While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a 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
March 8, 2019
Fiat Lux
Featured Trade:
(MARCH 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (SDS), (TLT), (TBT), (GE), (IYM),
(MSFT), (IWM), (AAPL), (ITB), (FCX), (FXE)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 3 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Are you sticking to your market top (SPY), (SDS) by mid-May?
A: Yes, at the rate that economic data is deteriorating, and earnings are falling, there’s no prospect of more economic stimulation here, my May top in the market is looking better than ever. Europe going into recession will be the gasoline on the fire.
Q: Where do you see interest rates (TLT) in 1-2 years?
A: Interest rates in 2 years could be at zero. If interest rates peaked at 3.25% last year, then the next move could be to zero, or negative numbers. The world is awash in cash, and without any economic growth to support that, you could have massive cuts in interest rates.
Q: Will (TLT) be going higher when a market panic sets in?
A: It will, which is why I’m being cautious on my short positions and why I’m only using tops to sell. You can be wrong in this market but still make money on every put spread, as long as you’re going far enough in the money. That said, when the stock market starts to roll over big time, you want to go long bonds, not short, and we may do that someday.
Q: Do you see a selloff to stocks similar to last December?
A: As long as the Fed does not raise interest rates, I don’t expect to get a selloff of more than 5% or 6% initially. If we do get a dramatic worsening of economic data and it looks like we’re headed in that direction, the Fed will start cutting interest rates, the recession signal will be on and only then will we drop to the December lows—and possibly as low as 18,000 in the Dow.
Q: General Electric has gone from $6 to $10; what would you do now?
A: Short term, sell with a 66% gain in a stock. Long term, you probably want to hold on. However, their problems are massive and will take years to sort out, probably not until the other side of the next recession.
Q: Microsoft (MSFT): long term hold or sell?
A: Absolutely long-term hold; look for another double in this company over the next 3 years. This is the gold standard in technology stocks today. Short term, you’re looking at no more than $15 of downside to the December low.
Q: Would you short banks (IYF) here since interest rates have failed to push them higher?
A: I would not; they’ve been one of the worst performing sectors of the market and they’re all very low, historically. You want to short highs like I’m doing now in the (SPY), the (IWM), and Apple (AAPL), not lows.
Q: Is the China trade deal (FXI) a ‘sell the news’ event?
A: Absolutely; there’s not a hedge fund out there that isn’t waiting to go short on a China trade deal. The weakness this week is them front-running that news.
Q: Do you see emerging markets (EEM) pushing higher from the 42 level, or will a global recession bring it back to earth?
A: First of all, (EEM) will go higher as long as interest rates in the U.S. are flatlining, so I expect a rally to last until the spring; however, when a real recession does become apparent, that sector will roll over along with everything else.
Q: Would you buy homebuilders (ITB) if this lower interest rate environment persists?
A: I wouldn’t. First of all, they’ve already had a big 28% run since the beginning of the year— like everything else—and second, low-interest rates don’t help if you can’t afford the house in the first place.
Q: Would you short corporate bonds if you think there’s going to be a recession next year?
A: I’m glad you asked. Absolutely not, not even on pain of death. I would buy bonds because interest rates going to zero takes bond prices up hugely.
Q: Should you buy stocks in front of a blackout period on corporate buybacks?
A: Absolutely not. Corporate buybacks are the number one buyers of shares this year, possibly exceeding $1 trillion. Companies are not allowed to buy their own stocks anywhere from a couple of weeks to a month ahead of their earnings release. By removing the principal buyer of a share, you want to sell, not buy.
Q: What are the chances the China trade deal (FXI) breaks down this month and no signing takes place?
A: I have a feeling Trump is desperate to sign anything these days, and I think the Chinese know that as well, especially in the wake of the North Korean diplomatic disaster. He has to sign the deal or we’ll go to recession, and that would be tough to run on for reelection.
Q: Which stock or ETF would you short on real estate?
A: If you short the iShares US Home Construction ETF (ITB), you short the basket. Shorting individual stocks is always risky—you really have to know what’s going on there.
Q: What’s the best commodity play out there?
A: Copper. If China is the only country that’s stimulating its economy right now, and China is the largest consumer of copper, then you want to buy copper. The electric car boom feeds into copper because every new vehicle needs 20 pounds of copper for wiring and rotors. Copper is also cheap as it is coming off of a seven-year bear market. What do you buy at market tops? Only cheap stuff.
Q: Why did you go so far in the money in the Freeport-McMoRan (FCX) call spread with only a 10% profit on the trade in five weeks?
A: In this kind of market, I’ll take 10% in 5 weeks all day long. But additionally, when prices are this high, I want to be as conservative as possible. Going deep in the money on that is a very low-risk trade. It’s a bet that copper doesn’t go back to the December lows in five weeks, and that’s a bet I’m willing to make.
Q: Will a new round of QE in Europe affect our stock market?
A: Yes, it’s terrible news. It will weaken the Euro (FXE), strengthen the dollar (UUP), and force US companies to lower earnings guidance even further. That is bad for the market and is a reason why I have been selling short.
Mad Hedge Hot Tips
March 7, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) US Growth is Fading, says the Fed Beige Book, slowing to a “slight to moderate rate”. The government shutdown is the cause. With Europe already in recession, I’ll be using rallies to increase my shorts. Sell (SPY) and (IWM). Click here.
2) No More Stress Test for Banks, as a pro-business Fed relaxes rules. This paves the way for the next financial crisis. Avoid banks like a bad tip from your bookie. Click here.
3) Healthcare Gets Hammered, as the sector is about to become a political football in the upcoming 2020 election. Avoid for now. Click here.
4) ECB Cuts Europe Growth Forecast Sharply, from 1.7% to 1.1%. Stimulus to renew on all front including more quantitative easing. It’s just a matter of time before their recession pulls the US down. Sell the Euro (FXE). Click here.
5) Initial Jobless Claim Falls by 3,000 to 223,000. If there is any trouble with the economy, it is certainly not on the jobs front. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(BETTER BATTERIES HAVE BECOME BIG DISRUPTERS)
(TSLA), (XOM), (USO)
(WILL NIO EAT TESLA’S LUNCH?),
(TSLA), (XPENG), (NIO)
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 a 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
Mad Hedge Technology Letter
March 7, 2019
Fiat Lux
Featured Trade:
(WILL NIO EAT TESLA’S LUNCH?),
(TSLA), (XPENG), (NIO)
Global Market Comments
March 7, 2019
Fiat Lux
Featured Trade:
(BETTER BATTERIES HAVE BECOME BIG DISRUPTERS)
(TSLA), (XOM), (USO)
The death of Tesla.
There is a sudden existential threat for one of the transformational American companies of the century created by Elon Musk.
And you can thank China for it.
If you didn’t know it, there are over 500 electric vehicle (EV) firms in China and the most widely known is NIO Inc.
NIO’s production chain spans just 20% the size of Tesla and has only delivered just a few thousand cars to this point.
Part of the reasoning for Tesla’s Musk to roll out a cheaper version of the Model 3 sedan was in reaction to the potential pipeline of China manufactured EV cars coming online.
The mushrooming of the electric car industry in China could be a death knell for Tesla.
Not only is the company battling stand-alone Chinese companies now for market share, but they will need to overcome the support of the Chinese communist party and the unlimited funds they throw at these types of national initiatives through generous subsidies.
As we speak, the communist party is starting to consolidate the national automotive industry and China’s National Development and Reform Commission will pour resources into the certain firms they believe can become national EV champions.
As it stands, China's sold more than 1 million electric vehicles in 2018 and could sell 2 million EVs by 2020.
And by 2030, China could dominate the global EV market by snatching 50% of the market.
I believe Tesla has absolutely zero future in China because of the explicit fact they are not a Chinese company and at this stage of the game, China and its home-grown tech are comfortable enough to stand behind the quality of their tech no matter how they acquire the secrets.
In fact, NIO Inc. produced an EV car that is above average quality and will improve with each iteration.
Headaches have already started to compile for Tesla as well when 1,171 Model 3 sedans arrived at industrial city Tianjin and were duly blocked with customs unhappy with the sticker labeling.
This nitpicking is a warning sign for things to come and Tesla will be hard-pressed to become what Apple was in China before Chinese consumers stopped buying iPhones. Or it may be just another iteration of the trade war, now a year old.
Don’t forget that US imported automobiles are exposed to high 100% customs duties that were infamously present even before the trade war began.
A Tesla factory in Shanghai is in the works with the $2 billion loan coming from a state-owned Chinese bank which vanishes any in-house knowhow Tesla planned to keep under wraps.
American high-end products will have to take on a bevy of domestic competitors, even some that possess borrowed foreign technology.
Along with the headwinds of battling state subsidies, Tesla will have to grapple with the price points at which Chinese EV companies sell their cars.
NIO’s ES6 is the follow up to the first all-electric SUV called the ES8 and deliveries start in June.
The car will go on sale for 358,000 RMB, or about $51,000, and that’s before government subsidies.
The 70kWh battery pack offers 254 miles of range and mimics Tesla features with an 11.3-inch touchscreen.
And if you thought Tesla could absorb the heavy blow from a $51,000 price point before government subsidies, then there is burgeoning EV firm Xpeng that crashes the price points even further.
The founder of Xpeng, Henry Xia, has conceded publicly that he was deeply influenced by Tesla and admitted his company was open-sourcing their patents.
The Xpeng G3 starts at 227,800 RMB, equivalent to less than $33,000, once again, before any government subsidies.
The product copies Tesla-style touchscreen features on the dashboard and has battery range capabilities of around 230 miles.
And here is the game changer, the effect of government subsidies could crater the price of these two types of Chinese EV cars to less than $9,000 for the consumer.
Game over for Tesla.
I surmise that once these Chinese EV cars cross the threshold of quality that puts the Chinese variant close to 75% as good as Tesla’s version, potential customers will flock to cheaper Chinese EV firms will a deluge of mass orders.
The global EV industry is the next high-tech industry to get hijacked from the Americans by the industrious Chinese who collaborate with state financial power to take down foreign competition.
Tesla, its leader Elon Musk, and every other high-end German car company are facing down a barrel of a gun that will prove to be an existential crisis of epic proportions.
This is all part and parcel of China’s plan to reshape the global export value chain.
China’s response is to crash the price of EV’s and use state support to outlast external competitors.
Equally as important, China has a massive shortage of EV infrastructure posing problems for Tesla cars to charge up outside.
This could be the trick up the sleeve of Beijing, they could easily squeeze Tesla out of the mix by allowing only home-grown EV cars to charge up at public charging stations citing security concerns of American technology.
The effect would be that Tesla owners would only be able to fill up in the confines of their own house which is problematic since most urban Chinese who can afford Teslas live in skyrise apartments without a personal garage.
The Middle Kingdom is also facing an ecological crisis at home and an exaggerated migration to EV cars is the state’s solution to cleaning up the domestic environment.
The long-term vision appears to have no place for Tesla in the Chinese economy – they already have their own Tesla’s and more imitations in the pipeline hoping to crash the price points even further.
Even more frustrating, 2020 or 2021 is the timeline to get Tesla production up and running in Shanghai, but by then, Tesla and Musk might be fighting from a position of weakness.
“Some people don't like change, but you need to embrace change if the alternative is disaster.” – Said Founder and CEO of Tesla Elon Musk
