Global Market Comments
April 3, 2018
Fiat Lux
Featured Trade:
(TUESDAY, JUNE 12, NEW ORLEANS, LA, GLOBAL STRATEGY LUNCHEON),
(MARCH 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (TBT), (FXY), (GS), (FCX), (CSCO), (INTC), (NEM),
(RIGHTSIZING YOUR TRADING)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader March 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: Should I hold onto long positions in FANG and Tech through the correction?
A: I would - these market moves happen so fast you won't be able to get back into them when it's time to buy. If you're a longer-term investor, it's better to take the pain if you want to outsmart the market. Keep your long positions; if you have a short-term trading book, you should have come out already.
Q: Would you buy Amazon here?
A: I would. I would start scaling in now, buying a few shares on every one of these big sell-off days. Their business model is stronger than ever. The Trump threats all amount to nothing. And if Amazon weren't doing this job another company would, most likely a Chinese one. This is all political noise, bluff, and posturing. I think (AMZN) could hit $2,000 in the next year.
Q: Every time I try to enter an option spread position in the (TLT) I have difficulty getting filled. Why is that?
A: As we're in a bear market in bonds now, liquidity in the options market is shrinking. Also, as you get extreme moves in the stock market, you're getting similar extreme moves in bonds. It's hard to get any kind of Trade Alert out on anything when markets move 600 points in two hours.
Q: Is this a bear market?
A: No, this is just a correction in a bull market, but it may be a vicious one because we've gone so long without one. We've really gone three years without a major correction like this one.
Q: The Japanese yen (FXY) is hitting new highs, is it time for a short?
A: Yes, but not yet; wait for that capitulation day in the stock market - you will be able to sell the yen short several points higher.
Q: Is Goldman Sachs (GS) still good for the medium term, and are they expecting record profits?
A: Yes, however even the best company in the world with the best earnings cannot stand up in the face of these gigantic selling waves that we're getting on everything. Financials in particular are getting hurt by the dips in interest rates and rising bond prices.
Q: Do we hold the China "A" in tech shares or sell and try to buy back later?
A: For the technology shares, it's really too late to sell here. Your sell day was either two weeks ago or the end of January. If you've already taken a 20% hit on these things, at this point I would hang on and take the last 5% or 10% in downside on these, before they rally back up again. Remember, these things could all hit new highs again in May, which is only a month away, when they report blockbuster earnings.
Q: Which stocks would you buy on this dip?
A: I would go after the laggard techs - the two big ones are Cisco Systems (CSCO) and Intel (INTC). I'm looking to add Cisco Systems for both The Global Trading Dispatch and the Mad Hedge Technology services at the end of this correction.
Q: Why haven't you sold volatility (VIX) yet?
A: I am looking for the final capitulation move I mentioned before - a fake breakdown in the S&P 500 (SPY) below the 200-day moving average at $256 to create another massive volatility spike into the low to mid-$30s.
Q: Will the trade war escalate?
A: Who knows? No one has been able to predict what this administration will do. They have been warning of trade wars for the last 18 months, but could you really stay out of the market for that long because of the risk of a trade war? No.
Q: Is North Korea still a threat?
A: No, they never were a threat. The whole thing is made up for political purposes.
Q: What's the problem with the ProShares Ultra Short 20+ Year Treasury Bond Fund (TBT)?
A: (TBT) costs you 60 basis points/month to maintain a negative carry; that's what it costs you to pay a double coupon on your short Treasuries, plus the management fee and expenses. So, in flat markets you can do OK with a put spread on the (TLT), but the (TBT) loses money in that situation. For that reason, it's a short-term trading vehicle, not a long-term hold.
Q: Should I be selling bonds here?
A: Absolutely, yes, but give it a few more basis points of upside.
Q: With oil strong, should I buy oil stocks here (XLE)?
A: No, the performance has been terrible even with oil prices rising. What happens to oil stocks when oil goes back down again? They fall.
Q: Is the Japanese yen (FXY) a buy, now that it has broken out?
A: No, you do not buy break outs, you buy breakdowns. I would wait for the Japanese yen to peak here and then sell.
Q: Should I sell Freeport McMoRan (FCX)?
A: A short term yes, long term, no. The global synchronized recovery story will come back once the trade war news goes away.
Q: What is your Newmont Mining (NEM) outlook?
A: I would be buying the dips here but only in small sizes.
Q: Can you go over exactly what the coming capitulation in the S&P 500 (SPY) would look like?
A: Break of the 200-day moving average on high volume.
Q: What do you see as the low on the 10-year US Treasury yield (TLT)?
A: I would think 2.70% would be the bottom on this move, maybe another point in the (TLT) and that would be a very ripe, short-selling area.
Good Luck and Good Trading!
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 2, 2018
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOODBYE THE QUARTER FROM HELL),
(SPY), (INTC), (AMZN), (CSCO),
(MONDAY, JUNE 11, FORT WORTH, TEXAS, GLOBAL STRATEGY LUNCHEON),
(THE HARD/SOFT DATA CONUNDRUM)
Well, that was some quarter! Call it the quarter from hell.
For as long as most traders and investors can remember, they are losing money so far this year. And they promised us such a rose garden!
The S&P 500 made a valiant, and so far successful effort to hold at the 200-day moving average at $256. We saw an unprecedented four consecutive days of 2% moves.
Yet, with all that tearing of hair, banging of heads against walls, and ulcers multiplying like rabbits, the (SPY) dropped only 5 points since January, off 1.8%, a mere pittance. It's been a whole lot of work and stress for nothing.
So far, the (SPY) has been bracketed by the 50-day moving average on the upside at $272, and the 200-day moving average on the downside. It could continue like this for six more months, forming a very long triangle formation with a year-end upside breakout.
Is the market going to sleep pending the outcome of the November midterm congressional elections?
But here's the catch. We now live in the world of false breakouts and breakdowns, thanks to algorithms. It happened twice in February and March to the upside.
What follows false upside breakouts? How about false downside breakdowns, which may be on the menu for us in April.
My bet is that we'll see one of these soon, taking the (SPY) down as low as $246. Then we'll rocket back up to the middle of the range in another one of those up 100-point days.
What will cause such a catharsis? An escalation of the trade war would certainly do it. Or maybe just a random presidential tweet about anything.
That's why I have been holding fire so far on my volatility shorts and more aggressive longs in stocks.
What will I be buying? Amazon (AMZN), which has essentially an unlimited future. Thank the president for creating a rare 16% selloff and unique buying opportunity with his nonsensical talk about antitrust action.
On what exactly does Amazon have a monopoly? Brilliance?
I also will be taking a look at laggard legacy old tech companies such as Intel (INTC) and Cisco Systems (CSCO). And how can you not like Microsoft here (MSFT)?
Of course, the mystery of the week was the strength in bonds (TLT) taking yields for the 10-year Treasury down to 2.75%. This is in the face of a Treasury auction on Wednesday that went over like a lead balloon.
I think it's all about quarter end positioning more than anything. Some hedge funds have big losses in stocks and volatility trading to cover, and what better way to do it than take profits on bond shorts through buying.
I already have started selling into the rally.
The scary thing about the bond action is that it has accelerated the flattening of the yield curve, with the two-year/10-year spread now only 50 basis points.
It also brings forward the inversion of the yield curve. And we all know what follows that with total certainty: a bear market in stocks and a recession.
The data flow for the coming week is all about jobs, jobs, jobs.
On Monday, April 2, at 9:45 AM, we get the March PMI Manufacturing Index.
On Tuesday morning, we receive March Motor Vehicle Sales, which have recently been weak at 17.1 million units.
On Wednesday, April 4, at 8:15 AM EST, the first of the trifecta of jobs reports comes out with the ADP Employment Report, a read on private sector high.
Thursday, April 5, leads with the Weekly Jobless Claims at 8:30 AM EST, which hit a new 49-year low last week at an amazing 210,000.
At 7:30 AM we get the March Challenger Job Cut Report.
On Friday, April 6, at 8:30 AM EST, we get the Big Kahuna with the March Nonfarm Payroll Report. Last month brought shockingly weak figures.
The week ends as usual with the Baker Hughes Rig Count at 1:00 PM EST. Last week brought a drop of 2.
As for me, I am headed up to Lake Tahoe, Nev., today for spring break to catch the last of the heavy snow. After a record 18 feet in March, Squaw Valley, Calif., has announced that it is keeping the ski lifts open until the end of May.
Good Luck and Good Trading.
It is the greatest conundrum facing traders, investors, and financial advisors today.
The recent "soft" economic data says the economy is booming, animal spirits are roaring, and the Trump trade is alive and well.
The "hard" data indicates that the economy is fading, fear and uncertainty are rampant, and you should sell everything immediately.
It is the greatest hard/soft divergence in the modern history of the US economy.
What's a poor investor to do?
Get this one right, and you'll make a killing. Get it wrong, and your portfolio will turn to ashes.
The numbers are undeniable.
"Soft" data comprises various poll-driven reports, such as consumer confidence and business surveys. These have been running.
The University of Michigan Consumer Sentiment Index hit a decade high in January and is up enormously YOY. Business surveys of every description are breaking records.
That "hard" data comprises economic reports that measure actual activity, such as retail sales.
These have not rebounded nearly as much as the soft data. Retail sales, housing sales, and the negative wealth effect of a falling stock market have all been turning in in-line or disappointing prints.
Here's a further complicating factor. Soft data is forward looking, while hard data is decidedly backward focused, often turning in numbers that are months old.
As a result, many private economic forecasters, and even different agencies of the US government are coming up with spectacularly diverging economic predictions based on the hard/soft weighting of their models.
The Federal Reserve Bank of New York's model, which gives more weight to the soft data, is currently projecting a 3% gross domestic product "print" this year.
On the other hand, the Federal Reserve Bank of Atlanta's model, which incorporates less soft data, is expecting only a 1% print.
You might as well throw a dart at the wall in a dive bar and pick a number.
Dig deeper into the numbers, and your conclusions can only become more disturbing.
It turns out that the overwhelming bulk of positive sentiment is coming from largely small businesses in red Trump-supporting states. They're clearly drinking the Kool-Aid.
You get almost the opposite result on the East and West Coasts, or in surveys that only look at Fortune 500 companies.
Eventually, only one group will be right. Either the hard data will catch up with the soft data, or it won't.
With November midterm elections getting closer by the day, with no new legislation passed this year, I believe the Trump trade will take MUCH longer to play out than expected.
In fact, a major economy-shifting bill may not pass at all this year.
So don't dump your stocks on pain of death. The bull market in stocks probably has at least another year to run.
Just don't expect too much excitement for the next several months.
Sell every rally AND buy every dip. This is what the pros are doing, with great success, as well as the followers of the Diary of a Mad Hedge Fund Trader.
Is This One Hard, Soft, or Both?
Global Market Comments
March 29, 2018
Fiat Lux
Featured Trade:
(IS IT ALL OVER FOR ARTIFICIAL INTELLIGENCE?),
(GOOGL), (TSLA), (NVDA), (LRCX), (AMD), (BOTZ),
(CHINA'S COMING DEMOGRAPHIC NIGHTMARE)
Take a look at the worst performing stocks of the past two weeks and they all have one theme in common: artificial intelligence.
You can trace the beginning of the move back to the Arizona crash by an Uber AI autonomous driven car that killed a pedestrian.
As all those who have studied chaos theory in mathematics, it's like the proverbial butterfly that flapped its wings in a Brazilian rain forest, which then triggered a typhoon in Japan.
Never mind that the pedestrian was jaywalking at night wearing dark clothes. AI is supposed to see this. My guess is that only a sensor failure could have caused the accident, a dud $5 part, which means it has nothing to do with AI.
This is the second autonomous driving death in three years. The last one, involving a Tesla Model S-1 in Florida, didn't see the back of a white truck while driving into the sun, and crashed into it, killing the driver.
And here is the problem if you are a trader or investor.
Autonomous driving has been a major theme in the entire tech sector for the past two years.
You can start with the car companies, Tesla (TSLA), Uber, and Google's (GOOGL) Waymo, and extend all the way out through the entire ecosystem.
That would include the chip makers, NVIDIA (NVDA), which is suspending its autonomous program, Intel (INTC), Advanced Micro Devices (AMD), and the chip equipment maker Lam Research (LRCX).
So, is it game over for these companies? Is it time to pick up our marbles and play elsewhere (there is nowhere else)?
I don't think so.
Let's look at the hard numbers involving automobile accidents. During the same three-year period that AI cars killed two people, human drivers killed a staggering 100,000, and left millions with injuries.
So there is absolutely no doubt that AI is the superior technology. AI-driven cars don't text while driving, drink, take drugs, drive while tired, overdo it with an afternoon of wine tasting in Napa Valley, or look down at their cell phones, as did the safety driver in the ill-fated Uber car in Phoenix.
AI is not just a self-driving car theme. It is permeating every aspect of the modern economy and will continue to do so at an accelerating pace. It is no one-hit wonder.
All that is happening now is that AI and tech stocks in general are backing off from grievously overbought conditions.
As we approach the next round of earnings reports in a month, the market focus rapidly will shift back from tedious and distressful technicals. That's when they will rocket again.
There is an old market term for the current state of technology stocks. It is known as a "Buying Opportunity."
I haven't been able to touch stocks I love for months because they were completing upward moves of 50% to 300% over the past two years.
They have just become touchable once again.
To watch the video of the Phoenix crash and the expression of the clueless safety driver, please click here.
Thanks to China's "one child only" policy adopted 30 years ago, and a cultural preference for children who grow up to become family safety nets, there are now 32 million more boys under the age of 20 than there are girls.
Large-scale interference with the natural male:female ratio has been tracked with some fascination by demographers for years and is constantly generating unintended consequences.
Until early in the last century, starving rural mothers abandoned unwanted female newborns in the hills to be taken away by "spirits."
Today, pregnant women resort to the modern day equivalent by getting ultrasounds and undergoing abortions when they learn they are carrying girls.
Millions of children are "little emperors," spoiled male-only children who have been raised to expect the world to revolve around them.
The resulting shortage of women has led to an epidemic of "bride kidnapping" in surrounding countries. Stealing of male children is widespread in Vietnam, Cambodia, Laos, and Mongolia.
The end result has been a barbell-shaped demographic curve unlike that seen in any other country.
The Beijing government says the program has succeeded in bringing the fertility rate from 3.0 down to 1.8, well below the 2.1 replacement rate.
As a result, the Middle Kingdom's population today is only 1.2 billion instead of the 1.6 billion it would have been.
Political scientists have long speculated that an excess of young men would lead to more bellicose foreign policies by the Middle Kingdom.
But so far the choice has been for commerce, to the detriment of America's trade balance and Internet security.
In practice, the one-child policy was only applied to those who live in cities or had government jobs. That is about two thirds of the population.
On my last trip to China I spent a weekend walking around Shenzhen city parks. The locals doted over their single children, while visitors from the countryside played games with their three, four, or five children. The contrast couldn't have been more bizarre.
Economists now wonder if the practice also will understate China's long-term growth rate. Parents with boys tend to be bigger savers, so they can help sons with the initial big-ticket items in life, such as an education, homes, and even cars.
The endgame for this policy has to be the Japan disease; a huge population of senior citizens with insufficient numbers of young workers to support them. The markets won't ignore this.
In the latest round of reforms announced by the Chinese government was the demise of the one-child policy.
But no matter how hard you try, you can't change the number of people born 30 years ago.
The boomerang effects of this policy could last for centuries.
Global Market Comments
March 28, 2018
Fiat Lux
Featured Trade:
(FRIDAY, APRIL 6, INCLINE VILLAGE, NEVADA, STRATEGY LUNCHEON)
(FROM THE FRONT LINES OF THE TRADE WAR),
(AAPL), (AVGO), (QCOM), (TLT),
(HOW THE MAD HEDGE MARKET TIMING ALGORITHM TRIPLED MY PERFORMANCE)
Poke your hand into a hornet's nest and you can count on an extreme reaction, a quite painful one.
As California is the growth engine for the entire US economy, accounting for 20% of US GDP, it is no surprise that it has become the primary target of Chinese retaliation in the new trade war.
The Golden State exported $28.5 billion worth of products to China in 2017, primarily electronic goods, with a host of agricultural products a close second.
In the most devious way possible, the Middle Kingdom targeted Trump supporters in the most liberal state in the country with laser-like focus. California exports 46% of its pistachios to China, followed by 35% of its exported plums, 20% of exported oranges, and 12% of its almonds.
By comparison, California imported a gargantuan $160.5 billion worth of goods from China last year, mostly electronics, clothing, toys, and other low-end consumer goods.
Some $16 billion of this was recycled back into the state via investment in real estate and technology companies.
Anecdotal evidence shows that figure could be dwarfed by the purchase of California homes by Chinese individuals looking for a safe place to hide their savings. Local brokers report that up to one-third of recent purchases have been by Chinese nationals paying all cash.
The Chinese tried to spend more. Their money is thought to be behind Broadcom's (AVGO) $105 billion bid for QUALCOMM (QCOM), which was turned down for national security reasons.
The next big chapter in the trade war will be over the theft of intellectual property, and that one will be ALL about the Golden State.
Also at risk is virtually Apple's (AAPL) entire manufacturing base in China, where more than 1 million workers at Foxconn assemble iPhones, Macs, iPads, and iPods.
The Cupertino, CA, giant could get squeezed from both sides. The Chinese could interfere with its production facilities, or its phones could get slapped with an American import duty.
So far, the trade war has been more bluff than bite. The US duties announced come to only $3 billion on $50 billion worth of trade. China responded with incredible moderation, only restricting $3 billion worth of imports.
By comparison, in 2017 the US imported a total of $505.6 billion in goods from China and exported $130.4 billion. Against this imbalance, the US runs a largest surplus in services.
The next Chinese escalation will involve a 25% tariff on American pork and recycled aluminum. Who is the largest pork producer in the US? Iowa, with $4.2 billion worth, and the location of an early presidential election primary.
Beyond that, Beijing has darkly hinted that is will continue to boycott new US Treasury bond auctions, as it has done for the past six months, or unload some if its massive $1.6 trillion in bond holdings.
Given the price action in the bond market today, with the United States Treasury Bond Fund (TLT) at a two-month high, I would say that the market doesn't believe that for two seconds. The Chinese won't cut off its nose to spite its face.
In the end, I think not much will come of this trade war. That's what the stock market told us yesterday with a monster 700-point rally, the biggest in three years.
The administration is discovering to its great surprise that its base is overwhelmingly against a trade war. And as business slows down, it will become evident in the numbers as well.
The US was the big beneficiary from the global trading system. Why change the rules of a game we are winning?
Still, national pride dies hard.
