Global Market Comments
August 14, 2018
Fiat Lux
Featured Trade:
(WHY BANKS HAVE PERFORMED SO BADLY THIS YEAR),
(JPM), (C), (GS), (SCHW), (WFC),
(HOW FREE ENERGY WILL POWER THE COMING ROARING TWENTIES),
(SPWR), (TSLA)
I went to the local branch of Wells Fargo Bank (WFC) yesterday, and I was appalled. The bank occupied the most expensive corner in town. It was staffed by a dozen people, all of whom spoke English as a second language.
Ask even the simplest question and they had to call a support center and wait 10 minutes on hold for the answer. It took an hour for me to open a checking account for one of my kids. The branch was in effect a glorified call center.
I thought, "This can't last." And it won't.
Banks were supposed to be the sector to own this year. They had everything going for them. The economy was booming, interest rates were rising, and regulations were falling like leaves in the fall.
Despite all these gale force fundamental tailwinds the banks have utterly failed to deliver. The gold standard J.P. Morgan is up only 8.46% on the year, while bad boy Citibank (C) is down 5.47%, and the vampire squid Goldman Sachs (GS) is off a gut-punching 10.27%. Where did the bull market go? Why have bank shares performed so miserably?
The obvious reason could be that the improved 2018 business environment was entirely discounted by the big moves we saw in 2017. Last year, banks were the shares to own with (JPM) shares up a robust 24.5%, while (C) catapulted by 29.3%.
It is possible that bank shares are acting like a very early canary in the coal mine, tweeting about an approaching recession. Loan growth has been near zero this year. That is not typical for a booming economy. It IS typical going into a recession.
When the fundamentals arrive as predicted but the stock fails to perform it can only mean one thing. The industry is undergoing a long-term structural change from which it may not recover. Yes, the bank industry may be the modern-day equivalent of the proverbial buggy whip maker just before Detroit took over the transportation business.
Managing a research service such as the Mad Hedge Technology Letter, it is easy to see how this is happening. Financial services are being disrupted on a hundred fronts, and the cumulative effect may be that it will no long exist.
This explains why this is the first bull market in history where there has been no new hiring by Wall Street. What happens when we go into a bear market? Employment will drop by half and those expensive national branch networks will disappear.
Financial services are still rife with endless fees, poor service, and uncompetitive returns. Online brokers such as Robin Hood (click here) will execute stock and option transactions for free. Now that overnight deposits actually pay a return they make their money on margin loans. They have no branch network but are still SIPC insured.
Legacy brokers such as Fidelity and Charles Schwab (SCHW) used to charge $25 a share to execute and are still charging $7.00 for full-service clients. And it's not as if their research has been so great to justify these high prices either. In a world that is getting Amazoned by the day, these high prices can't stand.
Regular online banking service also pay interest and are about to eat the big banks' lunch. Many now pay 1.75% overnight interest rates and offer free debit and credit cards, and checking accounts. Of course, none of these are household names yet, but they will be.
To win the long-term investment game you have to identify the industries of the future and run from the industries of the past. The legacy financial industry is increasingly looking like a story from the past.
Are Big Banks Ready for the Future?
Global Market Comments
August 13, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD,
or COMING HOME TO TROUBLE),
(TUR), (TLT), (UUP), (FXE), (TSLA),
(ARE YOU IN THE 1%?),
(SNE), (HMC), (TLT)
Ho Hum. Another week, another financial crisis. And why did I rush back from the bucolic mountain pastures of Zermatt? To come back to the smoke-laden skies from the Northern California forest fires? It all must be an early sign of dementia.
Trump's foreign policy now seems crystal clear; to destroy the economies of all our allies. That's what he accomplished with NATO member Turkey today by doubling tariffs, triggering an instant 20% devaluation of the Turkish Lira. Turkey has been at war with Russia for 600 years.
Most Turkish companies have their debts in U.S. dollars or Euros (FXE), so you can write them off. That puts European banks at risk of another crisis, which could quickly turn global in nature. The flip side of this move was to take the U.S. dollar (UUP) to a new high for the year, thus crushing our own exporters even further.
Did our stock market care? Well. Actually yes, taking the Dow Average down 300 points. Will it care more than today? Probably not. All we are seeing is profit taking in some of the most overbought high fliers.
That is, unless, you are a soybean farmer, who saw prices collapse yet again. I watch bean prices closely these days, as it is an indicator of the market's expectation of intensifying trade wars.
After four decades of efforts to develop the Chinese markets, those efforts are going up in flames. And that business is not coming back now that the U.S. has proved itself an unreliable partner. As anyone in business will tell you, you only get to offend a customer once.
Markets generally believe that the U.S. trade war against the rest of the world is nothing more than a negotiating ploy. If that is not the case and they go on and on, you can move up the next recession and bear market by a year, like to tomorrow.
Perhaps the most important news of the week was the July Consumer Price Index leaping to 2.9%, a decade high. This is on the heels of the 2.7% pop in Average Hourly Earnings that came with the July Nonfarm Payroll Report.
Yes, ladies and gentlemen, this is called inflation. And while bonds normally get destroyed by such a data point, fixed income markets instead decided to focus on the strong U.S. dollar.
That was enough to entice me to sell short the U.S. Treasury bonds (TLT) for the first time in three months. With the Fed raising interest rates on September 25 by 25 basis points, what could go wrong?
Tesla (TSLA) sucked a lot of the air out of the room this week with its mooted buyout at $420 a share. I think it will happen. There is a global capital glut right now, with trillions of dollars of capital looking for a home. Ownership of Tesla would be a great hedge for Saudi Arabia against falling oil prices, which already owns 4% of the company. And guess who the world's largest per capita buyer of Tesla's is? Norway, which has a $1 trillion sovereign wealth fund of its own. The proposed $82 billion price tag for Tesla would look like pennies on the dollar.
Tip toeing back into the market with two cautious positions has boosted my August performance to 1.32%. My 2018 year-to-date performance has clawed its way up to 26.14% and my nine-year return appreciated to 302.61%. The Averaged Annualized Return stands at 34.91%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 32.24%.
This coming week will be a very boring week on the data front.
On Monday, August 13, there will be nothing of note to report. It will just be another boring summer day.
On Tuesday, August 14, at 6:00 AM EST, we get the weekly NFIB Small Business Optimism Report.
On Wednesday, August 15, at 9:15 AM, we learn July Industrial Production.
Thursday, August 16, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are July Housing Starts. At 4:30 PM, we learn the July Money Supply, which we might have to start paying attention to, now that inflation is on the rise.
On Friday, August 17, at 10:00 AM EST, we get Leading Economic Indicators. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, I will be stuck indoors this weekend and the government has warned me not to go outside unless absolutely necessary because the air quality is so bad. Maybe I can sneak out to Costco at some point to replenish my empty refrigerator.
Good luck and good trading.
Global Market Comments
August 10, 2018
Fiat Lux
Featured Trade:
(AUGUST 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TBT), (PIN), (ISRG), (EDIT), (MU), (LRCX), (NVDA),
(FXE), (FXA), (FXY), (BOTZ), (VALE), (TSLA), (AMZN),
(THE DEATH OF THE CAR),
(GM), (F), (TSLA), (GOOG), (AAPL)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader August 8 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: What should I do about my (SPY) $290-295 put spread?
A: That is fairly close to the money, so it is a high-risk trade. If you feel like carrying a lot of risk, keep it. If you want to sleep better at night, I would get out on the next dip. The market has 100 reasons to go down and two to go up, the possible end of trade wars and continuing excess global liquidity, and the market is focusing on the two for now.
Q: What are your thoughts on the ProShares Ultra Short Treasury Bond Fund (TBT)?
A: Short term, it's a sell. Long term it's a buy. It's possible we could get a breakout in the bond market here, at the 3% yield level. If that happens, you could get another five points quickly in the TBT. J.P. Morgan's Jamie Diamond thinks we could hit a 5% yield in a year. I think that's high but we are definitely headed in that direction.
Q: What are your thoughts on the India ETF (PIN)?
A: It goes higher. It's been the best-performing emerging market, and a major hedge fund long for the last five years. The basic story is that India is the next China. Indicia is the next big infrastructure build-out. Once India gets regulatory issues out of the way, look for more continued performance.
Q: What are your thoughts on Intuitive Surgical (ISRG)?
A: Intuitive is a kind of microcosm in the market right now. It's trading well above a significant support level, which happens to be $508. I don't typically like Intuitive Surgical stock because the options are very inefficient, and therefore very pricey. I think, at this point, there is a bigger possibility of it breaking down than continuing to head higher. In other words, it's overbought. Buy long term, the sector has a giant tailwind behind it with 80 million retiring baby boomers.
Q: What are your thoughts on the entire chip sector, including Micron (MU), Lam Research (LRCX) and NVIDIA (NVDA)?
A: NVIDIA is the top of the value chain in the entire sector, and it looks like it wants to break to a new high. My target is $300 by the end of the year, from the current $240s. I think the same will happen with Lam Research (LRCX), which just had a massive rally. All three of these have major China businesses; China buys 80% of its chips from the U.S. You can do these in order in the value chain; the lowest value-added company is Micron, followed by Lam Research, followed by NVIDIA, and the performance reflects all of that. So, I think until we get out of the trade wars, Micron will be mired down here. Once it ends, look for it to get a very sharp upside move. Lam is already starting to make its move and so is NVIDIA. Long term, Lam and NVIDIA have doubles in them, so it's not a bad place to buy right here.
Q: You once recommended the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ) which is now down 10%, one of your few misses. Keep or sell?
A: Keep. It's had the same correction as the rest of Technology. All corrections in Technology are short term in nature--the long-term bull story is still there. (BOTZ) is a huge play on artificial intelligence and automation, so that is going to be with us for a long time, it's just enduring a temporary short-term correction right now, and I would keep it.
Q: What do you have to say about the CRISPR stocks like Editas Medicine Inc. (EDIT)?
A: The whole sector got slammed by a single report that said CRISPR causes cancer, which is complete nonsense. So, I would use this sell-off to increase your current positions. I certainly wouldn't be selling down here.
Q: What could soften the strong dollar?
A: Only one thing: a recession in the U.S. and an end to the interest-raising cycle, which is at least a year off, maybe two. Keep buying the U.S. dollar and selling the currencies (FXE), (FXY), (FXA) until then.
Q: What are your thoughts on Baidu and Alibaba?
A: I thought China tech would get dragged down by the trade wars, but they behaved just as well as our tech companies, so I'd be buying them on dips here. Again, if we do win the trade wars, these Chinese tech companies could rocket. The fundamental stories for all of them is fantastic anyway, so it's a good long-term hold.
Q: Have you looked at Companhia Vale do Rio Doce (VALE)? (A major iron ore producer)
A: No, I've kind of ignored commodities all this year, because it's such a terrible place to be. If we had a red-hot economy, globally you would want to own commodities, but as long as the recovery now is limited to only the U.S., it's not enough to keep the commodity space going. So, I would take your profits up here.
Q: With Tesla (TSLA) up $100 in two weeks should I sell?
A: Absolute. If the $420 buyout goes through you have $40 of upside. If it doesn't, you have $140 of downside. It's a risk/reward that drives like a Ford Pinto.
Q: How long will it take global QE (quantitative easing) to unwind?
A: At least 10 years. While we ended our QE four years ago, Europe and Japan are still continuing theirs. That's why stocks keep going up and bonds won't go down. There is too much cash in the world to sell anything.
Q: Apple (AAPL)won the race to be the first $1 trillion company. Who will win the race to be the first $2 trillion company?
A: No doubt it is will be Amazon (AMZN). It has a half dozen major sectors that are growing gangbusters, like Amazon Web Services. Food and health care are big targets going forward. They could also buy one of the big ticket selling companies to get into that business, like Ticketmaster.
Good Luck and Good trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
One of the goals of the Diary of a Mad Hedge Fund Trader is to identify major changes in the global economy early enough to get investors into the impacted shares early.
The death of the car is one of those trends, and it is still early, very early.
This is a very big deal.
Earlier in my lifetime, car production directly and indirectly accounted for about one-third of the U.S. economy.
Much of the growth during our earlier Golden Ages, in the 1920s and the 1950s, were driven by a never-ending cycle of upgrades of our favorite form of transportation and the countless ancillary products and services needed to support them.
Today, 253 million automobiles and trucks prowl America's roads, about half the world's total, with an average age of 11.4 years.
The demise of this crucial industry started during the 2008 crash, when (GM) and Chrysler (owned by Fiat) went bankrupt. Only more conservatively run, family owned Ford (F) survived on its own.
The government stepped in with massive bailouts. That was the cheaper options for the Feds, as the cost of benefits for an entire unemployed industry was far greater than the cost of the companies absorbed.
If it hadn't done so, the auto industry would have decamped for a new base near the technology hub in California, and today would be a decade closer to their futures than they are now.
And remember, the government made billions of dollars of profits from its brief foray into the auto industry. It was one of the best returns on investment in history.
I'll breakout the major directions the industry is now taking. Hint: It doesn't have much to do with traditional metal bashing.
The Car as a Peripheral
The important thing about a car today is not the car, but the various doodads, doohickeys, gizmos, and gadgets they stick in them.
In this category you can include 24/7 4G wireless, full Internet access, mapping software, artificial intelligence, and learning programs. 5G will accelerate this functionality tenfold.
(GM) is now installing more than 100 microprocessors in its vehicles to control and monitor various functions.
Good luck doing your own tune-ups.
The Car as a Service
When you think about it, automobile ownership is a wildly inefficient use of capital. It is usually a family's second-largest expense, after their home, running $30,000-$80,000.
It then sits unused in garages or public parking for 96%-98% of the day. Insurance, maintenance, and liability costs can be off the charts.
What if your car was used 24/7, as is machinery in well-run industrial plants? Your cost drops by 96%-98% to the point where it is almost free.
The sharing economy is the way to accomplish this.
We are already seeing several start-ups in major U.S. cities attempting to achieve this such as Zipcar, Car2Go, Getaround, Turo (formerly RelayRides), and City CarShare.
What happens to conventional car companies when consumers shift from ownership to sharing? Demand plunges by 96%-98%.
Perhaps that is why auto shares (GM), (F) have performed so abysmally this year relative to technology and the main market.
Self-Driving Technology
This is the hottest development area in the industry, with Apple (AAPL), Alphabet (GOOG), and the big European car makers committing thousands of engineers.
Let's say your car is now comfortably driving you to work, allowing you to read the morning papers and catch up on your email. Or maybe you're lazy and would rather watch the season finale for Game of Thrones.
What else is possible?
How about if, instead of parking, your car drops you off, saving that exorbitant fee.
Then it joins Uber, picking up local riders and paying for its own way. It then dutifully returns to pick you up at your office when it's time to go home.
Since the crash rate for computers is vastly lower than for humans, car insurance rates will collapse, gutting that industry.
Ditto for life insurance, as 35,000 people a year will no longer die in car crashes.
Half of all emergency room visits are the result of car accidents, so that business disappears too, dramatically shrinking health care costs in the process.
I have been letting my new Tesla S-1 drive me since last year, and I can assure you that the car can drive better than I can, especially at night.
What better way to get home after I have downed a bottle of Caymus cabernet at a city restaurant?
Driverless electric cars are totally silent, increasing the value of land near freeways.
Nor do they require much maintenance, as they have so few moving parts. Exit the car repair industry.
I could go on and on, but you get the general idea.
For more on the topic, please read "Test Driving Tesla's Self Driving Technology" by clicking here.
Virtual Reality
After 30 years of inadequate infrastructure budgets, trying to get into any American city center is a complete nightmare.
Only last week, a cattle truck turned over on the Golden Gate Bridge, bringing traffic to a halt. Fortunately, a cowboy traveling to a nearby rodeo was able to unload his horse and lasso the errant critters (no, it wasn't me!).
Even if you get into the city, you will be greeted by a $40 tab for a parking space. Hopefully, no one will smash your windows and steal your laptop (happened to me last year).
Why bother?
Thirty years ago, teleconferencing services pitched themselves as replacing the airplane.
Today, we are taking the next step, using Skype and GoToMeeting to conduct even local meetings, as we do at the Mad Hedge Fund Trader.
Virtual reality is clearly the next step, providing a 3-D, 360-degree experience that makes you feel like you and your products are actually there.
Better to leave that car in the garage where it can get a top up on its charge. BART is cheaper anyway, when it runs.
New Materials
We are probably five years away from adopting the carbon fiber technology now used in the aircraft industry for mass-market cars. Carbon has one-tenth the weight of steel, with five times the strength.
The next great leap forward for electric cars won't be through better batteries. It will come through a 70% reduction of the mass of a car, tripling ranges with existing technology.
San Francisco Becomes the Car Capital of the World
This will definitely NOT happen, as sky-high rents assure that the city by the bay will never attract large, labor-intensive industries.
Instead, the industry will develop much as the one for smartphones. The high value-added aspects, design and programming, will stay in California.
The assembly of the chassis, the body, and the rest of the vehicle will be best done in low-cost, tax-free states with a lot of land, such as Texas and Nevada.
What will happen to Detroit? It has already become a favored destination of new venture capital financial start-ups. The cost of offices and housing is virtually free.
Seems Alive to Me
Global Market Comments
August 9, 2018
Fiat Lux
Featured Trade:
(WHY YOU SHOULD AVOID THE CRYPTOCURRENCIES LIKE THE PLAGUE),
(BITCOIN), (GLD),
(TESTIMONIAL)
With Bitcoin probing new lows in its 9-month-old bear market, I am starting to get deluged with questions from readers as to whether it is time to buy.
My answer is always the same.
I wouldn't touch it with a 10-foot pole. I wouldn't even buy it with Donald Trump's money.
Bitcoin was a great buy at $1.00. At $6,000? Not so much. At the December $20,000 high? Yikes!
The inquiries are being driven by analysis from friends of mine, such as Tom Lee of Fundstrat, concluding that the theoretical value of Bitcoin could be as high as $50,000.
These are based on some obscure calculations of Bitcoin's value relative to the size of the global monetary base.
By the way, the same calculations done elsewhere suggest that gold (GLD) should also be worth $50,000 an ounce. Today, gold is trading at a lowly $1,218.
Here is the problem that I have with all cryptocurrencies.
The security is terrible.
When your Platinum American Express card is stolen, you just conveniently call the 800-number listed on the back of the card.
Not so with cryptocurrencies. When it's gone, it's gone. There is no recourse anywhere.
According to Chainalysis, a New York-based firm that sells ant- money laundering software, about 10% of all outstanding cryptocurrencies were stolen last year worth about $225 million.
More than 30,000 investors have fallen prey to ethereum-based scams alone, losing an average of $7,500 each.
The security for Bitcoin is no better.
There are in fact 32 cryptocurrencies now trading online, including Auroracoin, Dash, Gridcoin, Primecoin, and Zcash.
Most of these are originated abroad, often in countries with no U.S. extradition treaty.
New cryptocurrency issuance is expected to exceed $1.6 billion this year.
There is no limit. The number of cryptocurrencies that can ultimately be issued is infinite. Think of them as modern-day tulips.
According to the FBI, cyber-fraud in the U.S. topped $390 billion in 2015. Retired FBI chief Robert Mueller once told me that the bulk of all American crime now takes place online.
It is THE preferred method of picking your pocket.
Cryptocurrencies most often fall victim to the phishing scams by crooks posing as legitimate cryptocurrency creators, or "miners" as they are known.
Once the victims open up their digital currency accounts, they are cleaned out.
It doesn't help that cryptocurrencies have become the currency of choice for a number of criminal enterprises, including those employing ransomware attacks.
About 99% of the daily trading volume in Bitcoin takes place with Chinese counterparties.
They need it to sidestep strict foreign exchange restrictions and capital controls.
The average Chinese is not allowed to take more than $50,000 a year out of the country. Extensive disclosures on the use of funds are also required to discourage money laundering.
Bitcoin has also been popular in other emerging countries where the convertibility of their own currencies is either sketchy or nonexistent.
It is possible that cryptocurrencies and the blockchain technology they use have a role in the financial system in the future. I'm thinking the FAR future.
However, massive investments are first required in infrastructure and security. The technology needs to mature.
When online commerce first emerged in the mid-1990s, I was similarly suspicious.
I used a low-limit credit card for my first Amazon purchase, even though I personally knew the founder of the company.
That way, if my card got stolen, the loss would be manageable.
I may take a similar approach to cryptocurrencies in the future. Again, in the FAR future.
Personally, I would rather buy gold if a currency alternative was my inclination.
For a much more extensive discussion of Bitcoin specifically, please click here for "Is There a Bitcoin in Your Future."
Pick Your Poison
Mr. Mad Hedge Fund!
This is an old B-52 pilot with over 325 combat missions in Vietnam, flying out of Guam, Okinawa and Thailand, and the past Air Force Wing Commander of the Bomb Wing on Guam 1981-1983.
I am extremely pleased to have happened onto your website and, thusly, I have canceled some other subscriptions, narrowing myself down to only two!
Your bio has to be one of the most interesting reads that will ever exist relative to what all you have accomplished in life!
Have a great day!
So glad I ran across your site--have a great evening!!
Doug
