Global Market Comments
June 29, 2018
Fiat Lux
Featured Trade:
(WHY THE WORLD IS ABOUT TO END),
(TLT), (TBT), (HYLD), (LQD), (JNK), (SPG),
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA, CONFERENCE, OCTOBER 26-27, 2018)
I am basically a positive person. I never have been much of a Cassandra who predicts the end is near and the world is about to end. Nor have I ever been one to exaggerate. In this day, the raw facts are strange enough.
But you know what? The end really IS near and the world IS about to end.
If you knew that a trillion-dollar trade was about to unwind wouldn't you like to get in front of it? If you could you would be able to make a fortune for yourself.
Well guess what? Just such an opportunity is staring you in the face.
I am talking about the inversion of the yield curve, which I have been warning you about for the past two years. Now the mainstream media is finally getting on the bandwagon and starting to focus on this arcane concept.
During expanding economies, long-term interest rates are always higher than short-term ones to compensate investors for the greater risk that extended duration implies. The longer the life of a bond, the more things that can go wrong. They also need to be protected from rising inflation.
Inverted yield curve takes place when long-term interest rates are lower than short-term ones. This takes place when the Federal Reserve raises overnight rates to higher-than-normal levels to cool an overheating economy. This is a rare event, as the Fed action brings results usually in months. Yield curves are only inverted about 10% of the time, or about one year in every 10.
It turns out that the yield curve is the best predictor of recessions and bear markets out there. Take a look at the charts below, which I lifted from my friends at The New York Times. They show a yield curve inverting in 2007. The Great Recession and a 52% slide in the S&P 500 followed. It turns out that every recession of the past 60 years was preceded by an inverted yield curve.
It isn't just the yield curve that is anticipating the end of the Great Bull Market of the 2010s. The headline unemployment rate is also raising a red flag. The current jobless rate is now at 3.8%, an 18-year low. The last time we saw numbers this robust was, you guessed it, back in 2007.
In fact, I am seeing a whole range of data points warning that this economic cycle is coming to an end. As a hedge fund friend of mine told me the other day, "A year from now we'll be kicking ourselves over why we didn't sell. All the signs were there."
With the government about to report a US Q2 GDP figure of anywhere from 3% to 4% you must think I'm smoking California's largest cash crop (it's not grapes).
But having been through nine bull markets during my lifetime, I can tell you this is exactly what tops look like. Business is booming, you can't hire anyone, there are long lines everywhere, and nary a space is to be found in a shopping mall parking lot. This is when economies exhaust themselves, by overheating and pulling growth in from future years.
Now about that trillion-dollar trade.
Back in 2011, the spread between the two-year and 10-year Treasury paper (TLT) was a generous 3.0%. Bond traders made money hand over fist borrowing short, lending long, and leveraging this trade up anywhere from 10 to 100 times. The risk reward was so great that the aggregate value rose to the tens of trillions of dollars.
Today, that spread is on 34 basis points. Traders are still putting it on but keeping every close eye on the exit. After all, 34 basis points X 10 is 3.40%, which still handily beats overnight deposit rates.
When the spread turns negative the sushi hits the fan, and they sell everything, taking the rest of the world with it.
What will they be dumping? The entire long dated maturity range of not just Treasury bonds (TLT), but ALL bonds (LQD), (JNK) and high yielding stocks (HYLD), ETFs, MLPs (AMLP), and REITs (SPG). They call this a "bear market."
What's the cleanest way to play this? Sell short the (TLT) or buy the inverse 2X short Treasury ETF (TBT). Right here, with yield at a five-month low and prices at five-month highs, is a great entry point.
Just thought you'd like to know.
Mad Hedge Technology Letter
June 29, 2018
Fiat Lux
Featured Trade:
(IS AIRBNB YOUR NEXT TEN BAGGER?)
I was not surprised to hear that the home sharing app, Airbnb, was given a $31 billion valuation in the latest venture capital funding round.
The big question for you and I is: Will the valuation soar tenfold to $300 billion, and how much of a piece of that will you and I be allowed to get?
To answer that question I spent six weeks traveling around Europe as an Airbnb customer. This enabled me to understand its business model, its strengths and weaknesses, and analyze its long-term potential.
As a customer the value you receive is nothing less than amazing.
I have been a five-star hotel client for most of my life, with someone else picking up the tab much of the time, so I have a pretty good idea on the true value of accommodations.
What you get from Airbnb is nothing less than spectacular. You get three or four times the space for one-third the price. That's a disruption factor of 7:1.
The standards are often five-star and at the top end, depending on how much you spend. I found I could often get an entire three-bedroom house for the price of a single hotel room, with a better location.
Or, I could get an excellent abode in rural settings, where none other was to be had, whatsoever.
That's a big deal for someone like me who spends so much of the year on the road.
You also get a new best friend in every city you visit.
On most occasions the host greeted me on the doorsteps with the keys, and then introduced me to the mysteries of European kitchen appliances, heating, and air-conditioning.
Pre-stocking the refrigerator with fresh milk, coffee, tea, and jam seems to be a tradition the hosts pick up in their Airbnb orientation course.
One in Waterford, Ireland, even left me a bottle of wine, plenty of beer, and a frozen pizza. She read my mind. Thanks, Mary!
She then took me on a one-hour tour of their city, divulging secrets about their favorite restaurants, city sights, and nightspots. Every one proved golden.
After you check out, Airbnb asks you to review the accommodation. These can be incredibly valuable in deciding your next pick.
I had one near miss with what I thought was a great deal in London, until I read, "The entire place reeks of Indian cooking."
Similarly, the hosts rate you as a guest.
One hostess shared a story about picking up her clients from town after they got drunk and lost in the middle of the night. Then they threw up in the back of the car on the way home.
Guests forgetting to return keys are another common complaint.
Needless to say, I received top ratings from my hosts, as fixing their Wi-Fi to boost performance became a regular habit of mine.
After my initial fabulous experience in London, I thought it might be a one-off, limited to only the largest cities. So, I started researching accommodations for my upcoming trips.
I couldn't have been more wrong.
Just the Kona Coast alone on the big island of Hawaii had an incredible 50 offerings, including several bargain beachfront properties.
The center of Tokyo had more than 300 listings. The historic district in Florence, Italy, had a mind-blowing 351 properties.
Fancy a retreat on the island of Bali in Indonesia and tune up your surfing? There are more than 197 places to stay!
While we weren't looking, Airbnb has truly gone global.
Airbnb's business model is almost too simple to be true, involving no more than a couple of popular applications. Call it an artful melding of Google Earth, email, text, and PayPal.
While no one was looking, it became the world's largest hotel at a tiny fraction of the capital cost.
The company has 2 million hosts worldwide, and 100 million customers. That supply/demand imbalance shifts burden of the cost to the renters, who usually have to fork out a 12% fee, plus the cost of the cleaning service.
Hosts only pay 3% to process the credit card fees for the payment.
The tidal wave of revenues this has created has enabled Airbnb to become San Francisco's second largest privately owned "unicorn," right after the $70 billion behemoth ridesharing app, Uber.
To say that Airbnb has created controversy would be a huge understatement.
For a start, it has emerged as a major challenge to the hotel industry, which is still stuck with a 20th century business model. There's no way hotels can compete on price.
One Airbnb "super host" in Manhattan is managing 200 apartments, essentially, creating out of scratch, a medium-sized virtual "hotel."
Taxes are another matter.
Some municipalities require hosts to pay levies of up to 20%, while others demand quarterly tax filings and withholding taxes. That is, if tax collectors can find them.
Airbnb may be the largest new source of tax evasion today.
In cities where housing is in short supply Airbnb is seen as crowding out local residents. After all, an owner can make far more money subletting their residence nightly than with a long-term lease.
Several owners told me that Airbnb covered their entire housing cost for the year, while paying off the mortgage at the same time.
Owners in the primest of areas, such as in midtown Manhattan off of Central Park or the old city center in Dubrovnik, Croatia, rent their homes out as much as 180 days a year.
It is doing nothing less than changing lives.
That has forced local governments to clamp down.
San Francisco has severe, ironclad planning and zoning restrictions that only allow 2,000 new residences a year to come on the market.
It is cracking down on Airbnb, as well as other home-sharing apps such as FlipKey, VRBO, and HomeAway by forcing hosts to register with the city or face brutal $1,000-a-day fines.
So far, only 1,675 out of 9,000 hosts have done so.
Ratting out your neighbor as an off-the-grid Airbnb member has become a new cottage industry in The City by the Bay.
Airbnb is fighting back with multiple lawsuits, citing the federal Communications Decency Act, the Stored Communications Act, and the First Amendment covering the freedom of speech.
It is a safe bet that a $31 billion company can spend more on legal fees than a city the size of San Francisco.
The company also has become the largest contributor in San Francisco's local elections. In 2015, it fought a successful campaign against Proposition "F," meant to place severe restrictions on its services.
An Airbnb stay over is not without its problems.
The burden of truth in advertising is on the host, not the company, and inaccurate listings are withdrawn only after complaints.
A 20-something-year-old guy's idea of cleanliness may be a little lower than your own.
Longtime users learn the unspoken "code."
"Cozy" can mean tiny, "as is" can be a dump, and "lively" can bring the drunken screaming of four-letter words all night long, especially if you are staying upstairs from a pub.
And that spectacular seaside view might come with relentlessly whining Vespa's on the highway out front. Always brings earplugs and blindfolds as backups.
Researching complaints, it seems that the worst of the abuses occur in shared accommodation. Learning new foreign cultures can be fascinating. But your new roommate may want to get to know you better than you want.
In one notorious incident a Madrid guest was raped. The best way to guard against such unpleasantries is to rent the entire residence for your use only, as I do.
Another problem arises when properties are rented out for illegal purposes, such as prostitution or drug dealing.
More than once, an unsuspecting resident woke up one morning to discover they were living next door to a new bordello.
Wild parties that trash the dwelling, annoy the neighbors, and bring in the police is another worry.
Of course, the million-dollar question is, "When will the company go public?"
The current "unicorn" philosophy is to milk the company for all it's worth, and take it public when it is about to go ex-growth.
That's what happened to Twitter (TWTR), which grew exponentially, and then saw shares dive a gut-churning 72% after its initial public offering. It has since recovered.
On seeing the massive crowds of new tourists packing Europe this summer, my conclusion is that the travel industry is entering a hypergrowth phase. Blame the emerging middle-class Chinese who seem to be everywhere.
That means that at whatever price Airbnb goes public, there may not be a ten-bagger left for you. But a two or three bagger may be possible.
The real shock came when I left Airbnb and stayed in a regular hotel. Include the fees and the cleaning charges, and the service is no longer competitive for a single night stay.
In any case, most hosts have two- or three-night minimums to minimize hassle.
When I checked in at a Basel, Switzerland, five-star hotel, all I got was a set of keys and a blank stare. No great restaurant tips, no local secrets, no new best friend.
I spent that night surfing Airbnb, planning my next adventure.
_________________________________________________________________________________________________
Quote of the Day
"There are just not enough human buyers in the market," lamented Edward Perkin, chief equity investment officer at Eaton Vance.
"Every time there's a dip, you are going to see investors come in from the sidelines because they're underinvested. On the other hand, the market is going nowhere because of growth. So, every time the market sticks its head up, they are going to sell the rallies. You are going to see this over and over again," said hedge fund manager, Mark Fisher, of MBF Clearing Corp.
Global Market Comments
June 28, 2018
Fiat Lux
Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(TRAPPED IN PURGATORY),
(INDU), (SPY), (NASDAQ), (IWM), (TLT)
I can't believe my eyes.
Here we are at the midpoint of 2018 and the main markets are virtually unchanged. The Dow Average is down 1.5%, the S&P 500 is up +1%, NASDAQ has gained 8.79%, and the Russell 2000 has tacked on 7.18%.
Despite all the promises that happy days are here again, here we are dead in the water. Since the passage of one of the most simulative tax bills in December, we have gone absolutely nowhere.
We are essentially stuck in stock market purgatory.
Of course, you can blame the trade wars, the onset of which marked the top of the bull market on January 24 at 26,252.
The president got one thing right. Trade wars are easy to win, but for dictatorships not for democracies.
If you complain about trade policies in China you are told to shut up or face getting sent to a re-education camp. Worst case you might disappear in the night as has happened to a number of Chinese billionaires lately.
In America any restraint of trade anywhere invites 10,000 highly paid lobbyists desperate to reverse the action. Offer any resistance and the reprobates are thrown out of office, as may happen here in four months.
The Chinese have one weapon against which we have no defense. They can go hungry. They'll just tell their people to toughen up for the greater good of the nation. When I first arrived in the Middle Kingdom 45 years ago they were still recovering from the aftereffects of a famine that killed 50 million (there are NO substitutes for food). Try doing that in the U.S.
The Chinese have another secret weapon at their disposal. They paid $3.63 a week for a subscription to the New York Times (including Sundays). Because of this they know that the president is going into the midterm elections with the lowest approval ratings in history.
And they are doing this running on a policy of sending children to concentration camps, which they don't even do in China anymore. This will cost the party votes in every state except in Oklahoma.
So the Chinese are content to hang tough, meet every tit with a tat, match every escalation, and wait out the current administration. The only question for them is whether the president will be gone in 2 1/2 years or in six months, so it pays to stall.
This is a country where history is measured in millennia. When I asked premier Zhou Enlai in the 1970s what the outcome of the 1792 French Revolution was, he responded "It's too early to say."
None of this is good for stock prices.
So I will continue with my now five-month-old prediction that markets will remain trapped in narrow ranges until before the midterms, and then rally strongly. It will do this not because of who wins, but because of the mere fact that it is over.
If you are a trader, unless you can buy stocks on those horrific capitulation panic days and sell on the most euphoric peaks, it's better just to stay away. I can do that, but I bet most of you can't. But then I've been practicing for 50 years. This is why I dumped the last of my positions yesterday morning at the highs of the day, shooting out three Trade Alerts in rapid succession.
By the way, these are excellent reasons to avoid the bond market as well. While the fundamentals tell us that interest rates should continue to rise for years, the charts tell us a different story.
With 10-year U.S. Treasury bond yields (TLT) hitting a five-month low today, it is hinting that a recession isn't a 2019 event, it in fact has already started. Bulls better fall down on their knees and pray to their chosen idol that this is nothing more than an extended short covering rally.
It all sounds like a great time to take a long cruise to me.
China in 1973
Mad Hedge Technology Letter
June 28, 2018
Fiat Lux
Featured Trade:
(WHY TECH IS REGULATION PROOF),
(UBER)
"It is necessary for us to learn from others' mistakes. You won't live long enough to make them all yourself," said Admiral Hyman G. Rickover, creator of America's first nuclear submarine fleet.
Regulation lost again.
If regulation was a team at the 2018 Russian World Cup, they would have already been sent packing in disgrace.
Even if regulators want to regulate, tech companies swiftly respond with an army of well-paid lawyers fighting fiercely for its interests.
Tech is more powerful than government now and the desperation of government intervention after the fact falls on deaf ears.
Investors have even seen this happen in communist China where there are whispers in Beijing that China's BATs are getting too powerful for their own good.
In a major victory in the run-up to the 2019 IPO, Uber one-upped the Brits.
Uber won back its license to operate in the city of London, one of Uber's major growth engines, when British judge Emma Arbuthnot turned over the ruling and gave Uber a 15-month license.
Tech is invincible against the institutions attempting to clamp down on wild business practices involving data.
And this win proves that every emerging tech company should act brazenly and push the line when it can.
If regulations set tech in its crosshairs, this proves there is no recourse.
Tech is disrupting regulation.
Tech is changing so fast that regulators cannot keep up because of the creaky, bureaucratic nature of big government.
Once regulators wrap their heads around a new technology, the next technology is on its way to universal rollout.
If you want to boil everything down to the nuts and bolts, tech is just too nimble.
It can simultaneously morph into anything it wants in a jiffy because any morphing these days involves a computer, Internet connection, and execution ability.
This phenomenon has created a scenario where regulators will always be one step behind the tech companies, which at the same time are staying one step ahead of the hackers trying to skim off their profits or plain out blow a hole in their company.
It is hard to regulate something you do not know about or do not understand.
Even worse, if a technology becomes firmly embedded into popular culture, it's even harder to root it out.
The result is that Uber and the ride-sharing economy is here to stay. Now the most anticipated IPO in 2019 has its best European business up and running again.
When I say nimbleness, this does not just refer to staying ahead of regulators but also the agility to operate in certain geographic specific locations.
In just a few months, Uber shut up shop in Southeast Asia selling its business to Grab, the leading ride-sharing app in Southeast Asia, while receiving a 27.5% stake in Grab.
I have chronicled the problem with American companies entering into Southeast Asia, and this stake proves a shrewd move.
It will materially add to the top and bottom line once Uber goes public.
Southeast Asia is China's sphere of influence, and the special relationships Beijing has procured in the region offers Beijing unfettered access to claim it as its own turf.
This is going on while the Japanese "zaibatsu" and Korean "chaebols" are licking their chops to penetrate the Southeast Asian markets after grappling with an aging society and stagnant profitability.
SoftBank's Masayoshi Son, a recent investor of Uber, has applied pressure on Uber to focus on its premium markets and drop the third world pivot.
Effectively, Uber has done well to seize a stake in a region oozing with Chinese interests in a premium unicorn.
As Facebook has showed, the highest average revenue per user stems from North America and Europe.
Whether it's hawking ads or sharing transportation, companies can extract more profit per user in these two regions.
Migrating up the value food chain is bullish for its financials come the IPO.
London represents a huge opportunity for Uber.
Uber has cornered the London market with more than 3.6 million users serviced by more than 45,000 Uber drivers.
Digging its nails further into its core market will encourage the closing down of the cash burn model that Uber promulgated in its early days.
Before Uber sold its interests in China, it was burning $1 billion per year fighting domestic stalwart Didi Chuxing, one of China's best and brightest unicorns.
The $2 billion Uber lost in two years was enough and avoiding future China risk sealed the move out of China.
That move looks great considering the tariff war playing out in Washington.
The trend of western tech firms doubling down on western markets will strengthen going forward as Europe has the same worries about Chinese tech hijacking Europe's best technology such as China's Midea Group purchase of Germany's best robotic company Kuka in 2016.
China cannot do that anymore in Europe or America.
Uber Eats, one of Uber's hottest growth businesses, has no chance of succeeding in third world countries where delivery charges are a pittance due to cheap labor costs.
This business can only succeed in high transport cost societies.
Uber ran into headwinds using controversial UberPOP, Uber's compact vehicle app in Europe, in countries including Spain, Denmark, Germany, Italy, Finland, Japan, Hungary, and Bulgaria.
Aside from Bulgaria and Hungary, these locations represent high purchasing power countries that fit with Uber's business model.
Each victory in court will create additional income streams, and I am willing to bet on Uber's lawyers in the developed world, rather than a hodgepodge of uninformed regulators.
Imagine how regulators will police artificial intelligence (A.I.) in the future?
Only A.I. engineers understand what is happening under the hood of the car.
Uber will find the will and a way to enter into every market it considers healthy for its technology.
Under the new rules in London, Uber must now report crimes to the police instead of to the transport authority of London.
Drivers can only offer rides in locations where they have proper certifications to work for Uber.
Uber must now give a mandatory six-hour break to Uber drivers who have worked for 10 straight hours.
These new laws are hardly anything extreme and should already have been written into stone beforehand.
As expected, Uber blamed the debacle on Travis Kalanick, the maverick founder and former CEO of Uber. And Uber being "not fit" to operate was entirely convenient to use Kalanick as the scapegoat.
Uber has increased private hired vehicles in London 92% since 2009. Without London, Uber's future profitability and growth story becomes questionable.
Uber has interests in more than 600 cities worldwide and more than 40 of these are in England.
Uber can avoid any major damage with the Brighton's of the world refusing to cooperate, but it cannot lose its higher-grade locations in London, New York, San Francisco, and almost every major mega city in the western world.
They did it.
Tech disrupted regulation again, and next year's IPO should be a stunning spectacle.
It is normal in the current climate for expectations of tech darlings to explode, and 2019 will bring self-driving technology to the public markets creating even more demand for this asset scarce industry.
That is exactly what tech does.
Tech builds industry from scratch and regulators have no chance to control it.
Uber's ultimate goal is to profit from flying cars by 2023, in a new business called Uber Elevate that will cause regulators to fall even further behind the regulation curve as tech makes science fiction a reality in the near future.
_________________________________________________________________________________________________
Quote of the Day
"We're in a political campaign, and the candidate is Uber and the opponent is an asshole named Taxi," said founder and former CEO of Uber Travis Kalanick.
