“If the Fed brings a lump of coal in 2019, then they better bring some candy canes for the kids as well,” said Bill Gross, former CEO of bond giant, PIMCO.
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
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
Mad Hedge Hot Tips
December 21, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) December is the Worst Month of the Year, for the first time in market history. Santa Claus goes on strike. Trade wars, rising interest rates, government shut down? There is a lot of blame to go around. Click here.
2) NY Fed Governor Williams Juices the Market for 300 Points. What a difference a word makes! By saying rate rises are NOT on autopilot he triggered a monster rally. Apparently, the Fed cares about the stock crash after all. Click here.
3) Q3 GDP Revised Dow to 3.4%, down 0.1% from the last look. Too bad the stock market doesn’t see it. Click here.
4) November Durable Goods Plunge from 1.3% down to 0.8%. Isn’t this what the numbers are supposed to look like going into a recession? Click here.
5) Mad Hedge Hot Tips Will be Taking a Two Week Break. When the peloton TV adds dominate the airwaves, it time to get out of town. Catch you on the ski slopes at Lake Tahoe. See you again on January 7. Good luck in the New Year. John Thomas.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(WHY CASH IS ALWAYS THE BEST HEDGE)
(INDU)
(PRINT YOUR OWN CAR),
(TESTIMONIAL)
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 21, 2018
Fiat Lux
Featured Trade:
(WHY CASH IS THE BEST HEDGE)
(INDU)
(PRINT YOUR OWN CAR),
(TESTIMONIAL)
Over the decades, I have been besieged by suggestions by various market players over how to hedge their downside risk in the stock market.
I have analyzed most of these, experimented with them, and even tried out a few. These range from buying equity put options to selling call options, investing in bear ETFs, and trading the volatility index (VIX).
My conclusion is always the same: Cash is always the best hedge.
Hedge fund managers like me are always under pressure to deliver positive returns whether the stock market goes up, down, or sideways. A lot make this promise but few are actually able to deliver. You can almost count them on one hand and I know all of them personally.
And here is a hedge fund manager’s worst nightmare: both your longs go down and your shorts go down, eroding capital at a double rate. This is often the result when you come to rely on these esoteric “hedges.”
This happens when you have done all the research in the world, have countless mathematical formulas to back you up, and you backtest your data for 30 years.
First of all, assets classes don’t always perform according to financial models because there is always one big variable that managers can’t quantify: human emotion.
While algorithms and computers are completely rational, people aren’t, even the most experienced ones. After watching markets for over 50 years I can tell you that there is only one certainty. That the natural tendency of most people is to buy at market tops and sell at market bottoms.
In order words, making money in the stock market is an unnatural act and fights against the long-term tide of evolution. We, humans, are predators and hunters evolved to track game on the horizon of an African savanna. Modern humans are maybe 5 million years old but civilization has been around for only 10,000 years. Our brains have not had time to make the adjustment.
In the market, this means that if a stock has gone up, you believe it will continue to do so. This is why market tops and bottoms see volume spikes. To make money, you have to go against these innate instincts. Some people are born with this ability while others can only learn it through decades of training. I am in the latter group.
The 4,400-point decline we have all suffered over the last 2 ½ months is a classic example. Prices earnings multiples have given up half of their gains since the 2009 bear market bottom. It is one of the best buying opportunities in four years. So, what are investors doing? Selling.
Share prices are now discounting a severe recession in 2019 that probably isn’t going to happen. I don’t believe that we’ll get one until the end of 2019 and even then it will be a modest one. Essentially, we already have a recession in the price at these levels. If the recession doesn’t show, stocks will rocket.
What hedges worked during this time? Absolutely none. If you shifted from growth stocks to value ones, or from high beta ones to low beta shares, you still lost money, probably a lot. Those who hedged with volatility probably has some one-hit wonders, but add up their profit and loss for the entire year and it probably comes to negative numbers.
You know what didn’t lose money? Cash which in fact is now earning 2%-4% depending on where you have it parked.
This is why I have been running cash positions of 70%-90% for the past four months. Oh, how I love the smell of cash in the morning. Logging into my online trading account every morning and seeing a wad of cash is like getting a short rush of adrenaline.
Absolutely, cash is the best hedge.
Without Cash Your Portfolio Will Bite You Back
I am ever on the lookout for disruptive technologies that lead to great investment opportunities. Sitting here next door to Silicon Valley, that is not hard to do.
So I watched my TV with utter amazement the other day when I saw a 3-D printer create an entire car from scratch. It took ten hours to build the body, and the rest of the day to bolt on the electric motors, axels, wheels, and the rest of the parts.
Beyond the drive train, the vehicle has only 50 parts. This compares to the 5,000 or 6,000 parts needed for a conventional car. There’s a gigantic labor and cost saving right there.
I have to admit that I came late to the 3-D printing scene. When hobbyists started making colorful figurines on their printers a few years ago, I thought it no more than a niche of a few passionate geeks who are in such abundance here.
That was a good thing because the initial batch of stock market plays all went meteoric, then crashed and burned.
Such is often the case with cutting-edge technologies. You often don’t generate real profits until you get the second or third generation.
That’s the way the personal computer started which went mainstream with incredible speed in the early 1980s (to get the flavor of the day, watch the hit AMC series “Halt and Catch Fire”).
Then my biotech friends told me they were printing human organs substituting ink with cells. After that, I discovered that Elon Musk was using 3-D printers to build rocket engine parts at his Space X venture in Los Angeles.
Suddenly, I started to take the technology seriously.
Arizona-based Local Motors plans to take a great leap forward with the launch of a 3D printed car next year (click here for their website).
Dubbed the “Strati” (layers in Italian), the vehicle is made of reinforced carbon fiber thermoplastic, or ABS. It has one fifth the weight of steel with ten times the strength. You can pick up the car with two hands.
The company planned to build two versions of its vehicle during the first quarter of 2016. One would be a low-speed battery car or so-called neighborhood electric vehicle priced between $18,000 and $30,000. Faster, higher-priced versions would come later.
While the entry costs to the auto industry are legendarily high, in the billions of dollars, Local Motors’ upfront expenses are miniscule by comparison. The 49 foot long printer needed to print the body costs only $50,000.
Oak Ridge National Labs in Tennessee is a partner in the project which helped develop the monster printer. Nuclear weapons historians will recall them as the first refiner of U-235 during WWII.
It is the first effort to fundamentally change the way cars are put together since Henry Ford modernized the auto assembly line 100 years ago.
Local Motors is an internet creation all the way. It obtained its original funding through crowdsourcing, and held an international contest to find a design. An Italian won, hence the name.
It’s hard to see the Strati threatening the Tesla (TSLA), or any conventional car manufacturer any time soon. The current car is not yet street legal, and only does 40 miles per hour.
There is no great trading or investment play here yet. It is still early days. Give it a year or two.
However, it could be a hint of great things to come. I’ll take mine in black.
For the YouTube video of and interview with the Strati engineer, click here.
Ah, But is the Girl Printed As Well?
I can't tell you how much I enjoy your blog. It is the first place I go every morning and I miss you on the weekends.
I stumbled upon your site about 4 months ago and have been addicted to it since day one. I really appreciate not only your insight into the markets but also your global and historical perspectives.
All of this served up with your great sense of humor makes it a must read! Thanks for all your hard work.
Chip
Mad Hedge Hot Tips
December 20, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) That Was Some Rate Hike! Only 25 basis points knock 900 points off the Dow Average in an hour. What if he had raised by 50 points? The Fed says the economy is great, the stock market says it isn’t. Still, down 4,000 points in less than three months, you’d think we’re getting close to a bottom. Click here.
2) New York Home Prices are in Free Fall, thanks to the loss of local and mortgage tax deductions in the Trump tax bill. California and New Jersey are following close behind. Goodbye, home ATM! Click here.
3) Online Sales up 18% Year on Year. Recession? What recession? Goodbye Sears (SHLDQ), goodbye Macy’s (M). Click here.
4) Weekly Mortgage Applications Down 5.8%, in one of the sharpest drops in years. How come we can see these numbers and the Fed can’t? Click here.
5) Weekly Jobless Claims Up 8,000, to 214,000. It’s amazing to see this number rising during the holiday season. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(THE GLASS HALF EMPTY MARKET)
($INDU), (SPY)
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD),
(AAPL)
(MICRON TECHNOLOGY BOMBS AGAIN)
(MU), (FDX), (UPS), (AAPL), (QRVO), (SWKS), (NXPI), (CRUS), (LITE),