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)
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
Time to Bring in the Heavy Guns
"They say when you get old, you become wise. The truth is that when you get old, all the people who know you are stupid are dead," said the late comedian Joan Rivers.
Global Market Comments
August 23, 2019
Fiat Lux
Featured Trade:
(AUGUST 21 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXB), (NVDA), (MU), (LRCX), (AMD),
(WFC), (JPM), (BIDU), (GE), (TLT), (BA)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader August 21 Global Strategy Webinar broadcast with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Hey Bill, how often have you heard the word “recession” in the last 24 hours?
A: Seems like every time I turn around. But then we’re also getting a pop in the market; we thought it bottomed a few days ago. The question was: how far were we going to get to bounce? This is going to be very telling as to what happens on this next rally.
Q: Can interest rates go lower?
A: Yes, they can go a lot lower. The general consensus in the US is that we bottom them out somewhere between zero and 1.0%. We’re already way below that in Europe, so we will see lower here in the US. It’s all happening because QE (quantitative easing) is ramping up on a global basis. Europe is about to announce a major QE program in the beginning of September, and the US ended their quantitative tightening way back in March. So, the global flooding of money from central banks, now at $17 trillion, is about to increase even more. That’s what’s causing these huge dislocations in the bond market.
Q: If we’re having trouble getting into trades, should we chase or not?
A: Never chase. Leave your limit in there at a price you’re happy with. Often times, you’ll get done at the end of the day when the high frequency traders cash out all their positions. They will artificially push up our trade alert prices during the day and take them right back down at the end of the day because they have to go 100% cash by the close of each day—they never carry overnight positions. That’s becoming a common way that people get filled on our Trade Alerts.
Q: Will Boris Johnson get kicked out before the hard Brexit occurs?
A: Probably, yes. I’m hoping for it, anyway. What may happen is Parliament forcing a vote on any hard Brexit. If that happens, it will lose, the prime minister will have to resign, and they’ll get a new prime minister. Labor is now campaigning on putting Brexit up to a vote one more time, and just demographic change alone over the last four years means that Brexit will lose in a landslide. That would pull England out of the last 4 years of indecision, torture, and economic funk. If that happens, expect British stock markets to soar and the pound (FXB) to go up, from $1.17 all the way back up to $1.65, where it was before the whole Brexit disaster took place.
Q: Is the US central bank turning into Japan?
A: Yes. If we go to zero rates and zero growth and recession happens, there’s no way to get out of it; and that is the exact situation Japan has been in. For 30 years they have had zero rates, and it’s done absolutely nothing to stimulate their economy or corporate profits. The question then—and one someone might ask Washington—is: why pursue a policy that’s already been proven unsuccessful in every country it’s been tried in?
Q: Will US household debt become a problem if there is a sharp recession?
A: Yes, that’s always a problem in recessions. It’s a major reason why financials have been in a freefall because default rates are about to rise substantially.
Q: Given the big spike in earnings in NVIDIA (NVDA), what now for the stock?
A: Wait for a 10% dip and buy it. This stock has triple in it over the next 3 years. You want to get into all the chip stocks like this, such as Micron Technology (MU), Lam Research (LRCX), and Advanced Micro Devices (AMD).
Q: Baidu (BIDU) has risen in earnings, with management saying the worst is over. Is this reality or is this a red herring?
A: I vote for A red herring. There’s no way the worst is over, unless the management of Baidu knows something we don’t about Chinese intentions.
Q: When will Wells Fargo (WFC) be out of the woods?
A: I hate the sector so I’m really not desperate to reach for marginal financials that I have to get into. If I do want to get into financials, it will be in JP Morgan (JPM), one of my favorites. The whole sector is getting slaughtered by low interest rates.
Q: Any idea when the trade war will end?
A: Yes, after the next presidential election. It’s not as if the Chinese are negotiating in bad faith here, they just have no idea how to deal with a United States that changes its position every day. It’s like negotiating with a piece of Jell-O, you can’t nail it down. At this point the Chinese have thrown their hands up and think they can get a better deal out of the next president.
Q: Would you short General Electric (GE) or wait for another bump up to short it?
A: I would wait for a bump. Obviously—with the latest accounting scandal, which compares (GE) with Enron and WorldCom—I don’t want to get involved with the stock. And we could get new lows once the facts of the case come out. There are too many better fish to fry, like in technology, so I would stay away from (GE).
Q: How do you put stop losses on your trade?
A: It’s a confluence of fundamentals and technicals. Obviously, we’re looking at key support levels on the charts; if those fail then we stop out of there. That doesn’t happen very often, maybe on 10% of our trades (and more recently even less than that). Our latest stop loss was on the (TLT) short. That was our biggest loss of the year but thank goodness we got out of that, because after we stopped out at $138 it went all the way to $146, so that’s why you do stop losses.
Q: How about putting on a (TLT) short now?
A: No, I think we’re going to new highs on (TLT) and new lows on interest rates. We’re just going through a temporary digestion period now. We’ll challenge the lows in rates and highs in prices once again, and you don’t want to be short when that happens. The liquidity is getting so bad in the bond market, you’re getting these gigantic gaps as a global buy panic in bonds continues.
Q: Do you have thoughts on what Fed Governor Powell may say in Jackson Hole, and any market reaction?
A: I have no idea what he might say, but he seems to be trying to walk a tightrope between presidential attacks and economic reality. With the stock market 3% short of an all-time high, I’m not sure how much of a hurry he will be in to lower interest rates. The Fed is usually behind the curve, lowering rates in response to a weak economy, and I’m not sure the actual data is weak enough yet for them to lower. The Fed never anticipates potential weakness (at least until the last raise) so we shall see. But we may have little volatility for the rest of the week and then a big move on Friday, depending on what he says.
Q: What is your take on the short term 6-18 months in residential real estate? Are Chinese tariffs and recession fears already priced in or will prices continue to drop?
A: Prices will continue to drop but not to the extent that we saw in ‘08 and ‘09 when prices dropped by 50, 60, 70% in the worst markets like Florida, Las Vegas, and Arizona. The reason for that is you have a chronic structural shortage in housing. All the home builders that went bankrupt in the last crash has resulted in a shortage, and you also have an immense generation of Millennials trying to buy homes now who’ve been shut out by higher interest rates and who may be coming back in. So, I’m not expecting anything remotely resembling a crash in real estate, just a slowdown. And new homes are actually not falling at all. That’s because the builders are deliberately restraining supply there.
Q: What is a good LEAP to put on now?
A: There aren’t any. We’re somewhat in the middle of a wider, longer-term range, and I want to wait until we get to the bottom of that; when people are jumping out of windows—that’s when you want to start putting on your long term LEAPS (long term equity anticipation securities), and when you get the biggest returns. We may get a shot at that sometime in the next month or two before a year in rally begins. If you held a gun to my head and told me I had to buy a leap, it would probably be in Boeing (BA), which is down 35% from its high.
Global Market Comments
August 22, 2019
Fiat Lux
Featured Trade:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
Global Market Comments
August 21, 2019
Fiat Lux
Featured Trade:
(WHY YOU MIISED THE TECHNOLOGY BOOM AND WHAT TO DO ABOUT IT NOW),
(AAPL), (AMZN), (MSFT), (NVDA), (TSLA), (WFC), (FB)
Global Market Comments
August 20, 2019
Fiat Lux
Featured Trade:
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA CONFERENCE ON OCTOBER 25-26, 2019)
(THE BEST COLLEGE GRADUATION GIFT EVER),
(TESTIMONIAL)
Global Market Comments
August 19, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHAT A ROLLER COASTER RIDE!),
(SPY), (TLT), (VIX), (VXX), (M),
(WMT), (FB), (AMZN), (GOOGL), (IWM)
I like roller coasters. The Giant Dipper at the Santa Cruz Boardwalk is tough to beat, the last operating wooden coaster in the United States. And I’ll always have fond memories of the Cyclone at Coney Island in New York.
I especially liked this week in the financial markets, which provided more profitable trading opportunities, both on the long and the short side, that any other week of the past decade.
Perhaps the highpoint was on Thursday when I was staring at my screens watching ten year US Treasury bond yields (TLT) bottom at a near historic 1.46%, and my own Mad Hedge Market Timing Index plunging to a lowly 19.
Impulsively, I covered the last of my short positions and started piling on longs in the FANGs. The next morning, the Dow Average opened up 300 points. But then, it’s easy to be bold and decisive when you’re up 30% on the year, compared to only 11% for the Dow Average.
And guess what? The best may be yet to come!
As long as the Volatility Index stays over $20, you will be able to print all the money you want with options spreads. I’m talking 10%-15% A MONTH!
All eyes are now on September 1 when the Chinese announce their own retaliation to our tariff increase. Will they target ag again? Or does the bond market (TLT) take the hit this time (the Chinese government owns $900 billion worth of our debt).
And now for the question that everyone is asking: How far will the stock market fall in this cycle. We have already plunged 10% from the highs on an intraday basis. Could we drop another 10% in this period of high anxiety? Certainly. However, I tend to think it will be less than that.
The initial market pop on Monday came when the new Chinese tariffs were delayed, from September 1 to December 15, on some items. Tell me who saw this one coming. The potential costs of the tariffs are hitting the US more than China. It was worth a 550-point rally in the Dow Average. In 50 years, I’ve never seen such blatant market manipulation.
Gold hit a new six-year high, with the collapse of the Argentine Peso a new factor. A poor election result drove the beleaguered currency down 15% in one day, a massive move.
Now you have to worry about what’s happening in China AND Argentina. For the first time in history, gold now has a positive yield versus the Europe and the Japanese Yen, which both offer negative interest rates.
Hong Kong is becoming a factor driving US markets down. If there is a repeat if the 1989 Tiananmen Square massacre where thousands died, global markets could collapse. The hit to growth will be more than it currently can stand in its present weakened state.
Inflation is taking off, with Core Consumer Inflation for July coming in at a red hot 0.3%, delivering the strongest two-month price burst since 2006. If it keeps up, you can kiss those future interest rate cuts goodbye.
Germany is in recession. That is the only conclusion possible when you see Q2 at -0.1% growth and the economy still in free fall. The ZEW’s figures regarding Germany yesterday were nothing short of horrific as the Economic Sentiment Index fell to -44. When you damage China’s economy, it puts the rest of the world into recession. The global economy has become so interlinked, it can’t become undone without another great recession.
Bonds rates bottomed yesterday, at least for the short term, the intraday low for the ten-year US Treasury yield hitting 1.46%. Welcome to inversion land, where long term interest rates are below short-term ones. Confidence in the economy is melting like an Alaskan glacier. But with three more 25 basis point rate cuts to come, an eventual break below 1.0% is inevitable. Watch for stocks to remake half their recent losses.
Consumer Sentiment cratered in August from 97.0 estimated to 92.1. And that was before the stock market sold off. Consumer spending remains strong. The last time it was this strong was at the market top in 2008, the market top in 1999, and the market top in 1987.
July Housing Starts plunged 4.0%, to 1.191 million units as homebuilders move into recession mode. Not even record low-interest rates can get them to stick their necks out this time. Those that did last time got wiped out.
It’s been pedal to the metal all month with the Mad Hedge Trade Alert Service, with no less than 31 Trade Alerts going out so far. Some 18 or the last 19 round trips have been profitable, generating one of the biggest performance jumps in our 12-year history.
Since July 12, we have clocked a blistering 15.15% in profits or $15,150 for the model $100,000 trading portfolio.
My Global Trading Dispatch has hit a new all-time high of 330.65% and my year-to-date shot up to +30.51%. My ten-year average annualized profit bobbed up to +34.20%.
I have coined a blockbuster 12.18% 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.
The coming week will be a snore on the data front. Believe it or not, it could be quiet.
On Monday, August 19, nothing of note is released.
On Tuesday, August 20 at 10:30 AM, we get API Crude Oil Stocks.
On Wednesday, August 21, at 10:00 the Existing Home Sales are published for July.
On Thursday, August 22 at 8:30 AM, the Weekly Jobless Claims are printed. The Jackson Hole conference of global central bankers and economists begins.
On Friday, August 23 at 8:30 AM the July New Home Sales are announced.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I will be attending the Pebble Beach Concourse d’Elegance vintage car show where I will be exhibiting my 1925 Rolls Royce Phantom I, the best car ever made.
I don’t mind the wooden brakes, but it’s too bad they didn’t make adjustable seats in those days to fit my 6’4” frame. However, its price appreciation has been better than Apple’s (AAPL) which I bought as a fixer upper in England during the 1980s for $20,000. My average cost on Apple is a split adjusted 25 cents.
My Rolls will be shown alongside James Bond’s 1964 Aston Martin which sold for $6.3 million, a 1939 Volkswagen Type 64 priced at more than $20 million, and a $13 million 1958 Ferrari 250 GT BBT.
And what am I doing next weekend? Taking the Boy Scouts to the Six Flags roller coaster farm in Vallejo.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
My Phantom I
1939 Volkswagen
1954 Ferrari