Global Market Comments
January 10, 2020
Fiat Lux
Featured Trade:
(FRIDAY, FEBRUARY 7 PERTH, AUSTRALIA STRATEGY LUNCHEON)
(JANUARY 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(VIX), (VXX), (TSLA), (SIL), (SLV),
(WPM), (RTN), (NOC), (LMT), (BA), (EEM)
Posts
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 8 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: If the market is doing so well, why is the Fed flooding the market with liquidity?
A: It’s election year, so their primary focus is to get the president reelected and do everything they can to make sure that happens. If we continue at the current rate, the Fed will have zero ability to get us out of the next recession which will make it much deeper than it would be otherwise. Doing this level of borrowing and keeping interest rates near zero with the stock market going up 30% a year is insane, and we will be severely punished for it in the future.
Q: With the Volatility Index (VIX) near a 12-month low and the Mad Hedge Market Timing Index near an all-time high, is this a good time to put on LEAPs for the (VXX)?
A: Yes, in fact, a (VXX) LEAP (Long Term Equity Participation Security, or one-year-plus option spread), is the only LEAP I would put on right now. I get asked about LEAPs every day because returns on them are so huge, but I am holding back on a trade alert on a (VXX) leap because it seems like in January they really want to run this market high and run volatility down low. On the next move to a (VIX) in the $11 handle, you want to put out a one-year LEAP with a $16 strike. And that is essentially a guarantee that you will make money sometime in the coming year on a big down move in the stock market. (VXX) LEAPs are coming, just not yet.
Q: Do you think Iran is done with their attacks against the US or will there be more?
A: The belief there will be no more attacks is to call the end of a 40-year trend. There will be more attacks, and those are going to be your long side entry points. Every geopolitical crisis for the last 10 years has been a great entry point on the long side and the next one will be no different. Just hope you are not one of the victims.
Q: What would a war with Iran mean for the US economy and should I buy defense stocks?
A: You can take the Iraq war, which cost us about $4 trillion, and multiply that by three times to $12 trillion because Iran’s economy is three times the size of Iraq and has a much more sophisticated military. The Iranians are really in a good position because they know the US has no appetite for another Iraq, Afghanistan, or Vietnam. They just want us out of their neighborhood. As far as defense stocks, those really move on very long-term investments and production for government contracts. When you get an attack like this, you get a one-day pop of 5% and then they usually give it all back. So, I wouldn't be chasing defense stocks like Lockheed Martin (LMT), Northrop Grumman (NOC), and Raytheon (RTN) at these high levels—it’s a very high-risk trade.
Q: Will Boeing (BA) take heat from the Ukrainian crash in Tehran?
A: Yes. It’s down about $5, and you might even consider running the numbers on a February call spread. This may be the last chance to get into Boeing at those low levels. The 737 MAX will fly this year, their most important product.
Q: What’s your opinion on Thai Baht?
A: This really is the home here for opinion on all asset classes, large and small. The Thai Baht will rise. It’s a weak dollar play. Money is pouring into all the emerging currencies because of the massive overborrowing that’s going on in the U.S. Countries that overborrow and print money like crazy always debase their currencies over the long term. That makes emerging markets (EEM) a great buy, which are trading at half the valuation levels of US ones.
Q: U.S. hog farmers missed the opportunity of a lifetime last year because of African Swine Flu. Any thoughts on the price of pork and commodities for 2020?
A: They should do better now that we’re at least getting relief from an escalation of the trade war. However, I gave up covering agriculture because the American farmer is just too efficient; every year they just produce more and more crops with fewer and fewer inputs—it’s a loser’s game. They occasionally get bad weather and get a big price spike, but that Is totally unpredictable. I'm staying away from ag stocks. In terms of buying soybeans or Apple, or Google, or Amazon, I’ll take the tech stocks any day over ag’s. Plus, the insiders have a big advantage in ag’s.
Q: What is the ticker symbol for the Silver ETFs?
A: The Silver metal ETF is (SLV), Silver miners is (SIL), and the Silver Royalty Trust, Wheaton Precious Metals, is (WPM).
Q: Why has volatility been so minimal even with massive geopolitical risk going up?
A: Liquidity trumps all. This month, the fed is pumping a record $160 billion into the financial system, and all that money is going into stocks, making them go up and making volatility go down. Until that changes, this trend will continue.
Q: Apple just passed $300, is the next stop $400?
A: Yes, and we could get that this year in the run up to 5G in September. By the way, my average cost on my Apple shares split adjusted is 50 cents. I bought it in the late 1990s when the company was weeks away from bankruptcy.
Q: Any thoughts on Tesla (TSLA)?
A: Yes, go out and buy the car, not the stock. Wait for some kind of pullback. We have just had a fantastic run of good news kicking the stock from $180 up to $490. I think we will make it up to $550 on this run. But you don’t want to get involved unless you’re a day trader because now the risk is very high. The next big move for Tesla is going to be the announcement of a production factory in Berlin, where they will try to take on Mercedes, BMW, VW, and Audi on their home turf. Then, they will own Europe.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
December 20, 2019
Fiat Lux
Featured Trade:
(DECEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(BA), (CRSP), (BABA), (GLD), (PANW), (VIX), (VXX)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader December 18 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: What is the status of Boeing (BA) and when should I buy it?
A: Their 737 production was shut down because they literally ran out of space to park completed planes. They have something like 400 of them now sitting around on tarmacs all around northern Washington state. This is the worst-case scenario so it is a very tempting place to buy; I would do something like a February 2020 $250-$270 vertical bull call spread, make 10% in a month, and be conservative. If it weren't year-end, and I didn't already have my year in the bag, I would probably buy Boeing right here.
Q: Do you recommend CRISPR (CRSP) therapeutics as a buy?
A: Yes, but on a dip. I always hate buying stocks after they doubled. At some point in 2020, we will see correction in biotech stocks, and then you want to load the boat again. Here, I’m buying nothing.
Q: Is Palo Alto Networks (PANW) a buy at these levels?
A: Yes, it’s already had its correction—it's one of the few stocks that are buyable at these levels. But I would do something like a call spread, which is limited risk. As far as a pairs trade with Palo Alto vs Nvidia...I would not touch that with a ten-foot pole, because you can’t know the internal nature of two companies like that well enough to buy one and sell short the other against it. You could really get destroyed on that pairs trade, so don’t make that mistake.
Q: Do you think the US dollar (UUP) will head higher or lower next year?
A: It will go a lot lower, as the chickens from all the government borrowing come home to roost. More borrowing brings a lower dollar, which brings lower everything in the US; all US dollar-denominated assets will get hurt, and this may be what eventually kills off the bull market in stocks. Start buying the Euro (FXE) on dips.
Q: What do you think about Boris Johnson winning the UK election?
A: It is a disaster and will lead to the end of Great Britain. Scotland will go independent, Northern Ireland will join the Republic of Ireland, and even Wales may break off and form its own country. So, England will be reduced to a tiny rump of a country with a much lower standard of living. It may take 10 years to happen, but that’s where it’s going.
Q: Does the recent positive housing data mean we aren’t having a recession in 2020?
A: Yes, in fact the market has been backing out of a 2020 recession for the last three months; and the leading sector in the recovery has been housing, caused partly by extremely low-interest rates but also partly by millions of new millennials pouring into the housing market for the first time. Finally, my basement is empty. That explains why the entry-level and middle level of the market are strong, and the high end is still decreasing in price.
Q: Back in August, the global economy looked to be stalling, yet it was a great time to buy stocks.
A: That is exactly when to buy stocks—when the economy is terrible. If you get used to buying on the bad news and selling on the good news you will do very well as a trader. Most people do the opposite—people were dumping stocks in August. And that of course was when we went with one of our rare 100% longs. By the way, this happens every August, which is why I take my vacations in July.
Q: Do you see a global slowdown during the melt-up?
A: Well, the economy is still slowing down. It never stopped slowing down—we’re probably looking at a 1.5% GDP this quarter. However, in liquidity-driven markets, you don’t look at fundamentals; you look at the amount of cash that is available to buy equities, that’s why you buy equities. That said, if we ever do get a real economic recovery, you might actually have stocks going down because a price-earnings multiple of 20X is not an ideal place to buy stocks.
Q: What do you prefer for a Volatility Index (VIX) trade?
A: An option on the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) is one. Go long dates, like a year, and deep out-of-the-money, like the $18 strike price, to minimize the hot from Time decay. If your (VIX) goes back up to $25 the (VXX) will soar to $27 and you will make a fortune.
However, if you have the facility to trade futures, then options on the futures in the VIX is how most professionals will trade that.
Q: Should we be worried about the Repo crisis as we approach the end of the quarter?
A: Absolutely, you should be worried—the Fed might have to come through with another round of quantitative easing in order to prevent a surprise overnight pop in interest rates to 5%. That’s what happened last quarter; it could certainly happen again. The basic problem is that the structure of the US debt markets aren't built to handle the volume of borrowing that’s coming through from the US government, so with debt at an all-time high, we’re kind of in new territory here in terms of whether or not markets can actually handle that amount of borrowing. Total government borrowing next year will probably be $1.75 trillion dollars.
Q: What do you make of gold (GLD) at these levels?
A: Cheap but getting cheaper. You want to buy it the day the stock market peaks out in Q1 2020.
Q: Are Chinese equities a buy after the phase one trade deal?
A: Yes, and Alibaba (BABA) is probably your first pick in the Chinese area. During the whole trade war, the Chinese took significant action to stimulate their economy in order to offset the drag on trade. That stimulus is still out there, so we could see a reacceleration in the economy now that the trade war is no longer worsening.
Global Market Comments
September 5, 2019
Fiat Lux
SPECIAL VOLATILITY ISSUE
Featured Trade:
(SHOPPING FOR FIRE INSURANCE IN A HURRICANE),
(VIX), (VXX), (XIV),
(THE ABCs OF THE VIX),
(VIX), (VXX), (SVXY),
I am one of those cheapskates who buy Christmas ornaments by the bucketload from Costco in January for ten cents on the dollar because my 11-month theoretical return on capital comes close to 1,000%.
I also like buying flood insurance in the middle of the summer drought when the forecast in California is for endless days of sunshine. That is what we had at the end of July when the (VIX) was plumbing the depths of $12.
Get this one right, and the profits you can realize are spectacular.
It gets better.
If the bottom in volatility exactly coincides with the peak in the stock market that it measures, volatility could be headed back up to the 30% handle, and maybe more.
I double dare you to look at the charts below and tell me this isn’t happening.
Watch carefully for other confirming trends to affirm this trade is unfolding. Those would include a strong dollar, and a weak Japanese yen, Euro, and rising fixed income instruments of any kind.
Notice that every one of these is happening this week!
Reversion to the mean, anyone?
You may know of this from the many clueless talking heads, beginners, and newbies who call (VIX) the “Fear Index”.
For those of you who have a Ph.D. in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of option contracts on the S&P 500 index (SPX).
The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front-month and second-month expirations.
The (VIX) is the square root of the par variance swap rate for a 30-day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever-useful Black-Scholes equation.
You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?
For the rest of you who do not possess a Ph.D. in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don’t know what an SAT test is, this is what you need to know.
When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. Period. End of story. Class dismissed.
The (VIX) is expressed in terms of the annualized monthly movement in the S&P 500 (SPX) which, with the (VIX) today at $10, is at $72.54.
So for example, a (VIX) of $10 means that the market expects the index to move 2.89%, or $72.54 S&P 500 points, over the next 30 days.
You get this by calculating $10/3.46 = 2.89%, where the square root of 12 months is 3.46.
The volatility index doesn’t really care which way the stock index moves. If the S&P 500 moves more than the projected 2.89% in ANY direction, you make a profit on your long (VIX) positions.
I am going into this detail because I always get a million questions whenever I raise this subject with volatility-deprived investors.
It gets better.
Futures contracts began trading on the (VIX) in 2004 and options on the futures since 2006.
Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the “hedge” in hedge fund.
Global Market Comments
August 19, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHAT A ROLLER COASTER RIDE!),
(SPY), (TLT), (VIX), (VXX), (M),
(WMT), (FB), (AMZN), (GOOGL), (IWM)
I like roller coasters. The Giant Dipper at the Santa Cruz Boardwalk is tough to beat, the last operating wooden coaster in the United States. And I’ll always have fond memories of the Cyclone at Coney Island in New York.
I especially liked this week in the financial markets, which provided more profitable trading opportunities, both on the long and the short side, that any other week of the past decade.
Perhaps the highpoint was on Thursday when I was staring at my screens watching ten year US Treasury bond yields (TLT) bottom at a near historic 1.46%, and my own Mad Hedge Market Timing Index plunging to a lowly 19.
Impulsively, I covered the last of my short positions and started piling on longs in the FANGs. The next morning, the Dow Average opened up 300 points. But then, it’s easy to be bold and decisive when you’re up 30% on the year, compared to only 11% for the Dow Average.
And guess what? The best may be yet to come!
As long as the Volatility Index stays over $20, you will be able to print all the money you want with options spreads. I’m talking 10%-15% A MONTH!
All eyes are now on September 1 when the Chinese announce their own retaliation to our tariff increase. Will they target ag again? Or does the bond market (TLT) take the hit this time (the Chinese government owns $900 billion worth of our debt).
And now for the question that everyone is asking: How far will the stock market fall in this cycle. We have already plunged 10% from the highs on an intraday basis. Could we drop another 10% in this period of high anxiety? Certainly. However, I tend to think it will be less than that.
The initial market pop on Monday came when the new Chinese tariffs were delayed, from September 1 to December 15, on some items. Tell me who saw this one coming. The potential costs of the tariffs are hitting the US more than China. It was worth a 550-point rally in the Dow Average. In 50 years, I’ve never seen such blatant market manipulation.
Gold hit a new six-year high, with the collapse of the Argentine Peso a new factor. A poor election result drove the beleaguered currency down 15% in one day, a massive move.
Now you have to worry about what’s happening in China AND Argentina. For the first time in history, gold now has a positive yield versus the Europe and the Japanese Yen, which both offer negative interest rates.
Hong Kong is becoming a factor driving US markets down. If there is a repeat if the 1989 Tiananmen Square massacre where thousands died, global markets could collapse. The hit to growth will be more than it currently can stand in its present weakened state.
Inflation is taking off, with Core Consumer Inflation for July coming in at a red hot 0.3%, delivering the strongest two-month price burst since 2006. If it keeps up, you can kiss those future interest rate cuts goodbye.
Germany is in recession. That is the only conclusion possible when you see Q2 at -0.1% growth and the economy still in free fall. The ZEW’s figures regarding Germany yesterday were nothing short of horrific as the Economic Sentiment Index fell to -44. When you damage China’s economy, it puts the rest of the world into recession. The global economy has become so interlinked, it can’t become undone without another great recession.
Bonds rates bottomed yesterday, at least for the short term, the intraday low for the ten-year US Treasury yield hitting 1.46%. Welcome to inversion land, where long term interest rates are below short-term ones. Confidence in the economy is melting like an Alaskan glacier. But with three more 25 basis point rate cuts to come, an eventual break below 1.0% is inevitable. Watch for stocks to remake half their recent losses.
Consumer Sentiment cratered in August from 97.0 estimated to 92.1. And that was before the stock market sold off. Consumer spending remains strong. The last time it was this strong was at the market top in 2008, the market top in 1999, and the market top in 1987.
July Housing Starts plunged 4.0%, to 1.191 million units as homebuilders move into recession mode. Not even record low-interest rates can get them to stick their necks out this time. Those that did last time got wiped out.
It’s been pedal to the metal all month with the Mad Hedge Trade Alert Service, with no less than 31 Trade Alerts going out so far. Some 18 or the last 19 round trips have been profitable, generating one of the biggest performance jumps in our 12-year history.
Since July 12, we have clocked a blistering 15.15% in profits or $15,150 for the model $100,000 trading portfolio.
My Global Trading Dispatch has hit a new all-time high of 330.65% and my year-to-date shot up to +30.51%. My ten-year average annualized profit bobbed up to +34.20%.
I have coined a blockbuster 12.18% so far in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.
The coming week will be a snore on the data front. Believe it or not, it could be quiet.
On Monday, August 19, nothing of note is released.
On Tuesday, August 20 at 10:30 AM, we get API Crude Oil Stocks.
On Wednesday, August 21, at 10:00 the Existing Home Sales are published for July.
On Thursday, August 22 at 8:30 AM, the Weekly Jobless Claims are printed. The Jackson Hole conference of global central bankers and economists begins.
On Friday, August 23 at 8:30 AM the July New Home Sales are announced.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I will be attending the Pebble Beach Concourse d’Elegance vintage car show where I will be exhibiting my 1925 Rolls Royce Phantom I, the best car ever made.
I don’t mind the wooden brakes, but it’s too bad they didn’t make adjustable seats in those days to fit my 6’4” frame. However, its price appreciation has been better than Apple’s (AAPL) which I bought as a fixer upper in England during the 1980s for $20,000. My average cost on Apple is a split adjusted 25 cents.
My Rolls will be shown alongside James Bond’s 1964 Aston Martin which sold for $6.3 million, a 1939 Volkswagen Type 64 priced at more than $20 million, and a $13 million 1958 Ferrari 250 GT BBT.
And what am I doing next weekend? Taking the Boy Scouts to the Six Flags roller coaster farm in Vallejo.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
My Phantom I
1939 Volkswagen
1954 Ferrari
Global Market Comments
August 9, 2019
Fiat Lux
Featured Trade:
(AUGUST 7 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (XLK), (GLD), (DIS), (TLT),
(FXA), (FXY), (VIX), (VXX), (UNG), (USO)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader August 7 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Are we headed for a worldwide depression with today’s crash and interest rates?
A: No, I think the interest rates are more of an anomaly unique to the bond market. There is a global cash glut all around the world and all that money is pouring into bonds—not for any kind of return, but as a parking place to avoid the next recession. The economic data is actually stronger than usual for pre-recession indicators. US interest rates going to zero is just a matter of coming in line with the rest of the world. Three to six months from now we may get our final bear market and recession indicators.
Q: Do you think the market has more downside?
A: Yes; if the 200-day moving average for the (SPY) doesn’t hold, then you’re really looking at a potential 20% correction, not the 8% correction we have seen so far.
Q: Which sector would you focus on for any dips?
A: Technology (XLK). If they lead the downturn, they’re going to lead the upturn too. It’s the only place where you have consistent earnings growth going out many years. You’re really all looking for an opportunity to go back into Tech, but the answer is a firm not yet.
Q: Would you buy gold (GLD), even up here?
A: Only if you can take some pain. We’re way overdue for a correction on essentially everything—stocks, bonds, gold, commodities—and when we get it, you can get a real snapback on all these prices. The time to enter gold trade was really a month ago before we took off, and I’ve been bullish on gold all year. So, I think you kind of missed the entry point for gold just like you missed the entry point for shorts on the stock market last week. You only want to be selling decent rallies now. You don’t want to be selling into a hole that makes the risk/reward no good.
Q: What can you say about the (FXA) (the Australian dollar)?
A: It’s holding up surprisingly well given the carnage seen in the rest of the financial markets. I want to stand aside until we get some stability, at which point I think (FXA) will pop up back to the $71 level. New Zealand cutting their rates by 50 basis points really came out of the blue and could eventually feed into a weaker Aussie.
Q: Do you think China (FXI) has no reason to make a trade deal until the US elections?
A: Absolutely not; and this puts a spotlight on the administration’s total inexperience in dealing with China. I could have told you on day one: there’s no way they’re going to settle. Pride is a major factor in China. They have long memories of the opium wars and all the abuses they received at the hands of the western powers and are highly sensitive to any kind of foreign abuse. If you want to get the opposite of a settlement, do exactly what Trump is doing. The administration’s policy has no chance of accomplishing anything. He’s willing to take a lot more pain in the stock market until he gets a deal and that’s bad for all of us.
Q: How does the extra 10% tariff affect the market?
A: Think of everything you’re buying for Christmas; the price goes up 10%. That’s the effect, and it completely wipes out any earnings the retail industry might have had. It’s only bad. We are suffering less harm than China in the trade war, but we are suffering, nonetheless.
Q: Do you think volatility will spike soon?
A: It may very well have already spiked. I don’t think we’ll get a spike as high as in past selloffs because there’s a big short volatility industry that has come back. Any moves more than $30, you have short sellers come in there very quickly to hammer things back down. Also (VIX) isn’t necessarily something you want to be buying after the stock market has already dropped 8%. That train has left the station.
Q: Would a weaker dollar benefit the US economy?
A: Yes; it makes our exports cheaper on the global market. However, if the rest of the world is weakening their currencies as well, it will have no effect. Also, the last time this kind of currency war was attempted was in the early 1930s, and the outcome was the Great Depression.
Q: Defensive stocks—the China story is getting uglier?
A: In this kind of market, I’ve never been a big fan of defensive stocks like utilities or healthcare because defensive stocks go down in bear markets, just at a slower rate than growth stocks because they never went up in the first place. The best defensive stock is cash.
Q: If US interest rates are going to zero, how about buying leaps on (TLT)?
A: Multi-year highs is just not leap buying territory. Multiyear lows are where you buy LEAPS, which are Long Term Equity Participation Certificates. They are basically long-dated 1-2-year call options on stocks that are rising over the long term. The better trade—when we get to zero interest rates and it becomes impossible for rates to go any lower—would be to do a reverse leap. If (TLT) goes up to $200, I would do something like a $150-$160 on the put side betting that sometime over the next 2 years, interest rates go back up again and bonds go down. Too late for LEAPS on bonds, too early for LEAPS on equities.
Q: Do you buy out of the money LEAPS?
A: Yes; that is where you get the triple-digit returns. For example, you can buy the Walt Disney (DIS) June 2021 $150-$160 vertical bull call spread today for $3.30. If we close over $160 by then the spread will be worth $10, up 203% from your cost. And you only need a rise of 25% from here to get that return. This is why I love LEAPS, but only at medium term market bottoms.
Q: Is crude oil (USO) going to $25 on a barrel global slowdown fears?
A: I think you need an actual recession to go down to $25; in the current environment, $42 is a nice target. The basic problem is global structural oversupply and falling demand, which is a classically unfortunate combination for prices.
Q: When will interest rates go to zero?
A: Sooner than later, I would say. My original guess was sometime next year but at the rate we’re going, we could be there by the end of the year.
Q: Would you get involved in natural gas (UNG)?
A: Absolutely not; this is the high season for natural gas right now when summer air conditioner use creates peak demand. It certainly has been hot this summer, especially on a global basis, and if you can’t rally natural gas in this environment you never will. There is also a huge contango in (UNG) which most people can’t beat.
