Diary Archives

July 24 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader July 24 Global Strategy Webinar broadcast from Zermatt, Switzerland with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What are your thoughts on the Freeport McMoRan (FCX) long position here?

A: We could take a profit here. We probably have about 50% of the maximum potential profit, but I want to hang on and go to the max on this because we’re so far in the money. Cash always has a premium ahead on any Fed interest rate decision. But long term, I think the stock could double, and with the earnings report now out of the way, we have room to run.

Q: What can you say about semiconductor stocks?

A: Long term we love them, short term they are too high to chase here. I would wait for any kind of pullback and, better yet, pull back from the other side of the next recession. We’re not seeing an improvement in prices or orders so this is strictly a technical/momentum-driven trade right now.

Q: How do you play the Volatility Index (VIX)?

A: There are numerous ways you can do it; you can buy call options on the (VIX), you can buy futures on the (VIX), or you can buy the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX). We are probably a week away from a nice entry point on the long side here.

Q: Does a languishing U.S. dollar mean emerging market opportunities?

A: It absolutely does. If we really start to get a serious drop in the U.S. dollar (UUP)—like 5-10%—it will be off to the races for commodities, bonds (TLT), emerging stock markets (EEM), emerging bond markets (ELD), emerging currencies (CEW), and gold (GLD). All of your weak dollar plays will be off to the races—that’s why I went straight into bonds, the Aussie (FXA), and copper through Freeport McMoRan (FCX). All of these trades have been profitable.

Q: When should we sell the U.S. dollar?

A: How about now? For any kind of strength in a dollar against the (FXA), (FXE), (FXC) and (FXY), I would be buying any dips on those foreign exchange ETFs. We’re about to enter a six-month - one-year period weakness on the dollar. It could be the easiest trade out there. The only one I would avoid is the British pound (FXB) because of its own special problems with Brexit. You never want to go long the currency of a country that is destroying itself, which is exactly what’s happening with the pound.

Q: Should I start selling pounds?

A: It’s pretty late in the pound game now. We went into Brexit with the pound at $1.65 and got all the way down to $1.20. We’re a little bit above that now at $1.21. If for some reason, you get a surprise pop in the pound, say to $1.25, that’s where I would sell it, but down here, no.

Q: I missed the (FCX) trade—would you get in on the next dip?

A: Yes, we may not get many dips from here because the earnings were out. Today, they were not as bad as expected, and that was keeping a lot of buyers out of the market on (FCX), so any dips you can get, go a dollar out on your strikes and then take it because this thing could double over the medium term. If the trade war with China ends, this thing could make it to the old high of $50.

Q: Is now a good time to refi my home?

A: Yes, because by the time you get the paperwork and approvals and everything else done (that’ll take about 2 months), rates will likely be lower; and in any case you’re looking to refi either a 7/1 ARM or a 15-year fixed, and the rates on those have already dropped quite substantially. I was offered 3.0% for a 15-year fixed loan on my home just the other day.

Q: On trades like (FCX), why not sell short the put spread?

A: It’s really six of one, half dozen of the other. The profit on either one should be about the same. If it isn’t, an options market maker will step in and arbitrage out the difference. That’s something only an algorithm can do these days. I recommend in-the-money call spreads versus shorting sell short vertical bear put credit spreads because for beginners, in-the-money call spreads are much easier to understand.

Q: The Mueller hearings in Congress are today. Is there any potential impact on the market?

A: The market has completely detached itself from Washington—it couldn't care less about what’s happening there. I don't think politics have the capacity to affect stock prices. The only possible impact was the prospect of the government shutdown in September. That seems to have been averted in the latest deal between the House and the White House.

Q: What about Amazon (AMZN)?

A: Like the rest of technology, long term I love it, but short term it’s overdue for a small correction. I’m looking for Amazon to go to $3,000 a share—it’s essentially taking over the world. The antitrust threats will go absolutely nowhere; Congress doesn’t even understand what these companies do, let alone know how to break them up. I wouldn’t worry about it.

Q: I just received an email inviting me to buy a new Bitcoin auto trading system that is guaranteed to make me a millionaire in four months. It is being promoted by Nicole Kidman. Do you think I should try it?

A: I wouldn’t touch this with a ten-foot pole. No, wait. I wouldn’t touch this with a 100-foot pole! Whenever a new type of security comes out, these types of "get rich quick" investment scams come out of the woodwork. Cryptocurrency is no different. Nicole Kidman was probably paid $500,000 to make the pitch by a promotor. Or more likely, Nicole Kidman has nothing to do with these people and they just swiped her picture off the Internet. I hear about these things daily. Follow their plan and you are more likely to get completely wiped out than become a millionaire. There are NO get rich quick schemes. There are only get rich slowly strategies, such as following this newsletter. Click here to see the above-mentioned scam which you should avoid at all cost. Gee, do you think Nicole Kidman would be interested in promoting the Mad Hedge Fund Trader?

July 25, 2019

Diary, Newsletter, Summary

Global Market Comments
July 25, 2019
Fiat Lux

Featured Trade:

(HOW TO HEDGE YOUR CURRENCY RISK)
(FXA), (FXC), (UUP)
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
(AAPL)

July 24, 2019

Diary, Newsletter, Summary

Global Market Comments
July 24, 2019
Fiat Lux

Featured Trade:

(THEY’RE NOT MAKING AMERICANS ANYMORE),
E (THE DEATH OF THE FINANCIAL ADVISOR),

They're Not Making Americans Anymore

Diary, Newsletter, Research

You can count on a bear market hitting sometime in 2038, one falling by at least 25%.

Worse, there is almost a guarantee that a financial crisis, severe bear market, and possibly another Great Depression will take place no later than 2058 that would take the major indexes down by 50% or more.

No, I have not taken to using a Ouija board, reading tea leaves, nor examining animal entrails in order to predict the future. It can be much easier than that.

I simply read the data just released from the National Center for Health Statistics, a subsidiary of the federal Centers for Disease Control and Prevention (click here for their link).

The government agency reported that the US birth rate fell to a new all-time low for the second year in a row, to 60.2 births per 1,000 women of childbearing age. A birth rate of 125 per 1,000 is necessary for a population to break even. The absolute number of births is the lowest since 1987. In 2017, women had 500,000 fewer babies than in 2007.

These are the lowest number since WWII when 17 million men were away in the military, a crucial part of the equation.

The reason the American birth rate is such an important number is that babies grow up, or at least most of them do. In 20 years, they become consumers, earning wages, buying things, paying taxes, and generally contributing to economic growth.

In 45 years, they do so quite substantially, becoming the major drivers of the economy. When these numbers fall, recessions and bear markets occur with absolute certainty.

You have long heard me talk about the coming “Golden Age” of the 2020s. That’s when a two-decade long demographic tailwind ensues because the number of “peak spenders’ in the economy starts to balloon to generational highs. The last time this happened, during the 1980s and 1990s, stocks rose 20-fold.

Right now, we are just coming out of two decades of demographic headwind when the number of big spenders in the economy reached a low ebb. This was the cause of the Great Recession, the stock market crash and the anemic 2% annual growth since then.

The reasons for the maternity ward slowdown are many. The great recession certainly blew a hole in the family plans of many Millennials. Falling incomes always lead to lower birth rates, with many Millennial couples delaying children by five years or more. Millennial mothers are now having children later than at any time in history.

Burgeoning student debt, which just topped $1.5 trillion, is another. Many prospective mothers would rather get out from under substantial debt before they add to the population.

The rising education of women overall, a global trend, also contributes to the lag on having children. And spouses focused on career building often have a delayed interest in starting families.

Women are also delaying having children to postpone the “pay gaps” that always kicks in after they take maternity leave. Many are pegging income targets before they entertain starting families.

As a result of these trends, one in five children last year were born to women over the age of 35, a new high.

This is how some Latin American countries moved from eight to two-child families in only one generation. The same is about to take place in African countries where standards of living are rising rapidly, thanks to the eradication of several serious diseases.

The sharpest falls in the US have been with minorities. Since 2017, the birthrates for Latinos have dropped by 27% from a very high level, African Americans 11%, whites 5%, and Asian 4%.

Europe has long had the same problem with plunging growth rates but only much worse. Historically, the US has made up for the shortfall with immigration, but that is now falling, thanks the current administration policies. Restricting immigration now is a guaranty of slowing economic growth in the future. It’s just a numbers game.

So watch that growth rate. When it starts to tick up again, it’s time to buy….in about 20 years. I’ll be there to remind you with this newsletter.

As for me, I’ve been doing my part. I have five kids aged 14-34, and my life is only half over. Where did you say they keep the Pampers?

The Death of the Financial Advisor

Diary, Newsletter, Research

About one-third of my readers are professional financial advisors who earn their crust of bread telling clients how to invest their retirement assets for a fixed fee.

They used to earn a share of the brokerage fees they generated. After stock commissions went to near zero, they started charging a flat 1.25% a year on the assets they oversaw.

So, it is with some sadness that I have watched this troubled industry enter a long-term secular decline that seems to be worsening by the day.

The final nail in the coffin may be the new regulations announced by the Department of Labor, at the end of the Obama administration, which controls this business.

Brokers, insurance agents, and financial planners were already held to a standard of suitability by the government, based on a client’s financial situation, tax status, investment objectives, risk tolerance, and time horizon.

The DOL proposed raising this bar to the level already required of Registered Investment Advisors, as spelled out by the Investment Company Act of 1940.

This would have required advisors to act only in the best interests of their clients, irrespective of all other factors, including the advisor’s compensation or conflicts of interest.

What this does is increase the costs while also greatly expanding advisor liability. In fact, the cost of malpractice insurance has already started to rise. All in all, it makes the financial advisor industry a much less fun place to be.

As is always the case with new regulations, they were inspired by a tiny handful of bad actors.

Some miscreants steered clients into securities solely based on the commissions they earned, which could reach 8% or more, whether it made any investment sense or not. Some of the instruments they recommended were nothing more than blatant rip-offs.

The DOL thought that the new regulations will save consumers $15 billion a year in excess commissions.

Legal action by industry associations has put the DOL proposals in limbo. Unless it appeals, it is unlikely to become law. So, there will be a respite, at least until the next administration.

Knowing hundreds of financial advisors personally, I can tell you that virtually all are hardworking professionals who go the extra mile to safeguard customer assets while earning incremental positive returns.

That is no easy task given the exponential speed with which the global economy is evolving. Yesterday’s “window and orphans” safe bets can transform overnight into today’s reckless adventure.

Look no further than coal, energy, and the auto industry. Once a mainstay of conservative portfolios, all of these sectors have, or came close to filing for bankruptcy.

Even my own local power utility, Pacific Gas & Electric Company (PGE), filed for chapter 11 in 2001 because they couldn’t game the electric power markets as well as Enron.

Some advisors even go the extent of scouring the Internet for a trade mentoring service that can ease their burden, like the Diary of a Mad Hedge Fund Trader, to get their clients that extra edge.

Traditional financial managers have been under siege for decades.

Commissions have been cut, expenses increased, and mysterious “fees” have started showing up on customer statements.

Those who work for big firms, like UBS, Morgan Stanley, Goldman Sacks, Merrill Lynch, and Charles Schwab, have seen health insurance coverage cut back and deductibles raised.

The safety of custody with big firms has always been a myth. Remember, all of these guys would have gone under during the 2008-09 financial crash if they hadn’t been bailed out by the government. It will happen again.

The quality of the research has taken a nosedive, with sectors like small caps no longer covered.

What remains offers nothing but waffle and indecision. Many analysts are afraid to commit to a real recommendation for fear of getting sued, or worse, scaring away lucrative investment banking business.

And have you noticed that after Dodd-Frank, two-thirds of a brokerage report is made up of disclosures?

Many financial advisors have, in fact, evolved over the decades from money managers to asset gatherers and relationship managers.

Their job is now to steer investors into “safe” funds managed by third parties that have to carry all of the liability for bad decisions (buying energy plays in 2014?).

The firms have effectively become toll-takers, charging a commission for anything that moves.

They have become so risk-averse that they have banned participation in anything exotic, like options, option spreads, (VIX) trading, any 2X leveraged ETF’s, or inverse ETFs of any kind. When dealing in esoterica is permitted, the commissions are doubled.

Even my own newsletter has to get compliance review before it is distributed to clients, often provided by third parties to smaller firms.

“Every year, they try to chip away at something”, one beleaguered advisor confided to me with despair.

Big brokers often hype their own services with expensive advertising campaigns that unrealistically elevate client expectations.

Modern media doesn’t help either.

I can’t tell you how many times I have had to convince advisors not to dump all their stocks at a market bottom because of something they heard on TV, saw on the Internet, or read in a competing newsletter warning that financial Armageddon was imminent.

Customers are force-fed the same misinformation. One of my main jobs is to provide advisors with the fodder they need to refute the many “end of the world” scenarios that seem to be in continuous circulation.

In fact, a sudden wave of such calls has proven to be a great “bottoming” indicator for me.

Personally, I don’t expect to see another major financial crisis until 2032 at the earliest, and by then, I’ll probably be dead.

Because of all of the above, about half of my financial advisor readers have confided in me a desire to go independent in the near future, if they are not already.

Sure, they won’t be ducking all these bullets; but at least they will have an independent business they can either sell at a future date, or pass on to a succeeding generation.

Overheads are far easier to control when you own your own business, and the tax advantages can be substantial.

A secular trend away from non-discretionary to discretionary account management is a decisive move in this direction.

There seems to be a great separating of the wheat from the chaff going on in the financial advisory industry.

Those who can stay ahead of the curve, both with the markets and their own business models, are soaking up all the assets. Those who can’t are unable to hold onto enough money to keep their businesses going.

Let’s face it, in the modern age, every industry is being put through a meat grinder. Thanks to hyper accelerating technology, business models are changing by the day.

Just be happy you’re not a doctor trying to figure out Obamacare.

Those individuals who can reinvent themselves quickly will succeed. Those who can't will quickly be confined to the dustbin of history.

It's Not As Easy As It Looks

July 23, 2019

Diary, Newsletter, Summary

Global Market Comments
July 23, 2019
Fiat Lux

Featured Trade:

(DON’T MISS THE JULY 24 GLOBAL STRATEGY WEBINAR),
(HOW THE MAD HEDGE MARKET TIMING ALGORITHM WORKS),
(TESTIMONIAL)

Don’t Miss the July 24 Global Strategy Webinar

Diary, Newsletter

My next global strategy webinar will be held live from Zermatt, Switzerland on Wednesday, July 24, 2019 at 12:00 PM EST.

Co-hosting the show will be Mad Day Trader Bill Davis.

I’ll be giving you my updated outlook on stocks, bonds, commodities, currencies, precious metals, and real estate.

The goal is to find the cheapest assets in the world to buy, the most expensive to sell short, and the appropriate securities with which to take these positions.

I will also be opining on recent political events around the world and the investment implications therein.

I usually include some charts to highlight the most interesting new developments in the capital markets. There will be a live chat window with which you can pose your own questions.

The webinar will last 45 minutes to an hour-long. International readers who are unable to participate in the webinar live will find it posted on my website within a few hours.

I look forward to hearing from you.

To log into the webinar, please click on the link we emailed you entitled, "Next Bi-Weekly Webinar - July 24, 2019" or click here to register in advance.

July 22, 2019

Diary, Newsletter, Summary

Global Market Comments
July 22, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR BRACE YOURSELF),
(SPY), (TLT), (FXA), (FCX), (MSFT),
(TESTIMONIAL)

The Market Outlook for the Week Ahead, or Brace Yourself

Diary, Newsletter, Research

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck and good trading.

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