The Mad Hedge Fund Trader is seeing its biggest one-day gains since the inception of our Trade Alert Service 11 years ago. By the time you read this, we will have picked up an astounding 11% profit for the entire portfolio in 24 hours.
However, this being Halloween, I don’t want to sound like I’m whistling by the graveyard. But what I am about to say will scare the daylights out of you.
I hate to say I told you so but my prediction a year ago that the bull market would end on May 10, 2019 at 4:00 PM is starting to look pretty good.
If I am right, the charts for the S&P 500 (SPY) are setting up a classic head and shoulders top. The left shoulder was created by the January 2018 rally to $282.
We just saw the head created at the beginning of October at $293. All that remains is to build the right shoulder back up to $282 by the spring. What will then follow is the crying.
This is not a matter of throwing a dart at a calendar or reciting a chant taught to me by a long-dead Yaqui Indian. It is a simple matter of math. Here’s how it goes:
*The Fed Raises funds rate 25 basis points per quarter for the next four quarters to 3.25%
*The Yields Curve Inverts, taking short rates higher than long rates now at 3.15%
*Bond yield spread trades increase massively going into the inversion as traders ramp up the size to make up for shrinking spreads.
*When the spread turns negative, they dump everything, creating an interest rate spike to 4% or 5%.
*Inverted yield curves last an average of 14 months or until February 2020 in this cycle when a recession begins.
*Stock markets peak on average seven months before recessions, and you arrive at Friday, May 10, 2019 at 4:00 PM EST as the date for the demise of the bull market. At that point, it will be ten years and two months old, the longest such move in history.
A lot of people asked why I sent out so few trade alerts during the summer and going into the fall.
In fact, the list of negatives has reached laughable proportions:
*Longest bull market in history
*In the face of rising interest rates
*In the face of rising oil prices
*Rising inflation
*Nothing else to buy
*Only bull market in the world
*Valuations approaching two-decade highs
*Overwhelmingly concentration in big cap tech
*Double top in the market on an Equal Weight S&P 500 chart
*Record retail inflows into ETFs
*Recession has already started in the auto industry
*Recession has already started in the housing industry
*Rotation to value defensive stocks underway
*Massive unicorn IPOs planned in 2019- $215 billion
*Slowing GDP Growth 4.2% to 3.5%
*Large amount of economic growth sucked forward from 2019 as businesses accelerate Chinese imports to beat the tariffs
*The same is going on in China to buy our exports
Should you throw up your hands, dump all your stocks, and hide out in cash?
Absolute not! In fact, the last six months of a bull market are often the most profitable. Many tech stocks like Micron Technology (MU) and Advanced Micro Devices (AMD) have dropped by half in recent months. That means they have to double to get back to their old highs.
Other big quality stocks such as Amazon (AMZN) and Netflix (NFLX) have plunged by 30% and only have to appreciate by 43% to hit highs. It is, in fact, the best entry point for large-cap tech stocks since 2015 with valuations at a three-year low.
If I am wrong, the trade war with China plunges us into recession and ends the bull market sooner. Almost all the “worry” items on the list above are getting worse by the day.
Save That Date!
https://www.madhedgefundtrader.com/wp-content/uploads/2017/10/john-pumpkin-e1508717749583.jpg319400MHFTFhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTF2018-11-01 01:07:552018-10-31 20:33:59The Terrifying Chart Formation That is Setting Up
At the recent Mad Hedge Lake Tahoe Conference, I pinpointed software companies as a robust group of tech stocks that are the perfect late cycle investment in the economic environment we find ourselves in now.
To add some granularity about my thesis, I would like to start elaborating on an up-and-coming software stock that I find compelling and in the middle of a growth sweet spot.
And with the rapacious pullback, the tech sector has experienced as of late, this high-octane growth stock is poised to rev back up, albeit with more than your average volatility attached to its stock symbol.
If you can stomach the volatility, then Zendesk (ZEN) is the company for you to dip your toe in.
Zendesk is a customer service software offering solutions to clients through a flexible platform revolving around customer service tickets.
This $6 billion market cap tech firm thriving in the dodgy San Francisco Tenderloin district only need to be reminded of how fast a tech firm can be disrupted by stepping out of the office and experiencing ground zero of the San Francisco homeless movement in the scruffy Tenderloin.
I usually get lambasted for the lack of time I spend following budding tech firms, but you cannot blame me when the bulk of this year’s stock market gains have been extracted by the biggest and mightiest tech titans.
That does not mean all small tech is dead, but they certainly do have heightened existential risk because of the Amazons (AMZN) and Microsofts (MSFT) of the world, spreading their network effects far and wide.
International Business Machines Corporation’s (IBM) purchase of cloud company Red Hat (RHT) underscores the value of applying M&A to grow the top and bottom line, and the chronic bidders of these smaller minnows are usually the Amazons and Microsofts themselves who have the cash to dole out.
Salesforce (CRM) is always adding to its arsenal of integrated software companies that can scale up in the cloud, and Marc Benioff’s M&A strategy has thrived to devastating effect boosting the bottom and top line.
I must admit, tech does get the rub of the green over other industries because of the scaling effect afforded to profit poor tech companies.
The ample time to prove to investors they can snatch a growing user base, enhance product offerings, and develop an eco-system intertwined with recurring subscription products is not fair to other industries who are judged on different metrics mainly profits and profits now.
Well, life isn’t fair.
The addressable market is usually massive causing investors to stick with these burgeoning tech firms through thick and thin.
Zendesk is another company burning money, but let me tell you, they are no Snapchat (SNAP).
Operating margins are marching towards positive territory, meaning this outfit is well-run.
It was only at the beginning of 2015 when Zendesk’s operating margin registered -53%, and since then, they have dramatically reduced it to -36% at the end of 2016 and now -24% in 2018.
Gross margins next quarter will be hit a bit with its acquisition of Base CRM, headquartered in Mountain View, California and R&D offices in Krakow, Poland, offering a web-based all-in-one sales platform featuring tools for email, phone dialing, pipeline management, and forecasting.
Improving service offerings in the tech world usually means nabbing niche cloud companies that can easily be integrated into the larger eco-system and Base CRM, even though it has lower margins than Zendesk, is a nice pickup for the company boosting the top line while expanding cross-selling activities.
Then there is the sales revenue growth demonstrating all the hallmarks powerful software companies live up to with its 39% quarterly revenue growth.
Zendesk’s management has remarked that they fully expect to hit $1 billion in total sales by 2020 which is more than double the 2017 annual revenue of $430 million.
This year, Zendesk is forecasted to post just shy of $600 million in sales.
Large clients keep piling in hoping to modernize their customer service operations and wean themselves off the siloed legacy systems.
Disruption by some fresh newcomer in a disruptive industry that they operate in is usually the trigger forcing companies to spruce up their customer service software.
This path of migration will healthily continue for Zendesk reaffirming management’s thesis of $1 billion in sales by 2020.
Zendesk, flaunting off their innovation skills, identified the universal popularity of messenger app WhatsApp as an effective platform for its services and rolled out a product that integrates Zendesk services with WhatsApp.
This will allow businesses to manage customer service interactions and engage with customers directly on WhatsApp.
The customized integration links conversations between businesses and their customers on WhatsApp within Zendesk.
This move will allow Zendesk to stretch their tentacles further and wider while being able to provide faster support for customer service tickets which are incredibly time-sensitive.
Since management highlighted that WhatsApp is the go-to messenger in Asia Pacific and Latin America, there was no reason not to extend their offerings in a way that captures this vital userbase.
The WhatsApp pivot has been a nice addition with Zendesk’s management remarking that they “handle over 20% of our order status inquiries daily with WhatsApp and Zendesk, which is much faster than traditional methods.”
Omnichannel support within Zendesk’s platform will be key to securing the growth it needs to reach its $1 billion of sales milestone.
Innovation is the crucial ingredient in constructing the perfect products that can maximize customer service performance.
Its overseas exploits are not just a flash in the pan with its services supported in 30 languages and offices in 15 different countries. It all makes sense considering half their revenue is outside of America.
With IBM’s recent acquisition of Red Hat, buyers are still hunting for the right pieces to add to their portfolio.
The Red Hat purchase proved that demand still eclipses supply by a far margin.
Zendesk is one of those in the queue for a big buyer to swoop in with a mega offer.
It’s no guarantee that a company will pay a 63% premium like IBM did, but some sort of premium will be definitely warranted.
Zendesk offers the type of robust growth and premium cloud services that could easily fit into a bigger cloud player looking to improve their assortment of cloud tools.
This type of tailwind itself will naturally boost the stock by 5-10% alone if the macro picture can somehow manage to gain footing for the rest of the year.
As with the rest of tech, Zendesk dipped about 20% in the last 30 days but by no means does that mean this is a bad company with a weak future.
I would very much argue the opposite.
The weakness in sales offers a prime entry point in a fast-growing company that is part of the software and cloud movement that I have incessantly harped about.
If this company can show continued operating margins growth, maintain sales growth of above 30% YOY, and demonstrate product innovation, this stock will break out to higher levels.
As of now, that is exactly the road they are headed down.
Business abroad is doing so well that Zendesk recently splurged on a Europe, Middle East and Africa (EMEA) headquarters in Dublin, Ireland coined as the “the tech capital of Europe.”
Zendesk started with two employees in Dublin in 2012 and now boast over 300 employees occupying 58,000 square feet in a new office costing $10 million.
By 2020, Zendesk expects to build their Dublin branch to over 500 employees implying that the overseas pipeline is ripe for the taking.
I am highly bullish Zendesk and recommend that readers check out this attractive growth story.
SNAZZY NEW HEADQUARTER IN DUBLIN
https://www.madhedgefundtrader.com/wp-content/uploads/2018/10/Zendesk-HQ-dublin-1.png614762MHFTFhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTF2018-11-01 01:06:322018-11-01 11:42:21Look at Zendesk for your Next Ten Bagger
“I don't want to fight old battles. I want to fight new ones” – Said CEO of Microsoft Satya Nadella
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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
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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
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Not a day goes by without someone carping about the national debt to me which now stands at $21.6 trillion.
Since President Obama came into office on January 20, 2010, it skyrocketed.
Are we all going to hell in a handbasket? Eventually, yes.
While it is true that the national debt has increased by some $10 trillion over the past ten years, there is less than meets the eye.
Much less.
That includes the $4 trillion purchased by the Federal Reserve as part of its aggressive five-year monetary policy known as “quantitative easing”.
It also includes another $1 trillion of Treasury holdings by dozens of other federal agencies such as Fannie Mae, Freddie Mac, and Sallie Mae.
So, the net federal debt actually issued during Obama’s two terms is not $9 trillion, but $4 trillion.
That’s a big difference.
These numbers would make Obama one of the most fiscally conservative presidents in US history (see tables below).
And he pulled off this neat trick despite US tax revenues utterly collapsing in the aftermath of the Great Recession.
What the Treasury has in effect done is taken one dollar out of one pocket and put it in the other, 5 trillion times.
There has been no change in the nation’s true indebtedness or net worth as a result of these transactions.
In fact, these bonds were never even really issued. They only exist on a spreadsheet, on a server, on a mainframe, somewhere at 1500 Pennsylvania Avenue, NW, Washington DC.
And here is the real shocker.
The Treasury can cancel this debt at any time.
They can just decide to use one set of figures on the plus side of the balance sheet to offset an equal amount on the negative side, and poof, the debt is gone forever, and the national debt is suddenly only $16 trillion.
It wouldn’t even require an act of Congress. It could simply be carried out through a presidential order.
And we have seen a lot of those lately.
That would give America one of the lowest debt to GDP ratios in the industrialized world.
I actually recommended that the White House use this ploy to get around the last debt ceiling crisis.
All of this sounds nice in theory. But how would markets respond if this were the true state of affairs in the debt markets?
Ten-year US Treasury bond yields would stay stubbornly low around $3.10%.
Prices for marginal debt securities in emerging markets (ELD) would boom.
Am I ringing any bells here people? Do these sound like debt markets you know and love?
A half-century of trading has taught me to never argue with Mr. Market. He is always right.
By keeping its bonds, the Fed has a valuable tool to employ if it ever senses that real inflation is about to make a comeback without having to raise the overnight deposit rate.
It simply can raise bond market rates by selling some of its still considerable holdings.
“FED SELLS BOND HOARD.”
How do you think risk markets would take that headline? Not well, not well at all.
There are other reasons to keep the $5 trillion in phantom Treasury bonds around.
It assures that the secondary market maintains the breadth and depth to accommodate future large-scale borrowing demanded by another financial crisis, Great Recession, or war.
Yes, believe it or not, governments think like this.
I remember that these were the issues that were discussed the last time closing the bond market was considered.
That was at the end of the Clinton administration in 1999 when paying off the entire national debt was only a few years off.
But close down the bond market and fire the few hundred thousand people who work there, and it could take decades to restart.
This is what Japan learned in the 1960’s.
It took the Japanese nearly a half-century to build the bond infrastructure needed to accommodate their massive borrowings of today.
The Chinese are learning the same thing as they strive to construct modern debt markets from whole cloth. It is not an overnight job.
One of the most common questions I get from foreign governments, institutional investors, and wealthy individuals in my international travels is “What will come of America’s debt problem?”
The answer is easy. It will all go to debt heaven. It will disappear.
US government finances are now worsening at a pretty dramatic pace (see more charts and tables below).
The budget deficit has doubled from the Obama low of $450 billion to $900 billion in only two years. Debt has exceeded GDP for the first time since WWII. New government bond issuance is rocketing and will crush the market any day now.
However, there is a way out of the looming financial disaster.
A massive demographic tailwind kicks in during the 2020s as 85 million Millennials grow up to become big-time taxpayers.
In the meantime, the last of the benefit-hungry baby boomers finally die off, eliminating an enormous fiscal drag.
“Depends” and “Ensure” prices will crater.
The national debt should disappear by 2030, or 2035 at the latest. The same is true for the Social Security deficit. That’s when we next have to consider firing the entire bond market once more.
That is what happened to the gargantuan debt run up by the Great Depression, the Civil War, and the Revolutionary War.
Government debt always goes to debt Heaven either through repayment during the period of demographic expansion and economic strength, or via diminution of purchasing power caused by inflation.
That’s why we have governments to pull forward economic growth during the soft periods in order to even out economic growth and job creation over the very long term to accommodate population growth. Pulling forward growth during strong economies as the administration is now doing only ends in tears.
The French were the first to figure all this out in the 17th century. They were not the last.
History doesn’t repeat itself, but it certainly rhymes.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00MHFTFhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTF2018-10-31 01:07:002018-10-30 19:21:26What is America’s True National Debt?
I just stumbled across your writing and I love it!
I have been reading it all weekend. The more I read, the more I have this weird sensation in my frontal cortex. I believe it used to be called "thinking" before the new world order arrived. Almost stimulating....like the stuff before decaf...
What a fresh perspective you provide! You challenge my preconceived notions from CNN, and that is scary.
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