Global Market Comments
October 18, 2019
Fiat Lux
Featured Trade:
(OCTOBER 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (C), (GM), (IWM), ($RUT), (FB),
(INTC), (AA), (BBY), (M), (RTN), (FCX), GLD)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 16 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: How do you think the S&P 500 (SPX) will behave with the China trade negotiations going on?
A: Nobody really knows; no one has any advantage here and logic or rationality doesn’t seem to apply anymore. It suffices to say it will continue to be up and down, depending on the trade headline of the day. It’s what I call a “close your eyes and trade” market. If it’s down, buy it; if it’s, upsell it.
Q: How long can Trump keep kicking the can down the road?
A: Indefinitely, unless he wants to fold completely. It looks like he was bested in the latest round of negotiations because the Chinese agreed to buy $50 billion worth of food they were going to buy anyway in exchange for a tariff freeze. Of course, you really don’t get a trade deal unless you get a tariff roll back to where they were two years ago.
Q: Did I miss the update on the Citigroup (C) trade?
A: Yes, we came out of Citigroup a week ago for a small profit or a break-even. You should always check our website where we post our trading position sheet every day as a backstop to any trade alerts you’re getting by email. Occasionally emails just go completely missing, swallowed up by the ether. To find it go to www.madhedgefundtrader.com , log in, go to My Account, Global Trading Dispatch, then Current Positions. You can also find my newly updated long-term portfolio here.
Q: How much pain will General Motors (GM) incur from this standoff, and will they ever reach a compromise?
A: Yes, the union somewhat blew it in striking GM when they had incredibly high inventories which the company is desperate to get rid of ahead of a recession. If you wonder where all those great car deals are coming from, that's the reason. All of the car companies want to go into a recession with as little inventory as possible. It's not just GM, it’s everybody with the same problem.
Q: When does the New Daily Position Sheet get posted?
A: About every hour after the close each day. We need time to process our trades, update all the position sheets before getting it posted.
Q: What do you think about Bitcoin?
A: We hate it and don’t want to touch it. It’s unanalyzable, and only the insiders are making money.
Q: Are you predicting a repeat of Fall 2018 going into the end of this year to close at the lows?
A: No, I’m not. A year ago, we were looking at four interest rate increases to come. This year we’re looking at 1 or 2 more interest rate cuts. It’s nowhere near the situation we saw a year ago. The most we’re going to get is a 7% selloff rather than a 20% selloff and if anything, stocks will rise into the yearend then fall.
Q: Why are we trading the Russell 200 (IWM) instead of the ($RUT) Small Cap Index? We pay less commissions to brokers.
A: There's more liquidity in the (IWM). You have to remember that the combined buying power of the trade alert service is about $1 billion. And that’s harder to do with smaller illiquid ETFs like the ($RUT), especially the options.
Q: If this is a “Don’t fight the Fed” rally for investors, where else is there to go but stocks?
A: Nowhere. But it’s happening in the face of an oncoming recession, so it’s not exactly a great investment opportunity, just a trading one. 2009 was a great time not to fight the Fed.
Q: Do you want to buy Facebook (FB) even though there are so many threats of government scrutiny and antitrust breakups?
A: The anti-trust breakups are never going to happen; the government can't even define what Facebook does. There may be more requirements on disclosures, which means nothing because nobody really cares about disclosures—they just click the box and agree to anything. I was actually looking at this as a buy when we had the big selloff at the end of September and instead, I bought four other Tech stocks and (FB) had moved too far when we got around to it. I think there’s upside potential for Facebook, especially if we can move out of this current range.
Q: Would you sell short European banks? It seems like they’re cutting jobs right and left.
A: I always get this question after big market meltdowns. European banks have been underpricing risks for decades and now the chickens are coming home to roost. Some of these things are down 80-90% so it’s too late to sell short. The next financial crisis is going to be in Europe, not here.
Q: Is it time to short Best Buy (BBY) due to the China deal?
A: No, like Macys (M), Best Buy is heavily dependent on imports from China, and the stock has gotten so low it’s hard to short. And the problem for the whole market in general is all the best sectors to short are already destroyed, down 80-90%. There really is nothing left to short, now that all the bad sectors have been going down for nearly two years. There has been a massive bear market in large chunks of the market which no one has really noticed. So, that might be another reason the market is going up—that we’ve run out of things to short.
Q: Do you like Intel (INTC)?
A: Yes, for the long term. Short term it still could face some headwinds from the China negotiations, where they have a huge business.
Q: Would you buy American Airlines (AA) on the return of Boeing 737 MAX to the fleet?
A: Absolutely, yes. The big American buyers of those planes are really suffering from a shortage of planes. A return of the 737 MAX to the assembly line is great news for the entire industry.
Q: Do you like Raytheon (RTN)?
A: No, Trump has been the defense industry’s best friend. If he exits in the picture, defense will get slaughtered—it will be the first on the chopping block under a future democratic administration. And, if you’re doing nothing but retreating from your allies, you don't need weapons anyway.
Q: Will Freeport McMoRan (FCX) benefit from a trade war resolution?
A: Yes, the fact that it isn't moving now is an indication that a trade war resolution has not been reached. (FCX) has huge exposure to traditional metal bashing industries like they still have in China.
Q: Would you go long or short gold (GLD) here?
A: No, I'm waiting for a bigger dip. If you can get in close to the 200-day moving average at $129.50, that would be the sweet spot. Longer term I still like gold and it is a great recession hedge.
Good Luck and Good Trading!
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Yes, I Still Like Gold
Global Market Comments
October 17, 2019
Fiat Lux
Featured Trade:
(UPDATING THE MAD HEDGE LONG TERM MODEL PORTFOLIO),
(USO), (XLV), (CI), (CELG), (BIIB), (AMGN), (CRSP), (IBM), (PYPL), (SQ), (JPM), (BAC), (EEM), (DXJ), (FCX), (GLD)
I rarely make changes to the Mad Hedge Long Term Model Investment Portfolio.
This is my shot at recommending portfolios of assets and individual stocks that investors never have to touch. You just put your money in, and don’t cash in until you hit your retirement age of 65 or 70.
After all, changes in the drivers of our $22 trillion economy rarely occur. Trends usually last for decades.
However, this year is completely different. The rate of change in the drivers of our economy is changing so fast that the whole idea of “long term” is becoming a distant relic. Not to update my portfolio would have been irresponsible.
So please find the new Mad Hedge Long Term Model Portfolio by clicking here. You must be logged into your account to gain access. There you can download an Excel spreadsheet containing the entire portfolio.
Here are my comments on the changes.
I have taken my energy weighting (USO) from 10% to zero. With falling demand and rising supply from fracking and alternatives, it is hard to see that any investment in the area will do well. When Saudi Arabia wants to get out of the oil business, as it was with its ARAMCO IPO, so do you. Eventually energy prices will approach near zero.
I am increasing my allocation to biotech healthcare (XLV) from 20% to 25%, which I believe will become one of the two dominant sectors of the 2020s. Scientific advancement is accelerating on all front, creating enormous profit opportunities. This is why I launched the Mad Hedge Biotech and Healthcare letter.
I am also increasing my weighting in technology from 25% to 30% as their share of the global economy expands significantly. I am changing the mix here, taking our holding in legacy IBM (IBM) and adding PayPal (PYPL) and Square (SQ), betting on the future of fintech.
I am maintaining my share of banks at 10%, betting on an eventual resurgence in interest rates and the growth of the US economy. JP Morgan Chase (JPM) and Bank of America (BAC) are looking good and are selling below book value.
I am keeping my international exposure at a low 10%. But I am doing a substitution, dumping Europe and adding the iShares MSCI Emerging Markets ETF. (EEM) has been down for so long that it has essentially already discounted the next recession.
As for bonds, I am cutting my allocation from 10% to zero. With a ten-year US Treasury bond yield at 1.72%, the risk/reward for this entire asset class on a long-term basis is terrible. Adding $1.5 trillion in new debt every year will come back to haunt this market.
I am cutting my short position into the foreign exchange market from 20% and flipping to a long of 10%. As long as the US has the world’s highest major currency interest rates, the downside will be limited. However, the end of the Brexit saga will also be hugely Euro positive.
Regarding commodities, I am keeping my 5% holding in Freeport McMoRan (FCX), which has already fully discounted the next recession. You need to have some cash in areas that will explode coming out the other side of the next short recession, and this is one of them.
I am also reentering the gold market on the long side with a 10% weighting. Gold (GLD) is a hedge against the next recession and is also a play on China moving a major portion of its reserves out of US Treasuries and into precious metals.
Staying out of agriculture completely has been one of the smartest things I have done in recent years. I have even stopped covering it in my newsletters. It has been a major trade war victim as I expected. But it is also suffering from hyper-accelerating technology, which is delivering ever large amounts of crops at very lower prices. Here zero stays zero.
So, that’s it. Make your reallocations and go back to sleep. I’ll wake you up at the end of 2020.
Energy - 0%
Healthcare - 25%
Technology - 30%
Banks - 10%
International - 10%
Bonds - 0%
Foreign Exchange - 10%
Commodities - 5%
Precious Metals - 10%
Agriculture - 0%
Total - 100%
Global Market Comments
October 16, 2019
Fiat Lux
Featured Trade:
(A NOTE ON ASSIGNED OPTIONS OR OPTIONS CALLED AWAY),
(MSFT)
(DECODING THE GREENBACK),
With stock market volatility greatly elevated and trading volumes through the roof, there is a heightened probability that your short options position gets called away.
If it does there, is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit on your position.
Most of you have short options position, although you may not realize it. For when you buy an in-the-money call option spread, it contains two elements: a long call and a short call. The short call can get assigned or called away at any time.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it.
The 5:30 AM phone call was as shrill as it was urgent.
A reader had employed one of my favorite strategies, buying the Microsoft (MSFT) November 2018 $90-$95 in-the-money vertical call spread at $4.50.
He had just received an email from his broker informing him that his short position in the (MSFT) November $95 calls was assigned and exercised against him.
He asked me what to do.
I said, “Nothing.”
For what the broker had in effect done is allow him to get out of his call spread position at the maximum profit point 20 days before the November 16 expiration date.
All he had to do was call his broker and instruct him to exercise his long position in his November $90 calls to close out his short position in the $95 calls.
Calls are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
In other words, he bought (MSFT) at $90 and sold it at $95, paid $4.50 cents for the right to do so, his profit is 50 cents, or ($0.50 X 100 shares X 22 contracts) = $1,100. Not bad for a nine-day limited risk play.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations.
A call owner may need to sell a long stock position right at the close and exercising his long November $95 calls is the only way to execute it.
Ordinary shares may not be available in the market, or maybe a limit order didn’t get done by the stock market close.
There are thousands of algorithms out there, which may arrive at some twisted logic that the puts need to be exercised.
Many require rebalancing of hedges at the close every day, which can be achieved through option exercises.
And yes, calls even get exercised by accident. There are still a few humans left in this market to blow it.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.
This generates tons of commissions for the broker, but is a terrible thing for the trader to do from a risk point of view, likely generating a loss by the time everything is closed and netted out.
Avarice could have been an explanation here, but I think stupidity, poor training, and low wages are much more likely.
Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers, but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long, and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Global Market Comments
October 15, 2019
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, OCTOBER 18 OPTIONS EXPIRATION),
(ONLY TEN MORE DAYS UNTIL THE MAD HEDGE LAKE TAHOE, NEVADA CONFERENCE, OCTOBER 25-26, 2019)
Followers of the Global Trading Dispatch have the good fortune to own THREE deep in-the-money options position that expires on Friday, October 18, and I just want to explain to the newbies how to best maximize their profits.
These involves the:
the Russell 2000 (IWM) October 2019 $137-$142 in-the-money vertical Bull call spread at $5.00
the Russell 2000 (IWM) October 2019 $153-$156 in-the-money vertical BEAR PUT spread at $3.00
the United States Oil Fund (USO) October 2019 $9.50-$10.00 in-the-money vertical Bull call spread at $0.50
The total profit on all three positions will increase the value of our $100,000 model trading portfolio by an impressive 4.55%, or $4,550. These positions only became possible due to the extreme volatility (VIX) seen in the market in October, thanks to trade war fears, euphoria, then feat again.
Given that all of these positions are 5% in-the-money or more, we have enough of a cushion to run these into the Friday option expiration.
Provided that we don’t have a monster “RISK OFF” move in the market this week (more failure of the China trade talks? War with Iran? A massacre in Hong Kong?) which causes stocks to collapse and volatility to rocket, these positions should expire at its maximum profit points. So far, so good.
I’ll do the math for you on the first Russell 2000 position. Your profit can be calculated as follows:
Profit: $5.00 - $4.45 = $0.55
(22 contracts X 100 shares per option X $0.55 net profit)
= $1,210 or 12.46% in 13 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning October 21 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally mistakes do occur. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, Sell high” thing going.
I’m looking to cherry-pick my new positions going into the next quarter-end.
Take your winnings and go out and buy yourself a well-earned dinner. Or use it to put a down payment on a long cruise.
Well done, and on to the next trade.
Here’s to Another Trade Well Done!
Global Market Comments
October 14, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or UNICORNS AND CANDY CANE)
(AAPL), (FDX), (SPY), (IWM), (USO), (WMT), (AAPL), (GOOGL),
(X), (JPM), (WFC), (C), (BAC)
I have to tell you that flip-flopping from extreme optimism to extreme pessimism and back is a trader’s dream come true. Volatility is our bread and butter.
Long term followers know that when volatility is low, I struggle to make 1% or 2% a month. When it is high, I make 10% to 20%, as I have for two of the last three months.
That is what the month of October has delivered so far.
To see how well this works, the S&P 500 is dead unchanged so far this month, while the Mad Hedge Fund Trader alert service is up a gangbuster 10% and we are now 70% in cash.
While the market is unchanged in two years, risk has been continuously rising. That's because year on year earnings growth has fallen from 26% to zero. That means with an unchanged index, stocks are 26% more expensive.
Entire chunks of the market have been in a bear market since 2017, including industrials, autos, energy, and retailers. US Steel (X), which the president’s tariffs were supposed to rescue, has crashed 80% since the beginning of 2018.
The great irony here is that while the Dow Average is just short of an all-time high, all of the good short positions have already been exhausted. In short, there is nothing to do.
So, the wise thing to do here is to use the 1,200-point rally since Thursday to raise cash you can put to work during the next round of disappointment, which always comes. If we do forge to new highs, they will be incremental ones at best. That’s when you let your passive indexing friends pick up the next bar tab, who unintentionally caught the move.
In the meantime, we will be bracing ourselves for the big bank earnings due out this week which are supposed to be dismal at best. JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) are out on Tuesday and Bank of America (BAC) publishes on Wednesday.
That’s when we find out how much of this move has been about unicorns and candy canes, and how much is real.
Trump demoed his Own trade talks, creating a technology blacklist and banning US pension investment into the Middle Kingdom. He also hints he’ll take a small deal rather than a big one. Great for American farmers but leaves intellectual property and forced joint ventures on the table, throwing the California economy under the bus. I knew it would end this way. It’s very market negative. Without a trade deal, there is no way to avoid a US recession in 2020.
The Inverted Yield Curve is flashing “recession.” The three-month Treasury yield has been above the 10-year bond yield since May, and that always says a downturn is coming. The time to batten down the hatches is now.
US Producer Prices plunged in September, down 0.3%, the worst since January. It’s another recession indicator but also pushes the Fed to lower rates further.
Inflation was Zero in September, with the Consumer Price Index up 1.8% YOY. Slowing economy due to the trade war gets the blame, but I think that accelerating technology gets the bigger blame.
New Job Openings hit an 18-month low, down 123,000 to 7.05 million in August, as employers pull back in anticipation of the coming recession. Trade war gets the blame. The smart people don’t hire ahead of a recession.
FedEx (FDX) is dead money, says a Bernstein analyst, citing failing domestic and international sales. No pulling any punches, he said “The bull thesis has been shredded.” Not what you want to hear from this classic recession leading indicator. Nobody ships anything during a slowdown.
Loss of SALT Deductions cost you $1 trillion, or about 4% per home, according to an analysis by Standard & Poor’s. Quite simply, losing the ability to deduct state and local tax deductions creates a higher after-tax cost of carry that reduces your asset value. If you bought a home in 2017 you lost half of your equity almost immediately. The east and west coast were especially hard hit.
Fed to expand balance sheet to deal with the short-term repo funding crisis, which periodically has been driving overnight interest rates up to an incredible 5%. Massive government borrowing is starting to break the existing financial system. What they’re really doing is trying to head off to the next recession.
The Fed September minutes came out, and traders seem to be expecting more rate cuts than the Fed is. Trade is still the overriding concern. The next meeting is October 29-30. It could all end in tears.
Apple (AAPL) raised iPhone 11 Production by 10%, to 8 million more units, according Asian parts suppliers. Great news for its $1,089 top priced product ahead of the Christmas rush. It turns out that an Apple app is helping Hong Kong protesters manage demonstrations. I’m keeping my long, letting the shares run to a new all-time high. Buy (AAPL) on the dips.
The Mad Hedge Trader Alert Service has blasted through to yet another new all-time high. My Global Trading Dispatch reached new apex of +347.48% and my year-to-date accelerated to +47.24%. The tricky and volatile month of October started out with a roar +9.82%. My ten-year average annualized profit bobbed up to +35.64%.
Some 26 out of the last 27 trade alerts have made money, a success rate of 94%! Underpromise and overdeliver, that's the business I have been in all my life. It works. This is rapidly turning into the best year of the decade for me. It is all the result of me writing three newsletters a day.
I used the recession fear-induced selloff after October 1 to pile on a large aggressive short-dated portfolio which I will run into expiration. I am 60% long with the (SPY), (IWM), (USO), (WMT), (AAPL), and (GOOGL). I am 10% short with one position in the (IWM) giving me a net risk position of 50% long. All of them are working.
The coming week is pretty non-eventful of the data front. Maybe the stock market will be non-eventful as well.
On Monday, October 14, nothing of note is published.
On Tuesday, October 15 at 8:30 AM, the New York Empire State Manufacturing Index is released. JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) kick off the Q3 earnings season with reports.
On Wednesday, October 16, at 8:30 AM, we learn the September Retail Sales. Bank of America (BAC) and CSX Corp. (CSX) report.
On Thursday, October 17 at 8:30 AM, the Housing Starts for September are out. Morgan Stanley (MS) reports.
On Friday, October 18 at 8:30 AM, the Baker Hughes Rig Count is released at 2:00 PM. Schlumberger (SLB), American Express (AXP), and Coca-Cola (KO) report.
As for me, I’ll be going to Costco to restock the fridge after last week’s two-day voluntary power outage by PG&E. Expecting Armageddon, I finished off all the Jack Daniels and chocolate in the house. We managed to eat all of our frozen burritos, pork chops, steaks, and ice cream in a mere 48 hours. But that’s what happens when you have two teenagers.
Hopefully, it will rain soon for the first time in six months bringing these outages to an end.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
