You know those bond shorts you're carrying on my recommendation? They are about to pay off big time.
We are only one more capitulation sell-off day in the stock market from bonds starting to fall like a rock.
There is a financial crisis taking place overseas, which you probably don't know, or care about.
Here is my one-liner on this: You should care.
The London Interbank Offered Rate (LIBOR) is a measure of the cost of short-term borrowing in Europe. It is essentially their version of our own Fed funds rate. And here's the problem. It has been rising almost every day for two months.
If you read the financial press, you probably already know about LIBOR as the subject of a bid rigging scandal that prompted billion-dollar fines and jail terms for the parties involved.
You can take this as the opening salvo in the coming credit crisis. It probably won't start to seriously bite here in the US for two years. But it is already hurting the profitability of European banks now.
A staggering $350 trillion in loans in the US and abroad are tied to LIBOR-based loans, including $1.2 trillion in mortgages for high-end homeowners. Rising interest rates for this debt bring immediate pain.
You can see this clearly is the cost of funds around the world, as outlined by the charts below.
Saudi Arabia's cost of funds, or SAIBOR, historically a net supplier of funds to the continent thanks to its perennial oil surplus, has just been raised 60 basis points, the first such move in a decade.
It is causing cash squeeze in Hong Kong, as seen through escalating HIBOR rates. Even Australian banks, normally seen as the bedrock of the global financial system, have seen the sharpest rise in interest rates in eight years.
Of course, the reasons for the global credit squeeze here at home are screamingly obvious. The US government is in the process of tripling its annual borrowing needs, as the budgets deficit soars from $400 billion to $1.2 trillion.
Exacerbating the influence on the markets is the US Treasury's new preference for short-term borrowing instead of the long-term kind, thus boosting the cost of shorter-term money.
This is to reduce the immediate up-front cost of borrowing. Like so many administration policies, it is reaping a short-term paper advantage for a very much higher long-term real cost.
As we are just entering a 20-year bear market for bonds, the Feds should be borrowing as much long-term money as they possibly can.
This is what private corporations are doing, such as Apple (AAPL) and Goldman Sachs (GS), issuing 30- to 100-year bonds, even though they don't need the money.
The tax bill passed at the end of 2017 also has had the unintended side effect of raising European rates. US companies now are mobilizing some $2.5 trillion to bring home at minimal tax rates.
That has brought them to unload longer term investments and shift the funds into overnight commercial paper, further boosting rates.
You normally don't see this kind of divergence in domestic and foreign costs of money without some kind of credit crisis.
Nervous eyes are cast toward Germany's Deutsche Bank (DB), holder of the world's largest derivatives book, and whose share price has plunged a stunning 30% in two months. Clearly, the insider money is getting out. Expect to hear a lot more about Deutsche Bank in the coming months.
I have said all along that the true cost of the tax bill won't be in the immediate up-front price tag, but the long-range unintended consequences.
You don't turn America's $20.5 trillion economy on a dime without creating a lot of disruption. And now they want to pass a second tax bill!
Spiking Rates are Becoming a Real Headache
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Practically every day, I get emails from readers asking me to take over management of their money so I can execute my Trade Alerts for them.
With an 80% success rate and a 34% average annualized return, why wouldn't they?
Unfortunately, I have to turn down these invitations.
Watching the markets, doing the research for new Trade Alerts, keeping up with a global speaking and conference schedule, and running the Mad Hedge Fund Trader empire is so demanding that I have little time for anything else.
On top of that, I have my unpaid "hobby" of advising various arms of the United States government, including the US Treasury, The Federal Reserve, and the Joint Chiefs of Staff.
When the call comes from Washington, D.C. to jump, I have to ask "How high?"
Any other patriot would do the same.
In any case, actively managing someone else's money would raise conflicts of interest and regulatory problems.
I learned early on at Morgan Stanley decades ago to stay miles away from the "gray" areas. Leave those marginal lines of business to competitors, and they will inevitably blow up.
However, there is one way I can help. I can turn these contacts over to you, a professional financial advisor.
The assets of my readers looking for execution help can vary anywhere from $10,000 to $1 billion.
Their financial sophistication will range from entry-level beginner to a seasoned pro who would rather spend time on a golf course than in front of a screen.
So this could be the ideal opportunity for a starting financial advisor to build a new business, or an established firm to fill up the dance card for some junior staff. Invest in your customers, and they will pay you handsomely over the long term.
I won't know all these people personally, as I have thousands of followers. You'll have to get to know them on your own. All I know is that they had the smarts to buy my service and have stuck with it.
If you think your business would benefit from my own customer contacts, please send an email to Nancy at customer support at support@madhedgefundtrader.com and put "FINANCIAL ADVISOR AVAILABLE" in the subject line.
Please include your contact information, including phone number, address, email contact, and years of experience in the industry.
We will add it to our list of "Preferred Financial Advisors" and send it out when reader inquiries come in.
Any financial advisor who knows which end of a stock to hold upward should be able to add value for these new clients.
Knowledge of stocks and ETFs is standard now. Some experience in options trading is also helpful, as I often use these risk-controlling instruments in my Trade Alerts.
And, of course, you will be getting excellent guidance from myself as a reader of this newsletter.
My goal here is to see that my readers get the most out of our services, and participate in the Mad Hedge Fund Trader global trading and investment community.
Anything I can do to enhance your profits and level the dreadfully uneven playing field with Wall Street is a win for me.
My only request here is that you subscribe to my Mad Hedge Fund TraderPro newsletter and trade alert service, but only after your new client funds his account.
Good luck and good trading.
John Thomas
The Mad Hedge Fund Trader
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The banner year for the cloud continues as Dropbox's (DBX) blowout IPO passed with flying colors.
Investors' voracity for anything connecting to big data continues unabated.
Big data shares are now fetching a big premium, and recent negative news has highlighted how important big data is to every business.
Let's face it, Spotify (SPOT) needs capital to reinvest into its platform to achieve the type of scale that deems margins healthy enough to profit, even though it says it doesn't.
Big data architecture takes time to cultivate, but more importantly it costs a huge chunk of money to construct a platform worthy enough to satisfy consumers.
The daunting proposition of competing with the FANGs for users only makes sense if there is a reservoir of funds to accompany the fight.
Spotify CEO Daniel Ek has milked the private market for funding, making himself a multibillionaire in the process. And as another avenue of capital raising, he might as well go to the public to fund the venture in the future.
Cloud and big data companies have identified the insatiable investor appetite for their services. Crystalizing this sentiment is Salesforce's (CRM) recent purchase of MuleSoft - integration software that connects apps, data, and devices - for 18% more than its original offer for $6.5 billion.
The price was so exorbitant, analysts speculated that a price war broke out, but Salesforce paid such a high price because it is convinced that MuleSoft will triple in size by 2021. That is another great trading opportunity missed by you and me.
An 18% premium to the original price will seem like peanuts in five years. The year 2018 is unequivocally a sellers' market from the chips up to the end product and everything in between on the supply chain.
Spotify cannot make money if it's not scaled to 150 million users, compared to its current 76 million. And 200 million and 300 million would give CEO Daniel Ek peace of mind, but it's a hard slog.
Pouring gas on the fire, Spotify is going public at the worst possible time as tech stocks have been the recipient of a regulatory witch hunt pounding the NASDAQ, sending it firmly into correction territory.
Next up was Spotify's day to shine in the sun directly listing its stock.
Existing investors and Spotify employees are free to unload shares all they want, or load up on the first day. In addition, no new shares are being issued. This is unprecedented in the history of new NYSE listings.
Spotify is betting on its brand recognition and massive desire for big data accumulation. It worked big time, with a first day's closing price of $149, verses initial low ball estimates of $49.
Cloud companies are the cream of the big data crop, but Spotify's data hoard will contain every miniscule music preference and detail a human can possibly exhibit for potentially 100 million-plus people.
Spotify's data will become the most valuable music data in the world and for that it is worth paying.
But at what price?
Spotify has no investment bankers, and circumnavigating the hair-raising fees a bank would earn is a bold statement for the entire tech industry.
Sidestepping the traditional process has ruffled some feathers in the financial industry.
The mere fact that Spotify has the gall to execute a direct listing is just the precursor to big banks being phased out of the profitable investment banking sector.
Goldman Sachs (GS) was the lead advisor on Dropbox's (DBX) traditional IPO, and it was a resounding success rocketing 40% a few days after going public.
IPOs are not cheap.
The numbers are a tad misleading because Spotify paid about $40 million in advisory to the big investment banks leading up to the big day.
This is about a $28 million less than when Snapchat (SNAP) went public last year.
Uber and Lyft almost certainly would consider this option if Spotify nails its IPO day.
Banks are being squeezed from all sides as nimble, unregulated tech firms have proved better adaptable in this quickly changing environment.
Spotify's business model is based on spectacular future growth, which may occur.
It is a loss-making company that produces no proprietary solutions but is overlooked for its valuable data.
The company is the market leader in paid subscribers at 76 million, far outpacing Apple Music at 39 million and Pandora at 5.5 million.
Total MAUs (Monthly Active Users) expect to reach more than 200 million users, and paid subscribers could hit the 96 million mark by the end of 2018.
Spotify's business model bets on transforming the free subscribers who use Spotify with ad-supported interfaces into paid subscribers that are ad-free. Converting a small amount would be highly positive.
Gross margin is a number that sheds light on the real efficiencies of the company, and Spotify hopes to hit the 25% gross margin point by the end of 2018.
I am highly skeptical that gross margins can rise that high unless they solve the music royalty problem.
Royalty costs are killer, forcing Spotify to shell out a massive $9.75 billion in music royalties since its inception in 2006.
Spotify is paying too much for its content, but that is the cruel nature of the music industry.
The ideal solution would eventually amount to producing high quality original entertainment content on its proprietary platform akin to Netflix's (NFLX) business model with video content.
Spotify's capital is being drained by royalty fees amounting to 79% of its revenue.
This needs to be stopped. It's a losing strategy.
Considering Google (GOOGL) and Facebook (FB) do not pay for their own content, it frees up capital to pile into the pure technical side of the operations, enhancing their ad platforms luring in new users.
This is why the Mad Hedge Technology Letter sent you an urgent Trade Alert to buy Google yesterday when it was trading at $1,000.
All told, Spotify has managed to lose $2.9 billion since it was created 12 years ago - enough capital to create a new FANG in its own right.
Dropbox was an outstanding success and attaching itself to the parabolic cloud industry is ingenious.
However, potential insane volatility should temper investors' expectations for the first day of trading.
The lack of a road show, no lockup period, and no underwriting or book building will sacrifice stability in the short term.
There is incontestably a place for Spotify, and the expected 30% to 36% growth in 2018 looks attractive.
But then again, I would rather jump into sturdier names such as Lam Research (LRCX), Nvidia (NVDA), and Amazon (AMZN) once markets quiet down.
The private deals that took place before the IPO changed hands were in the range of $99 to $150. Considering the reference point will be set at $132, nabbing Spotify under $100 would be a great deal.
The market will determine the opening price by analyzing the buy and sell orders for the day with the help of Citadel Securities.
It's a risky proposition that 91% of shares are tradable upon the open. Theoretically, all these shares could be sold immediately after the open.
Legging into limit orders below $140 is the only prudent strategy for this gutsy IPO, but better to sit and observe.
"One of the only ways to get out of a tight box is to invent your way out." - Amazon CEO Jeff Bezos
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"A fool learns from experience. A wise man learns from the experience of others," said Otto von Bismarck, the first Chancellor of Modern Germany.
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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
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Douglas Davenporthttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDouglas Davenport2018-04-03 16:30:182018-04-03 16:30:18MOT Follow-Up to Text Alerts (XOM) Trade April 3, 2018
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline.Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline.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
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.
