Global Market Comments
February 8, 2019
Fiat Lux
Featured Trade:
(FEBRUARY 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (FXA), (NVDA), (SPY), (IEUR),
(VIX), (UUP), (FXE), (AMD), (MU), (SOYB)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 6 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Why are you so convinced bonds (TLT) are going to drop in 2019?
A: I think the Fed will regain the confidence to start raising rates again in the second half. Wage inflation is starting to appear, especially at the minimum wage level in several states. That will crater the bond market as well as the stock market, just as we saw in the second half of 2018. We’re in unknown territory in the bond market; we’re issuing astronomical WWII levels of debt and it’s only a matter of time before the Federal government crowds out private sector borrowers. Even if the bond market sidelines during this time, we will still make the maximum profit in the kind of option bear put spreads I have been putting on.
Q: Why did the Aussie (FXA) go down when they suddenly flipped from rising to cutting interest rates?
A: Interest rate differentials are the principal driver of all foreign exchange rates. They always have been and always will be. Rising rates almost always lead to a stronger currency. And with the US Fed on pause for the foreseeable future, we think the Aussie will be stronger going into 2019.
Q: Do you see the 10-year US Treasury yield going back up to 3.25% this year?
A: Yes, it’ll probably happen in the second half of the year—once the Fed gets its mojo back and decides that high employment and inflation are the bigger threats to the economy.
Q: Has NVIDIA (NVDA) bottomed here?
A: Probably, but you don’t want to touch the semiconductor chip companies until the summer. That’s when all the industry insiders expect the industry to turn and start discounting rocketing earnings after the next recession.
Q: Are stocks expensive here (SPY)?
A: On a trailing basis no, on a forward basis definitely yes. The current price/earnings multiple for the market is 17 now against a 14-20 range in 2018. So, we are dead in the middle of that range now. That’s OK when earnings are rapidly rising as they did last year. But they are falling now and at an increasingly increasing pace.
Q: Do you think the administration used the shutdown to bring forth a recession? To kickstart the pro-economic platform for reelection in 2020?
A: The administration’s view is that the economy is the strongest it’s ever been with no chance of future recession and that they will win the election as a slam dunk. If you believe that, buy stocks; if you don’t, sell them.
Q: How bad do you think Europe (IEUR) will get and does that mean the dollar (UUP) could see parity with the Euro (FXE) soon?
A: Europe is bad but they’re not going to raise interest rates anymore. However, they’re not going to cut them either because they’re already at zero. You need rising rates to see a stronger currency and the fact that the U.S. stopped raising rates is an argument for the Euro to go higher.
Q: Are we about to settle into a fading Volatility Index (VIX) environment for the rest of the year?
A: No, we are not; the (VIX) has been fading for 6 weeks. We’re approaching a bottom with the (VIX) here at $15, and the next big move in will probably be to the upside. The market has gotten WAY too complacent.
Q: Which are the most worrisome signals you see in the U.S. economy right now?
A: Weak earnings and sales guidance from all U.S. companies going forward and the immense jump in jobless claims last week as well as the ever-exploding amounts of government debt. Did I mention the trade war with China and the next government shutdown? Traders have a lot on their plate right now.
Q: How far will Lam Research (LRCX) go?
A: We’ve just had a massive 46% move up, so I wouldn’t chase it up here. However, long term there is still an easy double in this stock. They’re tied in with the semiconductor companies; NVIDIA, Advanced Micron Devices (AMD) and Micron Technology (MU) all trade in a group and may take one more run at the lows. Short term it’s overbought, long term it’s a screaming buy.
Q: Will the ag crisis feed into the main economy?
A: It could. All ag storage in the country is full, so farmers are putting the new harvest under tarps where it is rotting away and then claiming on their insurance. If you add another harvest on top of that it will be a disaster of epic proportions. China is America’s largest ag customer. It took decades of investment to develop them a client, and they are never coming back in their previous size. The trust is gone. Bankruptcies are at a ten-year high and that could eventually take down some regional banks which in turn hurt the big banks. However, ag is only 2% of the US economy, so it won’t cause the next recession. It’s really more of a story of local suffering.
Q: If you give out stop and not filled at stop price, when and how do you adjust to exit?
A: I would quickly enter it and if you’re not done quickly move it down five cents. If you don’t get done, do it again. There is no way to know where the real market is in until you put in a real order. There are 11 different option exchanges online and they are changing prices every millisecond. Furthermore, spread trades can get one leg done on one exchange and the second leg done on another, so prices can be all over the place.
Q: What data goes into the Mad Hedge Market Timing Index and how do you use it to time the markets?
A: It uses a basket of 30 different indicators which constantly changes according to what generates the highest return in a 30 year backtest. It includes a lot of conventional data points, like moving averages and RSIs, along with some of our own internal proprietary ones. When we are getting a reading below 20, we are looking to buy. Any reading over 65 and we are looking to sell, and over 80 we will only go short. It works like a charm. It paid for my new Tesla! I hope this helps.
Global Market Comments
February 7, 2019
Fiat Lux
Featured Trade:
(WHAT TO BUY AT MARKET TOPS?),
(CAT), ($COPPER), (FCX), (BHP), (RIO),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)
Hey John and the MAD Team, here's a late Happy New Years!
You really nailed and keep nailing great reversals and trends that are just beginning to deserve a watchful eye.
I'm still a bit stuck on futures, but I realize the safety in your spreads is a lot smarter...Thx for all you know and for all you do.
Rod
Alberta, Canada
Global Market Comments
February 6, 2019
Fiat Lux
Featured Trade:
(MY 20 RULES FOR TRADING IN 2019)
Global Market Comments
February 5, 2019
Fiat Lux
Featured Trade:
(A NOTE ON OPTIONS CALLED AWAY)
(TLT), (AAPL),
(THE GOVERNMENT’S COMING WAR ON MONEY)
I bought a tall caramel macchiato at Starbucks the other day. When I handed over a crisp $100 bill, the cashier’s response set me back.
“Oh, dinosaur money.”
I have to tell you that after speaking to US Treasury officials for a half-century, there is one thing I know for sure. The government absolutely hates money.
Now they finally have an alternative.
The government has been attempting to regulate Bitcoin almost since its inception. The SEC already successfully fought off several attempts to give it respectability by denying approval of several cryptocurrency-based securities.
The next step is for the government to get into the cryptocurrency business itself and snuff out the competition banning private issuance of online money.
It wouldn’t be the first time this has happened. Private issuance of paper money preceded government issuance by hundreds of years.
When I lived as a student in West Berlin during the 1960s, I had a nice little side business.
I organized weekend walking tours through the Berlin Wall at Checkpoint Charlie to visit East Berlin for American students too afraid to go alone.
To pay for it, I smuggled Ostmarks in my boots which I had purchased at a 75% discount in the west and used them to pay for everything in the east, booking a nice profit on the day. $10 for a lavish lunch for ten? No problem!
That would be much more difficult to pull off today as governments around the world have launched a war on cash that will not end until its ultimate demise.
This became clearly apparent when the government of India withdrew circulation of its two largest banknotes in 2017. Some 50% of Indian GDP is thought to take place in the underground economy in cash only.
The move caused a financial panic as consumers sold gold (GLD) and other hard assets to meet bills because they were unable to settle accounts with the large denomination notes they had hoarded.
As we move towards an all-electronic economy, the few remaining purposes where cash is essential are largely illegal.
Waitresses, babysitters, hookers, and bookies don’t report income to the IRS. Nor do drug dealers or illegal immigrants.
This is a big deal because eight states legalized marijuana in the last election.
Since banks are still banned from handling pot proceeds, this booming business has to take place entirely in cash, or more lately, bitcoin. Tales of dealers making their runs with gym bags full of $100 bills are rampant. States are reporting that while drunk driving is down, robberies are up.
The IRS estimates that $460 billion in tax revenue is lost every year through unreported income which is largely earned in cash.
Some half of the entire US paper money supply is held by foreigners or some $3.8 trillion where it is used to evade taxes, bribe foreign officials, and finance terrorism.
The US government’s war on cash is not a new thing. In 1929, it cut the size of US banknotes by one third to save money on the cost of high-grade paper.
In 1970, the US Treasury banned the circulation of the $10,000, $5,000, $1,000, and $500 bills to halt mafia money laundering. Since then, the IRS has been the biggest beneficiary of the move by catching tax cheaters.
Large denomination US bills are now solely the domain of collectors.
The US government would love to get out of the cash business entirely as it is so expensive to run. It spends about $737.4 million a year just to print American $1, $2, $5, $10, $20, $50, and $100 notes.
Paper dollar bills, which are actually made of 75% cotton and 25% linen, are completely worn out and have to be returned in only 18 months.
Coins are even a bigger loser. It costs more than two cents to make a penny.
Since the advent of color printers, counterfeiting has exploded. North Korea runs almost its entire economy on fake $100 bills which are said to be the best in the world.
Today, some 80% of the entire $3.8 trillion M1 notes and coins in circulation in America are in the form of $100-dollar bills. That works out to $4,200 per person. Where has all that money gone?
The US is now considering eliminating even this convenient denomination. While $1 million in $100s can fit into a tote bag, that quantity of $10 bills would weigh 220 pounds, a quantity much more difficult to sneak around.
An all-electronic economy would certainly pose some privacy problems as it would leave a massive paper trail on everything you do.
When you get audited by the IRS, the first thing they do is obtain your past three years of bank and credit card records detailing your every transaction.
State authorities will pursue phone records to establish your physical presence to verify residency. So how long did you really spend in tax-free Florida last year? Your cell phone carrier and credit card companies both know.
It would also pare back illegal immigration as this is another industry that runs entirely on cash. Once here, undocumented workers are often paid in cash in restaurants and on construction sites.
There is truly no place to hide.
Other countries are already well ahead in the war of cash. In Belgium, some 93% of all financial transactions take place electronically.
Sweden has also been pushing hard on this front taking the M1 money supply there down by 27% over the past two years.
Many small businesses there now post signs saying they don’t accept cash. The goal is to move to an all-electronic economy.
The preferences of Millennials are also moving us towards the cashless economy.
Have you ever been in line at Starbucks and noticed that the kid in front of you just paid $2 for a cup of coffee with his credit card? Or maybe he swiped his Apple Pay account on his iPhone?
Berlin in 1968
No Longer in Circulation
Global Market Comments
February 4, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or FROM PANIC TO EUPHORIA),
(SPY), (TLT), (AAPL), (GLD),
What a difference a month makes!
In a mere 31 days, we lurched from the worst December in history to the best January in 30 years. Traders have gone from lining up to jump off the Golden Gate Bridge to ordering Dom Perignon Champaign on Market Street.
However, not everything is as it appears. The suicide prevention hotline on the bridge has been broken for years, and you can now pick up Dom Perignon at Costco for only $120 a bottle.
Clearly, investors are enjoying the show but are keeping one eye on the exit. Perhaps that’s why gold (GLD) hit an 8-month high as nervous investors Hoover up a downside hedge against their long positions.
In fact, it has been the best January since 1987, with a ferocious start. The problem with that analogy is that I remember what followed that year (see chart below). After a robust first nine months of the year, the Dow Average (INDU) broke the 50-day moving average. It looked like just another minor correction and a buying opportunity.
The market ended up plunging 42% in weeks including a terrifying 20% capitulation swan dive on the last day. I tried actually to buy the stock at the close that day. The clerk just burst into tears and threw the handset on the floor. I didn’t get filled. Since the tape was running two hours late, NOBODY got filled on any orders entered after 12:00 PM.
It doesn’t help that markets have been rising in the face of a collapsing earnings picture. Look at the chart below and you’ll see that after peaking out at an annualized 26% a year ago in the wake the passage of the new tax bill, earnings have been rolling over like the Bismarck on their way to zero.
If you own stocks anywhere in the world, this chart should have made the hair on the back of your neck stand up. It’s almost as if the tax bill was delivering the OPPOSITE of its intended outcome.
How multiple expansion will we get in the face of fading earnings? How about none? How about negative!
A totally red-hot January Nonfarm payroll Report on Friday at 304,000 confirmed that the economy was still alive and well, at least on a trailing basis. Headline Unemployment Rate rose to 4.0%.
The Labor Department said that the government shutdown had no impact on the numbers because federal employees were furloughed and not unemployed. Tomato, tomahto.
However, 175,000 workers were laid off in the private sector and that is why the Unemployment Rate ticked up to a multi-month high. Noise from the shutdown is going to be affecting all data for months.
That’s also why part-time workers jumped 500,000 in January. A lot of federal employees started working as Uber drivers and pizza delivery guys to put food on the table without a paycheck.
Further confusing matters was the fact that December was revised down by 90,000.
Leisure & Hospitality led the way with 74,000 new jobs, followed by Construction with 52,000 and Health Care by 42,000 jobs.
The shutdown is over, but how much did it cost us? Standard & Poor’s says $6 billion but the restart costs will be greater. More recent estimates run as high as $11 billion.
Weekly Jobless Claims were up a stunning 53,000, to 253,000, an 18-month high. While government workers can’t claim, their private subcontractors can, hence the massive shutdown-driven jump.
Bitcoin hits a new one-year low at $3,400. Some $400 billion has gone to money Heaven since 2017. Only $113 billion in market capitalization remains. I told you it was a Ponzi scheme. US coal production hits a 39-year low as it is steadily replaced by natural gas and solar. Could there be a connection? Talk about data mining.
Earnings were mixed, with some companies coming out hero’s, others as goats.
Apple (AAPL) slightly beat expectations with revenues at $84.31 billion versus $83.97 billion expected, and earnings at $4.18 per share versus $4.17 expected. Guidance going forward is very cautious of a slowing China.
Good thing I saw the ambush coming and covered my short two days ago. A penny beat is the most managed earnings I have ever seen. To warn about earnings and then surprise to the upside is classic Tim Cook.
December Pending Home Sales cratered, down 2.2% in December and 9.8% YOY. Despite the dramatically lower mortgage interest rates, buyers fled the crashing stock market.
“PATIENCE” is still the order of the day at the Federal Reserve with its Open Market Committee Meeting ordering no interest rate rise. It was a trifecta for the doves. The free pass for stocks continues. That’s why I covered all my shorts starting from last week. Even a blind squirrel occasionally finds an acorn.
Tesla reported another profit for the second consecutive quarter, and the company is about to reach escape velocity. Model 3 production in 2019 is to reach 75% of the total output and we can expect a new pickup truck. A second factory in Shanghai will take the “3” to over a half million units a year. That $35,000 Tesla is just over the horizon.
Why are all major companies reporting good earnings but cautious guidance? Are they reading the newspapers, or do they know something we don’t? Not a great sign of a continuing bull market. Sell the next capitulation top.
This week was a classic example of how the harder I work, the luckier I get, and I have been working pretty hard lately.
I came out of a near money Apple (AAPL) put spread at cost, then rolled into a far money put spread just before the stock sold off. That little maneuver made me $1,030 in two days.
Then, I spotted a perfect “head and shoulders” top in the bond market set up by a three-point rally in the (TLT). When the red hot January Nonfarm Payroll report printed the next day at 5:30 AM PCT, bonds immediately gave back a full point.
It was all enough to boost my performance to a new all-time high after a hiatus of two months. Those who recently signed up for my service must think that I am some kind of freakin' genius! They’ll learn the truth soon enough.
My January and 2019 year-to-date return soared to +9.66%, boosting my trailing one-year return back up to +29.24%. The is my hottest start to a New Year in a decade. Sometimes you have to make a sacrifice to the trading gods to get rewarded and that is what December was all about.
My nine-year return climbed up to +309.80%, a new pinnacle. The average annualized return revived to +33.79%.
I am now 80% in cash, short the bond market, and short Apple.
The upcoming week is still iffy on the data front because of the government shutdown. Some government data may be delayed and other completely missing. Private sources will continue reporting on schedule. All of the data will be completely skewed for at least the next three months. You can count on the shutdown to dominate all media until it is over.
Jobs data will be the big events over the coming five days along with some important housing numbers. We also have several heavies reporting earnings.
On Monday, February 4 at 10:00 AM, we get the much delayed December Factory Orders. Alphabet (GOOGL) reports.
On Tuesday, February 5, 10:00 AM EST, we learn the January ISM Non-Manufacturing Index.
On Wednesday, February 6 at 8:30 AM EST, the November Trade Balance is published.
Thursday, February 7 at 8:30 AM EST, we get Weekly Jobless Claims. December Consumer Credit follows at 9:30 AM and should be a humdinger. Intercontinental Exchange (ICE) reports.
On Friday, February 8, at 10:00 AM EST, Wholesale Inventories are out. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’ll be sitting down with a case of Modelo Negro and a big bag of Cheetos to watch the commercials during the Super Bowl with my family. (My dad played for USC Varsity in 1948). I never forgave the Rams for defecting from Los Angeles, and Boston is too far away to care about.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Are We in for a Repeat?
Global Market Comments
February 1, 2019
Fiat Lux
Featured Trade:
(THE DEATH OF KING COAL),
(KOL), (PEA),
(THE BRAVE NEW WORLD OF ONLINE RETAILING),
(SNAP), (GPRO), (APRN), (SFIX)
