Q: Is NVIDIA (NVDA) in buy territory yet?

A: The answer is no. The whole technology area is wildly overdue for a rest. I'll take a look at $160.

Q: Is technology (XLK) over, or is this a brief dip and a continued uptrend?

A: There will be a continued uptrend in technology and the only question is whether the pullback will be for days, weeks, or months? You basically always buy every dip in technology until we hit a recession, which is about 2 years away. You just have to ask yourself how much pain you are willing to take in the interim. We have had pretty dramatic selloffs, and NVIDIA at one point was down 20% from the high, but that's what you get with a stock that goes up 300% in a year.

Q: What instrument do you put your money into when you go to cash?

A: I just move it into a cash account in my brokerage account. If you think you're going to be in cash for a while, like a couple of months, then it's worth buying 30 day or 90 day Treasury bills. That will at least give you some interest income, about 130 basis points annualized, but it's better than nothing at all. If you're in and out on a short-term basis, then it's not even worth buying Treasury bills unless you're a giant institution managing billions of dollars, in which case even one day of interest will add up to quite a lot of money.

Q: How long will the tech selloff last?

A: For the last 30 years, all tech selloffs have been temporary. Tech always comes back. Even if the stocks themselves get overvalued, the industry itself keeps growing exponentially. In my lifetime, tech has gone from 2% to 25% of the S&P 500 and it will be 50% in the next 20 years.

Q: Homebuilders have had a huge year. Will they continue to rise in 2018?

A: Yes, they will because we have a structural shortage of houses, both old and new, and that is so severe that it will take decades to sort out. As much as you've had these monster runs in housing stocks, they will continue to outperform next year. There is essentially no inventory on the market. Inventory is at 30 year lows and the only way to address that is to build more houses at higher profit margins. That is incredibly good news for the housing industry.

Q: Do you see 4% GDP growth in 2018 if they pass the tax bill?

A: Answer, No. We will continue with the same 2.5% to 3% annualized growth rate that we had for the last 9 years. It's almost impossible to go against the demographic tide. The tax bill with either have no effect on the economy, or a negative effect as I explained in the newsletter today. Half the country is getting hit with a big tax rise, especially homeowners. About 60% of the country are homeowners and they will all see higher taxes. They will reduce consumption, while the people getting the tax windfalls in red states who are non-homeowners, will save their tax windfall. The net effect on the economy is negative. That's why I expect the whole tax bill to be reversed in three years.

Q: Is today a good day to buy more US Treasury Bond Fund (TLT) put spreads?

A: Yes, but I would go out one more dollar on the strikes to give yourself a margin of safety and diversify risk. I would do a December $130-$132 bear put spread here, or I would go out to January and do the $131-$133 bear put spread. We could be topping here and looking at the charts shows there is a double top written all over it. If we take a run at $128 or $129, I am going to sit because I am betting this is just a brief spike up and then we give it all back. On the other hand, if we decisively break through $129 on high volume then I will stop out of our current (TLT) position and take my loss. It's all about risk control go into year end.

Q: How well did Black Friday/Cyber Monday help the bottom line and should I get into retailers now?

A: The answer is a firm "NO". We are seeing a couple of short term positives for the retail industry, including companies like Macy's (M). First, they are coming off of severely oversold conditions. They were the worst performing sector in the market this year. Number two, the Christmas sales have been fantastic, a function of a full employment economy and a growing GDP. All of this comes to an end in January when the super sales start and people start getting those giant credit card bills from December. You will see a lot of bankruptcies in retail. This is their last payday, and once they collect the cash, they will go out of business. Don't touch the retailers here, structurally, they are in terrible condition.

Q: Should I short the British pound (FXB) now after assassination threats to the Prime Minister and poor handling of Brexit?

A: Absolutely not, as I am bullish on the pound. My view is they eventually cancel Brexit, and when that happens the pound will rally back to its pre-Brexit level of $1.60. Do not short the pound down here. It could be a big mistake.

Q: What do you see oil (USO) doing in 2018?

A: We will break $60 but not by much. Fracking supply comes in in a major way around current levels. Look for increasing supply to be capping any oil moves from here. This is not a long play at this point, if anything, this is a short play.

Q: How will airline stocks like Delta (DAL) do in 2018?

A: The answer is good. These are high tax, domestic stocks which are doing fabulously well right now. When was the last time you saw an empty seat on an airplane? Basically, the industry concentration is so enormous right now, with the top four airlines getting 80% of the business. It's a license to print money and I am bullish on airlines.

Q: Do you see (TLT) under $118 by March 2018?

A: I would say yes, there is a 50/50 chance we could be under $118 by March. I can see that you are looking at LEAPS with that $118 strike and that's a good idea. Even if you do something like a $115-$118 leap now, that will double in value if the (TLT) moves to around $123, and we were there only last Friday, so it's not like it's impossible. Even if we do not hit $118, that could be a money maker in the short term.

Q: Would a stock dump be good for bonds?

A: Yes, because there will be a stampede into low interest, flight to safety instruments. Even that is not working right now and money is pouring into everything regardless of the fundamentals, thanks to global quantitative easing. That is why we are getting a spike up in the (TLT) today.

Q: What is the impact of the tax bill on the market?

A: There is a shot they might get something through before yearend, and if they do, expect a sharp rally that will close all markets at all-time highs, and I am guessing that is what will happen. I am much less positive in January.

Q: What is your favorite tech stock?

A: Being an old, conservative guy, I would say Apple (AAPL). It's going to have less volatility than the other tech stocks. The next move is probably down in the tech sector so I rather own one that goes down the least. That will be Apple. Even then I would still wait for a better entry point. I'm a short-term trader and not a long-term investor so I am cautious of anything that has doubled recently on the long side.

Q: Will the government shut down?

A: Maybe yes, for a day. Will it have a market impact? Yes, for a day. That has been the pattern with all past government shutdowns and I expect the President to favor a shutdown because it creates more instability and controversy which he seems to thrive on.

Good luck and good trading!

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Get Your Answers Here!

The greatest remaking of the US economy in history looks like it is about to be signed into law. I have been running the numbers, and the impact on your portfolio is pretty clear-cut. I'll summarize the high points and then go into detail on each measure.

1) It will create a higher high in all asset prices, including stocks and real estate, followed by a lower low later, probably sometime in 2020.

2) New asset allocations will shift out of growth stocks and into value ones.

3) That means new asset allocations will move out of FANG's (AAPL), (FB), etc.) and technology into financials (BAC), industrials (X), transports (UNP), and energy (XOM).

4) Money will move from large international companies which don't pay tax anyway to small domestic ones that do, hence the recent outperformance of the Russell 2000 (IWM) over NASDAQ (QQQ).

5) Bond prices (TLT) will stay higher, and yields lower, for longer. The 1% will receive the overwhelming amount of benefits from the tax bill, and they will pour most of this newfound wealth into capital preservation strategies in fixed income markets. This is consistent will all past economic cycles. However, US government deficits are already rocketing, and that will eventually take bonds down.

6) All funds repatriated from abroad will go into more stock buybacks and increased dividend payments. This is what happened with the last repatriation in 2003.

7) Stocks will rise in 2018 at half the 2017 rate, but with higher volatility. This is typical for the last year of the bull market.

8) The net impact on the US economy will be either zero or a small negative. Blue states that deliver nearly half of US consumer spending, like California, New York, New Jersey, Illinois, and Washington, are about to get hit with massive tax increases, depressing consumption. There will NOT be an offsetting increase in spending in red states, where tax windfalls will be saved, and not spent.

9) There will be no increase in employment. The same is true with inflation, which is now largely technology driven.

10) However, stimulus while economic activity is at a decade high will scare the Fed into raising interest rates sooner than later. Whatever gains companies see from a lower tax rate will be offset by higher interest rates, with the net effect on earnings at zero.

11) There will be no increase in capital spending, as companies are now hoarding record levels of cash and have no need for additional finance. They will only add to capacity if they see an immediate return, not something any intelligence management does in the ninth year of an economic recovery.

12) Short term traders were punished by the loss of FIFO (first in, first out) accounting, which amounts to a new back door capital gains tax.

13) The bill is a huge picker of winners and losers in the economy. Subsidies and write offs were particularly focused on the oil and commercial real estate industries. Money will move out of sectors with the lowest effective tax rate over the past five years (technology), to those with the highest tax rate (energy).

Most of the tax bill will be reversed the next time there will be democratic control of the government, which could be in as little as three years.

It's really hard to see how ANY blue state House Republican gets reelected in November after voting for an average $10,000 tax increase for their constituent homeowners, and there are 60 of those.

So companies are NOT going to be making any large long-term investments based on taxes remaining in their current form for very long.

Regular readers of this letter are already aware that my Trade Alert recommendations have been following the above line of logic since July.

It is all part of my strategy of dealing with expensive markets by only buying cheap stuff.

Those who followed my advice, well done!

Highest Effective Tax Rates Over the Past Five Years

35% Energy
33% Telecom
32% Industrial
31% Utilities
30% Consumer Discretionary
30% Consumer Staples
28% Financials
27% Materials
26% Health Care
24% Technology