Global Market Comments
August 18, 2020
Fiat Lux
Featured Trade:
(HOW TO HEDGE YOUR CURRENCY RISK),
(FXA), (UUP),
Let’s say you absolutely love a stock but despise the currency of the country it comes from.
The United States comes to mind.
The US Federal Reserve has announced they don’t expect to raise interest rates for three years. The US government is running record budget deficits. Debt to GDP is now at the highest level since WWII.
That means the greenback is about to become the weakest currency in the world. Look at the ten-year chart below and you’ll see that a major double bottom for the Aussie may be taking place.
Most American technology stocks are likely to gain 30% or more over the next two years. However, it’s entirely possible that the US dollar declines by 30% or more against the Australian (FXA) and Canadian (FXC) dollars during the same period. Making 30% and then losing 30% leaves you with precisely zero profit.
There is a way to avoid this dilemma that would vex Solomon. Simply hedge out your currency risk. I’ll use the example of the Australian dollar, as we have recently had a large influx of new subscribers from the land down under.
Let’s say you want to buy AUS$100,000 worth of Apple (AAPL), the world’s most widely owned stock.
Since Apple is listed on the New York Stock Exchange, its shares are denominated in US dollars. When you buy Apple in Australia, your local broker will automatically buy the US dollars for your account to settle this trade in the US, taking out a small commission along the way. You are now long US dollars, thus creating a currency risk.
Getting rid of this currency risk is quite simple. You need to offset your US dollar long with a US dollar short of equal value. Long dollars/short dollars give the Australian investor a currency-neutral position. The US dollar can go to hell in a handbasket and you won’t care.
There are several financial instruments with which you can do this. Buying Invesco Currency Shares Australian Dollar Trust ETF (FXA) is the easiest. This ETF invests 100% of its assets in long Australian dollar/short US dollar futures and overnight cash positions.
I’ll do the math for you on the final hedged position assuming that the Australian dollar is worth 70 US cents.
BUY AUS$100,000 long US dollars X US$0.70 cents/dollar = US$70,000.
US$70,000/$210 per share for Apple = 333 Apple shares
BUY US$70,000/$70 (FXA) price = US$1,000 shares of the (FXA)
Thus, by owning AUS$100,000 shares of Apple shares and 1,000 shares of the (FXA) you have completely removed the currency risk in owning Apple. You have, in effect, turned Apple into an Australian dollar-denominated stock. Apple can rise, the US dollar will fall, and you will make twice as much money in Australian dollars.
There are a few problems with this precise trade. The liquidity in the (FXA) is not great, especially during US trading hours. Understandably, the bulk of Aussie liquidity takes place during Australian business hours.
There are other instruments with which you can hedge out the currency risk of Apple, or any other US dollar-denominated investment.
You can take out your own short dollar position in the futures market. You can ask your bank to create a short position in the US dollar in the cash market. Or, you can simply ask your broker to hedge out your US dollar currency risk, for which they will charge you another small commission.
Hedging out currency risk not only is free, the market will pay you to do it. That’s because Australian dollar overnight interest rates at 1.00% are lower than US dollar overnight interest rates at 2.50%. By shorting Aussie against the buck, you get to keep this 1.50% interest differential.
You don’t have to be Australian to want your Apple shares denominated in Australian dollars. In fact, hedge funds do this all day long. They pursue a strategy of keeping their long position in the world’s strongest securities (Apple), and their shorts positions in the world’s weakest securities (the US dollar). This, by the way, is also the strategy of the Mad Hedge Fund Trader. It’s called “global long/short macro.”
The better ones often make money on both sides of the equation, with the longs rising and the shorts falling. You can do the same in your own personal online trading platform.
I should urge a word of caution here. What happens if you hedge out your US dollar risk, and the dollar continues to appreciate? Then you will get none of the gains from that appreciation and will end up losing money in Australian dollars if Apple shares remain unchanged.
In the worst case, if both Apple and the Aussie could go down, this accelerates your losses. So, currency hedging can be a double-edged sword. Yes, this may be irrational given the fundamentals of the Aussie and Apple. But as any experienced long term trader will tell you, “Markets can remain irrational longer than you can remain liquid.”
Many thanks to John Maynard Keynes.
Looks Like a Good Bet to Me
Global Market Comments
August 17, 2020
Fiat Lux
Featured Trade:
(JOIN THE AUGUST 24-26 MAD HEDGE TRADERS & INVESTORS SUMMIT),
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME BACK FROM YOUR CRUISE),
(INDU), (TLT), (GLD), (TBT), (FB), (AMZN), (AAPL), (BAC), (JPM)
I have long advocated a long cruise as the best of all long-term investment strategies. After all, over the past 100 years, stocks have gone up 80% of the time, including the last Great Depression and WWII. Almost all news is negative, so ignoring should boost your investment returns immensely.
The last six months offer the most recent example. If you had departed on February 14 and return on Friday, August 14, the index return would have been absolutely zero, but you would have collected 1% in dividends. If you had been overweight in technology and biotech stocks, as I have been advocating for the past decade, you would have been up 20-30%.
Of course, this year, cruising presented its own risks, not from a sinking ship, pirates, or the norovirus, but from Covid-19. Many guests departed in the best of spirits to return DOA in the ship’s overcrowded meat locker.
The stock markets are offering more than the usual amount of risks as well. Think of an irresistible force, massive liquidity, meeting the immovable object, record-high valuations.
Only action in Washington could break this stalemate to the upside, a deal between the House and the White House that brings yet another stimulus package. Most of whatever money gets approved will head straight for the stock market, either directly or indirectly. Until then, we will be trapped in a narrow range.
These conditions could last into September, or until after the election. Nobody knows. That’s why eight of my nine positions expire on Friday, in four trading days.
Trump took executive action to help the economy but offers not a penny in funding. He expects states running record deficits to pay for a big chunk. It’s a symbolic act that will have no impact on the economy. The bottom line is no more stimulus for the economy. Stocks will hate it. Trump fiddles while America burns.
A bond market collapse is imminent, with record new issuance in the coming week and a strong July Nonfarm Payroll Report last Friday. Expect ten-year Treasury yields to go back to 0.95% and prices to collapse. Inflation is ticking up, with Consumer prices rising to 1.6% YOY. Fed buying of $80 billion a month is already in the price. I am selling short the (TLT).
Warren Buffet was a major buyer of His own stock, picking up a record $5.1 billion worth of Berkshire Hathaway (BRK/B). With $146.6 billion in cash on hand, what else is he going to do? Berkshire Class A shares were down 7.4% for the year through Friday’s close, compared with the 3.7% gain in the S&P 500. It’s his way of betting on the long-term future of industrial America at a discount.
Russia claimed Covid-19 Vaccine, causing stocks to pop. The rotation trade continues with a vengeance, with tech (I’m short), bonds (I’m short), and gold down big and “recovery” stocks like cruise lines, hotels, restaurants, and banks (I’m long) on a tear. Some $5 trillion in cash is pouring in from the sidelines, so there is only “UP” and “UP BIG”. (SPY) hit a new all-time high.
Tesla announced 5:1 stock split on August 21, which is the options expiration day. Long expected, it is just the latest in a series of Elon Musk attacks against the shorts, of which I am now one. The shares are up only 7% on the announcement. The impact won’t be so great, as it only takes the shares back to where they were in March.
Biden picked Kamela Harris as VP. It is the safe choice, not that California was ever in doubt in the electoral college. A moderate choice clearly takes aim at the conservative Midwest. Markets will rally because she is not Elisabeth Warren, who would have pilloried the banks and big tech and is essentially anti-capitalist.
College Football is postponed for 2020-2012, delivering a $4 billion hit to sponsoring colleges and another drag on GDP. No more free Corvettes for USC players. It's another example of local government taking the lead on Corona measures where the federal government is totally absent.
Van Eck targets $3,400 for gold. One of the original players in gold mutual funds who I know from the big bull market during the 1970s sees a 72% increase in the barbarous relic coming. With the government running the printing presses 24/7 to end the Great Depression collapsing the US dollar, it’s a no-brainer.
Consumer Prices unexpectedly jump, up 0.6% in July and 1.6% YOY. It’s a legitimate “green shoot” and provided yet another reason for the recovery trade. Rebounding inflation is always a great time to be short the US Treasury bond market (TLT). Keep selling every rally in the (TLT).
Retail Sales jump 1.2% in July, despite rising Corona cases, taking it back above pre-pandemic levels. Industrial Production picked up 3%. A lot was bought on credit. The problem is that all of those stimulus and unemployment dollars are now gone. In the meantime, further aid is frozen in Washington. No shopping, no growth.
Weekly Jobless Claims drop below one million for the first time since March. It’s still terrible, but it’s progress. Take what you can get. However, the rate of decline is flagging, and the next report could well bring an upturn.
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.
Nothing refreshes and clears the mind like a vacation.
As a result, my Global Trading Dispatch blasted through to a substantial new all-time high. August is running at a blistering 6.03%, delivering a 2020 year to date of 34.66%, versus -2.00% for the Dow Average. That takes my eleven-year average annualized performance to a new all-time high of 36.61%. My 11-year total return has rocketed to 390.57%.
It certainly helped being short big tech (AAPL), (AMZN), (FB), short US Treasury bonds (TLT), (TBT), long banks (JPM), (BAC), and long gold (GLD).
The only numbers that count for the market are the number of US Corona virus cases and deaths, which you can find here.
On Monday, August 17 at 8:30 AM EST, the August New York Empire State Manufacturing Index is published.
On Tuesday, August 18 at 8:30 AM EST, Housing Starts for July are released.
On Wednesday, August 19 at 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, August 20 at 8:30 AM EST, the Weekly Jobless Claims are announced.
On Friday, August 14, at 10:00 AM EST, Existing Home Sales for July are printed. At 2:00 PM The Bakers Hughes Rig Count is released.
As for me, with six days of 100-degree temperatures forecast, I attempted to go to the beach. A car crash on the Richmond Bridge trapped me in traffic for an hour. By the time I made it to the coast, the beaches were unreachable, thanks to unprecedented crowding.
With the local real unemployment rate at 25%, people have a lot of free time on their hands these days. It’s all part of the times we live in.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
August 14, 2020
Fiat Lux
Featured Trade:
(AUGUST 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (TLT), (TSLA), (AAPL), (FB), (AMZN), (VXX), (VIX), (JPM), (BAC), (GDX), (NUGT), (MRNA), (BRK/B), (SLV), (FCX)
Below please find subscribers’ Q&A for the August 12 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: I just joined your service. Can you explain the logic to your current model trading portfolio?
I always try to balance long positions with short position. That greatly mitigates the risk of an out-of-the-blue crash, like we saw in February. Also, every individual position has a long and short, further reducing volatility. And you never can lose more money than you put up, so your risk is defined. That’s another classic risk control measure.
There is a further four hedge in that the portfolio is spread across all asset classes. So, I am long banks (JPM), (BAC), short US Treasury bonds (TLT), short a basket of big tech stocks (AAPL), (AMZN), (FB) and long gold (GLD). Something is always working where you can take profits. Our proprietary Mad Hedge Market Timing Index is always a big help in judging the best time to enter and exit these asset classes.
That is the short course on hedge fund risk management 101.
Q: Is it a good time to add in gold (GLD) here?
A: Yes, my long-term target for gold is $3,000/oz, possibly higher—it’s very common once you get a breakout from a 7-year bottoming process to get a big move like that. You always go back and retest that breakout level, that’s what’s happening now. I would use this dip to buy gold. You can look at (GLD) itself, the (GDX) gold miners which will give you 4:1 leverage over gold, or any of the 2x or 3x gold leveraged ETFs like (NUGT). There are lots of ways to play gold this time left from over the last bull market in gold ten years ago. So yes, bullish on gold with a temporary pullback in store. This recovery trade, which is buying banks, casinos, hotels, restaurants, weak dollar, weak buy market, weak gold—this is all temporary, this is just a trade. Those will all reverse themselves, probably by September if not sooner. So, if you missed the first round in the gold bull market, there’s certainly another chance to get back in.
Q: Do you think Biden and Harris will crash the stock market if elected?
A: No, since Biden started to run away in the polls, the stock market basically went straight up every day, and I prefer the stock market’s judgment on these things to opinion polls or talking heads. As far as Harris is concerned, she was the most middle of the road conservative pick of the 12 or so people they were looking at for vice president. Certainly, she’s a favorite with Wall Street, and isn’t it interesting they’re looking for the talents of a prosecutor in the White House? Who do you think they have in mind? So yes, that’s a net positive for the market. If anything, a new administration will bring a whole new round of Quantitative Easing and deficit spending, except it will be focused on bailing out Main Street, not Wall Street.
Q: Is the vaccine drug maker Moderna (MRNA) overbought here at 70?
A: Yes, I think to get any more appreciation you need to get an actual result on the many vaccines that are out there.
Q: Will Tesla (TSLA) pass 2,000 by year end?
A: I tend not to think so; Tesla had a once-in-a-lifetime 10-fold increase over a year. That is a very big move to digest, and while I’m saying people should keep their Tesla longs for the long term, short term you want to be selling calls against your long positions to hedge any downside and to take in some extra income.
Q: What caused ten-year US Treasury yields (TLT) to jump 14% yesterday? What will yields do from here?
A: Yields will go up and retest the 95-basis point level we saw a couple of months ago. That means we’re going to have a clear shot at adding shorts, probably for the next several weeks or months.
Q: I got the first TLT trade, but when I added the second one, I had to automatically close out my 175 short position to add the long 175 put position.
A: That is the correct way to do this. And what you end up with is a wider spread with a much larger size. So, you take all three positions we currently have, and you now have a (TLT) August $170-177.5 bear put spread in triple the original size and triple the profit, which expires in 5 trading days. It’s a trade with a very high return over a very short time frame. It’s the kind of trade that’s only available with very high volatilities in the market—at $25 in the (VIX), and you get very high accelerated time decay going into the close. So, it really was a two-week expiration play on the (TLT).
Q: Apple (AAPL) has been able to avoid any major damage in its share price in this trade war. How long can it last?
A: It can last 3 more months, until the election. It’s really quite amazing that the Chinese have not retaliated against Apple in all of these trade wars, and the reason for this is that Apple employs a million people in China, and they make a ton of money out of it. Apple has also managed their relationship with the communist government perfectly. So, that’s why they haven’t been hit. General Motors, other US companies—they could get expropriated. If the US can expropriate TikTok, what’s to stop China from expropriating General Motors, Starbucks, or even Apple for that matter?
Q: How do we know who has a real vaccine and who has a fake one? There’s so much information out there, I have a hard time filtering through what is real.
A: Wait for 100,000 people to try it out first—that’s what my plan is. That will be the safe way to do it. And if that means quarantining another couple of months to make sure you get the real deal, it’s worth the investment. Most industry safety standards, like animal trials, have been ditched by the FDA in order to get Trump a vaccine before the election. Putin is doing the same in Russia.
Q: Why is Warren Buffet buying back shares of Berkshire Hathaway (BRK/B) in record amounts? Is it because he sees no good investments?
A: He’d rather buy his own shares at parity or at a small premium than pay record PE multiples for essentially anything else in the market. Because the government rushed in so quickly to support the stock market, there never were any real deals in stocks, they never really got cheap. Yes, it sounds like down 40% in 2 months is cheap, but stocks weren’t, not even close to cheap, on a PE multiple basis. We never got close to the 9 ½X we saw in 2009. Also, if you believe in a recovery play, the ultimate recovery play is Berkshire Hathaway because they own predominantly old-line industrial cash flow stocks, which will lead any real recovery in the economy. So, at this point, Berkshire Hathaway will probably get you a higher return on a 12-month view than say Apple, Facebook or Amazon.
Q: Gold (GLD) vs Silver (SLV)? Which is better? And what about Copper (FCX)?
A: Silver always outperforms gold by at least 2 to 1 in any real economic recovery. Copper prices have risen 30% in 4 months; that is discounting a real economic recovery someday, so I would be buying copper on dips also.
Q: How do we learn more about options?
A: I suggest you go to the “How to Trade” section on our website, and that has links. Every trade alert we send out also has a link to a video that tells you exactly how to do the options part of that trade. And if you don’t want to do options, we also propose ETF and single stocks.
Q: What year end effect on the market do you see from a Biden tax plan on long term capital gains and qualified dividends at the ordinary income rate?
A: Well, if he actually proposes that, there will be a rush to sell assets by the end of the current year so people can take advantage of the very favorable capital gains tax that exist now. However, it’s not known whether that is actually the tax increase he’s proposing; it’s more likely he’ll simply return to the pre-Trump tax rates. However, I do expect him to come up with highly punitive tax rates on any real estate-related investment as a way of getting back at Trump. And that’s like loss carry forwards, steps up in the cost basis, 1031 exchanges—things specific to the real estate industry.
Q: If you think markets are going to come off, why aren’t you more aggressive buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?
A: (VXX) has become such a professional market it really has become a day trading vehicle. It’s hard to get customers in and out of this thing fast enough to make them money, as most of my followers are not set up to be day traders. It’s a market where 90% of the professionals are playing from the short side, so when you get moves up, they essentially happen over 1 or 2 days, and then they spend weeks or months bleeding off. It really is a tough trade for a retail trader to do; and it is an area where the insiders in Chicago trade this thing and really do have an in-house advantage that I would rather not try to bet against.
Q: I sold the top on all precious metals positions and started buying back today. Was that the right thing to do?
A: Yes, I have a feeling it is. Start scaling in—if you’re nervous about buying gold here, buy a third of a position now, a third if it’s higher or lower, and a third if it’s higher or lower again. That’s what any pro would do.
Q: Do you see another big economic crisis in 2021?
A: I don’t think so; I think any continued weakness will be hit with massive liquidity from the Fed and more government spending. Now that they found the model to keep the economy going, they’re going to just keep at it, no matter who is in power. Roosevelt kept at it for 5 years to end the Great Depression, until he was bailed out by WWII, so hopefully we don’t have to bail our economy out the same way with WWIII.
Q: What about Bitcoin here?
A: We don’t trade Bitcoin as we think the whole thing is a giant scam. There’s also no value added by anyone. Insiders have a huge advantage, the people who are creating the bitcoin to sell. So, it’s a security with no fundamentals—thus unanalyzable.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
August 13, 2020
Fiat Lux
Featured Trade:
(RAISING MY TESLA TARGET TO $5,000),
(TSLA)
(TESTIMONIAL)
The bad news about Tesla (TSLA) is that it may take several months, if not a year to digest the massive ten-fold leap in Tesla shares that has taken play over the past year.
The good news is that I am raising my long term target from the $2,500 that I held for the last decade to $5,000 over the next five years. Remember, I first recommended the stock at $16.50, right after the IPO went bust.
I knew I was on the right track when the salesman told me that the customer who just preceded me for a Tesla Model X 100D SUV was the Golden Bay Warriors star basketball player, Steph Currie.
Well, if it’s good enough for Steph, then it’s good enough for me.
Last week, I received a call from Elon Musk’s office to test the company’s self-driving technology embedded in their new vehicles for readers of the Diary of a Mad Hedge Fund Trader.
I did, and prepare to have your mind blown!
I was driving at 80 MPH on CA-24, a windy eight-lane freeway that snakes its way through the East San Francisco Bay Area mountains. Suddenly the salesman reached over and flicked a lever on the left side of the driving column.
The car took over!
There it was, winding and turning along every curve, perfectly centered in the lane. As much as I hated to admit it, the car drove better than I ever could. It does especially well at night, a valuable asset for senior citizens whose night vision is fading fast.
All that was required was for me to touch the steering wheel every two minutes to prove that I was not sleeping.
The cars do especially well in rush hour driving, as it is adept at stop and go traffic. You can just sit there and work on your laptop, read a book, or watch a movie on the built in 4G WIFI HD TV.
When we returned to the garage, the car really showed off. When we passed a parking space, another button was pushed, and we perfectly backed 90 degrees into a parking space, measuring and calculating all the way.
The range is 290 miles, which I can recharge at home at night from a standard 220-volt socket in my garage in seven hours. The chassis can rise as high as eight inches off the ground so it can function as a true SUV.
The “ludicrous mode,” a $10,000 option, takes you from 0 to 60 mph in 2.9. However, even a standard Tesla can accelerate so fast that it will make the average passenger carsick.
Here’s the buzzkill.
Tesla absolutely charges through the nose for extras.
The 22-inch wheels, the third row of seats to get you to seven passengers, the premium sound, the leather seats, and the self-driving software can easily run you $30,000-$40,000.
A $750 tow hitch will accommodate a ski rack on the back. There is a $1,000 delivery charge, even if you pick it up at the Fremont factory.
It’s easy to see how you can jump from an $84,990 base price to a total cost of $162,500, including taxes, for the ultra-luxury Performance model with every option the company offered.
It's my company that the car will be purchased under, thanks to the incredible tax breaks afforded to the wealthy by the Trump tax bill.
This allowed me to deduct the entire $162,500 cost of the vehicle upfront, plus the maintenance and insurance costs for the entire life of the car. However, I will have to maintain a mileage log as a hedge against any future IRS audits.
It looks like I’ll have to buy yet another Tesla this year as tax breaks for the rich are soon to become a thing of the past.
As for “drop dead’ curb appeal, nothing beats the Model X. Buy the stock on every 20% dip. The days of young ladies writing their phone numbers on post-it-notes under the windshield wipers so they can get a ride are not over.
Global Market Comments
August 12, 2020
Fiat Lux
Featured Trade:
(THE IDIOT’S GUIDE TO INVESTING),
(TSLA), (BYND), (JPM)
Global Market Comments
August 11, 2020
Fiat Lux
Featured Trade:
(THE SECRET FED PLAN TO BUY GOLD),
(GLD), (GDX), (PALL), (PPLT),
(TESTIMONIAL)