Global Market Comments
August 14, 2019
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, AUGUST 16 OPTIONS EXPIRATION),
(CRM), (FB), (M), (VIX)
(SILICON VALLEY REAL ESTATE SAYS THE BULL MARKET IN TECH CONTINUES)
Global Market Comments
August 14, 2019
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, AUGUST 16 OPTIONS EXPIRATION),
(CRM), (FB), (M), (VIX)
(SILICON VALLEY REAL ESTATE SAYS THE BULL MARKET IN TECH CONTINUES)
Followers of the Mad Hedge Technology Letter have the good fortune to own three deep in-the-money options position that expires on Friday, August 16, and I just want to explain to the newbies how to best maximize their profits.
This involves the:
the Salesforce (CRM) August 2019 $125-$130 in-the-money vertical BULL CALL spread at $4.50 which will expire at $5.00
the Macy's (M) August 2019 $23-$25 in-the-money vertical BEAR PUT spread at $1.74 which will expire at $2.00
the Facebook (FB) August 2019 $167.50-$172.50 in-the-money vertical BULL CALL spread at $4.50 which will expire at $5.00
The total profit on all three positions will increase the value of our $100,000 model trading portfolio by 3.68%, or $3,680. This position only became possible due to the extreme volatility (VIX) seen in the market in recent weeks.
Provided that we don’t have a monster “RISK OFF” move in the market this week (more failure of the China trade talks? War with Iran? A massacre in Hong Kong?) which causes stocks to collapse and volatility to rocket, these positions should expire at its maximum profit points. So far, so good.
I’ll do the math for you on the Salesforce (CRM) position. Your profit can be calculated as follows:
Profit: $5.00 expiration value - $4.50 cost = $0.50 net profit
(22 contracts X 100 shares per option X $0.50 net profit)
= $1,100 or 11.11% in 7 trading days.
One of the reasons that I run these positions into expiration is that with volatility high, and therefore the implied volatility on the options, we get paid much more to run these into expiration than we have in the past.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning August 19 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, mistakes occasionally do occur. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market disappears, and the spreads substantially widen when a security has only hours or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next quarter end.
Take your winnings and go out and buy yourself a well-earned dinner. Or use it to put a down payment on a long cruise.
Well done, and on to the next trade.
The shares of FANGs will continue to rocket if Silicon Valley commercial real estate is any indication of the future growth rates.
The group is gobbling up office space at such a prodigious rate that only a vast expansion of their business would justify these massive long-term commitments.
Commercial real estate commitments are one of the most valuable leading indicators of stock performance out there. They show what the companies themselves think of their future prospects.
Apparently, the stock market agrees with me. Technology is virtually the only group of shares moving to new all-time highs in these otherwise dismal trading conditions.
Just this month, Facebook (FB) signed a lease for the entire brand new 43-story Park Tower in downtown San Francisco, and that’s just to house its Instagram business.
Google (GOOGL) is leasing 39% of the office space in Mountain View, CA. It is currently in negotiations with the nearby city of San Jose to build a skyscraper occupying an entire city block that will house 10,000 tech workers. It also is building another 1 million square feet near an old prewar dirigible landing strip in Moffett Park.
Apple (AAPL) is hogging some 69% of the office space in Cupertino, CA. It is just now moving into its new massive spaceship-inspired headquarters, where 10,000 workers will slave away. The world’s largest company is currently on the hunt for a second headquarter's location.
Netflix is slowly gobbling up Los Gatos, CA. It was recently joined by the set top device company Roku (ROKU), which is growing by leaps and bounds.
Fruit canning was the original industry of Silicon Valley at the turn of the 20th century, taking advantage of the surrounding peach, plum, and apricot groves. When I was a kid after WWII, defense firms such as Lockheed (LMT) took over, creating thousands of high-paying engineering jobs.
It didn’t hurt that Stanford University was spitting distance away, and the University of California was just on the other side of the bay. These two schools supplied the manpower to fuel the hypergrowth ahead.
To say the growth has caused local headaches would be an understatement in the extreme. The San Francisco Bay Area now sports the world’s most expensive residential housing. The median San Francisco home price has skyrocketed to $1,334,000 and requires an annual income of $334,000 to support it.
Small businesses such as dry cleaners, nail salons, restaurants, and barber shops have been driven out by soaring rents. It’s not uncommon now to go out to dinner only to find a “closed” sign on your favorite nightspot. Your personal assistant now has to travel miles just to get your suits pressed.
As for traffic, forget about it. Rush hour has ceased to exist. Freeways are now jammed a nonstop 12 hours a day in the worst neighborhoods.
Success has its price, and this was never truer than in Silicon Valley.
Global Market Comments
August 13, 2019
Fiat Lux
Featured Trade:
(THE TRADE OF THE CENTURY IS SETTING UP),
(TLT),
(HOW TO BUY A SOLAR SYSTEM),
(SCTY), (SPWR), (TSLA)
Global Market Comments
August 12, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or
(CYB), (FXE), (TLT), (FXY), (COPX), (USO),
(GLD), (VIX), (FXB), (IWM0, (DIS), (CRB), (FB)
(A COW BASED ECONOMICS LESSON)
So, this is what the best trading week looks like.
Investors panicked. The hot money fled in droves. Predictions of escalating trade wars, recessions, and depressions abounded.
The bottom line for followers of the Mad Hedge Fund Trader? We picked up 4.4% on the week, as may make as much next week.
A number of trading nostrums were re-proven once again. That which can’t continue, won’t. When too many people gather on one side of the canoe, it will capsize. If you execute a trade and then throw up on your shoes, you know it will be a good one. I could go on and on.
The week also highlighted another trend. That is the market has become a one-trick pony. The focus of the market is overwhelmingly on technology, the only sector that can promise double digit growth for years to come. And it’s not just technology, but a handful of large cap companies. Investing has become a matter of technology on, or technology off.
This is always how bull markets end, be it the Nifty 50 of the early 1970s, Japanese stocks of the late 1980s, or the Dotcom Bubble of the 1990s.
It was a week that ran off fast forward every day.
China retaliated against the US in the trade war and stocks dove 900 points intraday. The Middle Kingdom imposed a total ban on all US agricultural imports and took the Yuan (CYB) down to a decade low to offset tariffs.
All financial markets and asset classes are now flashing recession and bear market warnings. The Mad Hedge Market Timing Index fell from 70 to 22, the steepest drop in recent memory. The US dollar dropped sharply against the Euro (FXE) and the Japanese yen (FXY). Oil (USO) went into free fall. Copper (COPX) collapsed to a new low for the year.
The New York Fed lowered its Q3 GDP growth to a lowly 1.56%, with the Atlanta Fed pegging 1.9%. Payrolls, orders, import/export prices, and trade are shrinking across the board, all accelerated by the ramp up in the trade war. Manufacturing and retailing are going down the toilet. Sow the wind, reap the whirlwind.
The German economy (EWG) is in free fall, as most analysts expect a negative -0.1% GDP figure for Q2. The fatherland is on the brink of a recession which will certainly spill into the US. That Mercedes Benz AMG S class you’ve been eyeing is about to go on sale. Great Britain (FXB) is already there, with a Brexit-induced negative -0.2% for the quarter.
Some 50% of S&P 500 dividends now yield more than US Treasury bonds. At some point, that makes equities a screaming “BUY” in this yield-starved world, but not quite yet. Is TINA (there is no alternative to stocks) dead, or is she just on vacation?
Ten-year US Treasury bonds (TLT) hit 1.61%, down an incredible 50 basis point in three weeks. Zero rates are within range by next year. The problem is that if the US goes into the next recession at zero interest rates, there is no way to get out. A decades-long Japanese style Great Depression could ensue.
Bond giant PIMCO too says zero interest rates are coming to the US. Too bad they are six months late from my call. It’s all a matter of the US coming into line with the rest of the world. The global cash and profit glut has nowhere else to go but the US. Much of the buying is coming from abroad.
Gold (GLD) hit a six-year high, as a rolling stock market panics drive investors into “RISK OFF” trades and downside hedges. While high interest rates are the enemy of the barbarous relic, low rates are its best friend and negative rates are even better. We are rapidly approaching century lows on a global basis.
Do your Christmas shopping early this year, except do it at the jewelry store and for your portfolio. Above $1,500 an ounce gold is beating stocks this year and the old all-time high of $1,927 is in the cards.
As I expected, August is proving to be the best short selling opportunity of the year. Not only can we make money in falling markets, elevated volatility means we can get into long side plays at spectacularly low levels as well.
With the Volatility Index (VIX) over $20, it is almost impossible to lose money on option spreads. The trick was to get positions off while markets were falling so fast.
The week started out with a rude awakening, my short in the US Treasury Bond Fund rising 1 ½ points at the opening. I covered that for a tear-jerking 3.26% loss, my biggest of the year. But I also knew that making money had suddenly become like falling off a log.
I fortuitously covered all of my short positions in the S&P 500 (SPY) and the Russell 2000 (IWM) right when the Dow average was plumbing depths 2,000-2,200 points lower than the highs of only two weeks ago. Then I went aggressively long technology with very short dated August plays in Walt Disney (DIS), Salesforce (CRM), and Facebook (FB).
My Global Trading Dispatch has hit a new all-time high of 324.78% and my year-to-date shot up to +24.68%. My ten-year average annualized profit bobbed up to +33.60%.
I coined a blockbuster 6.31% so far in August. In a mere three weeks I shot out 12 Trade Alerts, 11 of which made money, bringing in a 10% profit net of the one-bond loss. All of you people who just subscribed in June and July are looking like geniuses.
The coming week will be a snore on the data front. Believe it or not, it could be quiet.
On Monday, August 12 at 11:00 AM EST, the Consumer Inflation Expectations for July are released.
On Tuesday, August 13 at 8:30 AM US Core Inflation for July is published.
On Wednesday, August 14, at 10:30 the IEA Crude Oil Stocks are announced for the previous week.
On Thursday, August 15 at 8:30 AM EST, the Weekly Jobless Claims are printed. At 9:15 we learn July Industrial Production.
On Friday, August 16 at 8:30 AM, the July Housing Starts are out.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be headed to the Land’s End Music Festival in San Francisco this weekend and listen to many of the local rock groups. Hopefully, I will be able to unwind from the stress and volatility of the week.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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.
Global Market Comments
August 8, 2019
Fiat Lux
Featured Trade:
(HOW TO KNOW IF THE BULL MARKET IS WELL AND TRULY OVER),
(THE TALE OF TWO ECONOMIES),
(FB), (AAPL), (AMZN)
I have lately been besieged with emails from followers asking if they should sell everything, put all their money into cash, and if the great bull market is well and truly over.
My answer is the same to all. If a full-throated and affirmative “NOT YET”. Things may look scary now, but they could get a lot worse, and eventually, that will take place.
I’ll tell you why. I have a laundry list of issues that could kill the bull once and for all. And while some of them are flashing alarm signals, many aren’t. I’ll go through them one by one.
Inequality
The Trade War – is far and away the biggest risk to the market. If each escalation is met with Chinese retaliation, then both countries will slide into recession. At some point, cooler heads may prevail but that is no sure thing. Having met several men who endured the 1936-38 Long March, I can assure you that the Chinese have a far better ability to sustain pain than we do. And the Chinese don’t have an election next year.
Cyber Terrorism – Imagine that you sat down to turn on your computer one day and nothing happened. The Internet was down, all financial transactions ceased, the power went out, and all food distribution ceased. America’s Internet infrastructure is far more vulnerable than most people realize. That's why I have been recommending cybersecurity stocks for the past decade. Certainly, my own local utility, PG&E (PGE) doesn’t maintain security to a military standard. It should.
Debt Levels in China – It’s easy to forget that perhaps 40% of China’s government-owned financial institutions are de facto bankrupt. They have been accumulating bad loans for decades and hiding them on their balance sheets and essential negative net worths. If one suddenly goes under, it could easily lead to a cascading series of bankruptcies much as we saw in the US during the 2008 financial crisis that spills over to the US and Europe. Back then, we lost Lehman Brothers and Bear Steans, and could have lost everyone if the government hadn’t stepped in.
Debt levels in the US – Passage of the latest spending bill means the US national debt is about to soar from $22 to $24 trillion over the next two years. The markets are ignoring this for now. It won’t forever.
Movement to the Left – Trump has run the most radically right-wing government in American history. Can you believe that we are now in the concentration camp business? The risk is that the electorate responds by installing a radical left-wing government in 2020 in reaction. That would bring a return of 90% personal tax rates, the elimination of long term capital gains treatments, and other policies with a strong anti-business tilt.
Global Interest Rates at Zero – We seem to be well on our way there. Once at zero, central banks will be powerless to get us out of recessions by cutting rates. Just look at how Japan has done over the past 30 years.
2020 Election – Is going to be loaded with fireworks to be sure. The rancor may get so extreme on both sides that it literally scares people out the market.
Middle East War – War with Iran, which is now threatened daily by the administration, will be an enormous drag of the US economy. Investment shifts from machinery to weapons, which have no impact on productivity.
Trump Blows Up – The president implements a policy that is so deleterious to the US economy that the stock market panics. Some would argue we are already there.
Climate Change Accelerates – That is already happening but is hurting countries closer to the equator than ourselves, like India and Egypt. The US military certainly considers this an existential threat. Increased severe hurricanes, heat caused crop failures, wildfires, and more frequent flooding are already having severe localized effects. Imagine all that getting much worse. And there are severe impacts which we haven’t even thought about yet. The first effect we have already seen? Higher insurance premiums for everyone. Good luck getting new fire insurance in California or flood insurance in Florida.
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There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
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