Global Market Comments
December 12, 2016
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK OF DECEMBER 12TH AKA TRADE THE TWEET),
(BA), (WYNN), (TLT), (TBT),
(TESTIMONIAL),
(SIGN UP NOW FOR TEXT MESSAGING OF TRADE ALERTS)
The Boeing Company (BA)
Wynn Resorts, Limited (WYNN)
iShares Trust - iShares 20+ Year Treasury Bond ETF (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
Trade the Tweet.
That seems to be the new strategy adopted by traders who are still groping in the dark trying to figure out how to make money in the brave new world.
So, when the President-elect says something idiotic and knocks a stock down 10% in seconds, you buy it.
When sanity returns and the stock bounces back the next day, you take profits.
It worked with Boeing (BA) this week. It worked with Wynn Resorts (WYNN) when the Chinese later figured out the game.
Who?s next? Only The Donald knows for sure.
At this rate, we should have one out of two good trades a day for the next four years.
With selling now apparently illegal, expect stocks to continue their grind up until year end.
That?s because sellers are postponing realizing capital gains until 2017, when lower tax rates are expected to kick in.
So, if all the traditional December selling has been pushed back to January, what happens to markets in January?
Politics aside, we could be facing one of the seminal decisions of the decade when the Federal Reserve renders its decision on interest rates this coming Wednesday.
Will they raise by 25 basis points, or will Janet Yellen go for the full 50? I?m betting on the former, as my friend, Janet, is still a dove, regardless of which way the political winds are blowing.
By the way, I have arranged a private meeting with the nation?s central bank governor in January while she is here for the holidays and a round of meetings at the San Francisco Fed.
I?ll let you know what I discover in a New Year newsletter.
Of course, I?m filled with holiday cheer, thanks to the double short in the Treasury bond market (TLT) I have maintained since the November 8th election.
Bonds are in free fall, and are now approaching two-year lows. The (TLT) has collapsed a staggering 12 points since Election Day.
In the meantime, another one of my heroes, the ProShares UltraShort 20+ Year Treasury 2X ETF (TBT) hit a new multiyear high of $42.20, up an eye popping 41.57% since the July low.
Although we have already moved a lot, how many bonds do you want to be short when ten-year yields are on their way from 2.50% to 6%?
How about a truckload?
This will be the trade that keeps on giving. Think of it as your new rich uncle, or the cousin that just IPO'd a hot new tech company.
You better get out there and refinance your house before rates really take off. And while you?re at it, you better buy a second and third home too.
With Dodd-Frank about to be set on fire, lending standards will disappear, and everyone and his brother will be out there borrowing to buy new homes before rates rise further.
I know history repeats itself, but does it have to be so predictable?
As the year winds down, I feel the increasing gravitational pull of Incline Village at Lake Tahoe in the High Sierras which is forecast to get snow every day for the next week.
I?m looking forward to writing my 2017 All Asset Class Annual Review which take me two weeks to write.
I?ll only be taking breaks to play Monopoly, Jenga and Risk, eat freshly baked chocolate chip cookies, and, of course, snow shoe vast distances at high altitude.
As for the coming week?s data releases:
Monday, December 12th, has absolutely nothing of note to be released as we move into the year end wind down.
On Tuesday, December 13th at 10:00 AM EST, we get a new update on November Factory Orders.
On Wednesday, December 14th at 2:00 PM, the big event of the week takes place when the Fed releases its interest rate decision. A press conference with Janet Yellen will follow.
At 10:30 AM the EIA Petroleum Status Report will give us updated inventory numbers. Will oil peak out here? Or does it have a few more dollars to run?
On Thursday, December 15th, we learn the Weekly Jobless Claims at 8:30 AM EST. We also get a new Consumer Price Index for November. These may be the last low inflation numbers we see for a generation.
On Friday, December 16th, we get a quadruple witching options expiration, with the big players gaming the opening and the close. I am out of my December options positions so I really don?t care what happens.
At 1:00 PM we get the Baker Hughes Rig Count. We?ll see if falling oil production puts a dent in US oil production.
Keep in mind that virtually all economic indicators are still backward, and not reflective of our brave new world. We won?t see that until January.
I am one of your MDT subscribers in Tasmania Australia (currently 16 hours ahead of NY).
I have a regular day job, and am unable to day trade US markets and an unable to participate in the bi-weekly webinars. And although a MDT subscriber for nearly three years now it is only that last six months that I have got into the groove of your webinars and daily updates.
The daily updates on the markets levels have been very instructive as to where JT places his spreads, so that now I have started placing my own independently with success.
When the market dipped at the horror of a Trump win on 6 Nov, it seemed like a good time to put with a (SPY) $204-$207 Bear Put Spread.
This success led me to put on a (SPY) $222-$225 Bear Put Spread on 15 Nov when the (SPY) was 217. Your persistent subsequent urging not to short the market led me to look for an exit. This came on Friday 18th when the market dipped again, allowing me to exit for a 9 cent? loss.
Of course I should have applied the same logic (likely further rise in the market? further falling of VXX) to JTs VXX position at the same time. Would have come with a similar negligible loss instead of (as JT said) a nosebleed.
I have just started writing covered calls on my Interactive Brokers platform and have covered (weekly) calls on FCX (long 10.02) and FEYE (long 12.38) and managing to stay in the game.
There has been a noticeable uplift in your voice in recent webinars as market action has picked up.
Keep up the good work.
Kind regards
Malcolm G
Hobart, Tasmania, Australia
?Confidence is the cheapest form of stimulus.? said former Clinton Treasury Secretary, Larry Summers.
While the Global Trading Dispatch focuses on investment over a one week to six-month time frame, Mad Options Trader, provided by Matt Buckley, will focus primarily on the weekly US equity options expirations, with the goal of making profits at all times. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
December 9, 2016
Fiat Lux
Featured Trade:
(TECHNOLOGY OR TOILET PAPER?),
(KMB), (AAPL), (UTX), (TLT), (UUP), (WYNN),
(THE 1% HIT IN THE BOND MARKET),
(TLT), ($TYX), (LQD), (MUB), (ELD)
Kimberly-Clark Corporation (KMB)
Apple Inc. (AAPL)
United Technologies Corporation (UTX)
iShares 20+ Year Treasury Bond ETF (TLT)
Powershares DB US Dollar Index Bullish Fund (UUP)
Wynn Resorts, Limited (WYNN)
Treasury Yield 30 Years (^TYX)
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
iShares National Muni Bond (MUB)
WisdomTree Emerging Markets Local Debt Fund (ELD)
The world?s largest maker of toilet paper, Kimberly-Clark (KMB) currently earns a net profit margin of 5.45% and trades at a price earnings multiple of 20.68X.
Apple (AAPL), the world?s largest technology company, earns a net profit margin of 22.3% and trades at a price earnings multiple of 13.51X.
These numbers suggest that making toilet paper is 6.26 times more profitable than selling iPhones.
But it isn?t.
So is the future of the world economy in toilet paper? Should we toss out iPhones in the dustbin of history and unload the stock?
That may be the answer, at least for the short term.
Or are we seeing nothing less than a wild mispricing of sectors and shares that will eventually correct itself?
I vote for the latter.
However, financial markets of any description are facing unusual circumstances on every front.
The newly elected president?s disdain for Steve Jobs' creation is no secret.
Only yesterday, he demanded that Apple shut down manufacturing in China and build the world?s biggest factory in the US. That would raise Apple?s labor cost from $3 to $35 an hour.
Needless to say, that is impossible.
To do so would increase the cost of iPhones from $700 to $5,000 which was about what I paid for a Motorola analogue brick phone in 1990 and the service was lousy.
The bulge left in the pocket of my Burberry raincoat is still present and, no, it?s not because I am glad to see you.
The great irony here is that the iPhone has never been made in the US.
It was not a product the manufacture of which was offshored. IPhones have to be made in China or they can?t be made at all. Tens of thousands of cutting edge technology products can be similarly described.
That leaves the hapless company to face the 35% import duty from China threatened by Mr. Trump.
It would be far cheaper for Apple just to pay the duty and then pass the cost on to consumers, which would then raise the cost of an iPhone from $700 to $800. Fewer iPhones would be sold, but not my much.
Apparently, no one has told Trump yet that this arbitrary duty would be illegal under the terms of the World Trade Organization (WTO), an organization created by the United States to enforce international trading rules.
So, what if Trump then withdraws from the WTO? What if he pulls the United States out of the United Nations, another libertarian panacea?
He could do this, since honoring agreements does not seem to be in Trump?s DNA, as his long string of business defaults and bankruptcies attests.
International trade would continue, just without us. That would leave China to take over the rest of the world market. Our economy and stock market would suffer, as well as our defense alliances.
Of course, we really don?t know what Trump is going to do.
But the early indications are horrendous.
He attacked Boeing (BA), knocking 11% off its stock price in minutes which, by the way, has created more high paying jobs exporting aircraft to China than any other American company.
The Carrier bail out means that tax payer money will be siphoned out of the east and west coasts so a company in Indiana, the Vice President?s home state, can build air conditioners at noncompetitive prices.
The union leader then confirmed that it was only 700 jobs that were saved for $7 million, not 1,100, and the president attacked him.
And never mind that the country?s eight other major air conditioning manufacturers are now disadvantaged. Are they in for a handout too?
The president has signed Carrier?s death warrant, making it a ward of the state for a photo op.
This is anything but capitalism.
I?m sure parent company United Technology (UTX), whose stock has soared since the election, is figuring out how to unload Carrier as I write this.
If this is Trump?s new rust belt economic strategy, expect an initial rise in GDP growth as the stimulus hits, and then a collapse when the bill comes due.
That, by the way, is my new economic scenario for the rest of the decade. Higher, artificially induced growth for three more years, and then a recession, with no net gain in GDP. Welcome to boom and bust.
I do fine in this environment, but I?m not so sure about you. Remember, I only have to run faster than you, not the grizzly bear that is chasing both of us.
All of this now raises the question of how to trade and invest under President Trump. He is turning the White House into a reality TV show, and filling cabinet posts with other reality stars, like Linda McMahon.
When Twitter traffic is the primary criteria for policy decisions, what is a sober, long-term portfolio to do?
Since it really is all about creating a false reality, I predict a series of ?pretend? victories on the business front.
Carrier will open a new plant to great fanfare, and then bury the losses in some affiliate. Apple might even open a token factory to build a small number of? ?super premium? iPhones just to make Trump go away.
And now I just heard that China will retaliate against any trade sanctions by clamping down on casino company Wynn Resorts (WYNN) by limiting ATM withdrawals in Macao, instantly vaporizing 11.05% of this company?s market capitalization.
Steve Wynn was a big Trump supporter, but perhaps less so today.
Is this how it?s going to be? Is EVERYTHING now political?
I confess, I can?t write fast enough to keep up with this stuff.
Over the long term, it?s really tough to beat the Law of Supply and Demand.
The last major country that attempted to sidestep it with a closed economy was the Soviet Union, and we know how that worked out; however, it took 70 years to unwind.
The policy that Trump is attempting here is more National Socialism than Republican.
Trump?s bogus economic policies will eventually be exposed for the sham they are. It?s just a matter of time before they blow up. ?
Buying low and selling high based on solid fundamentals will once again become a successful investment strategy.
Until then, that toilet paper company is looking pretty good. And keep selling short Treasury bonds (TLT) and buying the US dollar (UUP).
The Future?
It has been a month now since the presidential election, and who has been hurt the most?
No, it is not liberals, unions, Planned Parenthood, or environmentalists.
It is the 1%.
That is because the 1% have the overwhelming share of their wealth parked in the bond market, and it has been heading in a decidedly southern direction for the past four weeks.
In fact, bond market losses now exceed $1 trillion since Trump gained the presidency. Fixed income has turned into a veritable dumpster fire.
The worst is yet to come. If Trump actually implements his vast expansion of the federal deficit, ten-year Treasury bond yields could rocket from 2.42% to 6%, knocking one third off of bond values.
There are many important lessons to be learned here.
For a start, this is not your father?s bond market.
The internal dynamics of the fixed income markets have changed so much in the last three decades that it has become unrecognizable to long term practitioners such as myself.
A big factor has been the takeover of the bond market by the richest segment of the US population and, indeed, the global economy. As wealth concentrates at the top, its character changes.
Let me stop here and tell you that the ultra rich are different from you and me, and not just because they have more money.
I have learned this after nearly half-century-long relationships with the planet?s wealthiest families, including the Rockefellers, Rothschilds, DuPonts, Morgans, and Pritzkers.? I first knew them as important contacts at The Economist magazine, then as clients at Morgan Stanley, then as investors in my hedge fund, and now as subscribers to The Diary of a Mad Hedge Fund Trader.
The wealthier families become, the more conservative they are in their investment choices. Their goal shifts from capital appreciation to asset protection.
They lose interest in return on capital and become obsessed with return of capital. This is how the rich stay rich, sometimes for centuries. I have even noticed this among my newly minted billionaire hedge fund buddies.
What this means for the bond market is that they never sell. When they buy a 30-year Treasury bond, it is with the expectation of holding it for the full 30-year term until maturity.
That way they can avoid capital gains tax and only have to pay interest on the coupon payments. When they die, spouses get the step up in cost basis, and then the wealth passes from one generation to the next.
Taxes are never paid.
Back in the 1980s, when wealth was more evenly distributed, the top 1% only accounted for 1% of Treasury bond ownership. Today, that figure is closer to 25%.
Add this to the 50% of our national debt that is owned by foreign investors who also tend to hold paper for its full term. Central banks don?t pay taxes either.
China and Japan are the biggest holders, with around $1 trillion each. This means that 75% or more of Treasury bonds are owned by investors who don?t sell.
With bonds very close to 30-year highs, keeping these securities has been the right thing to do. I can?t tell you how many investment advisors I know who have distilled their practices down to only fixed income instruments.
This involves the entire coupon clipping space, including municipals (MUB), corporates (LQD), junk (JNK), and even emerging market debt (ELD).
This is driven by customer demand, the 1%ers, not from any great insights or epiphanies they achieved on their own.
Of course, there is a certain amount of driving with your eyes firmly fixed on the rear view mirror going on here. Maybe the rich will finally sell their bonds once prices fall hard, stay down, and then go down some more.
That appears to be what is in front of us right now.
Inflation rearing its ugly head might also do the trick, which is always bad for bond prices, as it reduces the purchasing power of money.
Selling is certainly what they were doing with both hands in the early eighties, when the ten-year yield hit 12%.
Again, the rear view mirror effect kicked in big time, when bonds were called ?certificates of wealth confiscation?. They are about to become those once again.
There are other matters to consider with the 1% owning so much of the bond market. This is money that is not being invested in startups and creating jobs. It is money that is not being used to engender new economic growth.
One of the fantasies of the last election was the claim that the 1% were creating so many jobs. They weren?t, not as long as their money was parked in a risk-free bond market.
Instead, it is just stagnating. This is one reason why economic growth is so flaccid this decade and will remain so. This is fine for the 1%, but not so good for the rest of us.
The bottom line here is that while bonds are oversold and due for a bounce, it is a bounce that should be sold into.
Bonds are quickly becoming the asset class you don?t want to know, whether you?re in the 1% or not.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
I would like to take this as an opportunity to sell calls against the position.
My suggestion today is to Sell to Open (1) December 16th-$14 call for every 100 shares you own.
These are the calls that expire next Friday.
They are quoted at $.34 to $.41, with the last trade at $.40.
Try to sell them for $.40 or better.