MHFTF

Why the Stock Market is Bottoming Here

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All good things must come to an end, and that includes bull markets in stocks.

But this one is not over yet. If my calculations are correct, the current correction should end right around here over the next week or two. Like the famed Monte Python parrot, the bull market is not dead, it is only resting. 

My logic is very simple. In February, the Dow Average suffered a 3,300 point downdraft. However, at least 1,000 points of this was due to the overnight implosion of the $7 billion short volatility industry that spiked the (VIX) up to $50. 

That trade no longer exists, at least to the extent that it did in January. There is no Velocity Shares Daily Inverse VIX Short Term ETN (XIV) blow up in the cards at tomorrow morning’s opening. 

With the Dow Average down 2,200 points, or 8.14%, from its September high, the major indexes ought to bottom out right around here. I also expect the Volatility Index to peak here at $30.

Incredible as it may seem, the Dow Average has given up almost all of its 2018 gains. Unchanged on the seems to be a point that the market wants to gravitate to, and then sharply bounce off of.

That means the 200-day moving average for the S&P 500 should hold as well near $274, down 6.4% from all-time highs made only last week. That has provided rock-solid support for the index since the bull market began in 2009, except for brief hickeys in 2011 and 2015.

At these prices the PE multiple for the S&P 500 has plunged back down to only 16 times, providing substantial valuation support that has held for years. The economy is still growing at a 4% clip and I expect that to continue through the end of 2018.

The hissy fit between the White House and the Federal Reserve was the principal cause for the Wednesday 831-point selloff. There is a reason why the president has never been allowed to control interest rates in the United States. Telling the citizenry that the “Fed is loco” does not inspire confidence among stock buyers.

If he could, they would be zero, all the time, forever, and the US dollar would have the same purchasing power as the Zimbabwe one or Weimar German Deutsche Mark.

Another crucial factor that investors are missing is that we are now in the blackout period for Q3 earnings when companies are not allowed to buy their own stocks. Companies have almost become the sole buyers of equities in 2018 and are expected to reach a record high of $1 trillion in purchases this year.

A blackout means that the nice guy who has been buying all those drinks has suddenly become stuck in the bathroom for an extended period of time.

That makes the biggest buyers of their own stock like Apple (AAPL), Cisco Systems (CSCO), Amazon (AMZN), and Amgen (AMGN) particularly interesting. 

The shackles come off Apple’s buybacks when the Q3 earnings are announced after the close on November 1, a mere 14 trading days away. Apple CEO Tim Cook has committed to buying $100 billion worth of Apple shares.

Finally, my Mad Hedge Market Timing Index, which has been worth its weight in gold, just hit its all-time low at 4 and is flashing an extreme “BUY”. The last time this happened was at the February 8 capitulation low.

Of course, we will probably still see some heart-stopping volatility in the run up to the election. But after that, I still expect a burst to new all-time highs. If my 3,000 S&P 500 target is hit, that means there is a potential 9.5% gain from today’s low.

Investors raced to unload winners in the run up to yearend. Now that many of those winners have become losers, the selling should abate. Oh, and that bond collapse? Bonds have actually gone up since the big stock selling started two days ago, taking yields down from 3.25% to 3.13%. At some point, someone will notice.

Unfortunately, making money in the market is no longer the cakewalk that it used to be. There’s no more loading the boat, and then going on a long cruise. From now on, we are going to have to work for our money.

We may see a bottom this morning when banks announce their Q3 earnings. JP Morgan’s Jamie Diamond starts his conference call at 8:30 AM EST and the entire investment industry will be listening with baited breath.

 

Mad Hedge Market Timing Index

 

Correction? What Correction?

 

MHFTF

Netflix Says We Become a Nation of Couch Potatoes

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While much of the artificial intelligence focus has been on Amazon (AMZN), Apple (AAPL), Tesla (TSLA), and Alphabet (GOOG) this year, there is another firm in the field making money hand over fist.

That would be Netflix (NFLX), whose earnings have been on a tear all year, sending the shares soaring.

By this summer the company boasted a staggering 130 million subscribers, with much of the recent growth coming from overseas.

Traders went gaga over the numbers.

Indeed, the firm tracks every keystroke you make.

Watch the sultry tropical thriller Bloodline (sadly scheduled for cancellation), and the company’s clever AI will steer you straight into a like-minded series.

It’s like the “roach motel” network. Once you check in, you can never check out.

Analysts briefly worried about Netflix when Disney (DIS) announced it was pulling its offerings from the omniscient online streaming company, a major seller.

To watch Buzz Lightyear, Woody, and an interminable number of nearly identical princesses (I have three daughters) you’ll have to seek out Disney’s own distribution channel sometime in the future.

But the firm shot back with an $8 billion budget for original content for 2018, in one fell swoop making it one of the largest Hollywood production firms.

Now Netflix is a regular feature of the annual Oscar presentations. Last month it won an impressive 23 Emmys, tying AT&T Warner Media’s HBO for the first time.

They say a picture is worth a thousand words, and I just found 3,000 of them.

Look at three stock charts and you will immediately understand some of the most important structural trends now sweeping through our economy.

Those would be the charts for Amazon (AMZN), Netflix (NFLX), and Macy's (M).

Retail Sales are clearly in a secular long-term decline. Indeed, Macy’s (M) announced last year that it is closing 100 of its 769 stores.

Are these numbers revealing a major new trend in our society? Are we soon to have our every need catered to without lifting a finger? 

Have We Become a Nation of Couch Potatoes?

After spending weeks preparing a major research piece for a private client on artificial intelligence, I would have to say that the answer is an overwhelming “Yes!”

Artificial intelligence, or AI, is far more pervasive than you think. Half of all apps now rely on some form of AI, and within five years, all of them will.

Within a decade, AI will cure cancer and most other human maladies, drive our cars, decide our elections, and do our shopping.

You probably all know that Northern California has been besieged with wildfires lately.

Guess what has suddenly started populating my screen? Adds for smoke detectors!

AI has become the leading market theme for 2018.

People my age all remember George Jetson, the space age cartoon series, who only had to work an hour a day because machines did the rest of the work for him.

The modern incarnation of his ultra-light workweek will be far darker and more sinister.

Instead of a one-hour day, it is far more likely that one person will keep a full time eight-hour a day job, while another seven unfortunates become full time unemployed.

By the way, I am determined to be that one guy with a job. So should you.

Indeed, I am increasingly coming across dire predictions that 30% of all jobs will disappear within ten years. 

I’m sure that they will. 

The real question is whether that 30%, or more, will be replaced by jobs yet to be invented. I bet they will. 

Evolution and creative destruction are now happening on fast forward.

After all, some 25% of the professions listed on the Department of Labor website did not exist a decade ago. 

SEO manager? Concert social media buzz creator? Online affiliate manager? Solar panel installer? Reputation defender?

What does the stock market do in this new dystopian society? It goes through the roof. 

After all, far fewer workers creating a greater output generate much larger earnings that send share prices soaring.

It is all a crucial part of my “Golden Age” scenario for the 2020s. 
Having said all that, I think I’ll go binge-watch Netflix’s tropical film noir “Bloodline.” I hear it’s hot.

“Game of Thrones” and “House of Cards” don’t restart until next year.

 

 

 

Our Future?

 

MHFTF

October 11, 2018

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Global Market Comments
October 11, 2018
Fiat Lux


Featured Trade:

(REACHING PEAK TECHNOLOGY STOCKS),
(GOOGL), (MSFT), (NFLX), (FB), (AAPL),
(LOCKHEED MARTIN’S SECRET FUSION BREAKTHROUGH),
(LMT), (NOC), (BA)

MHFTF

Reaching Peak Technology Stocks

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I drove into San Francisco for a client dinner last night and had to wait an hour at the Bay Bridge toll gate. When I finally got into town, the parking attendant demanded $50. Dinner for two at Morton’s steakhouse? How about $400.

Which all underlines the fact that we have reached “Peak” San Francisco. San Francisco just isn’t fun anymore.

The problem for you is that if the City by the Bay has peaked, have its much-loved big cap technology stocks, like Facebook (FB), Alphabet (GOOGL), and Netflix (NFLX) peaked as well?

To quote the late manager of the New York Yankees baseball team, Yogi Berra, “Nobody goes there anymore because it’s too crowded.”

What city was the number one creator of technology jobs in 2017?

If you picked San Francisco, you would have missed by a mile. Anyone would be nuts to start up a new business here as rents and labor are through the roof.

Competition against the tech giants for senior staff is fierce. What, no fussball table, free cafeteria, or on-call masseuses? You must be joking!

You would be much better off launching your new startup in Detroit, Michigan. Better yet, hyper-connected low-waged Estonia where the entire government has gone digital.

In fact, Toronto, Canada is the top job creator in tech now, creating an impressive 50,000 jobs last year. Miami, FL and Austin, TX followed. Silicon Valley was at the bottom of the heap.

It’s been a long time since peach orchards dominated the Valley.

Signs that the Bay Area economy is peaking are everywhere. Residential real estate is rolling over now that the harsh reality of no more local tax deductions on federal tax returns is sinking in.

To qualify for a home loan to buy the $1.2 million median home in San Francisco, you have to be a member of the 1%, earning $360,000 a year or better.

Two-bedroom one bath ramshackle turn of the century fixer uppers are going for $1 million in the rapidly gentrifying nearby city of Oakland, only one BART stop from Frisco.

Most school districts have frozen inter-district transfers because they are all chock-a-block with students. And good luck getting your kid into a private school like University or Branson. There are five applicants for every place at $40,000 a year each.

The freeways have become so crowded that no one goes out anymore. It’s rush hour from 6:00 AM to 8:00 PM every day.

When you do drive it’s dangerous. The packed roads have turned drivers into hyper-aggressive predators, constantly weaving in and out of traffic, attempting to cut seconds off their commutes. And there is no drivers ed in China.

I took my kids to the city the other day for a Halloween “Ghost Tour” of posh Pacific Heights. It was lovely spending the evening strolling the neighborhood’s imposing Victorian mansions.

The ornate gingerbread and stained-glass buildings are stacked right against each other to keep from falling down in earthquakes. It works. The former abodes of gold and silver barons are now occupied by hoody-wearing tech titans driving new Teslas.

We learned of the young girl forced into a loveless marriage with an older wealthy stock broker in 1888. She bolted at the wedding and was never seen again.

However, the ghost of a young woman wearing a white wedding address has been seen ever since around the corner of Bush Street and Octavia Avenue. Doors slam, windows shut themselves, and buildings make weird creaking noises.

Then I came to a realization walking around Fisherman’s Wharf as I was nearly poked in the eye by a selfie stick-wielding visitor. The tourist areas on weekdays are just as crowded as they were on summer weekends 30 years ago, except that now the number of languages spoken has risen tenfold, as has the cost.

It started out to be a great year for technology stocks. Amazon (AMZN) alone managed to double off its February mini crash bottom, while others like Apple (AAPL) rocketed by 56%. But traders may have visited the trough once too often

The truth is that technology stocks have not performed since June, right when the Mad Hedge Fund Trader dumped its entire portfolio. Only Microsoft (MSFT) and Amazon (AMZN) have managed to eke out new all-time highs since then, and only just.

The rest of tech has been moving either sideways in the most desultory way possible, or suffered cataclysmic declines like Facebook (FB) and Micron Technology (MU).

Of course, the trade wars haven’t helped. It’s amazing that big tech hasn’t already been hit harder given their intensely global business models.

Nor has rising interest rates. Big cap tech companies have such enormous cash balances that they are all net creditors to the financial system and actually benefit from higher interest rates. But dear money does slow the US economy and that DOES hurt their earnings prospects.

No, I’m not worried about tech for the long term. There is no analog company that can compete with a digital company anywhere in the world.

Accounting for 26% of the stock market capitalization and 50% of its profits, it’s only a question of when we get a major new up leg in share prices, not if.

The only unknown now is whether this next leg will take place before or after the next recession. Given the rate at which interest rates and oil prices are rising in the face of a slowing global economy, it’s looking like the recession may win the race.

As our tour ended, who did we see having dinner in the front window of one of the city’s leading restaurants? A young woman wearing a white wedding dress.

Yikes! Maybe the recession is sooner than I thought.

 

 

 

 

MHFTF

The Secret Behind the Double in Lockheed Martin’s Shares

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One of the blowout performers in recent years has been defense company Lockheed Martin (LMT), whose stock has doubled since 2014.

Even if we don’t get new wars, we still have several ongoing ones, the administration has promised substantially ramped up defense spending in coming years.

And thanks to a decade of downsizing and consolidation there are only a few serious players left in the sector.

That means a lot of money piling into a limited number of names.

However, there is one factor that is helping (LMT) that virtually no one outside the theoretical physics community knows about.

That would be ignition.

No, I don’t mean the rebuilt ignition you bought on eBay for the beat-up ’68 Cadillac El Dorado up on blocks in your front yard.

Lockheed Martin’s famed Skunk Works in the California high desert has finally come out of the closet and announced that it has made a major breakthrough in fusion research.

A small functioning reactor could be available in as little as three years.

If true, the news would be dynamite.

I have long been partial to Lockheed as a company as it employed my mother on an assembly line in Los Angeles to build B-17 bombers during WWII.

When I visited a secret Russian airbase in 1992 to view the wreckage of Gary Powers’ U-2 spy plane, the steel Lockheed serial number was unmistakable.

After I asked to take it home as a souvenir, my hosts replied with a very firm “Nyet!” and hurried me out of the facility, citing it as a “National Treasure.”

The new fusion technology would deliver ten times more power than conventional nuclear reactors at a fraction of the cost.

Fusion involves the combining of two hydrogen atoms to create one helium atom releasing immense amounts of power.

To know how much, simply refer to Albert Einstein’s famous equation, E = MC squared.

If successful, the discovery could make available unlimited amounts of carbon-free energy at near zero cost without creating any toxic waste.

The breakthrough relies on using a “magnetic bottle” to contain the several hundred million degrees of heat generated instead of four foot thick reinforced concrete containment structures.

So far, the stock market is clueless.

Economical fusion power, the type unleashed by thermonuclear hydrogen bombs, has long been the dream of physicists and long-term planners everywhere.

The focus of research has until now taken place at the National Ignition Facility next door to me at Lawrence Livermore National Labs in Livermore, California. There, progress has recently suffered several setbacks, cost overruns,  and time delays.

Mention California to most people, and images of love beads, tie-dyed T-shirts, and Birkenstocks come to mind.

But it is also the home of the first atomic bomb which was originally designed amid the vineyards and cow pastures of this bucolic suburb.

Dr. Robert Oppenheimer of the UC Berkeley School of Mining used to keep the first ever purified piece of plutonium in a file cabinet in his office that, thankfully, was made out of steel.

If it were a wooden cabinet, the US might have lost WWII.

Today, the world’s first cyclotron has been turned into a modern steel sculpture in a traffic roundabout, not a mile from my home.

The thinking at the time was that if someone accidentally flipped the wrong switch, it wouldn’t blow up San Francisco, or more importantly, Berkeley.

The $5 billion Livermore project aims 192 lasers at a BB-sized piece of frozen hydrogen, using fusion to convert it to helium and unlimited amounts of clean energy.

The heat released by this process reaches 100 million degrees, hotter than the core of the sun, and will be used to fuel conventional steam electric power plants.

The raw material is seawater and a byproduct is liquid hydrogen which can be used to fuel cars, trucks, and aircraft. If this all sounds like it is out of Star Trek, you’d be right.

I worked with these guys in the early 70s back when math was used to make things and before it was used to game financial markets, and I can tell you there is not a smarter and more dedicated bunch of people on the planet.

If it works, we will get unlimited amounts of clean energy for low cost in about 20 years. Oil will only be used to make plastics and fertilizer, taking the price down to $10 for domestic production only.

The crude left in the Middle East will become worthless. Lumps of coal will only be found in museums, or in jewelry, its original use. If it doesn’t work, it will melt the adjacent Mt. Diablo and take me with it.

If Lockheed’s fusion success is scalable, it could send the share price on a ballistic move from current levels.

It could well also drag the rest of the defense sector with it.

That would include Northrop Grumman (NOC) and Boeing Aircraft (BA).

If you don’t get your newsletter tomorrow, you’ll know what happened.

Now, what is this switch for?

 

 

 

Hi Mom!

MHFTF

October 10, 2018

, ,

Global Market Comments
October 10, 2018
Fiat Lux


SPECIAL TESLA ISSUE

Featured Trade:
(OCTOBER 14 SAVANNAH GEORGIA STRATEGY BREAKFAST),
(THE BULL CASE FOR TESLA),
 (TSLA), (GM), (F)

MHFTF

Sunday, October 14, 2018 - Savannah, GA Strategy Breakfast

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Come join John Thomas at the Mad Hedge Fund Trader’s Global Strategy Breakfast which I will be conducting in Savannah, Georgia on Sunday, October 14, 2018 at 8:00 AM. A sumptuous breakfast will be followed by an extended question and answer period.

I’ll be giving you my up to date view on stocks, bonds, foreign currencies, commodities, precious metals, energy, and real estate. And to keep you in suspense, I’ll be throwing a few surprises out there too. Tickets are available for $209.

Breakfast will be held at a downtown Victorian Savannah hotel nearby that will be emailed with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research.

To purchase tickets for the breakfast please click here.

 

MHFTF

The Bull Case for Tesla

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Talk about a bad news factory.

A short interest of 26% in Tesla (TSLA) stock has the tendency to manufacture bad news on a daily basis, whether it is true or not. It really has been a black swan a day.

This really is the most despised stock in the market. But you have to expect that when you are simultaneously disputing the auto, oil, dealer, and advertising industries, and doing it all union-free.

It also doesn’t help that Tesla is on the Department of Justice speed dial, undergoing no less than three investigations since the advent of the new administration. I can’t imagine why this is happening, given that the White House is now packed with oil industry executives.

That’s why I have been advising investors to buy the car and not the stock.

That is until now.

The truth is that all of this negativity is generating the best entry point for Tesla shares in two years.

In the meantime, the San Francisco Bay Area has become flooded with new Tesla 3’s. These are suddenly everywhere and soon will outnumber the ubiquitous Toyota Prius, until now the favorite of technology employees.

Q3 production of Tesla 3’s reached an eye-popping 55,840, up from 18,440 the previous quarter, taking Tesla’s total output to 80,000 including the model X.

That puts the company on target to reach 250,000 units in 2019. Tesla may be about to see something it has not witnessed in the company’s 15-year history: a real profit.

When I picked up my first Tesla 1 in 2010, chassis no. 125, I was all alone and treated like I was visiting royalty. The sales staff fawned all over me, offering me free hats, coffee mugs, and other tchotchke. Today, a staggering 200 people a day are gleefully driving their new wheels away from the Fremont factory, and another 200 getting them home-delivered by semis. Take a number and wait in line.

I have pinned down several of these drivers in parking lots, shopping malls, and trailheads to quiz them about their new ride and the answer is always the same. It’s a car from 20 years in the future, the best they have ever driven, and they will never buy another marque again.

Sounds pretty good, doesn’t it?

So I perked up the other day when I heard my old pal, legendary value investor Ron Baron, make the bull case for Tesla.

Ron has never done things by halves. He expects Tesla’s market capitalization to soar from $43 billion today to $1 trillion by 2030, a mere 12 years away. By then, Tesla should be generating $150 billion a year in profits. That implies that a 23-fold increase in the share price to $5,570 is ahead of us.

Half of this will be generated by the auto sales, while the other half will be produced by a burgeoning battery business. Tesla will easily become the largest auto manufacturer in the world within a few years.

Tesla will sell 10-15 million cars a year by 2030, compared to the current 300,000 annual rate.

It already is the one American auto maker with the highest US parts content, nearly 100%. It has also been one of the largest creators of new jobs over the past decade, right behind Amazon (AMZN), at some 46,000.

It’s really all about the math. Today, Tesla is building its Tesla 3’s at a cost of $28,000 apiece and selling them for $62,000. That’s the high price they have been realizing with extra options like four-wheel drive, 300-mile extended range batteries, painted wheels, and all the other bells and whistles. That gives you a $34,000 profit per vehicle.

Tesla’s “cheap” cars, the stripped-down rear wheel drive Tesla 3’s that will sell for a modest but world-beating $35,000 won’t be available until early 2019.

At this rate, the entire company will become profitable when it hits a production rate of 10,000 units a week compared to the current 6,000 units. They should achieve that sometime in early 2019.

Much has been made of drone video footage showing vast parking lots in Fremont, CA chock-a-block with shiny new Tesla 3’s. This creates a false sense of poor sales.

The actual fact is that Tesla has no dealer network. All of those parked cars have been sold and are awaiting owners to pick them up. The months it takes from payment to actual delivery gives Tesla a free float on billions of dollars. That’s worth a lot in a world of steadily rising interest rates.

Oh, and those notorious tents? They could withstand a category 5 hurricane. However, like everything else the company does, they’re revolutionary. They enable bypassed permitting procedures and can be built very quickly and cheaply.

How are things going with the competition? Not so good. The traditional internal combustion car industry has hundreds of billions of dollars tied up in engine factories that will eventually become worthless. They really are the 21st century equivalent of buggy whip makers.

General Motors (GM), Ford (F), and Chrysler are executing slow motion roll out of electric cars in order to squeeze a few more years of use out of these legacy plants. Electric cars don’t use engines. That is putting them ever further behind.

This is what the poor share performance of auto shares has been screaming at you all year despite one of the strongest economies and stock markets in history. Yes, “peak Auto” is at hand.

The high-end brands like Mercedes, BMW, Audi, and Porsche that just entered the all-electric market are a decade behind Tesla in autonomous software and manufacturing processes. They all have huge, expensive dealer networks.

Let’s see how sales go after they suffer their first fatal crash. In the meantime, Tesla has run up 200 million miles worth of driving data.

Factory insiders say a speed-up of new Tesla orders is in the works. Orders placed before December 31, 2018 are entitled to a $7,500 federal tax credit. That drops to $3,750 in the first half of 2019, only $1,750 in the second half, and zero in 2020.

In the meantime, the oil industry is still collecting $55 billion a year of federal oil depletion allowances. Go figure.

At the same time, many states like California, far and away Tesla’s largest market (Texas is no. 2), are either maintaining or expanding their own electric car subsidies or gas guzzler penalties. It is $2,500 per car in California.

Ron Baron is not alone in his admiration of Tesla. Macquarie Research has just initiated coverage with a strong “BUY” and a target of $430 a share, up 70% from today’s close.

Next in the works will be a Tesla Model Y, a small four-wheel drive based on the Tesla 3 chassis. A Roadster relaunch comes next in 2022, a $250,000 super car that will be doubtless aimed at Arab sheiks and billionaire car collectors.

By then the entire product line will spell SEXY. See! Elon Musk does have a sense of humor after all!

My First S-1

 

RIP

 

 

My New Wheels

 

MHFTF

October 9, 2018

, ,

Global Market Comments
October 9, 2018
Fiat Lux


SPECIAL REPORT ON GOLD

Featured Trade:
(TAKING A LOOK AT GOLD LEAPS),
(GLD), (ABX), (AMZN)

MHFTF

Taking a Look at Gold LEAPS

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As incredible as it may sound, I’m starting to hear good things about gold. That’s amazing as the barbarous relic has been the red headed step child of the financial markets for the past six years. Not since the yellow metal peaked in 2011 have I heard the talk so bullish.

You can thank central banks which have become the principal buyers of gold in 2018. China is always the largest buyer. It has been joined by Russia, which is avoiding American trade sanction, and Kazakhstan. Now Poland has joined the fray. Central banks have accounted for a stunning 264 metric tonnes of purchases this year, or some 9.3 million ounces.

You can thank the coming return of inflation in the US economy, gold’s best friend. With a 4.2% GDP growth rate in Q2, the return of rapidly rising prices is just a matter of time. We here in Silicon Valley have grown inured to ever rising prices for everything. You in the rest of the country are about to get the bad news.

You can thank Amazon (AMZN) founder Jeff Bezos for pouring gasoline on the fire. By giving 250,000 US workers a 25% pay increase from $12 to $15, he has created a national short squeeze for minimum wage workers. If McDonald’s (MCD), Target (TGT), and Wal-Mart (WMT) join the fray, as they must or lose workers, wage inflation will go national.

Yes, you can remind me that rising interest rates are a terrible backdrop against which to own gold. The Federal Reserve has essentially promised us four more 25 basis point rate hikes by next summer. That would take the overnight rate to 3.25%, a historically "normalized” rate.

But what happens when the rate hikes stop? Gold takes off like a scalded chimp.

It is in fact a myth that gold can’t perform in a raising rate environment. When you look at gold’s “golden age” during the 1970’s when the barbarous relic rocketed from $34 to $900, a 24-fold increase, interest rates were rising almost as fast.

Over the same time period, the ten-year US Treasury yield soared from 5% to 16%. At the end of the day, investors fear inflation far more than high interest rates.

So when you believe that an oversold asset is about to turn but don’t know when, what is the best course of action?

Long Term Equity Anticipation Securities, or LEAPS, are a great way to play the market when you expect a substantial move up in a security over a long period of time. Get these right and the returns over 18 months can amount to several hundred percent.

At market bottoms these are a dollar a dozen. At all-time highs they are as scarce as hen’s teeth. However, scouring all asset classes there are a few sweet ones to be had.

Today, you can buy the SPDR Gold Shares ETF (GLD) January 2020 $120-$125 call spread for $1.60. For those who are new to the Mad Hedge Fund Trader, that involves buying the January 2020 $120 call and selling short the January 2020 $125 call.

This has the attributes of reducing your cost and minimizing the cost of time decay while giving you highly leveraged upside exposure over a long period of time.

If the price of gold rises by $11.20, from $113.80 to $125, a mere 9.8% by the January 17 option expiration date, the profit on this trade will amount to 212.5%. In order words, a $1,000 investment will become worth $3,125 if gold simply returns back to where it was in April.

If you’re more aggressive than I am (unlikely), you can buy the SPDR Gold Shares ETF (GLD) January 2020 $125-$130 call spread for $1.00, That would give you a maximum potential profit of 400%. In order words, a $1,000 investment will become worth $5,000 if gold simply return back to its February 2018 high.

A number of other fundamental factors are coming into play that will have a long-term positive influence on the price of the barbarous relic.

The only question is not if, but when the next bull market in the yellow metal will accelerate.

All of the positive arguments in favor of gold all boil down to a single issue: they're not making it anymore.

Take a look at the chart below and you'll see that new gold discoveries are in free fall. That's because falling prices from 2011 to 2018 caused exploration budgets to fall off a cliff.

Gold production peaked in the fourth quarter of 2015 and is expected to decline by 20% in the following four years.

The industry average cost is thought to be around $1,400 an ounce, although some legacy mines such as at Barrack Gold (ABX) can produce it for as little as $600.

So why dig out more of the stuff if it means losing more money?

It all sets up a potential turn in the classic commodities cycle. Falling prices demolish production and wipe out investors. This inevitably leads to supply shortages.

When the buyers finally return for the usual cyclical macro-economic reasons, there is none to be had, and price spikes can occur which can continue for years.

In other words, the cure for low prices is low prices.

Worried about new supply quickly coming on-stream and killing the rally?

It can take ten years to get a new mine started from scratch by the time you include capital rising, permits, infrastructure construction, logistics and bribes.

It turns out that the brightest prospects for new gold mines are all in some of the world's most inaccessible, inhospitable, and expensive places.

Good luck recruiting for the Congo!

That's the great thing about commodities. You can't just turn on a printing press and create more, as you can with stocks and bonds.

Take all the gold mined in human history, from the time of the ancient pharaohs to today, and it could comprise a cube 63 feet on a side.

That includes the one-kilo ($38,720) Nazi gold bars with stamped German eagles upon them which I saw in Swiss bank vaults during the 1980's when I was a bank director there.

In short, there is not a lot to spread around.

The long-term argument in favor of gold never really went away.

That involves emerging nation central banks, especially those in China and India, raising gold bullion holdings to western levels. That would require them to purchase several thousand tonnes of the yellow metal!

Venezuela has also been a huge gold seller to head off an economic collapse, thanks to the disastrous domestic policies there.

When this selling abates, it also could well shatter the ceiling for the yellow metal.

Tally ho!

  

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