Global Market Comments
April 18, 2018
Fiat Lux
Special Residential Real Estate Issue
Featured Trade:
(WHY THE HOMEBUILDERS ARE NOT DEAD YET),
(DHI), (TOL), (LEN), (ITB), (KBH)
It was as if someone had turned out the lights.
The homebuilders, after delivering one of the most prolific investment performance of any sector until the end of January, suddenly collapsed.
Since then, they have been dead as a door knob, flat on their backs, barely exhibiting a breath of life. While most of the market has since seen massive short covering rallies, the homebuilders have remained moribund.
The knee-jerk reaction has been to blame rising interest rates. But in fact, rates have barely moved since the homebuilders peaked, the 10-year US treasury yield remaining confined to an ultra-narrow tedious 2.72% to 2.95% yield.
The surprise Canadian limber import duty has definitely hurt, raising the price of a new home by an average of $3,000. But that is not enough to demolish the entire sector, especially given long lines at homebuilder model homes.
Are the homebuilders gone for good? Or are they just resting.
I vote for the later.
For years now, I have begged, pleaded, and beseeched readers to pour as much money as they can into residential real estate.
Investing in your own residence has generated far and away the largest returns on investment for the past five years, and this will continue for the next 10 to 15 years.
For we are still in the early innings of a major real estate boom.
A home you buy today could increase in value tenfold by 2030, and more if you do so on the high-growth coasts.
And while I have been preaching this view to followers for years, I have been assaulted by the slings and arrows of naysayers predicting that the next housing crash is just around the corner - only this time, it will be worse.
I have recently gained some important new firepower in my campaign.
My friends at alma mater UC Berkley (Go Bears!), specifically the Fisher Center for Real Estate and Urban Economics, have just published a report written by the Rosen Consulting Group that is blowing the socks off the entire real estate world.
The implications for markets, and indeed the nation as a whole, are nothing less than mind-blowing.
It's like having a Marine detachment of 155 mm howitzers suddenly come in on your side.
The big revelation is that only a few minor tweaks and massaging of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 could unleash a new tidal wave of home buyers that will send house prices, and the shares of homebuilders (ITB) ballistic.
The real estate industry would at last be restored to its former glory.
That's the happy ending. Now let's get down to the nitty gritty.
First, let's review the wreckage of the 2008 housing crash.
Real estate probably suffered more than any other industry during the Great Recession.
After all, the banks received a federal bailout, and General Motors was taken over by the Feds. Remember Cash for Clunkers?
No such luck with politically unconnected real estate agents and homebuilders.
As a result, private homeownership in the US has cratered from 69.2% in 2006 to 63.4% in 2016, a 50-year low.
Homeownership for married couples was cut from 84.1% to 79.6%.
Among major cities, San Diego led the charge to the downside, an area where minority and immigrant participation in the market is particularly high, with homeownership shrinking from 65.7% to a lowly 51.8%.
Home price declines were worse in the major subprime cities of Las Vegas, Phoenix, and Miami.
There were a staggering 9.4 million foreclosures during 2007-2014, with adjustable rate loans accounting for two-thirds of the total.
Some 8.7 million jobs were lost from 2007-2010, while the unemployment rate soared from 5.0% to 10%. The collapse in disposable income that followed made a rapid recovery in home prices impossible.
As a result, real estate's contribution to US GDP growth fell from 17.9% of the total to only 15.6% in 2016.
That is a big hit for the economy and is a major reason why growth has remained stuck in recent years at a 2% annual rate.
While the ruins were still smoking, Congress passed Dodd-Frank in 2010. The bill succeeded in preventing any more large banks from going under, with massive recapitalization requirements.
As a result, US banks are now the strongest in the world (and also a great BUY at these levels).
But it also clipped the banks' wings with stringent new lending restrictions.
I recently refinanced my homes to lock in 3% interest rates for the long term, since inflation is returning, and I can't tell you what a nightmare it was.
I had to pay a year's worth of home insurance and county property taxes in advance, which were then kept in an impound account.
I was forced to supply two years worth of bank statements for five different accounts.
Handing over two years worth of federal tax returns wasn't good enough.
To prevent borrowers from ginning up their own on TurboTax, a common tactic for marginal borrowers before the last crash, they must be independently verified with a full IRS transcript.
Guess what? A budget constrained IRS is remarkably slow and inefficient at performing this task. Three attempts are common, while your loan sits in limbo.
(And don't even think of asking for Donald Trump's return when you do this. They have NO sense of humor at the IRS!)
Heaven help you if you have a FICO score under 700.
I had to hand over a dozen letters of explanation dealing with assorted anomalies in my finances. My life is complicated.
Their chief goal seemed to be to absolve the lender from any liability whatsoever.
And here's the real killer.
From 2014, banks were forced to require from borrowers a 43% debt service to income ratio. In other words, your monthly interest payment, property taxes, and real estate taxes can't exceed 43% of your monthly gross income.
This hurdle alone has been the death of a thousand loans.
It is no surprise then that the outstanding balance of home mortgages has seen its sharpest drop in history, from $11.3 trillion to $9.8 trillion during 2008-2014. It is down by a third since the 2007 peak.
Loans that DO get done have seen their average FICO scores jump from 707 to 760.
Rocketing home prices are making matters worse, by reducing affordability.
Only 56% of the population can now qualify to buy the mean American home priced at $224,000, which is up 7.7% YOY.
Residential fixed investment is now 32% lower than the 2005 peak.
Also weighing on the market was a student loan balance that rocketed by 400% to $1.3 trillion since 2003. This eliminated a principal source of first-time buyers from the market, a major source of new capital at the low end.
Now for the good news.
Keep Dodd-Frank's capital requirements, but ease up on the lending standards only slightly, and all of the trends that have been a drag on the market quickly reverse.
And yes, some 2.3% in missing US GDP comes back in a hurry, and then some. That's a whole year's worth of economic growth at current rates.
Rising incomes generated by a full employment economy increase loan approvals.
Foreclosure rates will fall.
More capital will pour into homebuilding, alleviating severely constrained supply.
More investment in homes as inflation hedges steps up from here.
The entry of Millennials into the market in a serious way for the first time further increases demand.
Promised individual tax cuts will add a turbocharger to this market.
There is one way the Trump administration could demolish this housing renaissance.
If the deductibility of home mortgage interest from taxable income on Form 1040 Schedule "A" is cut back or eliminated to pay for tax cuts for the wealthy, a proposal now being actively discussed in the White House, the whole party is canceled.
The average American will lose his biggest tax break, and the impact on housing will be huge.
A continued war on immigrants will also hurt, which accounted for one-third of all new households from 1994-2015.
You see, we let them in for a good reason.
Assuming this policy self-inflicted wound doesn't happen, the entire homebuilding sector is a screaming "BUY."
On the menu are Toll Brothers (TOL), DH Horton (DHI), and Pulte Homes (PHM).
You can also add the IShares US Home Construction ETF (ITB), a basket of the leading homebuilding names (For the prospectus, click here.)
To read the UC Berkeley report in its entirety, entitled Homeownership in Crisis: Where Are We Now? a must for any serious real estate professional or investor, please download the PDF file for free by clicking here.
The bottom line here is that after a three-month break, the stirrings of a recovery in homebuilders may be just beginning.
Where It's Hot
It's Always Better on the Coasts
Global Market Comments
April 17, 2018
Fiat Lux
Featured Trade:
(HAS THE RECESSION ALREADY STARTED?)
(WHERE THE ECONOMIST "BIG MAC" INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (CYB)
It started with a slow drip.
Then it became a trickle.
Now it is an undeniable torrent.
Negative economic data reports, once as rare as hen's teeth, have suddenly become as common as NRA bumper stickers at a Trump rally. The economic data flow has definitely turned sour.
Is this a growth scare? Or is it the beginning of a full-blown recession, the return of which investors have been dreading for the past nine years.
The data flow was hotter than hot going into January, taking the stock market to a new all-time high.
We only got final confirmation of this a few weeks ago, when the last report on Q4 GDP rose by 0.2% to 2.9%, one of the best readings in years.
Then the rot began.
At first it was just one or two minor, inconsequential reports here and there. Then they ALL turned bad. Not by large amounts, but by small incremental ones, frequent enough to notice.
The February Dallas Fed General Business Activity Index dropped from 28 to 21, the March Institute of Supply Management Manufacturing Activity declined from 61 to 59, while Services Activity shaved a point, from 59 to 58.
The big one has been the March Nonfarm Payroll Report - that printed a soft 103,000 - which was far below the recent average of 200,000.
As recently as this morning, the National Association of Home Builders Sentiment Index dropped a point from 70 to 69.
When you see one cockroach, it is easy to ignore. When it becomes a massive infestation, it is a different story completely.
The potential explanations for the slowdown abound.
There is no doubt that the Trade War with China is eroding business confidence, as is the secret renegotiation of the North American Free Trade Agreement (NAFTA).
Decisions on major capital investments by companies were a slam dunk three months ago. Now, many are definitely on hold.
There is abundant evidence that the Chinese are scaling back investment in the US and pausing new trade deals with American counterparties. They have been boycotting purchases of new US Treasury bonds for eight months.
The new import duty for Canadian timber is raising the cost of low-end housing, worsening affordability and causing builders to cut back.
Instead they are refocusing efforts on high-end housing where profit margins are much wider.
Shooting wars with Syria, North Korea, and Iran are permanently just over the horizon, further giving nervous investors pause.
And the general level of chaos coming out of Washington, including the unprecedented level of administrations firings and resignations, are scaring a lot of people.
Since I am a person who puts my money where my mouth is every day of the year, I'll give you my 10 cents worth on what all this really means.
Two weeks ago I started piling into to an ultra-aggressive 100% "RISK ON" trading book, loading the boat with a range of asset classes, including longs in financial and technology stocks, and gold and big shorts in the bond market.
My bet is that while however serious all of the above concerns may be, they pale in comparison with Q1 2018 earnings growth of historic proportions that is now unfolding, prompted by the December tax bill.
The second 10$ correction of 2018 had nothing to do with fundamentals. It was all about hot money retreating to the sideline until the bad news waned and the good news returned.
And so it has. Forecast Q1 earnings are now looking to come in above 20% YOY. These will be reports for the ages.
My bet has paid off in spades, with followers of my Mad Hedge Trade Alert Service up 10.70% so far in April, up +17.46% in 2018, and up a breathtaking 54.04% on a trailing 12-month basis. It is a performance that causes my competitors to absolutely weep.
If fact, the rest of 2018 could play out exactly as it has done so far, with frantic sell-offs following the end of each quarterly reporting period, followed by slow grind-up rallies leading into the next. Technology will lead the rallies every time.
Which means we may go absolutely nowhere in the indexes 2018, but have a whole lot of fun getting there. If you see this coming you can make a ton of money trading around it.
With our current positions, Mad Hedge followers could be up 25% on the year as soon as mid-May.
Which raises the question of, "When will the recession really start?"
My bet is sometime in 2019, when earnings growth downshifts from 20% to 10% or even 5%.
If this happens in the face of an inverting yield curve where short-term interest rates are higher than long-term ones, and a continuing trade war AND shooting wars, and broadening Washington scandals, then a recession becomes a sure thing.
A bear market should precede that by about six months.
So date those high-risk positions, don't marry them.
My former employer, The Economist, once the ever-tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its "Big Mac" index of international currency valuations.
Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.
The index counts the cost of McDonald's (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.
What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai baht are cheap.
I couldn't agree more with many of these conclusions. It's as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas.
I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool than a speedy lunch.
The World's Most Expensive Big Mac
Global Market Comments
April 16, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WEEK THAT NOTHING HAPPENED),
(TLT), (GLD), (SPY), (QQQ), (USO), (UUP),
(VXX), (GOOGL), (JPM), (AAPL),
(HOW TO HANDLE THE FRIDAY, APRIL 20 OPTIONS EXPIRATION), (TLT), (VXX), (GOOGL), (JPM)
This was the week that American missiles were supposed to rain down upon war-torn Syria, embroiling Russia in the process. It didn't happen.
This was the week that the president was supposed to fire special prosecutor Robert Mueller, who with his personal lawyer is currently reading his private correspondence for the past decade with great interest. That didn't happen either.
It was also the week that China was supposed to raise the stakes in its trade war with the United States. Instead, President Xi offered a conciliatory speech, taking the high road.
What happens when you get a whole lot of nothing?
Stocks rally smartly, the S&P 500 (SPY) rising by 2.87% and the NASDAQ (QQQ) tacking on an impressive 3.45%. Several of the Mad Hedge long positions jumped by 10%.
And that pretty much sums up the state of the market today.
Get a quiet week and share prices will naturally rise, thanks to the power of that fastest earnings growth in history, stable interest rates, a falling dollar, and gargantuan share buybacks that are growing by the day.
With a price earnings multiple of only 16, shares are offering investors the best value in three years, and there is very little else to buy.
This is why I am running one of the most aggressive trading books in memory with a 70% long 30% short balance.
Something else unusual happened this week. I added my first short position of the year in the form of puts on the S&P 500 right at the Friday highs.
And, here is where I am sticking to my guns on my six-month range trade call. If you buy every dip and sell every rally in a market that is going nowhere, you will make a fortune over time.
Provided that the (SPY) stays between $250 and $277 that is exactly what followers of the Mad Hedge Fund Trader are going to do.
By the way, 3 1/2 months into 2018, the Dow Average is dead unchanged at 24,800.
Will next week be so quiet?
I doubt it, which is why I'm starting to hedge up my trading book for the first time in two years. Washington seems to be an endless font of chaos and volatility, and the pace of disruption is increasing.
The impending attack on Syria is shaping up to more than the one-hit wonder we saw last year. It's looking more like a prolonged air, sea, and ground campaign. When your policies are blowing up, nothing beats like bombing foreigners to distract attention.
Expect a 500-point dive in the Dow Average when this happens, followed by a rapid recovery. Gold (GLD) and oil prices (USO) will rocket. The firing of Robert Mueller is worth about 2,000 Dow points of downside.
Followers of the Mad Hedge Trade Alert Service continued to knock the cover off the ball.
I continued to use weakness to scale into long in the best technology companies Alphabet (GOOGL) and banks J.P. Morgan Chase (JPM), and Citigroup (C). A short position in the Volatility Index (VXX) is a nice thing to have during a dead week, which will expire shortly.
As hedges, I'm running a double short in the bond market (TLT) and a double long in gold (GLD). And then there is the aforementioned short position in the (SPY). I just marked to market my trading book and all 10 positions are in the money.
Finally, I took profits in my Apple (AAPL) long, which I bought at the absolute bottom during the February 9 meltdown. I expect the stock to hit a new all-time high in the next several weeks.
That brings April up to a +5.81% profit, my trailing one-year return to +50.23%, and my eight-year average performance to a new all-time high of 289.19%. This brings my annualized return up to 34.70%.
The coming week will be a slow one on the data front. However, there has been a noticeable slowing of the data across the board recently.
Is this a one-off weather-related event, or the beginning of something bigger? Is the trade war starting to decimate confidence and drag on the economy?
On Monday, April 16, at 8:30 AM, we get March Retail Sales. Bank of America (BAC) and Netflix (NFLX) report.
On Tuesday, April 17, at 8:30 AM EST, we receive March Housing Starts. Goldman Sachs (GS) and United Airlines (UAL) report.
On Wednesday, April 18, at 2:00 PM, the Fed Beige Book is released, giving an insider's view of our central bank's thinking on interest rates and the state of the economy. Morgan Stanley (MS) and American Express (AXP) report.
Thursday, April 19, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 9,000 last week. Blackstone (BX) and Nucor (NUE) report.
On Friday, April 20, at 10:00 AM EST, we get the Baker Hughes Rig Count at 1:00 PM EST. Last week brought an increase of 8. General Electric (GE) and Schlumberger (SLB) report.
As for me, I'll be heading into San Francisco's Japantown this weekend for the annual Northern California Cherry Blossom Festival. I'll be viewing the magnificent flowers, listening to the Taiko drums, eating sushi, and practicing my rusty Japanese.
Good Luck and Good Trading.
Global Market Comments
April 13, 2018
Fiat Lux
Featured Trade:
(ANNOUNCING THE MAD HEDGE LAKE TAHOE, NEVADA, CONFERENCE, OCTOBER 26-27, 2018),
(APRIL 11 GLOBAL STRATEGY WEBINAR Q&A),
(TLT), (TBT), (GOOGL), (MU), (LRCX), (NVDA) (IBM),
(GLD), (AMZN), (MSFT), (XOM), (SPY), (QQQ)
We all had so much fun last year at the Mad Hedge Lake Tahoe Conference that we unanimously voted to meet a year later.
That time is now approaching, and the dates have been set for Friday and Saturday, October 26-27.
Come learn from the greatest trading minds in the markets for a day of discussion about making money in the current challenging conditions.
How soon will the next bear market start and the recession that inevitably follows?
How will you guarantee your retirement in these tumultuous times?
What will destroy the economy first: rising interest rates or a trade war?
Who will tell you what to buy at the next market bottom?
John Thomas is a 50-year market veteran and is the CEO and publisher of the Diary of a Mad Hedge Fund Trader. John will give you a laser-like focus on the best-performing asset classes, sectors, and individual companies of the coming months, years, and decades. John covers stocks, options, and ETFs. He delivers your one-stop global view.
Arthur Henry is the author of the Mad Hedge Technology Letter. He is a seasoned technology analyst, and speaks four Asian languages fluently. He will provide insights into the most important investment sector of our generation.
The event will be held at a five-star resort and casino on the pristine shores of Lake Tahoe in Incline Village, NV, the precise location of which will be emailed to you with your ticket purchase confirmation.
It will include a full breakfast on arrival, a sit-down lunch, and coffee break. The wine serviced will be from the best Napa Valley vineyards.
Come rub shoulders with some of the savviest individual investors in the business, trade investment ideas, and learn the secrets of the trading masters.
Ticket Prices
Copper Ticket - $599: Saturday conference all day on October 27, with buffet breakfast, lunch, and coffee break, with no accommodations provided
Silver Ticket - $1,299: Two nights of double occupancy accommodation for October 26 & 27, Saturday conference all day with buffet breakfast, lunch and coffee break
Gold Ticket - $1,499: Two nights of double occupancy accommodation for October 26 & 27, Saturday conference all day with buffet breakfast, lunch, and coffee break, and an October 26, 7:00 PM Friday night VIP Dinner with John Thomas
Platinum Ticket - $1,499: Two nights of double occupancy accommodation for October 26 & 27, Saturday conference all day with buffet breakfast, lunch, and coffee break, and an October 27, 7:00 PM Saturday night VIP Dinner with John Thomas
Diamond Ticket - $1,799: Two nights of double occupancy accommodation for October 26 & 27, Saturday conference all day with buffet breakfast, lunch, and coffee break, an October 26, 7:00 PM Friday night VIP Dinner with John Thomas, AND an October 27, 7:00 PM Saturday night VIP Dinner with John Thomas
Schedule of Events
Friday, October 26, 7:00 PM
7:00 PM - Exclusive dinner with John Thomas and Arthur Henry for 12 in a private room at a five-star hotel for gold and diamond ticket holders only
Saturday, October 27, 8:00 AM
8:00 AM - Breakfast for all guests
9:00 AM - Speaker 1: Arthur Henry - Mad Hedge Technology Letter editor Arthur Henry gives the 30,000-foot view on investing in technology stocks
10:00 AM - Speaker 2: Brad Barnes of Entruity Wealth on "An Introduction to Dynamic Risk Management for Individuals"
11:00 AM - Speaker 3: John Thomas - An all-asset class global view for the year ahead
12:00 PM - Lunch
1:30 PM - Speaker 4: Arthur Henry - Mad Hedge Technology Letter editor on the five best technology stocks to buy today
2:30 PM - Speaker 5: John Triantafelow of Renaissance Wealth Management
3:30 PM - Speaker 6: John Thomas
4:30-6:00 PM - Closing: Cocktail reception and open group discussions
7:00 PM - Exclusive dinner with John Thomas for 12 in a private room at a five-star hotel for Platinum or Diamond ticket holders only
To purchase tickets click: CONFERENCE.
Below please find subscribers' Q&A for the Mad Hedge Fund Trader April Global Strategy Webinar with my guest 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: Many of your April positions are now profitable. Is there any reason to close out before expiration?
A: No one ever got fired for taking a profit. If you feel like you have enough in hand - like 50% of the maximum potential profit in the position, which we do have in more than half of our current positions - go ahead and take it.
I'll probably run all of our April expirations into expiration day because they are very deep in the money. Also, because of the higher volatility and because of higher implied volatility on individual stock options, you're being paid a lot more to run these into expiration than you ever have been before, so that is another benefit.
Of course, one good reason to take profits now is to roll into another position, and when we find them, that may be exactly what we do.
Q: What do you think will be the impact of the US hitting Syria with missiles?
A: Initially, probably a 3-, 4-, or 500-point drop, and then a very rapid recovery. While the Russians have threatened to shoot down our missiles, in actual fact they can't hit the broad side of a barn. When Russians fired their cruise missiles at Syrian targets, half of them landed in Iran.
At the end of the day, it doesn't really impact the US economy, but you will see a big move in gold, which we're already starting to see, and which is why we're long in gold - as a hedge against all our other positions against this kind of geopolitical event.
Q: Will 2018 be a bull market or a bear market?
A: We are still in a bull market, but we may see only half the returns of last year - in other words we'll get a 10% profit in stocks this year instead of a 20% profit, which means it has to rise 12% from here to hit that 10% up by year-end.
Q: What is your take on the ProShares Ultra Short 20+ Year Treasury Bond Fund (TBT)?
A: I am a big buyer here. I think that interest rates (TLT) are going to move down sharply for the rest of the year. The (TBT) here, in the mid $30s, is a great entry point - I would be buying it right now.
Q: How do you expect Google (GOOGL) to trade when the spread is so wide?
A: It will go up. Google is probably the best-quality technology company in the market, after Facebook (FB). We'll get some money moving out of Facebook into Google for exactly that reason; Google is Facebook without the political risk, the regulatory risk, and the security risks.
Q: Are any positions still a buy now?
A: All of them are buys now. But, do not chase the market on any conditions whatsoever. The market has an endless supply of sudden shocks coming out of Washington, which will give you that down-400-points-day. That is the day you jump in and buy. When you're buying on a 400-down-day, the risk reward is much better than buying on a 400-point up day.
Q: What is "sell in May and go away?"
A: It means take profits in all your positions in May when markets start to face historical headwinds for six months and either A) Wait for another major crash in the market (at the very least we'll get another test of the bottom of the recent range), or B) Just stay away completely; go spend all the money you made in the first half of 2018.
Q: Paul Ryan (the Republican Speaker of the House) resigned today; is he setting up for a presidential run against Trump in 2020?
A: I would say yes. Paul Ryan has been on the short list of presidential candidates for a long time. And Ryan may also be looking to leave Washington before the new Robert Mueller situation gets really unpleasant.
Q: What reaction do you expect if Trump resigns or is impeached?
A: I have Watergate to look back to; the stock market sold off 45% going into the Nixon resignation. It's a different world now, and there were a lot more things going wrong with the US economy in 1975 than there are now, like oil shocks, Vietnam, race riots, and recessions.
I would expect to get a decline, much less than that - maybe only a couple 1,000 points (or 10% or so), and then a strong Snapback Rally after that. We, in effect, have been discounting a Trump impeachment ever since he got in office. Thus far, the market has ignored it; now it's ignoring it a lot less.
Q: Thoughts on Micron Technology (MU), Lam Research (LRCX), and Nvidia (NVDA)?
A: It's all the same story: a UBS analyst who had never covered the chip sector before initiated coverage and issued a negative report on Micron Technology, which triggered a 10% sell-off in Micron, and 5% drops in every other chip company.
He took down maybe 20 different stocks based on the argument that the historically volatile chip cycle is ending now, and prices will fall through the end of the year. I think UBS is completely wrong, that the chip cycle has another 6 to 12 months to go before prices weaken.
All the research we've done through the Mad Hedge Technology Letter shows that UBS is entirely off base and that prices still remain quite strong. The chip shortage still lives! That makes the entire chip sector a buy here.
Q: Can Trump bring an antitrust action against Amazon?
A: No, no chance whatsoever. It is all political bluff. If you look at any definition of antitrust, is the consumer being harmed by Amazon (AMZN)?
Absolutely not - if they're getting the lowest prices and they're getting products delivered to their door for free, the consumer is not being harmed by lower prices.
Second is market share; normally, antitrust cases are brought when market shares get up to 70 or 80%. That's what we had with Microsoft (MSFT) in the 1990s and IBM (IBM) in the 1980s. The largest share Amazon has in any single market is 4%, so no there is basis whatsoever.
By the way, no president has ever attacked a private company on a daily basis for personal reasons like this one. Thank the president for giving us a great entry point for a stock that has basically gone up every day for two years. It's a rare opportunity.
Q: How will the trade war end?
A: I think the model for the China trade war is the US steel tariffs, where we announced tariffs against the entire world, and then exempted 75% of the world, declaring victory. That's exactly what's going to happen with China: We'll announce massive tariffs, do nothing for a while, and then negotiate modest token tariffs within a few areas. The US will declare victory, and the stock market rallies 2,000 points. That's why I have been adding risk almost every day for the last two weeks.
Q: Would you be buying ExonMobil (XOM) here, hoping for an oil breakout?
A: No, I think it's much more likely that oil is peaking out here, especially given the slowing economic data and a huge onslaught in supply from US fracking. We're getting big increases now in fracking numbers - that is very bad for prices a couple of months out. The only reason oil is this high is because Iran-sponsored Houthi rebels have been firing missiles at Saudi Arabia, which are completely harmless. In the old days, this would have caused oil to spike $50.
Q: Would you be selling stock into the rally (SPY), (QQQ)?
A: Not yet. I think the market has more to go on the upside, but you can still expect a lot of inter-day volatility depending on what comes out of Washington.
Q: Do you ever use stops on your option spreads?
A: I use mental stops. They don't take stop losses on call spreads and put spreads, and if they did they would absolutely take you to the cleaners. These are positions you never want to execute on market orders, which is what stop losses do. You always want to be working the middle of the spread. So, I use my mental stop. And when we do send out stop loss trade alerts, that's exactly where they're coming from.
Q: Will the Middle East uncertainty raise the price of oil?
A: Yes, if the Cold War with Iran turns hot, you could expect oil to go up $10 or $20 dollars higher, fairly quickly, regardless of what the fundamentals are. It's tough to be blowing up oil supplies as a great push on oil prices. But that's a big "if."
Hello from the Italian Riviera!