Playing the Short Side with Vertical Bear Put Debit Spreads

Note: This is a repeat article for out many new subscribers.

For me, the glass is half full, not half empty, and it’s always darkest just before the dawn. After all, over the past 100 years, markets rise 80% of the time, and that includes the Great Depression.

However, every now and then conditions arise where it is prudent to sell short or make a bet that a certain security will fall in price.

This could happen for myriad reasons. The economy could be slowing down. Companies might disappoint on earnings. “Sell in May, and go away?” It works….sometimes.

Other securities have long-term structural challenges, like the US Treasury bond market (TLT). Exploding deficits as far as the eye can see assure that government debt of every kind will be a perennial short for years to come.

Once you identify a short candidate, you can be an idiot and just buy put options on the security involved. Chances are that you will overpay and that accelerated time decay will eat up all your profits even if you are right and the security in question falls. All you are doing is making some options trader rich at your expense.

For outright put options to work, your stock has to fall IMMEDIATELY, like in a couple of days. If it doesn’t, then the sands of time run against you very quickly. Something like 80% of all options issued expires unexercised.

And then there’s the right way to play the short side, i.e., MY way. You go out and buy a deep-in-the-money vertical bear put debit spread.

This is a matched pair of positions in the options market that will be profitable when the underlying security goes down, sideways, or up small in price over a defined limited period of time. It is called a “debit spread” because you have to pay money to buy the position instead of receiving a cash credit.

It is the perfect position to have on board during bear markets which we will almost certainly see by late 2019 or 2020. As my friend Louis Pasteur used to say, “Chance favors the prepared.”

I’ll provide an example of how this works with the United States Treasury Bond Fund (TLT) which we have been selling short nearly twice a month since the bond market peaked in July 2016.

On October 23, 2018, I sent out a Trade Alert that read like this:

Trade Alert – (TLT) – BUY

BUY the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.60 or best.

At the time, the (TLT) was trading at $114.64. To add the position you had to execute the following positions:

Buy 37 November 2018 (TLT) $120 puts at…….………$5.70

Sell short 37 November 2018 (TLT) $117 puts at…….$3.10

Net Cost:………………………….………..………….…………..$2.60

Potential Profit: $3.00 – $2.30 = $0.40
(37 X 100 X $0.40) = $1,480 or 11.11% in 18 trading days.

Here’s the screenshot from my personal trading account:

This was a bet that the (TLT) would close at or below $117 by the November 16 options expiration day.

The maximum potential value of this position at expiration can be calculated as follows:

+$120 puts
–  $117 puts
+$3.00 profit

This means that if the (TLT) stays below $117 the position you bought for $2.60 will become worth $3.00 by November 16.

As it turned out that was a prescient call. By November 2, or only eight trading days later, the (TLT) had plunged to $112.28. The value of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread had risen from $2.60 to $2.97.

With 92.5% of the maximum potential profit in hand (37 cents divided by 40 cents), the risk/reward was no longer favorable to carry the position for the remaining ten trading days just to make the last three cents.

I, therefore, sent out another Trade Alert that said the following:

Trade Alert – (TLT) – TAKE PROFITS

SELL the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.97 or best

In order to get out of this position you had to execute the following trades:

Sell 37 November 2018 (TLT) $120 puts at……………..………$7.80

Buy to cover short 37 November 2018 (TLT) $117 puts at….$4.83

Net Proceeds:………..……………….………..………………….……..$2.97

Profit: $2.97 – $2.60 = $0.37

(37 X 100 X $0.37) = $1,369 or 14.23% in 8 trading days.


Of course, the key to making money in vertical bear put spreads is market timing. To get the best and most rapid results you need to buy these at market tops.

If you’re useless at identifying market tops, don’t worry. That’s my job. I’m right about 90% of the time and send out a STOP LOSS Trade Alert very quickly when I’m wrong.

With a recession and bear market just ahead of us, understanding the utility of the vertical bear put debit spread is essential. You’ll be the only guy making money in a falling market. The downside is that your friends will expect you to pick up every dinner check.

But only if they know.


Understanding Bear Put Spreads is Crucial in Falling Markets

How the Mad Hedge Market Timing Algorithm Works

Since we have just taken in a large number of new subscribers from around the world, I will go through the basics of my Mad Hedge Market Timing Index one more time.

I have tried to make this as easy to use as possible, even devoid of the thought process.

When the index is reading 20 or below, you only consider “BUY” ideas. When it reads over 80, it’s time to “SELL.” Everything in between is a varying shade of grey. Most on the time, the index fluctuates between 20-80, which means that there is absolutely nothing to do.

After three years of battle-testing, the algorithm has earned its stripes. I started posting it at the top of every newsletter and Trade Alert last year, and will continue to do so in the future.

Once I implemented my proprietary Mad Hedge Market Timing Index in October, 2016, the average annualized performance of my Trade Alert service has soared to an eye-popping 33.17%.

As a result, new subscribers have been beating down the doors trying to get in.

Let me list the highpoints of having a friendly algorithm looking over your shoulder on every trade.

*Algorithms have become so dominant in the market, accounting for up to 90% of total trading volume, that you should never trade without one

*It does the work of a seasoned 100-man research department in seconds

*It runs real time and optimizes returns with the addition of every new data point far faster than any human can. Image a trading strategy that upgrades itself 30 times a day!

*It is artificial intelligence driven and self-learning.

*Don’t go to a gunfight with a knife. If you are trading against algos alone, you WILL lose!

*Algorithms provide you with a defined systematic trading discipline that will enhance your profits.

And here’s the amazing thing. My Mad Hedge Market Timing Index correctly predicted the outcome of the presidential election, while I got it dead wrong.

You saw this in stocks like US Steel, which took off like a scalded chimp the week before the election.

When my and the Market Timing Index’s views sharply diverge, I go into cash rather than bet against it.

Since then, my Trade Alert performance has been on an absolute tear. In 2017, we earned an eye-popping 57.39%. In 2018, I clocked 23.67% while the Dow Average was down 8%, a beat of 31%. So far in 2019, we are up 18.10%.

Here are just a handful of some of the elements which the Mad Hedge Market Timing Index analyzes real time, 24/7.

50 and 200 day moving averages across all markets and industries

The Volatility Index (VIX)

The junk bond (JNK)/US Treasury bond spread (TLT)

Stocks hitting 52-day highs versus 52-day lows

McClellan Volume Summation Index

20-day stock bond performance spread

5-day put/call ratio

Stocks with rising versus falling volume

Relative Strength Indicator

12-month US GDP Trend

Case Shiller S&P 500 National Home Price Index

Of course, the Trade Alert service is not entirely algorithm-driven. It is just one tool to use among many others.

Yes, 50 years of experience trading the markets is still worth quite a lot.

I plan to constantly revise and upgrade the algorithm that drives the Mad Hedge Market Timing Index continuously, as new data sets become available.



It Seems I’m Not the Only One Using Algorithms

The Market Outlook for the Week Ahead, or Brace Yourself

When you have constant jet log, you often have weird dreams. Take this morning, for example.

I dreamed that Fed governor Jay Powell invited me over to his house for breakfast. While he was cooking the bacon and eggs, Donald Trump started to call him every five minutes ordering him to lower interest rates. Jay got so distracted that the bacon caught fire, the house burned down, and we all died.

Fortunately it was only a dream. But like most dreams, parts of it were borrowed from true life.

Brace yourself, this could be the deadest, least interesting, most somnolescent week of the year. Thanks to all of those “out of office” messages we are getting with our daily newsletter mailings, I know that most of you will be out on vacation. Trading desks everywhere are now manned by “B” teams.

Then, the most important data release of the month doesn’t come out until Friday morning. It will be weak, but how weak? Q1 came in at a robust 3.1%. Q2 could be under 1%. The bigger unknown is how much of this widely trumpeted slowdown is already in the market?

Given the elevated levels of stock markets everywhere, most traders will rather be inclined to bet on which of two flies crawls up a wall faster. Such are the dog days of summer.

We here in Europe are bracing for the next ratchet up in climate change, where every temperature record is expected to be broken. It is forecast to hit 92 in London, 106 in Paris, and 94 in Berlin. Still, that’s a relief from India, where it was 120. Five more years of global warming and India will lose much of its population as it will become uninhabitable.

I shall have to confine my Alpine climbing to above 8,000 feet where hopefully it can reach the 70s. By the way, the air conditioning in Europe sucks, and the bars always run out of ice early.

While the Fed is expected by all to cut interest rates a quarter point next week, we have suddenly received a raft of strong economic data points hinting that it may do otherwise.

Inflation hit an 18-month high, with the CPI up a blistering 0.3% in June. That’s why bonds (TLT) took a sudden four-point hit. Soaring prices for apparel (the China trade war), used cars, rents, and healthcare costs led the charge. Is this the beginning of the end, or the end of the beginning?

The Empire State Factory Index hits a two-year high, leaping from -8.6 in June to 4.3 in July. No recession here, at least in New York.

Microsoft (MSFT) blew it away, with spectacular Q2 earnings growth, wiping out conservative analyst forecasts. Azure, the company’s cloud business, rose a spectacular 64%. Nothing like seeing your number one stock pick for 2019 take on all comers. Buy (MSFT) on every dip.

An early read on Q2 GDP came in at a sizzling 1.8%. Many forecasts were under 1%, thanks to the trade wars, soaring budget deficits, and fading tax revenues. That’s still well down from the 3.1% seen in Q1. It seems no one told Main Street, where retail sales and borrowing are on fire, according to JP Morgan’s Jamie Diamond.

US Retail Sales rose a hot 0.4% in June, raising prospects that the Fed may not cut interest rates after all. Stocks and bonds both got hit. Don’t panic yet, it’s only one number.

If the Fed only looks at the data above, it would delay a rate cut for another quarter. If they choose that option, the Dow Average would plunge 1,000 points in a week. The market-sensitive Fed knows this too.

However, the Fed has to be maintaining a laser-like focus on the Conference Board Index of Leading Economic Indicators, which lately have been rolling over like the Bismarck and always presage a recession. For your convenience, I have included a 60-year chart below with the recessions highlighted.

And there were a few soft spots in the numbers as well.

China growth slowed to 6.2%, a 27-year low. Never mind that the real rate is probably only 3%. The slowdown is clearly the outcome of the trade war. That’s what happens when you make war on your largest customer. Markets rallied because it was not worse.

Banks beat on earnings, but stocks yawned, coming off an “OK” quarter. It’s still the sector to avoid with a grim backdrop of sharply falling interest rates. They’re also getting their pants beat by fintech, from which there is no relief.

There is no end to the China trade war in sight, as Trump once again threatened another round of tariff increases. It looks like the trade war will outlast the presidential election, since the Chinese have no interest in helping Trump get reelected. The puzzle is that the stock market could care less.

Trump’s war on technology expanded. First, Facebook (FB) got hit with a $5 fine over privacy concerns. Now Google (GOOGL) is to be investigated for treason for allegedly helping the Chinese military. In the meantime, Europe is going after Amazon (AMZN) on antitrust concerns. If the US isn’t going to dominate technology, who will. Sorry, but this keyboard doesn’t have Chinese characters.

June US Housing Starts fell 0.9%, while permits dove 6%. If builders won’t build in the face of record low interest rates, their outlook for the economy must be grim. Maybe the 36% YOY decline in buying from Chinese has something to do with it.

Oil popped on the US downing of an Iranian drone in the Straits of Hormuz, which I flew over myself only last week on my way to Abu Dhabi. Expect this tit for tat, “Phony War” to continue, making Texas tea (USO) untradeable. In the meantime, the International Energy Agency has cut oil demand forecasts, thanks to a slowing global economy.

My strategy of avoiding stocks and only investing in weak dollar plays like bonds (TLT), foreign exchange (FXA), and copper (FCX) has been performing well. After spending a few weeks out of the market, it’s amazing how clear things become. The clouds lift and the fog disperses.

My Global Trading Dispatch has hit a new high for the year at +17.78% and has earned a respectable 2.54% so far in July. Nothing like coming out of the blocks for an uncertain H2 on a hot streak.

My ten-year average annualized profit bobbed up to +33.12%. With the markets now in the process of peaking out for the short term, I am now 70% in cash with Global Trading Dispatch and 100% cash in the Mad Hedge Tech Letter. If there is one thing supporting the market now, it is the fact that my Mad Hedge Market Timing Index has pulled back to a neutral 44. It’s a Goldilocks level, not too hot and not too cold.

The coming week will be a fairly sedentary one on the data front after last week’s fireworks, except for one big bombshell on Friday.

On Monday, July 22, the Chicago Fed National Activity Index is published.

On Tuesday, July 23, we get a new Case Shiller National Home Price Index. June Existing Home Sales follow.

On Wednesday, July 24, June New Home Sales are released.

On Thursday, July 25 at 8:30 AM EST, the Weekly Jobless Claims are printed. So are June Durable Goods.

On Friday, July 26 at 8:30 AM EST, we get the most important release of the week, the advance release of US Q2 GDP. The numbers are expected to be weak, and anything above 1.8% will be a surprise, compared to 3.1% in Q1. Depending on the number, the market will either be up big, down big, or flat. I can already hear you saying “Thanks a lot.”

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I’ll be attending a fund raiser tonight for the Zermatt Community band held in the main square in front of St. Mauritius church. If you don’t ski, there isn’t much to do in the winter here but practice your flute, clarinet, French horn, or tuba.

We’ll be eating all the wurst, raclete, beer, and apple struddle we can. As an honorary citizen of Zermatt with the keys to the city, having visited here for 51 years, I get to attend for free.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader



Mad Hedge Market Timing Index










What’s Happened to Apple?

One of the great mysteries of the tech world has at last been answered.

Apple’s brand new spaceship-designed headquarter, one of the world’s most valuable buildings, has finally had a value put on it.

New figures released this week show the tech giant’s circular headquarters in Cupertino, CA was assessed at a breathtaking $3.6 billion by Santa Clara County for property tax purposes. The valuation doesn’t perfectly coincide with its market value — how much it would sell for — but is based off a detailed appraisal of the building, which opened in 2017.

If you include computers, furniture, and even farm equipment to take care of the property’s abundant peach trees, the figure rises to $4.17 billion for the fiscal year that ended in June, the assessor’s office said.

Beyond its giant 2.8 million-square-foot size, Apple Park’s high-end materials, abundant glass, and intricate design make it a standout in Silicon Valley. The building is so big it even has its own weather.

Unfortunately, the share prices of companies that spend billions on flashy new designer headquarters do not have a great history. Ride around Manhattan in an Uber cab and you’ll quickly understand that time has not been kind to the extravagant: the Chrysler Building, the Pan Am Building, and the AT&T building to name just a few.

Citicorp’s HQ, with its horizon-defining slant-edged roof, is still in business, but the stock is still down 75% from its pre-crash high. Is Apple headed in the same direction?

Looking at the share price performance of the past year, which has been zero, you might be forgiven for thinking so. Other tech stocks have risen by 50% or more during the same period.

Apple Park is among the world’s dozen most expensive buildings despite its relatively modest four-storey height.

America’s tallest spire, the 1,776-foot One World Trade Center in New York, cost $3.9 billion to build according to the Port Authority of New York and New Jersey which owns the building and has 3.5 million square feet. Singapore’s Marina Bay Sands resort reportedly topped $5 billion in costs, while Finland’s Olkiluoto 3 nuclear reactor exceeded $6 billion.

Saudi Arabia’s holy city of Mecca is home to two of the most valuable buildings in the world: the $15 billion Abraj Al Bait Towers and the $100 billion Great Mosque of Mecca.

Apple Park was assessed at more than twice the amount of Salesforce Tower, San Francisco’s tallest building, which was valued at $1.7 billion by San Francisco. Salesforce Tower has about half as much office space as Apple Park despite being 57 stories taller.

With property taxes in Santa Clara County running around 1.25%, Apple would owe around $50 million annually.

The building is a manageable expense for Apple’s profit machine. In its most recent quarter, Apple reported a mind-numbing $58 billion in revenue and $11.5 billion in net income.

Apple was Santa Clara County’s largest property taxpayer for the 2017-18 fiscal year, with $56 million in taxes paid.

Investors have been frustrated with Apple’s recent performance, although it did make back most of the 40% hickey it suffered last fall.

Its business plan seems well on track, shifting from a hardware company to one that focuses on software and services. If anything, the shift has been taking place faster than expected, with the cloud, iTunes, Apple Wallet, Apple Care, the App Store, and other services accounting for a growing share of earnings.

All will become clear when the company announces their Q3 earnings on Tuesday, July 30 after the stock market close.

No, I think the problem with Apple is that it is suffering from the China Disease. Employing a million people who produce 225 million iPhones a year, Apple is the preeminent hostage in the US-China trade dispute. That, undoubtedly, has been a dead weight on the shares.

However, after covering this field for half a century, I can tell that trade wars start, trade wars play out, and trade wars end. Unlike other trade wars, this one has a specific end date. That would be on Wednesday, January 20, 2021, or in 18 months, the date of the next presidential inauguration.

As for me, I am waiting to upgrade my current iPhone X until it includes 5G wireless technology early next year. I bet 225 million others are as well. Dump the trade war and Apple shares could rocket up towards my old long-term target of $250 a share in a heartbeat.

By the way, there is one other headquarter that may be about to join the dustbin of history. That would be 725 Fifth Avenue, NY, NY 10022, which has been appraised at a mere $371 million and carries a hefty $100 million in debt. In is now partly owned by the US Justice Department, which will soon sell its stake.

Locals know it as Trump Tower.




Storage Wars

No, this piece is not about the TV reality show that has a gruff lot of hopeful entrepreneurs blindly bidding for the contents of abandoned storage lockers.

With hyper-accelerating technology creating data at an exponential rate, it is getting far too big to physically store.

In 2018, over $80 billion was spent on data centers across the country, often in the remotest areas imaginable. Bend, OR, rural West Virginia, or dusty sun-baked Sparks, NV, yes, they’re all there.

And you know what the biggest headache for the management of many tech companies is today? A severe shortage of cost-effective data storage and the skyrocketing electric power bills to power them.

During my lifetime, storage has evolved from one-inch magnetic tape on huge reels to highly unreliable 5 ¼ inch floppy disks, then 3-inch discs, and later to compact discs.

The solid-state storage on silicon chips that hit the market six years ago was a dream, as it was cheap, highly portable, and lightning fast. Boot-up time shrank from minutes to seconds. The only problem was the heat and sitting on it when you forgot those ultra slim designs on the sofa.

Moore’s Law, which has storage doubling every 18 months while the cost halves, has proved faithful to the bitter end. The problem now is, the end is near as the size of an electron becoming too big to pass through a gate is increasingly becoming a limiting factor.

As of 2017, the world needed 44 gigabytes of storage per day. According to the International Data Corporation, that figure will explode to 460 billion gigabytes by 2025, in a mere seven years.

That’s when the global datasphere will reach 160 trillion gigabytes, or 160 zettabytes. It all sounds like something out of an Isaac Asimov science fiction novel.

You can double that figure again when Google’s Project Loon brings the planet’s 5 million residents currently missing from the Internet online.

In the meantime, companies are making fortunes on the build-out. Some $50 billion has to be spent this year just to keep even with burgeoning storage demand.

And guess what? Thanks to rocketing demand from electric cars and AI, memory grade silicon is expected to run out by 2040.

All I can say is “Better pray for DNA.”

Deoxyribonucleic acid has long been the Holy Grail for data storage. There is no reason why it shouldn’t work. After all, you and I are the product of the most dynamic data storage system known to man.

All of the information needed to replicate ourselves is found in 3 trillion base pairs occupying every single cell in the human body.

To give you some idea of the immense scalability of DNA, consider this. One exabyte of data storage using convention silicon would weigh 320 metric tonnes. The same amount of information in DNA would occupy five cubic centimeters weighing five grams, or 0.18 ounce!

And here is the big advantage of DNA. Conventional silicon permits only two programing choices, “0” or “1”. Even with just that, we have been able to achieve incredible gains in computing over the last 50 years.

DNA is made of four difference bases, adenine, cytosine, guanine, and thymine, which allow four squared possible combinations, or 16. The power demands are immeasurably small and it runs cool.

Also known as NAM, or nucleic acid memory, it has already burst out of the realm of science fiction. Microsoft Research (MSFT), the University of Washington, and (IBM) have all gotten it to work on a limited basis.

So far, retrieval is the biggest problem, something we ourselves do trillions of times a day every day without thinking about it.

DNA is organic, requires no silicon, and can replicate itself into infinity at zero cost. The information can last tens of thousands of years. Indeed, scientists were recently able to reconstruct the DNA from Neanderthals who lived in cave in Spain 27,000 years ago.

Yes, you can now clone your own Neanderthal. Gardening work maybe? Low-waged assembly line workers? Soldiers? Traders? I think I already know some. Look for that tell-tale supraorbital brow (click here for details).

But I diverge.

If you want to make money, like tomorrow, instead of in a decade, there are still a few possibilities on the storage front.

If you want to take a flyer on the ongoing data storage buildout, you might look at Las Vegas-based Switch (SWCH). The company IPO’d in October and has since seen its shares drop by 32%, which is normal for these small tech companies.

A much cleaner and safer play is Cisco Systems (CSCO), one of my favorite lagging old technology companies. After all, everyone needs Cisco routers on an industrial scale.



The Future of Computing


Your Daughter’s Next Date?

The Death of the Mall

We’ve all heard this story before.

Malls are dying. Commerce is moving online at breakneck pace. Investing in retail is a death wish.

No less a figure than Bill Gates, Sr. told me that in a decade, malls would only be inhabited by climbing walls and paintball courses, and that was a decade ago.

Except it didn’t quite work out that way. Lesser quality malls are playing out Mr. Gates’ dire forecast. But others are booming. It turns out that there are malls, and then there are malls.

There is one big kicker here that no one is noticing except me. If my prediction that this is not a low interest rate decade but  a LOW INTEREST RATE CENTURY turns out to be correct, then mall REITs with their high yields are the “BUY” of the century, but only if you have a very long-term view.

Let me expand a bit on my thesis.

Technology is moving forward at an exponential rate. As a result, product performances are improving dramatically while costs are falling. Commodity and energy prices are also rising, they are but a tiny fraction of the cost of production.


The nearest hint of real inflation won’t arrive until the 2020s when Millennials become big spenders, driving up the cost of everything.

We also have a Fed that is pursuing the most dovish policies in history. It’s looking like interest rates peak at 3.25% in this cycle, and then go negative when we go into the next recession. That is about 300 basis points lower than the top seen prior to the last recession.

So, let’s go back to the REIT thing. Real Estate Investment Trusts are a creation of the Internal Revenue Code which gives preferential tax treatment for investment in malls and other income generating properties.

There are 1,100 malls in the United States. Some 464 of these are rated as B+ or better and are concentrated in the biggest spending parts of the country (San Francisco, North New Jersey, Greenwich, CT, etc).

Trading and investing for a half century, I have noticed that most managers are backward looking, betting that existing trends will continue forever. As a result, their returns are mediocre at best and terrible at worst.

Truly brilliant managers make big bets on what is going to happen next. They are constantly on the lookout for trend reversals, new technologies, and epochal structural changes to our rapidly evolving modern economy.

I am one of those kinds of managers.

These are not your father’s malls. It turns out the best quality malls are booming while second and third tier ones are dying the slow painful death that Mr. Gates outlined.

It is all a reflection of the ongoing American concentration of wealth at the top. If you are selling to the top 1% of wealth owners in the country, business is great. If fact, if you cater even to the top 20%, things are pretty damn fine.

You can see this in the top income-producing tenants in the “class A” malls. In 2000, they comprised J.C. Penney, Sears, and Victoria’s Secret. Now Apple, L Brands, and Foot Locker are sought after renters. Put an Apple store in a mall, and it is golden.

And what about that online thing?

After 20 years of online commerce, the business has become so cutthroat and competitive that profit margins have been beaten to death. You can bleed yourself white watching Google AdWords empty out your bank account. I know because I’ve tried it.

Many online-only businesses are now losing money, desperately searching for that perfect algorithm that will bail them out, going head-to-head against the geniuses at Amazon.

I open my email account every morning and find hundreds of solicitations for everything from discount deals on 7 For All Mankind jeans, to the new hot day trading newsletter, to the latest male enhancement vitamins (although why they think I need the latter is beyond me).

Needless to say, it is tough to get noticed in such an environment.

It turns out that the most successful consumer products these days have a very attractive tactile and physical element to them. Look no further than Apple products which are sleek, smooth, and have an almost sexual attraction to them.

I know Steve Jobs drove his team relentlessly to achieve exactly this effect. No surprise then that Apple is the most successful company in history and can pay astronomical rents for the most prime of prime retail spaces.

It turns out that “Clicks to Bricks” is becoming a dominant business strategy. A combination of the two is presently generating the highest returns on investment in retail today.

People start out by finding a product online, and then going to the local mall to try it on, touch it, and feel it. Apple does this.

Research shows that two thirds of Millennials prefer buying their clothes and shoes at malls. Once there, the probability of a serendipitous purchase is far greater than online, anywhere from 20% to 60% of the time.

This explains why pure online businesses by the hundreds are rushing to get a foothold in the highest end malls.

Immediate contact with a physical customer give retailers a big advantage, gaining them the market intelligence they need to stay ahead of the pack. In “fast fashion” retailers like H&M and Uniqlo, which turn over their inventories every two weeks, this is a really big deal.

There’s more to the story. Malls are not just shopping centers, they have become entertainment destinations as well. With an ever-increasing share of the population chained to their computers all day, the demand for a full out-of-the-house shopping, dining, and entertainment family experience is rising.

Notice how Merry Go Rounds have started popping up at the best properties? IMAX Theaters are spreading like wildfire. And yes, they have climbing walls too. I haven’t seen any paintball courses yet, but the guns and accessories are for sale.

And notice that theaters are now installing first class adjustable heated seats and will serve you dinner while the movie is playing. (Warning: if you eat in the dark, you will end up wearing half of it home).

This is why all of the highest rated malls in the country are effectively full. If you want space, there you have to wait in line. REIT managers pray for tenant bankruptcies so that can jack up rents on the next incoming client or pivot their strategy towards the newest retail niche.

Malls are also in the sweet spot in the alternative energy game. Lots of floor space means plenty of roof space. That means they can cash in on the 30% federal investment tax credit for solar roof installations. Some malls in sunny southwestern states are net power generators effectively turning them into min local power utilities.

Fortunately, we, investors, are spoiled for choice in the number of securities we can consider, most of which can now be bought for bargain basement prices. Many have a return on investment of 9-11%, a portion of which is passed on to the end investor.

There are now 25 REITs in the S&P 500. The sector has become so important that the ratings firm is about to create a separate REIT subsector within the index.

According to (click here for the link), these are some of the largest mall-related investment vehicles in the country.

Simon Growth Property (SPG) is the largest REIT in the country with 241 million square feet in the US and Asia. It is a fully integrated real estate company which operates from five retail real estate platforms: regional malls, Premium Outlet Centers, The Mills, community/lifestyle centers and international properties. It pays a 4.88% dividend.

Macerich Co. (MAC) is a California based-company that is the third largest REIT operator in the country. It has been growing though acquisitions for the past decade. It pays a 5.31% dividend.

Taubman Centers, Inc. (TCO) runs a national network of malls in some of the priciest zip code in the country. Properties include the Beverly Center in Los Angeles, Stamford Town Center in Stamford, CT, and the Fair Oaks mall in Fairfax, VA. It was established by the late Alfred Taubman of Sotheby’s fame. It pays a 4.59% dividend.

Mind you, REITs are not exactly risk-free investments. To get the high returns, you take on more risk. We remember how disastrously the sector did when the credit crunch hit during the 2009 financial crisis. Many went under while others escaped by the skin of their teeth.

There are a few things that can go wrong with malls. Local economies can die, as it did in Detroit. Populations age, shifting them out of a big spending age group. And tax breaks can be here today and gone tomorrow.

These are all highly leveraged companies, so any prolonged rise in interest rates could be damaging. But as I pointed out below, there is little chance of that in the near future.

The bottom line here is that we are seeing anything but the death of the mall. It just depends on the mall.

All in all, if you are looking for income and yield, which everyone on the planet is currently pursuing, then picking up some REITs could be one of your best calls of the year.




See You At the Mall

Where The Economist “Big Mac” Index Finds Currency Value

My former employer, The Economist, once the ever-tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its “Big Mac” index of international currency valuations.

Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.

The index counts the cost of McDonald’s (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.

What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai baht are cheap.

I couldn’t agree more with many of these conclusions. It’s as if the august weekly publication was tapping The Diary of a Mad Hedge Fund Trader for ideas.

I am no longer the frequent consumer of Big Macs that I once was as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool than a speedy lunch.








The Big Mac in Yen is Definitely Not a Buy

Why US Bonds Love Chinese Tariffs

For many, one of the most surprising impacts of the administration’s tariffs on Chinese imports announced today has been a rocketing bond market.

Since the December $116 low, the iShares 20+ Year Treasury Bond ETF (TLT) has jumped by a staggering $16 points, the largest move up so far in years.

The tariffs are a highly regressive tax that will hit consumers hard in the pocketbook, thus reducing their purchasing power.

It will dramatically slow US economic growth. If the trade war escalates, and it almost certainly will, it could shrink US GDP by as much as 1% a year. A weaker economy means less demand for money, lower interest rates, and higher bond prices.

There is no political view here. This is just basic economics.

And while there has been a lot of hand-wringing over the prospect of China dumping its $1.1 trillion in American bond holdings, it is unlikely to take action here.

The Beijing government isn’t going to do anything to damage the value of its own investments. The only time it actually does sell US bonds is to support its own currency, the renminbi, in the foreign exchange markets.

What it CAN do is to boycott new Treasury bond purchases, which it already has been doing for the past year.

The tariffs also raise a lot of uncertainty about the future of business in the United States. Companies are definitely not going to increase capital spending if they believe a depression is coming, which the last serious trade war during the 1930s greatly exacerbated.

While stocks despise uncertainty, bonds absolutely love it.

Those of you who are short the bond market through the ProShares Ultra Short 20+ Year Treasury ETF (TBT) have a particular problem that is often ignored.

The cost of carry of this fund is now more than 5% (two times the 2.10% coupon plus management fees and expenses). Thus, long-term holders have to see interest rates rise by more than 5% a year just to break even. The (TBT) can be a great trade, but a money-losing investment.

The Chinese, which have been studying the American economic and political systems very carefully for decades, will be particularly clever in its retaliation. And you thought all those Chinese tourists were over here just to buy our Levi’s?

It will target Republican districts with a laser focus, and those in particular who supported Donald Trump. It wants to make its measures especially hurt for those who started this trade war in the first place.

First on the chopping block: soybeans, which are almost entirely produced in red states. In 2016, the last full year for which data is available, the US sold $15 billion worth of soybeans to China. Which are the largest soybean producing states? Iowa followed by Minnesota.

A major American export is aircraft, some $131 billion in 2017, and China is overwhelmingly the largest buyer. The Middle Kingdom needs to purchase 1,000 aircraft over the next 10 years to accommodate its burgeoning middle class. It will be easy to shift some of these orders to Europe’s Airbus Industries.

This is why the shares of Boeing (BA) have been slaughtered recently, down some 13.5% from the top. While Boeing planes are assembled in Washington state, they draw on parts suppliers in all 50 states.

Guess what the biggest selling foreign car in China is? The General Motors (GM) Buick which saw more than 400,000 in sales last year. I have to tell you that it is hilarious to see my mom’s car driven up to the Great Wall of China. Where are these cars assembled? Michigan and China.

The global trading system is an intricate, finally balanced system that has taken hundreds of years to evolve. Take out one small piece, and the entire structure falls down upon your head.

This is something the administration is about to find out.




Here Comes the Next Biotech Revolution

Technology and biotechnology are the two seminal investment themes of this century.

And while many tech companies have seen share prices rise 100-fold or more since the millennium, biotech and its parent big pharma have barely moved the needle.

That is about to change.

You can thank the convergence of big data, supercomputing, and the sequencing of the human genome, which overnight, have revolutionized how new drugs are created and brought to market.

So far, only a handful of scientists and industry insiders are in on the new game. Now it’s your turn to get in on the ground floor.

The first shot was fired in December 2017 when CVS (CVS) bought Aetna (AET) for an eye-popping $69 billion, puzzling analysts. A flurry of similar health care deals followed, with Berkshire Hathaway (BRK.A), Amazon (AMZN) with its Verily start-up, and J.P. Morgan (JPM) joining the fray.

March followed up with a Cigna (CI) bid for Express Scripts, a pharmacy benefits manager. Apple (AAPL) has suddenly launched a bunch of healthcare-based apps designed to accumulate its own health data pool.

What’s it all about? Or better yet, is there a trade here?

No, it’s not a naked bid for market share, or an attempt to front run the next change in health care legislation. It’s much deeper than that.

In short, it’s all about you, or your personal data to be more precise.

We have all seen those clever TV ads about IBM’s (IBM) Watson supercomputer knowing what you want before you do. In reality, we are now on the third generation of Watson, known as Summit, the world’s fastest super computer. By the way, Summit uses thousands of NVIDIA (NVDA) graphics cards, which is yet another reason why I love that company.

Summit can process a mind-numbing 4 quadrillion calculations per second. This is the kind of computing muscle power that you once associated with a Star Trek episode.

Financed by the Department of Defense to test virtual nuclear explosions and predict the weather (that’s why we signed the nuclear test ban treaty), Summit has a few other tricks up its sleeve.

It can, for example, store every human genome and medical record of all 330 million people in the United States, process that data instantly, and spit out miracle drugs to cure any disease almost at whim.

You know all those lab tests, X-rays, MRI scans, and other tests you’ve been accumulating over the years? They add up to some 30% of the world daily data creation, or some 4 petabytes (or 4 million gigabytes) a day. That’s a lot of zeroes and ones.

Up until a couple of years ago, this data just sat there. It was like having a copy of the Manhattan telephone book (if it still exists) but not knowing anyone there. Thanks to Summit, we now not only have a few friends in Manhattan, we know everyone’s most intimate personal details.

I have been telling readers for years that if you can last only 10 more years, you might be able to live forever as all major human diseases will be cured during this time. Summit finally gives us the tools to achieve this.

Imagine the investment implications!

The U.S. currently spends more than $3 trillion on health care, or about 15% of GDP, and costs are expected to rise another 6% this year. To modernize this market, you will need to create from scratch four more Apples or six more Facebooks (FB) in terms of market capitalization. You can imagine what getting in early is potentially worth to your investment portfolio.

Crucial to all of this was Craig Venter’s decoding of his own DNA in 2000 for the first time which cost about $1 billion. Today, you and I can get 23andMe,, or Family Tree DNA to do it for $100, with most of the scut work done in China.

Of course, key to all of this is getting the medical data for every U.S. citizen on line as fast as possible. The Obama administration began this effort seven years ago. Remember those gigantic overstuffed records rooms at your doctor’s office? They’ve all been sent to the recycling bin. You don’t see them anymore.

But we have a long way to go, and 20% of the U.S. population who don’t have HAVE any medical records, including all of the uninsured, will be a challenge.

To give you some idea of the potential and convince you that I have not gone totally MAD, let me tell you about Amgen’s (AMGN) sudden interest in the country of Iceland. Yes, Iceland.

There, a struggling young start-up named deCode sequenced the DNA of the entire population of the country, about 160,000 individuals. It tried to monetize its findings, but it was early and lost money hand over fist. So, the company sold it to Amgen in 2012 for $415 million.

Until then, targeting molecules for development was based on a hope and a prayer, and only a hugely uneconomic 5% of drugs made it to market. I was a bit like wildcatting for oil, another extremely high risk venture.

Using artificial intelligence (yes, those NVIDIA graphics processors again) to pretest against the deCode DNA database, it was able to increase that hit rate to 75%.

It’s not a stretch to assume that a 15-fold increase in success rates leads to a 15-fold improvement in profitability, or thereabouts.

Word leaked out setting off a gold rush for equivalent data pools that led to the takeover boom described above. And what happens when the pool of data explodes from 160,000 individuals to 330 million? It boggles the mind.

Another aspect of this is that Iceland has the purest gene pool in the world. Some 90% of the population is directly descended from Vikings, while the remaining 10% is from the Irish slaves they captured.

As a result, the health care industry is now benefiting from a “golden age” of oncology. Average life expectancy for chemotherapies is increasing by months at a time for specific cancers.

All of this is happening at a particularly fortuitous time for drug, health care, and biotech companies, which are only just now coming out of a long funk.

Traders seemed to have picked up on this new trend in May, which is why I slapped on a long position in the iShares Nasdaq Biotechnology ETF (IBB) (click here for a full description).

Like many companies in the sector, it is coming off of a very solid one-year double bottom and is going ballistic today.

The area is ripe for rotation. Other names you might look at include Biogen (BIIB), Celgene (CELG), and Regeneron (REGN).

If you have grown weary of buying big cap technology stocks at new all-time highs, try adding a few biotech and pharmaceutical stocks to spice this up. The results may surprise you.

As for living forever, that will be the subject of a future research piece. The far future.






China’s Coming Demographic Nightmare

Thanks to China’s “one child only” policy adopted 30 years ago and a cultural preference for children who grow up to become family safety nets, there are now 32 million more boys under the age of 20 than girls.

Large scale interference with the natural male:female ratio has been tracked with some fascination by demographers for years, and is constantly generating unintended consequences.

Until early in the last century, starving rural mothers abandoned unwanted female newborns in the hills to be taken away by “spirits.”

Today, pregnant women resort to the modern day equivalent by getting ultrasounds and undergoing abortions when they learn they are carrying girls.

Millions of children are “little emperors,” spoiled male-only children who have been raised to expect the world to revolve around them.

The resulting shortage of women has led to an epidemic of “bride kidnapping” in surrounding countries. Stealing of male children is widespread in Vietnam, Cambodia, Laos, and Mongolia.

The end result has been a barbell shaped demographic curve unlike that seen in any other country.

The Beijing government says the program has succeeded in bringing the fertility rate from 3.0 down to 1.8, well below the 2.1 replacement rate.

As a result, the Middle Kingdom’s population today is only 1.2 billion instead of the 1.6 billion it would have been.

Political scientists have long speculated that an excess of young men would lead to more bellicose foreign policies by the Middle Kingdom.

But so far the choice has been for commerce, to the detriment of America’s trade balance and Internet security.

In practice, the one child policy was only applied to those who live in cities or had government jobs. That is about two-thirds of the population.

On my last trip to China, I spent a weekend walking around Shenzhen city parks. The locals doted over their single children, while visitors from the countryside played games with their three, four, or five children. The contrast couldn’t have been more bizarre.

Economists now wonder if the practice will also understate China’s long-term growth rate. Parents with boys tend to be bigger savers, so they can help sons with the initial big-ticket items in life, like education, homes, and even cars.

The end game for this policy has to be the Japan disease; a huge population of senior citizens with insufficient numbers of young workers to support them. The markets won’t ignore this.

In the latest round of reforms announced by the Chinese government was the demise of the one child policy.

But no matter how hard you try, you can’t change the number of people born 30 years ago.

The boomerang effects of this policy could last for centuries.