Selling short the US Treasury bond market (TLT) has been one of my core trades for the last 2 ½ years when rates hit a century low at 1.34%.
I call it my “Rich Uncle” trade. Every time bonds rallied five points, I unloaded government debt. If they rallied more, I doubled up. And my new “uncle” reliably wrote me a check every few weeks. As a result, I made money on 22 out of 23 consecutive Trade Alerts on this one asset class.
However, the gravy train may be coming to an end. Over the last week, two eminent authorities on bonds, my once Berkeley economics professor and former Federal Reserve governor Janet Yellen, and Golden Sachs (GS), one of the largest bond traders, have both opined that the yield on the ten-year US Treasury bond peaked last October at 3.25%.
My arguments against them are looking increasingly hollow, peaked, and facile. If bonds don’t resume their downtrend soon, I may have to surrender, run up the white flag, and toss my own 4.0% peak forecast in interest rates into the dustbin of history.
The data is undeniably starting to pile up in favor of Yellen and (GS). After a decade of economic expansion, inflation has absolutely failed to show. Sitting here in Silicon Valley which plans to use new technology to destroy 50 million jobs over the next 20 years, it was always obvious to me that wage gains in this recovery would be nil. Wages don’t rise in that circumstance.
So far, so good.
The China trade war continues to extract its pound of flesh from American business, trashing growth prospects everywhere. The government shutdown is also paring US growth by 0.10% a week. Hardly a day goes by now when another research house doesn’t predict a 2020 recession.
Current Fed governor Jay Powell has acknowledged as much, postponing any further interest rate hikes for the first half of this year.
If we peaked at 3.25% then where is the downside? How about zero, or better yet, negative -0.40%, the yield lows seen in Japan and Germany three years ago? That’s when my pal, hedge fund legend Paul Tudor Jones, started betting the ranch on the short side with European bonds making yet another fortune.
That’s when you’ll be able to refi your home with a 30-year conventional fixed rate loan of 2.0%. This is where home loans were available in Europe at the last lows.
After the traumatic move in yields from 3.25% down to 2.64% and (TLT) prices up from $111 to $124, you’d expect the market to give back half of its gains. That’s where we reassess. If the government shutdown is still on at that point, all bets are off.
The Five Most Important Things That Happened Today
(and what to do about them)
1) Apple’s Asian Suppliers Report Terrible Numbers. iPhone prices in China are cut. It looks like I’ll be able to keep my short position into expiration after all. Click here.
2) Citigroup Stock Rallies off of Decent Earnings. That’s more important for the main market than it is for (C). Last quarter, the stock tanked on good earnings. But I won’t touch this buggy whip sector anyway. Buy (EBAY) and (SQ) instead. Click here.
3) PG&E Goes Bankrupt, in order to keep the lights on in the face of $30 billion in wildfire liabilities. It’s the second time in 20 years. Thank goodness for my solar panels. Power prices are about to spike up big time. Click here.
4) Don’t Get Too Bullish Now. A ton of bad economic news will hit the market in February. China slowdown, European crash, Brexit, what’s not to hate? Click here.
5) Netflix Raises Prices and the Stock Soars. Their monthly take is jumping by 13%-18%. (NFLX) shares are now up by 50% since the Christmas Eve Massacre. The Walking Dead and House of Cards just got more expensive. Click here.
Published today in the Mad HedgeGlobal Trading Dispatch and Mad Hedge Technology Letter:
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-15 10:59:152019-01-15 10:59:15Mad Hedge Hot Tips for January 15, 2019
Yesterday, I listed my Five Surprises of 2019 which will play out during the first half of the year prompting stocks to take another run at the highs, and then fail.
What if I’m wrong? I’ve always been a glass half full kind of guy. What if instead, we get the opposite of my five surprises? This is what they would look like. And better yet, this is how financial markets would perform.
*The government shutdown goes on indefinitely throwing the US economy into recession.
*The Chinese trade war escalates, deepening the recession both here and in the Middle Kingdom.
*The House moves to impeach the president, ignoring domestic issues, driven by the younger winners of the last election.
*A hard Brexit goes through completely cutting Britain off from Europe.
*The Mueller investigation concludes that Trump is a Russian agent and is guilty of 20 felonies including capital treason.
*All of the above are HUGELY risk negative and will trigger a MONSTER STOCK SELLOFF.
It’s really difficult to quantify how badly markets will behave given that this scenario amounts to five black swans landing simultaneously. However, we do have a recent benchmark with which to make comparisons, the 2008-2009 stock market crash and great recession. I’ll list off the damage report by asset class. I also include the exchange-traded fund you need to hedge yourself against Armageddon in each asset class.
*Stocks – Depending on how fast the above rolls out, you will see a stock market (SPY) collapse of Biblical proportions. You’ll easily unwind the Trump rally that started at a Dow Average of 18,000, down 25% from the current level, and off a gut-churning 9,000 points or 33% from the September top. The next support below is the 2015 low at 15,500, down 11,500 points, or 43% from the top. By comparison, during the 2008-2009 crash, we fell 52%. Everything falls and there is no safe place to hide. Buy the ProShares UltraShort S&P 500 bear ETF (SDS).
*Bonds – With the ten-year US Treasury yield peaking at 3.25% last summer, a buying panic would spill into the bond market. Inflation is nonexistent, we are running at only a 2.2% YOY rate now, so widespread deflation would rapidly swallow up the entire economy. In that case, all interest rates go to zero very quickly. The Fed cuts rates as fast as it can. Eventually, the ten-year yield drops to -0.40%, the bottom seen in Japanese and German debt three years ago. Buy the 2X short bond ETF (TBT) which will rocket to from $35 to $200.
*Foreign Exchange – With US interest rates going to zero, the US Dollar (UUP) gets the stuffing knocked out of it. The Euro soars from $1.10 to $1.60 last seen in 2010, and the Japanese yen (FXY) revisits Y80. Strong currencies then crush the economies of our largest trading partners. Their governments take their interest rates back to negative numbers to cool their own currencies. Cash becomes trash….globally.
*Commodities
Here’s the really ugly part about commodities. They are only just starting to crawl OUT of a seven-year bear market. To hit them with another price collapse now would devastate the industry. Producer bankruptcies would be widespread. The ags would get especially hard hit as they have already been pummeled by the trade war with China. Midwestern regional banks would get wiped out. Buy the DB Commodity Short ETN (DDP).
*Energy
The price of oil (USO) is also just crawling back from a correction for the ages, down from $77 to $42 a barrel in only three months. Hit the sector with a recession now in the face of global overproduction and the 2009 low of $25 becomes a chip shot, and possibly much lower. Those who chased for yield with energy master limited partnerships will get flushed. Several smaller exploration and production companies will get destroyed. And gasoline drops to $1 a gallon. The Middle East collapses into a geopolitical nightmare and much of Texas files chapter 11. Buy the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).
*Precious metals
Gold (GLD) initially rallies on the flight to safety bid that we have seen since September. However, if things get really bad, EVERYTHING gets sold, even the barbarous relic, as margin clerks are in the driver’s seat. You sell what you can, not what you want to, as liquidity becomes paramount. This is what took the yellow metal down to $900 an ounce in 2009. Buy the DB Gold Short ETN (DGZ).
*Real Estate
Believe it or not, real estate doesn’t do all that bad in a worst-case scenario. It is perhaps the safest asset class around if a new crisis financial unfolds. For a start, interest rates at zero would provide a huge cushion. The Dodd-Frank financial regulation bill successfully prevented lenders returning to even a fraction of the leverage they used in the run-up to the last recession. We are about to enter a major demographic tailwind in housing as the Millennial generation become the predominant home buyers. I’ve never seen a housing slump in the face of a structural shortage. And homebuilder stocks (ITB) have already been discounting the next recession for the past year. A lot is already baked in the price.
Conclusion
Of course, it is highly unlikely that any of the above happens. Think of it all as what Albert Einstein called a “thought experiment.” But it is better to do the thinking now so you can do the trading later. There may not be time to do otherwise.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/03/John-Thoms-Black-Swans-e1413901799656.jpg337400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-15 08:06:042019-07-09 04:42:36Here’s the Worst-Case Scenario
“At some point in 2019, knuckles are going to be turning white, and we'll see whatever rabbits Janet Yellen is going to have to pull out of her hat,” said David Rosenberg of Gluskin, Sheff & Associates.
https://www.madhedgefundtrader.com/wp-content/uploads/2012/03/roller_coaster2.jpg400392Arthur Henryhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngArthur Henry2019-01-15 08:05:512019-01-15 07:06:21Quote of the Day - January 15, 2019
The Mad Hedge Technology Letter has a front-line seat to the carnage wrought by the balkanization of technology that is swiftly descending across all corners of the tech universe.
In technology terms, this is frequently referred to as “splinternet.”
A quick explanation for the novices can be summed up by saying splinternet is the fragmenting of the Internet causing it to divide due to powerful forces such as technology, commerce, politics, nationalism, religion, and interests.
The rapid rise of global splinternet news stories will have an immediate ramification on your tech portfolio and it’s my job to untangle the knots.
What investors are seeing is the bifurcation of the global tech game into a binary world of Chinese and American tech.
Most recently, Central European country Poland, who was thought to be siding with the Chinese because of the growing presence by large-cap Chinese tech in Warsaw, announced government security had arrested a Huawei employee, Chinese national Wang Weijing, for allegedly spying on behalf of the Chinese state.
For all the naysayers that believe the administration’s hope of curtailing the theft of western technology was a bogus endeavor, this recent event buttresses the notion that Chinese state-funded tech companies are truly running nefariously throughout the world.
In fact, Poland has little to gain from this maneuver if you take the current status quo as your guidebook, and I would argue it is a net negative for Poland because Chinese tech is deeply embedded inside of the Poland tech structure bestowing profits and internet capabilities on multiple parties.
Making the case stronger against China, Poland has no flagship tech communications company that would serve as competition to the Chinese or could directly gain from this breach of trust.
The fringe of the Eurozone Central European nations and Eastern European countries bordering Russia running developing economies rely on Huawei and other low-cost Chinese tech suppliers like ZTE to offer value for money for a populace who cannot afford $1000 Apple (AAPL) iPhones and exorbitant western European telecommunications infrastructure equipment.
The Chinese beelining to this burgeoning area in Europe has given these less developed countries high-speed broadband internet for $10-$15 per month and 4G mobile service for $7 per month, a smidgeon of what westerners fork out for the same monthly service.
Poland rebuffing Huawei is an ominous sign for Chinese tech doing business in the Czech Republic and Hungary as European countries are moving towards denying Huawei in unison.
The last few years saw China create the same recipe of success for fueling economic expansion mimicking the American economy.
The tech sector led the way with outsized gains boosting productivity while analog companies transformed into digital companies to take advantage of the efficiencies high-tech provides.
At the same time, Beijing has initiated a muscular response to the accelerated growth of local tech companies.
The foul play of American tech in Europe has given impetus to Beijing to launch a power grab on local tech structures such as Baidu, Alibaba, and Tencent.
This couldn’t be more evident at Tencent who has failed to secure any new gaming licenses for their best gaming titles.
PlayerUnknown’s Battlegrounds (PUBG), a battle royale multiplayer, has been deprived of massive revenue because of Tencent’s inability to win a proper gaming license from the Chinese authorities to sell in-game add-ons.
In total, lost revenue has already cost Chinese video game companies over $2 billion in revenue since May 2017.
Beijing wants to temper the growing clout of private tech companies who were the recipient of the Chinese consumer’s gorge on technology in the last 20 years.
These companies have never been more infiltrated by the communist party and this can be mainly attributed to the acknowledgment by Beijing that Chinese tech companies are too powerful for their own good now and are a legitimate threat to the powers above.
That is what the sudden retirement of Founder of Alibaba Jack Ma told us who infuriated Chairman Xi because Ma was the first Chinese of note to meet American President Donald Trump at Trump Towers pledging to create a million jobs in America.
Ma later rescinded that statement and was put out to pasture by Beijing.
What does this all mean?
As the broad-based balkanization spreads like wildfire, Chinese and American tech companies’ addressable markets will shrink hamstringing the drive to accelerate revenue.
The potential loss of Europe for the Chinese could give way to Nokia, Siemens, and other western telecommunication companies to move in hijacking a bright spot for Huawei.
If Apple isn’t punching above their weight in China, well that almost certainly means that local tech companies aren’t having a cake walk in the park as well.
The winter sell-off turned the screws on tech first and then the rest of equities obediently, Chinese tech could have a similar domino effect to the Chinese economy boding badly for Chinese ADRs listed on the New York Stock Exchange (NYSE).
Last year, the Shanghai index was one of the worst performing stock markets in the world.
And if the trade wars are really ravaging a few key limbs from local Chinese tech firms, then companies exposed to the Chinese consumer such as Alibaba (BABA), JD.com (JD), Pinduoduo (PDD), Ctrip.com International (CTRP) and Tencent Music Entertainment (TME) could fall off a cliff.
This has already been in the works.
These companies are a good barometer of the health of the Chinese consumer and have had an abysmal last six months of price action.
The vicious cycle will repeat itself with worsening Chinese data drying up the demand for Chinese tech services and the Chinese consumer tightening their purse strings as they try to save money from a cratering economy.
It could become a self-fulfilling prophecy and that is what other indicators such as negative automobile sales and a rapidly failing real estate market are telling us.
The 65 million ghost apartments dotted around China don't help.
This could be the perfect opportunity to instigate wide-ranging reforms to open up the financial, insurance, a tech market to the west, something many analysts thought China would do after joining the World Trade Organization (WTO).
However, Beijing’s retrenchment preferring to pedal mercantilism and cold-blooded power grabs could offer Chairman Xi the prospect of further consolidating his authority by sticking his fingers deeper into the local tech structures giving the state even more control.
I would guess this is a false dawn.
American tech will confront balkanization headwinds of its own evidence in Vietnam as the government blamed Zuckerberg’s Facebook (FB) for failing to root out anti-government rhetoric which is illegal in the communist-based country.
If you haven’t figured it out yet – there is an underlying suitability issue with western tech services that tie up with authoritarian governments.
It many times leads the western tech companies to be a pawn in a political game that later turns into a bloody mess.
The weak rule of law has spawned a convenient practice of blaming western tech to distract from internal disputes strengthening the nationalist case of a purported western tech firm gone rogue.
This could lead Facebook to be removed in Vietnam, and the $238 million in ad revenue that will vanish.
Headaches are sprouting up across Europe with Facebook clashing with more stringent data privacy rules through General Data Protection Regulation (GDPR).
German’s largest national Sunday newspaper Bild am Sonntag claimed from sources that the Federal Cartel Office will summon Facebook to halt collecting some user data.
This could take a machete to ad revenue in a critical lucrative market for Facebook, and this experience is being echoed by other American tech companies who are running full speed into complicated regulatory quagmires outside of America.
Adding benzine to the flames, Deputy Attorney General Rod Rosenstein speaking at a cybercrime symposium at Georgetown University’s Law Center in Washington added to the tech misery explaining that to “secure devices requires additional testing and validation—which slows production times — and costs more money.”
This is not bullish to the overall tech picture at all.
Hamstringing tech is not ideal to promoting economic growth, but the decades of unchecked growth is finally reverting back to the mean with regulation rearing its unpretty head and the balkanization of tech forcing countries to pick between China or America.
The silver lining is that the American economy remains resilient taking the body blows of a government shutdown, interest rate drama, and trade war uncertainty in full stride.
The net-net is that American and Chinese tech firms could experience decelerating revenue growth far dire than any worst-case scenario forecasted by industry analysts.
Therefore, I forecast that American tech shares have limited upside for the next 6-10 weeks and Chinese tech is dead money in that same time span.
Any rally is ripe for another sell-off if there are no meaningful breakthroughs in the trade war and if China’s economic data continues to falter.
The global growth scare could actually come home to roost.
The supposed narrowing of trade differences has been nothing more than tactical, and procuring any fundamental victories is a hard ask in the short term.
In an ideal world, China would open the floodgates and allow the world to join them in an economic détente, however, based on Chairman Xi’s record of purging his mainland enemies and the military, slamming the gates shut and padlocking them seems more likely at this point.
Seizing the rights to an untimed Chairmanship term has its perks – this is one of them and he is using the entire assortment of options available to him.
Traders should look at deep in-the-money vertical bear put spreads on any sharp rally to specific out-of-fashion tech names saddled with regulatory and data balkanization headwinds, or tech firms with a large footprint in mainland China.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/battlegrounds.png412808Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-15 04:06:582019-07-09 04:57:18The Balkanization of the Internet
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The Five Most Important Things That Happened Today
(and what to do about them)
1) December New Home Starts Fall 19%, and 40% in North California and 49% in Southern California. Rising interest rates and the stock market crash are to blame. But this housing recession is already in the price of the stocks. Click here.
2) Banks are Reporting Earnings This Week. Will the new generation of buggy whip makers even exist in a year? Or will FinTech companies like Square (SQ) and eBay (EBAY) eat their lunch? Look for banks to disappointment even low expectations. Click here.
3) This is the Week When Economic Data Ceases to Exist, unless it comes from private sources. Entering the fourth week of the government shutdown, we are all now flying blind.
4) US Core Inflation is Up Only 2.2% YOY, after a miniscule 0.2% gain in December. Don’t count on that pay rise anytime soon. All your company’s money is going to share buybacks instead. Click here.
5) Newmont Mining Buys Goldcorp for $10 Billion to create the world’s largest gold miner. Another classic sign of a long-term bottom for the barbarous relic is when the miners start taking over each other. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(THE MARKET FOR THE WEEK AHEAD, or IS THE BULL MARKET BACK?),
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-14 11:30:252019-01-14 11:30:25Mad Hedge Hot Tips for January 14, 2019
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