Diary Archives

All is Well at the Mouse House

I’ll never forget the first time I met Walt Disney. There he was at the entrance on opening day of the first Disneyland in Anaheim, CA in 1955 on Main street shaking the hand of every visitor as they came in. My dad sold the company truck trailers and managed to score free tickets for the family.

At 100 degrees on that eventful day, it was so hot that the asphalt streets melted. Most of the drinking fountains and bathrooms didn’t work. And ticket counterfeiters made sure that 100,000 people jammed the relatively small park. But we loved it anyway. The band leader handed me his baton and I was allowed to direct the musicians in the most ill-tempoed fashion possible.

After Walt took a vacation to my home away from home in Zermatt, Switzerland, he decided to build a roller coaster based on bobsleds running down the Matterhorn on a 1:100 scale. In those days, each ride required its own ticket, and the Matterhorn needed an “E-ticket”, the most expensive. It was the first tubular steel roller coaster ever built.

And investment in Walt Disney was dead money for years.

The main reason has been the drain on the company presented by the sports cable channel ESPN. Once the most valuable cable franchise, the company is now suffering from multiple fronts, including the acceleration of cord-cutting, the demise of traditional cable, the move to online streaming, and the demographic abandonment of traditional sports like football.

However, ESPN’s contribution to Walt Disney earnings is now so small that it is no longer a factor.

All that changed in March when Wall Street got the first whiff of Disney plans to enter the online streaming business. In quick order, it ended its contract with Netflix (NFLX) to stream its movies and announced plans to launch Disney Plus to compete directly with Netflix.

Since then, the shares have risen by an eye-popping 40% and every institutional investor out there is struggling to double up their position. Personally, I think the stock could hit $200 in the next couple of years. That’s why I am trying to run a recurring long in the stock going forward.

In the meantime, a lot has gone right with Walt Disney. The parks are going gangbusters. With two teenage girls in tow, I have hit three in the past two years (Anaheim, Orlando, and Paris, where they serve wine with their $20 cheeseburgers).

The movie franchise is going from strength to strength. Frozen 2 and Toy Story 4 were blockbusters. A new Star Wars films is due in December, Star Wars: Episode IX – The Rise of Skywalker. Its online strategy is one of the best in the business. And it’s just a matter of time before they hit us with another princess. How many is it now? Nine?

It is about to expand its presence in media networks with the acquisition of 21^st Century Fox (FOX) assets, already its largest source of earnings. It will join the ABC Television Group, the Disney Channel, and the aforementioned ESPN.

As for old Walt, he died of lung cancer in 1966, just when he was in the planning stages for the Orlando Disney World. All that chain-smoking finally got to him. Despite that grandfatherly appearance on the Wonderful World of Color weekly TV show, friends tell me he was a complete bastard to work for.

August 29, 2019

Diary, Newsletter, Summary

Global Market Comments
August 29, 2019
Fiat Lux

Featured Trade:

(HOW THE MARKETS WILL PLAY OUT FOR THE REST OF 2019),
(SPY), ($INDU), (USO), (TLT), (UUP), (COPX), (GLD),
(HOW THE MAD HEDGE MARKET TIMING ALGORITHM WORKS)

How the Markets Will Play Out for the Rest of 2019

Diary, Newsletter

We are currently caught between a rock and a hard place.

The whims of one man will dictate whether after a brutal summer, markets recover to new all-time highs, or plunge into the depths of despair in a bear market and recession.

My bet is that the S&P 500 (SPY) will trade between the 50-day moving average at $294 and the 200-day moving average at $278. Right now, we are dead in the middle of that range.

Then on September 18, the Federal Open Market Committee convenes to deliver a decision on interest rates. I believe that no matter what the decision is, whether they cut rates or leave them unchanged, you will see another sharp selloff in stocks, possibly as much as another 2,000 Dow points. That will bring us a December 2018 repeat.

So why does falling interest rates bring cratering stock prices? For a start, you can take your traditional playbook on how markets are supposed to work and throw it in the trash. Low rates USED to bring high stock prices, but no more.

What is driving markets now is not the absolute level of interest rates today, no matter how low they may be historically. It is how many interest rate cuts are left until we get to zero. So an August 1 25-basis point rate cut meant there are fewer rate cuts in the future so a heart-stopping 2,000-point plunge in the Dow average ensued.

The same twisted logic will apply on September 18, only 16 trading days away. By the way, I plan to be 100% in cash by September 18.

Long term, the outlook gets more complicated.

If the trade war ends in September, then the stock market could rocket up to new all-time highs, surpassing 3,200 by the end of the year, up 14.2% from present levels.

If the trade war drags on, a recession is a sure thing in 12-24 months. That means a bear market in stocks is a sure thing in 6-15 months. And that assumes we are not already in a bear market. After all, the major indexes have been unable to top new highs made in January 2018.

The next bear market will likely take the indexes ($INDU) down 40%. They are, after all, the most overvalued assets in the world.

Oil (USO) will plunge to $25 a barrel. Ten-year US Treasury bond yield (TLT) will collapse to 0%, as I have long been advertising. The US dollar (UUP) leaps, deepening the recession. Commodity prices collapse (COPX) and gold (GLD) soars. We might even get into a shooting war in the South China Sea, as there will be nothing for the Beijing leadership to lose.

Again, it all depends on the whim of one man, one who has never done business in China, and who is constantly surprised by Chinese reactions to his own moves. There is no Trump Hotel in Beijing, nor one planned.

Good luck with that.

Just thought you’d like to know.

Getting Ready for Hard Times

How the Mad Hedge Market Timing Algorithm Works

Diary, Newsletter, Research

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 of the time, the index fluctuates between 20-80, which means that there is absolutely nothing to do.

To identify a coming market reversal, it’s good to see the index chop around for at least a few weeks at an extreme reading. Look at the three-year chart of the Mad Hedge Market Timing Index.

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 two years ago 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 34.61%.

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. Imagine 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-drive. 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

August 28, 2019

Diary, Newsletter, Summary

Global Market Comments
August 28, 2019
Fiat Lux

Featured Trade:
(RIGHT SIZING YOUR TRADING)
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)

August 28, 2019 - Quote of the Day

Diary, Newsletter, Quote of the Day

"Savers are losers," said a radio ad for a mortgage broker in Reno, Nevada.

August 27, 2019

Diary, Newsletter, Summary

Global Market Comments
August 27, 2019
Fiat Lux

Featured Trade:

(FIVE STOCKS TO BUY AT THE BOTTOM),
(AAPL), (AMZN), (SQ), (ROKU), (MSFT),
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
(AAPL)

Five Stocks to Buy at the Market Bottom

Diary, Newsletter

With the Dow Average down 2,000 points in four weeks, you are being given a second bite of the apple before the yearend tech-led rally begins.

So, it is with great satisfaction that I am rewriting Arthur Henry’s Mad Hedge Technology Letter’s list of recommendations.

By the way, if you want subscribe to Arthur’s groundbreaking, cutting edge service, please click here at https://hi290.infusionsoft.com/app/orderForms/tl-sub

It’s the best read on technology investing in the entire market.

You don’t want to catch a falling knife, but at the same time, diligently prepare yourself to buy the best discounts of the year.

The China trade war has triggered a tsunami wave of selling, tearing apart the tech sector with a vicious profit-taking few trading days.

No doubt that asset managers are frantically locking in profits for the rest of the year and protecting ebullient performance from a first quarter to remember.

This week shouldn’t deter investors from picking up bargains that were non-existent since December because the bulk of the highest quality tech names churned higher with lurching momentum.

Here are the names of five of the best stocks to slip into your portfolio in no particular order once the madness subsides.

Apple

Steve Job’s creation is weathering the gale-fore storm quite well. Apple has been on a tear reconfirming its smooth pivot to a software services-tilted tech company. The timing is perfect as China has enhanced their smartphone technology by leaps and bounds.

Even though China cannot produce the top-notch quality phones that Apple can, they have caught up to the point where local Chinese are reasonably content with its functionality.

That hasn’t stopped Apple from vigorously growing revenue in greater China 20% YOY during a feverishly testy political climate that has their supply chain in Beijing’s crosshairs.

The pivot is picking up steam and Apple’s revenue will morph into a software company with software and services eventually contributing 25% to total revenue.

They aren’t just an iPhone company anymore. Apple has led the charge with stock buybacks and will gobble up a total of $150 billion in shares by the end of 2019. Get into this stock while you can as entry points are few and far between.

Amazon (AMZN)

This is the best company in America hands down and commands 5% of total American retail sales or 49% of American e-commerce sales.

It became the second company to eclipse a market capitalization of over $1 trillion. Its Amazon Web Services (AWS) cloud business pioneered the cloud industry and had an almost 10-year head start to craft it into its cash cow. Amazon has branched off into many other businesses since then oozing innovation and is a one-stop wrecking ball.

The newest direction is the smart home where they seek to place every single smart product around the Amazon Echo, the smart speaker sitting nicely inside your house. A smart doorbell was the first step along with recently investing in a prefab house start-up aimed at building smart homes.

Microsoft (MSFT)

The optics in today look utterly different from when Bill Gates was roaming around the corridors in the Redmond, Washington headquarter, and that is a good thing in 2019.

Current CEO Satya Nadella has turned this former legacy company into the 2^nd largest cloud competitor to Amazon, and then some.

Microsoft Azure is rapidly catching up to Amazon in the cloud space because of the Amazon-effect working in reverse. Companies don’t want to store proprietary data to Amazon’s server farm when they could possible destroy them down the road. Microsoft is mainly a software company and gained the trust of many big companies especially retailers.

Microsoft is also on the vanguard of the gaming industry taking advantage of the young generation’s fear of outside activity. Xbox-related revenue is up 36% YOY, and its gaming division is a $10.3 billion per year business.

Microsoft Azure grew 87% YOY last quarter. The previous quarter saw Azure rocket by 98%. Shares are cheaper than Amazon and almost as potent.

Square (SQ)

CEO Jack Dorsey is doing everything right at this fin-tech company blazing a trail right to the doorsteps of the traditional banks.

The various businesses they have on offer makes me think of Amazon’s portfolio because of the supreme diversity. The Cash App is a peer-to-peer money transfer program that cohabits with a bitcoin-investing function on the same smartphone app.

Square has targeted the smaller businesses first and is a godsend for these entrepreneurs who lack immense capital to create a financial and payment infrastructure. Not only do they provide the physical payment systems for restaurant chains, they also offer payroll services and other small loans.

The pipeline of innovation is strong with upper management mentioning they are considering stock trading products and other bank-like products. Wall Street bigwigs must be shaking in their boots.

The recently departed CFO Sarah Friar triggered a 10% collapse in share price on top of the market meltdown. The weakness will certainly be temporary, especially if they keep doubling their revenue every two years like they have been doing.

Roku (ROKU)

Benefitting from the broad-based migration from cable TV to online streaming and cord-cutting, Roku is perfectly placed to delectably harvest the spoils.

This uber-growth company offers an over-the-top (OTT) streaming platform along with the necessary hardware and picks up revenue by selling digital ads.

Founder and CEO Anthony Woods owns 21 million shares of his brainchild and insistently notes that he has no interest in selling his company to a Netflix or Apple.

Roku’s active accounts mushroomed 46% to 22 million in the second quarter. Viewers are reaffirming the obsession with on-demand online streaming content with hours streamed on the platform increasing 58% to 5.5 billion.

The Roku platform can be bought for just $30 and is easy to set up. Roku enjoys the lead in the over-the-top (OTT) streaming device industry controlling 37% of the market share leading Amazon’s Fire Stick at 28%.

The runway is long as (OTT) boxes nestle cozily in only 40% of American homes with broadband, up from a paltry 6% in 2010.

They are consistently absent from the backbiting and jawboning the FANGs consistently find themselves in partly because they do not create original content and they are not an offshoot from a larger parent tech firm.

This growth stock experiences the same type of volatility as Square.

Be patient and wait for 5-7% drops to pick up some shares.

You Have to Know Which Flowers to Pick

August 26, 2019

Diary, Newsletter, Summary

Global Market Comments
August 26, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TWEET THAT SANK A THOUSAND SHIPS),

(SPY), (TLT), (GOOGL), (FB), (DIS), MSFT), (WMT), (IWM)

The Market Outlook for the Week Ahead, or The Tweet that Sank a Thousand Ships

Diary, Newsletter

I always wondered who the enemy was. Now, I know.

Not only is Fed governor Jerome Powell responsible for the upcoming recession, I also heard he fixed the 1918 World Series where the Chicago White Sox deliberately lost.

And come to think of it, Jack the Ripper and D.B Cooper were never caught either. If Tweets are to be believed, the Fed now needs to seek guidance from the president before any subsequent policy decision.

It all reminds me of the last days of the Third Reich when Adolph Hitler was ordering into action divisions that no longer existed.

And I love all of it.

An 850 point top to bottom swan dive in the Dow Average vaporized all my short positions, which I had put on days ago for just this eventuality. It also allowed me to get back into Microsoft (MSFT) down $5, which I have been struggling to get back into for months.

My only miss of the month has been in Gold (GLD), whose move continues to be so parabolic that I haven’t been able to get you, or me, into it.

No doubt the administration will respond with another charm offensive, as this did this week, and ignite another ferocious short-covering rally.

The harsh truth is that confidence is eroding by the day. And the escalating talk of a recession can, in itself, cause a recession. So much depends on belief when share price earnings multiples are trading at a lofty 17X. But it is all looking increasingly like a little boy trying to head off a flood by holding his finger in a hole in a dike.

There’s no more waiting to see if the trade war escalates again on September 1. We already have the answer. It now appears we have instant escalation all the time with every Tweet. It’s not exactly what I want to bet my retirement fund on.

I have been getting questions as to why I have been adding long positions with the outlook so grim. For a start, these positions are all triply hedged.

I’m long a call against a short call with an identical maturity. I have low beta long positions hedged against high beta short positions. And finally, I don’t think we can break down below the 200-day moving average in the major indexes until the September 20 Fed meeting when they FAIL to cut interest rates again because the data isn’t there yet.

The net, net, net of all of this is that my portfolio can take a 1,000-point hit in the Dow Average and its no big deal.

And don’t forget. Ultra-low interest rates will put a higher floor under the market than we have seen in past selloffs.

I pray the insanity keeps up (did I hear a reference to the Messiah the other day?) because it is allowing me to ship out Trade Alerts as fast as I can write them.

Stocks rose briefly on German stimulus prospects. It's an idea imported from America, heavy borrowing and massive deficit spending to float the economy. It’s just what the world needs, more freshly printed money, like the last $17 trillion worked so well. It’s all confirmation that Europe is already in recession.

The US now has the world’s highest interest rates, at 3.60% for 30-year fixed-rate loans. Only the US offers loans of this duration, thanks to heavy government subsidies through Fannie Mae and Freddie Mac.

Floating rate loans in France are 1.39%, in Germany are 1.0%, Japan at 0.65%. In Denmark, banks will lend at a negative -0.50%. Yes, they will pay you to live in your house. But when you’re borrowing at -0.90% you can do that. Only China has higher interest rates, with an overnight at 4.60%. The irony runs deep.

Unsurprisingly, the Congressional Budget Office cut 0.3% off of its 2020 growth forecast and the US budget deficit will rise to a ruinous $1 trillion two years sooner than expected. Fading business investment and weakening consumer spending will be the problems. The trade war is also a drag. It’s funny how no one wants to spend in front of a recession.

“Mid Cycle Adjustment” is how the Fed described the last interest rates cut in minutes released on Wednesday. It makes further cuts less likely. So does a stock market trading 5% below all-time highs. They also mention the cut as an “insurance policy” not actually justified by the current economic data. Three weeks ago, the fed cut rates for the first time in a decade.

The Mad Hedge Trader Alert Service is posting its best month in two years. Some 22 of the last 23 round trips have been profitable, generating one of the biggest performance jumps in our 12-year history.

My Global Trading Dispatch has hit a new all-time high of 334.61% and my year-to-date shot up to +34.47%. My ten-year average annualized profit bobbed up to +34.62%.

I have coined a blockbuster 16.14% so far in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.

As long as the Volatility Index (VIX) stays above $20, deep-in-the-money options spreads are offering free money. I am now 80% invested, 60% long big tech and 20% short, with 20% in cash. It rarely gets this easy.

The coming week will be a snore on the data front. Believe it or not, it could be quiet, as we grind through the last week of the summer.

On Monday, August 26 at 8:30 AM, US Durable Goods for July are out.

On Tuesday, August 27 at 9:00 AM, we get a new S&P Case Shiller National Home Price Index for June

On Wednesday, August 28, at 10:30, we learn the EIA Crude Oil Stocks for the previous week.

On Thursday, August 29 at 8:30 AM, the Weekly Jobless Claims are printed. July Pending Home Sales are published at 10:00 AM.

On Friday, August 30 at 10:00 AM, the University of Michigan Consumer Sentiment is printed.

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

As for me, it will be a busy weekend with volunteer work at the Alameda Food Bank due and CPR training at the local fire department. I feel like I am getting my Eagle Scout rank all over again.

Good luck and good trading.

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