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
Global Market Comments
May 27, 2019
Fiat Lux
SPECIAL MEMORIAL DAY ISSUE
Featured Trade:
(A TRIBUTE TO A TRUE VETERAN)
Mad Hedge Hot Tips
May 24, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) All Markets Now Signaling Recession, with bonds up huge and everything else down huge, like all stocks, oil, commodities, and real estate. Technology is leading the charge to the downside. The bigger they are, the harder they fall. Ten-year US Treasury yields plunge to 2.30%. It might be a good summer to take a round the world cruise. Click here.
2) Mad Hedge Market Timing Index Dives 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 two months. Click here.
3) The Federal Reserve Warns that Trade Could Demolish the Recovery. You break it, you own it. Isn’t it amazing how quickly panics happen? Risk happens fast. Click here.
4) Tesla Production May Hit New Record in Q2. That’s why I bought (TSLA) yesterday. The 5.3% 2025 convertible bonds are essentially a no risk 10% yield here for the next six years. Tweeting is out, leaked documents are in, and not an SEC offending coming from Elon Musk anywhere. Is this the new business model? Click here.
5) British Prime Minister Theresa May Resigns, sending the British pound into a tailspin. Brexit goes on hold one more time. Click here.
Published today in the Mad Hedge Global Trading Dispatch:
(MONDAY JULY 8 VENICE, ITALY STRATEGY LUNCHEON)
(FROM THE FRONT LINE OF THE TRADE WAR)
(SPY), (AAPL), (TLT)
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
May 24, 2019
Fiat Lux
Featured Trade:
(MONDAY JULY 8 VENICE, ITALY GLOBAL STRATEGY LUNCHEON)
(FROM THE FRONT LINE OF THE TRADE WAR)
(SPY), (AAPL), (TLT)
Poke your hand into a hornet's nest and you can count on an extreme reaction, a quite painful one.
As California is the growth engine for the entire US economy, accounting for 20% of US GDP, it is no surprise that it has become the primary target of Chinese retaliation in the new trade war.
The Golden State exported $28.5 billion worth of products to China in 2017, primarily electronic goods, with a host of agricultural products a close second.
In the most devious way possible, the Middle Kingdom targeted Trump supporters in the most liberal state in the country with laser-like focus. California exports 46% of its pistachios to China, followed by 35% of its exported plums, 20% of exported oranges, 12% of its almonds.
By comparison, California imported gargantuan $160.5 billion worth of goods from China last year, mostly electronics, clothing, toys, and other low-end consumer goods.
Some $16 billion of this was recycled back into the state via investment in real estate and technology companies.
Anecdotal evidence shows that figure could be dwarfed by the purchase of California homes by Chinese individuals looking for a safe place to hide their savings. Local brokers report that up to one-third of recent purchases have been by Chinese nations paying all cash.
The Chinese tried to spend more. Their money is thought to be behind Broadcom’s (AVGO) $105 billion bid for QUALCOMM (QCOM), which was turned down for national security reasons.
The next big chapter in the trade war will be over the theft of intellectual property, and that one will be ALL about the Golden State.
Also at risk is virtually Apple’s (AAPL) entire manufacturing base in China where more than one million workers at Foxconn assemble iPhones, Macs, iPads, and iPods. It took Apple 20 years to build this facility. It will take 20 more years to move it.
The Cupertino giant could get squeezed from both sides. The Chinese could interfere with its production facilities, or its phones could get slapped with an American import duty.
By comparison, in 2017 the US imported a total of $505.6 billion in goods from China and exported $130.4 billion. Against this imbalance, the US runs the largest surplus in services.
The last Chinese escalation will involve a 25% tariff on American pork and recycled aluminum. Who is the largest pork producer in the US? Iowa, with $4.2 billion worth, the location of an early presidential election primary.
Beyond that, Beijing has darkly hinted that is will continue to boycott new US Treasury bond auctions, as it has done for the past six months, or unload some of its massive $1.6 trillion in bond holdings.
Given the price action in the bond market today, with the United States Treasury Bond Fund (TLT) at a two-year high, I would say that the market doesn’t believe that for two seconds. The Chinese won’t cut off their nose to spite their face.
The administration is discovering to its great surprise that its base is overwhelming against a trade war. And as business slows down, it will become evident in the numbers as well.
The US was the big beneficiary of the global trading system. Why change the rules of a game we are winning?
Still, national pride dies hard.
How soon will the trade war end? Does China want to help Donald Trump get elected in 2020, or his opponent?
It looks like it is going to be a long slog.
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
May 23, 2019
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) The Tech Cold War is Dominating Trading, triggering a global stock market route. The bond market, at two-year highs, says the recession is already here. If you didn’t make your money in Q1, you’re screwed. 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. Click here.
2) The Fed is Patient, and indefinitely so. That is the revelation coming out of yesterday’s Fed minutes. That means the next rate move will be a cut more likely than a hike, and this is BEFORE the trade war saw a major escalation. Watch bond yields (TLT) fall to new lows. Click here.
3) No China Meetings 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. Click here.
4) New Homes Sales 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. Click here.
5) Heard at SALT. US Consumer Debt Service is only 10% of disposable income. That is reasonably low and may suggest that we may have longer to go until the next recession. Consumer Spending accounts for a gargantuan 70% of the US economy.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(TUESDAY, JUNE 25 SYDNEY, AUSTRALIA STRATEGY LUNCHEON)
(DINING WITH THE BOTTOM 20%)
(ANOTHER 5G PLAY TO LOOK AT)
(EQIX), (CSCO), (GOOGL), (MSFT), (ORCL)
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