“We can lead, but we cannot carry,” said Mike Ryan, chief investment strategist at UBS, about America’s role in the global economy.
“It must be pointed out that Huawei package incident either shows the incredibly poor quality of FedEx's service or that FedEx is playing a very disgraceful role.” – Said the Global Times of China
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to the 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 Hot Tips
May 28, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Bond Market Says the Recession is Already Here, with ten-year interest rates at 2.27%, a new 2019 low. German bunds hit negative -0.16%. JP Morgan CEO Jamie Diamond says the trade war could cause real damage to the US economy. Click here.
2) The Bear Market in Home Prices Continues, in March, with the Case Shiller CoreLogic National Home Price Index showing a 3.7% annual price gain, down 0.2%. Home price in San Francisco is posting negative numbers. When will those low-interest rates kick in? Click here.
3) US Capital Goods Fall Out of Bed, in April, down 0.9%, in another important pre-recession indicator. No company with sentient management wants to expand capacity ahead of an economic slowdown. Click here.
4) From Red State to Welfare State, and from farmer to ward of the state. The administration’s $16 billion bailout of the farm states won’t cover a fraction of the damage the trade war has done. Farmers are switching crops not to meet demand but to gain the maximum government payouts. Most would rather work for living and prefer free trade. Click here.
5) Heard at SALT. Decentralization is the next big trend in technology. To move out of Silicon Valley into the rest of the country, you only need a laptop and a broadband connection to start up a new company. Costs are cheaper, and staff is available. That’s what Mark Cuban told me.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
SPECIAL MEMORIAL DAY ISSUE
(A TRIBUTE TO A TRUE VETERAN)
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE COMES THE HEAD AND SHOULDS TOP)
(CHINA’S RARE EARTH WEAPON)
(TSLA), (AAPL), (LMT), (BAESY), (RTN)
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
May 28, 2019
Fiat Lux
Featured Trade:
(CHINA’S RARE EARTH WEAPON)
(TSLA), (AAPL), (LMT), (BAESY), (RTN)
There are many ways to describe the trade war the U.S. administration finds itself in.
Many experts have chimed in too categorizing it as a fight for technological supremacy.
There are many different ways to skin a cat.
I’ll tell you what is really going on.
Above all else, this logjam has more to do with a battle for resources, and more specifically, rare earth elements that power the devices, cars, and gadgets that many westerners have become accustomed to.
Let’s make no bones about it, Beijing has cornered the rare earth’s market spanning from assets in the Congo and the cobalt that is produced there to supply on their own turf forcing the U.S. to be reliant on China for about 85% of its rare earth supply.
In other words, the rare earth industry in China is a large industry that is important to Chinese internal economics.
Rare earths are a group of elements on the periodic table with similar properties.
The elements are also critical to national governments because they are used in the defense industry for top-secret weaponry.
Permanent magnets can be used for several applications including serving as essential components of weapon systems and high-performance aircraft such as drones.
China has touted their own state-owned companies to reach deep into this market and make it their own.
The results are visible to the entire world and China gaining a stranglehold on these valuable inputs will have lasting consequences.
Rare earth metals are made up of 17 elements — lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium, scandium, and yttrium.
U.S. companies will need to start developing new supply channels in other markets and Australia could allow U.S. companies' lifelines in securing the orders they need to function as a company.
Military companies important to national security devour these types of precious metals and Raytheon Co (RTN), Lockheed Martin Corp (LMT) and BAE Systems (BAESY) all produce sophisticated missiles with these elements powering their guidance systems, and sensors.
These traded companies’ shares could be in for short-term turbulence if China decides to pull the rug out from underneath banning Chinese companies doing business with American companies, or by slapping on tariffs to respond to the tariffs on Chinese imports.
California's Mountain Pass mine is the sole US rare earth facility with a caveat.
The owner of the mine ships over 50,000 tons of rare earth concentrate for processing in China, meaning that it will be harder than first thought to strip China out of the process.
China and America are in the first stages of a massive decoupling.
Not only smartphone operating systems will be affected with Huawei announcing it will roll out its own in-house operating system after Google announced that they will pull its apps and use of the Android system off of Huawei’s phone, but almost anything of significant value from an Ivy league computer engineering degree to electric cars will be retrenched on each side.
This is terrible news for Tesla (TSLA), and they could be hit next by the Chinese communist party if they deem electric cars integral to national security because of the data and sensors that deliver precious information back to Silicon Valley.
Tesla is in the midst of building a Gigafactory in Shanghai and their growth strategy is solely focused on China.
China standing up to the U.S. is a blunt force way of saying that nobody will dictate to the Chinese their future prospects except themselves.
They feel after 35 years of economic super growth, they should be granted with the options of choosing their destiny.
Huawei will feel the repercussions of these detrimental policies with their European business a big question going forward.
Germany was always a large bullseye for the Chinese government and scooping up robotic centerpiece Kuka, was a smash and grab in broad daylight.
The sleeping giant of Germany has woken up and is on the offensive after allowing the Chinese unfettered access for a generation.
Risks are high in Germany and they could be the first industrial power to be gutted and left behind the woodshed by China Inc and the CCP.
The U.S. faces a conundrum in that the method in which aided China’s rise of forced technology transfers and IP theft can only be stopped if actively removed, meaning we are headed for a game of chicken with the other side hoping the other side blinks first.
The market fallout will be deep and wide-ranging with the most movement in technology companies that are leveraged to China meaning chip companies.
But then there are the tech companies who have deeply embedded interests in China such as Apple (AAPL) whose supply chain is in the eye of the storm with Foxconn.
The worst possible case is China banning the sales of precious earth metals to the U.S. forcing the U.S. to buy from a 3rd party country which in turn would increase costs of American products.
This is what I would categorize as a hard landing and absolute decoupling.
The common denominator of this trade war is higher costs for the American consumer and mass layoffs in China – this is my base case.
However, I would argue that a rare earth's ban would not be as bad as initially thought because many consumers are tapped out with phones, tablets, and computers.
The elongated refresh cycle will not mean consumers will go without access to the internet and its services.
In terms of the stock market, this puts a wet towel on the positive momentum of early spring when the Nasdaq roared higher.
The Nasdaq could be stuck under 8,000 for the summer unless a rapprochement takes place which I would put at 30% for a structural détente and 65% for a kick the can down the road détente.
The ironic unintended consequence is the safe haven trade of buying treasuries has come back in vogue and could be a huge boon for the domestic real estate market.
This extends the bull market in properties at least another six months with lower rates allowing fresh buyers to take advantage of lower financing opportunities amid a bump in inventory.
The bull market absolutely needs the real estate market on-sides to perpetuate because of the fragile nature of this part of the late economic cycle.
I also believe that U.S. President Donald Trump will become even more brazen as stronger economic data stateside suggests he could pile on even more pressure on the Chinese communist party to coerce them into a big win that will aid him in his reelection efforts.
Let’s not forget that much of this has to do with the 2020 road back to the White House.
As it stands, corporate America has finally understood the message of moving their supply chain out of China which means mass layoffs for many Chinese particularly in the southern region around Guangzhou.
This is not a marketing charade, this trade war has teeth.
China’s Central Bank will be forced into dovish policy to help state-owned companies who many are akin to zombie companies and another relic of communism that has yet to be uprooted.
All this means debt, debt, and more debt piling up on the mainland and on American shores.
If you thought this was the time of austerity, then you are truly wrong.
The end game could be a Chinese yuan that drops like a heavy stone through the psychological threshold of $7 and on its way down to $7.50.
If this comes to pass, expect a 10% correction and a demonstrably strong U.S. dollar, Japanese yen, Swiss Franc, and a generational entry points into the equity market.
“Now there is a new long march, and we should make a new start.” – Said Chairman of China Xi Jinping
Global Market Comments
May 28, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE COMES THE HEAD AND SHOULDERS TOP)
I was perusing hundreds of charts over the weekend as I usually do looking for great trading insights when what I saw stunned, frightened, and gobsmacked me. A “Head and Shoulders” top is setting up for the major stock market indexes.
Take a look at the charts below and you will see it is clear as day for the Dow Average, the S&P 500, and the NASDAQ. The Russell 2000 chart shows a “Head and Shoulders” top that has already broken down into bear market territory for the stocks most sensitive to a recession.
I am normally not a big fan of technical analysis. I see it as the refuge of young and inexperienced traders who are unable or incapable of engaging in deep, meticulous, and time consuming fundamental analysis.
However, when the charts confirm what I already know is happing in the real economy, the hair stands up on the back of my neck. And that is exactly what is happening now.
To say that the China trade war has thrown the fat on the fire would be a vast understatement. Every business in the country is now taking a hard look at their business models trying to understand if they can survive a prolonged trade war or go out of business.
It turns out that you cannot manufacture ANYTHING in America without using Chinese parts. You know all of those products that claim they are 100% made in America? Many, if not most, of the parts are Chinese. Only the labor to assemble them is from the US. This has been the dirty little secret of the US economy for a long time.
While the administration is claiming these companies can easily source elsewhere, most of the needed parts are not available at the price or the volume needed to fill the gap, and many of these parts are ONLY made in China. It took 40 years to integrate the Chinese and US economies as an alternative to an endless war and the relationship is not going to be unwound overnight on a whim with a Tweet.
I am not the only one who has noticed this. JP Morgan (JPM) has dramatically cut their growth forecast from 3.2% in Q1 to a lowly 1% in Q2. The Federal Reserve itself warned that trade could demolish the recovery. You break it, you own it. Isn’t it amazing how quickly panics happen? Risk happens fast.
The president has said that trade wars are “easy to win,” but it depends on how you decline “winning.” If “winning” means that we go bankrupt slower than the Chinese, he is probably right. But we all go bankrupt nonetheless.
The impact of the trade war won’t be evident in the economic data for months. The advanced estimate of Q2 GDP won’t be released by the Bureau of Economic Analysis until July 26 (click here).
By the time the administration figures out that this war is unwinnable, we may already be solidly in recession and deep into a bear market for stocks.
And let me ask you this question. How hard do you think the Chinese are going to work to get Donald Trump reelected? They don’t have a presidential election to worry about next year. Someone else does. Better clean up that extra bedroom. The trade war isn’t staying overnight on the sofa. It is moving in as a permanent resident.
So, for the foreseeable future, I strongly advise you to sell into every substantial rally, reduce risk, and pare back your trading. Anything you keep, you have to be able to withstand a 40% drawdown. That’s what all the lead tech stocks did in December.
This is turning into the best “Sell in May and go away”. It might be the summer to take that long-postponed trip around the world. Hmmmm. That’s I’m doing.
Stocks dove last week on the trade war escalation, with technology taking the biggest hit. Fears of Chinese retaliation are rampant.
All markets are now signaling recession, with bonds up huge and everything else down huge, like all stocks, oil, commodities, and real estate. The bigger they are the harder they fall. Ten-year US Treasury yields plunged to 2.30%. It might be a good summer to take a round the world cruise.
Mad Hedge Market Timing Index plummeted to 28, from a high of 72 just weeks ago. That means stocks have more downside to go, and a solid “BUY” won’t appear for months.
No China meetings will be held for at least a month, says US Treasury Secretary Steven Mnuchin. Don’t expect any respite from this front. It seems preventing Trump’s tax returns from being released is taking up all his time. Also, the US government runs out of money at summer’s end, unless the Democratic-controlled House opens up the checkbook first.
In the cruelest move, China blocked the broadcast of the final episode of Game of Thrones, forcing fanatics to search the Internet for the final conclusion. It looks like this is going to be a no holds barred war.
Tesla finally broke $200, as fears of Chinese tariff hikes hit its parts supply. Analysts cite other “distractions” like the SEC and the margin call on Elon Musk’s leveraged long position in $500 million worth of the shares. Wait for the final capitulation. The “BUY” for (TSLA) is setting up. Electric car subsidies are to return on 2021 and the shares will soar. Expect institutions to front run this move by a year.
Some 90% of the net buying in the market now is corporate buybacks, shrinking the float of available shares by 4% this year, and more than 10% for single stocks like Apple (AAPL), Microsoft (MSFT), Cisco Systems (CSCO), and Oracle (ORCL). Buy ALL of the buyback stocks on big dips.
New Homes Sales were down 6.9%, in April. As in past cycles, they are seeing the recession first, despite ultra-low interest rates. Prices here still rising, thanks to trade war-induced rocketing materials and lumber costs.
Existing Home Sales shed 0.4%, to only 5.19 million units in April, despite year low mortgage interest rates. The good news is that inventory shrank to 4.2 months. A lot of homes are now for sale at “aspirational” prices, with sellers hanging on to last year’s prices. I don’t understand why investors are buying the homebuilder stocks, unless its anticipation of the return of SALT deductions in two years.
The Mad Hedge Fund Trader managed to hang on to new all-time highs last week, despite the horrific trading conditions.
Global Trading Dispatch closed the week up 15.72% year-to-date and is up 0% so far in May. My trailing one-year rose to +20.71%.
The Mad Hedge Technology Letter did fine, making money on longs in Microsoft (MSFT) and Amazon (AMZN). Some 10 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.
My nine and a half year profit jumped to +315.86%. The average annualized return popped to +33.24%. With the market's incredible and dangerously volatile, I am now 70% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter.
I’ll wait until the markets enjoy a brief short-covering rally before adding any short positions to hedge my longs.
The coming week will see only one report of any real importance, the Fed Minutes on Wednesday afternoon. Q1 earnings are almost done.
On Monday, May 27 at 8:30 AM, the markets are closed for the Memorial Day holiday.
On Tuesday, May 28, 9:00 AM EST, the Case Shiller CoreLogic National Home Price Index is out.
On Wednesday, May 29 at 4:00 AM, MBA Mortgage Applications are out for the previous week.
On Thursday, May 30 at 8:30 AM, Weekly Jobless Claims are published. So is the first revision of the Q1 GDP. A second update on Q1 GDP is also published.
On Friday, May 31 at 8:30 AM, we learn the April Core Inflation.
As for me, I’ll be leading the local Memorial Day parade with my fellow veterans. I always consider myself lucky at these events because they are well attended by men with missing arms and legs and rising in wheelchairs. I am heartened by the young kids I see siting on curbs waving small American flags.
I firmly believe that the world will never see a large army war again. WWII needed 17 million men under arms, Vietnam 9 million, and the War in Iraq
2.8 million. You can see the trend. The next war will be fought by a few thousand programmers….and we will win.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
