9:00 AM EST, we get a new Case Shiller CoreLogic National Home Price index which will almost certainly show a decline.
On Wednesday, March 27 at 8:30 AM, we get new Trade Deficit figures for January which have lately become a big deal.
Thursday, March 28 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also then get another revision for Q4 GDP which will likely come down.
On Friday, March 29 at 10:00 AM, we get February New Home Sales. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’m praying that it stops snowing in the High Sierras long enough for me to get over Donner Pass and spend the spring at Lake Tahoe. We are at 50 feet for the season, the second highest on record.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 22, 2019
Fiat Lux
Featured Trade:
(I HAVE AN OPENING FOR THE MAD HEDGE FUND TRADER CONCIERGE SERVICE),
(MARCH 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(BA), (FCX), (IWM), (JNJ), (FXB), (VIX), (JPM)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What do you make of the Fed’s move today in interest rates?
A: By cutting short their balance sheet unwind early and ending quantitative tightening (QT) early, it amounts to two surprise interest rate cuts and is hugely “RISK ON”. In effect, they are injecting $2.7 trillion in new cash into the financial system. New highs in stocks beckon, and technology stocks will lead. This is a game changer. In a heartbeat, the world has moved from QT to QE, and we already know what that means for socks. They go up.
Q: Why buy Boeing shares (BA) ahead of a global recession?
A: It’s an 18-day bet that I’ve made in the options market. The US economic data is already indicating recession. The data will continue to worsen and that will continue until we go into a recession. But that’s not happening in 18 trading days. Also, we’re getting into Boeing down 20% from the top so our risk is minimal.
Q: Why are we in an open Russell 2000 (IWM) short position?
A: We now have three long positions— 40% on the long side with the Freeport McMoRan (FCX) double position. It’s always nice to have something on the other side to hedge sudden 145-point declines like we have today. Ideally, you want to be hedged at all times. But it’s hard to fund good companies to sell short in a bull market.
Q: Do you need some euphoria to get the Volatility Index (VIX) to the $30-$60 level?
A: No, you don’t need euphoria. You need fear and panic. The (VIX) is a good “fear index” in that it rises when markets are crashing and falling when markets are slowly rising. And for that reason, I’m not buying (VIX) right now. With a sideways to slowly rising market, we could see the $9 handle again before this move is over.
Q: What should be the exit on the Russell 2000 (IWM)?
A: One choice is taking 80% of the maximum profit when you hit it—that’s where the risk-reward tips against you if you keep the position. The other option is to be greedy and run it all the way into expiration, taking the full profit. It depends on your risk tolerance. Remember, we hit the 80% profit three times in March only to stop out of positions for a loss. The market just doesn’t seem to want to let you take the whole 100%.
Q: Why are all your expirations on April 18?
A: That’s when the monthly options expire; therefore, they have the most liquidity of any other option expiration. If you go with the weeklies before or after the monthlies, the liquidity declines dramatically, which can be very frustrating. Since I used to cover only the largest clients, we could only trade in monthlies because we needed the size.
Q: Will Johnson and Johnson (JNJ) survive all those talcum powder lawsuits?
A: They’ve been going on for 10 years—you’d think they’d know by now if they have asbestos in their talcum powder or not. I highly doubt this will get anywhere; they’ll probably win everything on appeal.
Q: What do you anticipate on Brexit?
A: I think eventually Brexit will fail; we’ll have a referendum which will get voted down, Britain will rejoin Europe, and the British pound (FXB) will go to $1.65 to the dollar where it was when Brexit hit three years ago, up from $1.29 today. It would be economic suicide for Britain to leave Europe, as they would have to compete against Europe, the US, and China alone, and they are slowly figuring that out. Demographic change alone over three years would guarantee that another referendum fails.
Q: My partner owns JP Morgan (JPM). Do you still say banks are not a good place to be?
A: Yes. Fintech is eating their lunch. If they couldn't go up with interest rates moving up in the right direction, they certainly won’t be doing better now that interest rates are going down. Legacy banks are the new buggy whip industry.
Q: Why are commodities (FCX) increasing with a coming recession?
A: They are a hard asset and do better in inflation. Also, they’re stimulating their economy in China and we aren't—commodities do better in that situation as China is the world’s largest buyer of commodities, as do all Chinese investments.
Q: Would you buy Biogen (BIIB) on the dip? Its down 30% today.
A: Canceling their advanced phase three trials for the Alzheimer drug Aducanumab is the worst-case scenario for a biotech company. Some $12 billion in prospective income is down the toilet and many years of R&D costs are a complete write-off. Avoid (BIIB) until the dust settles.
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 21, 2019
Fiat Lux
Featured Trade:
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE),
Global Market Comments
February 11, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or DON’T STAND NEXT TO THE DUMMY),
(AAPL), (MSFT), (TSLA), (VIX), (TLT), (TBT), (FXI)
When I was a war correspondent (Cambodia, Laos, Iraq, Kuwait, Indonesia), my seniors gave me a sage piece of advice that saved my life many times.
“Don’t stand next to the dummy.”
Don’t go near the guy wearing the Hawaiian shirt, NY Yankees baseball cap, and aviator sunglasses. You want to be dressed in the same color as the troops and blend in as much as possible. Otherwise, the enemy will aim at the dummy and hit you.
As much as I tried, at 6’4” I was never going to blend in anywhere in Asia. So, I went into the stock market instead.
Now 50 years later, I am facing another dummy problem. Except that the next hit I may take will be of the financial kind rather than the metallic one.
The reaction to the Trump tax cuts is going to be far worse than any benefits the privileged class was able to reap from the cuts in the first place. Listening to the proposals aired, I shudder: A maximum 70% tax rate, the end of special estate tax treatment, a millionaire’s surtax, and the banning of corporate share buybacks.
It’s that last one that that will be particularly damaging for the US economy. Often, a company’s best possible investment is in its own shares where returns are frequently higher than possible through investing in their own business. Just think of all those shares Apple (AAPL) bought at $25, now at $170, and Microsoft (MSFT) picked up at $10.
This is one of the only occasions were management and shareholder interests are one and the same. The event is tax-free as long as you don’t sell your shares. And companies don’t have to pay dividends on stock they have retired, boosting profits even further.
The media loves pandering to the most extreme views out there. I know because I used to do it myself. Cooler heads will almost certainly prevail when the tax code is completely rewritten again in two years. Still, one has to worry.
The week had plenty for we analysts and strategists to chew on.
Is the Fed pausing because of political pressure or an economy that is falling apart? Neither answer is good for equity holders. Start cutting back risk while you can. There are lots of bids on the way up, but none on the way down as December showed.
There has lately been a rising tide of weak data to confirm the negative view.
Factory orders nosedived 0.6% in November, the worst in a year. Funny how nobody wants to make stuff ahead of a recession. ISM Non-Manufacturing Index Cratered to 56.7. Should we be worried? Hell, yes! Why are we getting so many negative data points and stocks keep rising?
Farm sector bankruptcies are soaring, hitting a decade high. Apparently, the trade wars and global warming aren’t working for them. Ironically, ag prices are about to take off to the upside when a Chinese trade deal gets done. Buy the ags for a trade.
Tesla (TSLA) cut prices again in a blatant bid for market share and global domination. The low-end Tesla 3 price drops to $42,900. Next stop $35,000. Too bad they laid off my customer support personnel to cut costs. I can’t find my AM radio.
China trade talks (FXI) hit the skids, taking the stock market down with it as an administration official concedes they are “nowhere close to a deal” with the deadline 3 weeks off. Trump desperately needs a deal while the Chinese don’t, who think they can do better under the next president. If you disagree with this view in China, your organs get harvested and sold on the open market.
The European economy is also going down the drain with the EC’s forecast of economic growth cut from 1.9% to 1.3%. The US-China trade war is cited as a major factor. The global synchronizes slowdown accelerates. Looks like they’ll have more time to drink cheap wine and smoke Gauloises.
The Volatility Index (VIX) hit $15 and that seems to be the bottom for the time being. The market was more overbought than at any time since July. Is the “fear gauge” signaling that happy days are here again? I doubt it. Don’t whistle past the graveyard.
The Mad Hedge Market Timing Index is entering danger territory with a reading of 67 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.
I stopped out of my short portion in Apple when my stop loss was triggered by pennies. The second I was out, it began a $6 selloff. Welcome to show business.
I used a major 3 ½ point rally in the bond market to put on a new double short position there. The yield on the ten-year US Treasury bond has to plunge to 2.40% in a month, a three-year low, for me to lose money on this position. It’s a bet that I am happy to make.
My 2019 year to date return leveled out at +10.03%, boosting my trailing one-year return back up to +35.75%.
My nine-year return maintained +310.17%, a new high. The average annualized return stabilized at +33.83%.
I am now 70% in cash and triple short the bond market.
Government data is finally starting to trickle out now that the government shutdown is over.
On Monday, February 11 there is nothing of note to report. Everything important is delayed.
On Tuesday, February 12, 10:00 AM EST, we get the January NFIB Small Business Index. Earnings for Activision Blizzard (ATVI) are out and should be a complete disaster, along with Twilio (TWLO).
On Wednesday, February 13 at 8:30 AM EST, the all-important January Consumer Price Index is published. Barrick Gold (GOLD) reports.
Thursday, February 14 at 8:30 AM EST, we get Weekly Jobless Claims. We also get December Retail Sales which should be good.
On Friday, February 15, at 8:30 AM EST, the February Empire State Index is out. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I will be battling my way through the raging snowstorms of the High Sierras trying to get over Donner Pass to my Lake Tahoe estate. Unless I clear the six feet of snow off the roof soon, or the house will get crushed from the weight as it did three years ago.
Where are all those illegal immigrants hanging out in front of 7-Eleven now that I need them?
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 8, 2019
Fiat Lux
Featured Trade:
(FEBRUARY 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (FXA), (NVDA), (SPY), (IEUR),
(VIX), (UUP), (FXE), (AMD), (MU), (SOYB)
