Global Market Comments
January 26, 2016
Fiat Lux
Featured Trade:
(THE COMING BULL MARKET IN GOLD),
(GLD), (GDX), (ABX)
(WILL GOLD COINS SUFFER THE FATE OF THE $10,000 BILL), (GLD),
(THE PRICE OF STARDOM AT DAVOS)
SPDR Gold Shares (GLD)
Market Vectors Gold Miners ETF (GDX)
Barrick Gold Corporation (ABX)
Loyal followers of the Mad Hedge Fund Trader are well aware that I have been bearish on gold for the past five years.
However, it may be time for me to change that view.
A number of fundamental factors are coming into play that will have a long-term positive influence on the price of the barbarous relic. The only question is not if, but when the next bull market in the yellow metal will begin.
All of the positive arguments in favor of gold all boil down to a single issue: they?re not making it anymore.
Take a look at the chart below and you?ll see that new gold discoveries are in free fall. That?s because falling prices have caused exploration budgets to fall off a cliff.
Gold production peaked in the fourth quarter of 2015, and is expected to decline by 20% for the next four years.
The industry average cost is thought to be around $1,400 and ounce, although some legacy mines can produce for as little as $600. So why dig out more of the stuff if it means losing more money?
It all sets up a potential turn in the classic commodities cycle. Falling prices demolish production, and wipe out investors. This inevitably leads to supply shortages.
When the buyers finally return, there is none to be had and price spikes can occur which can continue for years. In other words, the cure for low prices is low prices.
Worried about new supply quickly coming on-stream and killing the rally?
It can take ten years to get a new mine started from scratch by the time you include capital rising, permits, infrastructure construction, logistics and bribes. It turns out that the brightest prospects for new gold mines are all in some of the world?s most inaccessible, inhospitable, and expensive places.
Good luck recruiting for the Congo!
That?s the great thing about commodities. You can?t just turn on a printing press and create more, as you can with stocks and bonds.
Take all the gold mined in human history, from the time of the ancient pharaohs to today, and it could comprise a cube 63 feet on a side. That includes the one-kilo ($38,720) Nazi gold bars stamped with German eagles upon them, which I saw in Swiss bank vaults during the 1980?s.
In short, there is not a lot to spread around.
The long-term argument in favor of gold never really went away. That involves emerging nation central banks, especially those in China and India, raising gold bullion holdings to western levels. That would require them to purchase several thousand tonnes of the yellow metal!
So watch the iShares Emerging Market ETF (EEM). A bottom there could signal the end of the bear market for gold as well.
Sovereign wealth funds from the Middle East have recently been dumping gold to raise money. The collapse of oil prices has made it impossible to meet their wildly generous social service obligations.
Hint: governments in that part of the world that fail to deliver on promises are often taken out and shot.
When this selling abates, it also could well signal the final low in gold. That?s why I have been strongly advising readers to watch the price of Texas tea careful, as both it an gold should bottom on the same day.
Let me throw out one more possibility for you to cogitate over. Another big winner of rising precious metal prices is residential real estate, which people rush to buy as an inflation hedge. Remember inflation?
Tally ho!
Looks Like A ?BUY? to MeGlobal Market Comments
January 25, 2016
Fiat Lux
Featured Trade:
(A DAY IN THE LIFE OF THE MAD HEDGE FUND TRADER),
(SPY), (SPX), (QQQ), (AAPL), (VIX), (FSLR), (SCTY), (TLT), (TBT), (FXE), (GLD), (GDX), (USO)
SPDR S&P 500 (SPY)
S&P 500 Index (SPX)
PowerShares QQQ (QQQ)
Apple Inc. (AAPL)
VOLATILITY S&P 500 (^VIX)
First Solar, Inc. (FSLR)
SolarCity Corporation (SCTY)
iShares 20+ Year Treasury Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
CurrencyShares Euro Trust (FXE)
SPDR Gold Shares (GLD)
Market Vectors Gold Miners ETF (GDX)
United States Oil (USO)
Global Market Comments
January 22, 2015
Fiat Lux
SPECIAL SHORT SELLING ISSUE
Featured Trade:
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
ProShares Short S&P500 (SH)
ProShares UltraShort S&P500 (SDS)
ProShares Short QQQ (PSQ)
ProShares Short Dow30 (DOG)
ProShares Short Russell2000 (RWM)
ProShares UltraPro Short S&P500 (SPXU)
Apple Inc. (AAPL)
VOLATILITY S&P 500 (^VIX)
iPath S&P 500 VIX ST Futures ETN (VXX)
Renaissance IPO ETF (IPO)
iShares MSCI USA Momentum Factor (MTUM)
PowerShares S&P 500 High Beta (SPHB)
AdvisorShares Ranger Equity Bear ETF (HDGE)
Global Market Comments
January 21, 2016
Fiat Lux
SPECIAL CRASH ISSUE
Featured Trade:
(HOW TO TRADE A CRASH),
(TEN STOCKS TO BUY AT THE BOTTOM),
(SPY), (QQQ), (USO), (IWM), (JNK)
SPDR S&P 500 ETF (SPY)
PowerShares QQQ Trust, Series 1 (QQQ)
United States Oil (USO)
iShares Russell 2000 (IWM)
SPDR Barclays High Yield Bond ETF (JNK)
I have a feeling that you are going to really need to know how to trade a crash in the coming weeks.
Due to our recent blockbuster performance, up 39% last year alone, we have also taken in a large number of new subscribers. They should read this piece carefully and commit it to memory, and have the key points tattooed on their forearm.
There won?t be time to look for these words to the wise, once the market?s wheels really fall off.
In my half-century of trading stocks, I have been through quite a few crashes.
When the Nifty Fifty collapsed in 1973, everyone thought it was the end of the world. The Dow Average fell to 650. President Nixon resigned shortly afterwards.
The 1987 crash certainly left its scars. My equity department at Morgan Stanley lost $75 million in one day, then a staggering amount. We had to pedal triple time to make it all back by the end of the month. I remember that George Soros puked right at the very low.
The 1998 emerging market debacle certainly put our wits to the test. That little affair ultimately led to the Russian debt default and the blow up of Long Term Capital Management, Nobel Prize winners and all.
The 2000 Dotcom Crash was one to remember. At least the parties leading up to the peak made it all worth it. But a lot of friends lost their careers and their homes over that one.
2008-09? That one sent us all back to our history books searching for comparisons with the Great Depression.
It turns out that we were only in for a Great Recession instead and a 52% market decline instead of a 90% one. Not a single person alive thought markets would triple over the next six years, as they have done.
The 2010 Flash Crash, the last time we were down 1,000 points in a single day? Seems like it was only yesterday, just water off your back.
So given my long history of surviving market melt downs, I have to tell you that the August swoon doesn?t even rank in the top ten.
But then again, it?s not over yet either.
So trading crashes is a skill set that every long-term investor is going to need. It is an ability that may save your wealth, if not your life.
I have listed below my twelve rules for trading crashes that I have compiled off the back of decades of hard earned experience.
TWELVE RULES FOR TRADING A CRASH
1) Shrink your trading book to a single position so it?s easier to watch.
2) Shrink your size so it?s small enough for you to sleep at night?even during a crash.
3) Watch the (VIX) as a leading indicator. This time, junk bonds (HYG) and the Russell 200 (IWM) are functioning as pathfinders as well.
4) Don?t be afraid to trade, since now is when risk is the lowest and the rewards the highest. Don?t give up, throw up your hands in despair, and go into hiding like everyone else is.
5) You wanted to buy on a dip? This is a dip. Be careful what you wish for.
6) Time is compressed during a crash. Share price movements that normally take months occur in minutes. Be prepared to do a lot of trading.
7) Liquidity disappears and spreads widen dramatically. Basically, the market wants you to go away. Some of the lesser ETF?s take the biggest hits, as no one wants to touch them.
8) Expect system breakdowns everywhere as they are hyper stressed. Trading platforms can seize up, computers freeze, and the Internet noticeably slows down.
9) If you have any kind of leverage, now is when your brokers will come after you. Margin requirements can double or quadruple overnight with no notice. If you can?t cough up the extra money they will execute a forced liquidation of your account at terrible prices.
10) When you buy single names, focus on quality. It is a rare chance to buy Cadillacs at a discount. Be careful, because fundamentals mean nothing during a crash. Cash is King.
11) Don?t even think about calling your broker. You?re on your own. They?ll just put you on perpetual hold or throw the handset down on the floor and burst into tears, as happened to me during the 1987 crash when I tried to buy.
12) Maintain discipline, exercise strict risk control, and let the other people panic. Now is when you define yourself as a trader. Anyone can trade a bull market. But only a few can handle the bear version.
HAVING SAID ALL THAT, GOOD LUCK AND GOOD TRADING!
How to Keep Your Head Above Water in a Crash
Suddenly, the consolidation turned into a correction and maybe even a bear market.
A crucial part of trading a crash is knowing what to do at the bottom. Don?t worry. You?ll receive a flurry of text alerts from me right when that happens.
Many individual investors simply run to the bathroom and lock the door, hoping nobody knocks on the door for a couple of days.
Worse, they dump every stock they have. That?s what makes market bottoms.
Trades that once seemed impossible can now get done, provided you use limit orders.
Let me get this right. Stocks are crashing because:
1) The Federal Reserve isn?t going to raise interest rates anymore.
2) The price of oil has dropped 84% in five years.
3) Commodities have reached multi-decade lows.
4) The US dollar has suddenly stabilized.
5) Investors are yanking money from abroad and pouring it into the US on a flight to safety trade because it is the only place they can obtain a positive return, especially in stocks.
May I point out the screamingly obvious right here?
These are all reasons for 90% of US companies that borrow money and consume energy and commodities to increase earnings and to boost their share prices.
Only the 10% that derive revenues from ripping oil and commodities out of the ground should get hurt here.
Of course the market doesn?t know that. It is anything but rational when we hit big triple digit declines. There was only one direction on, and that was OUT.
And that is where you make your money
Margin clerks rule supreme, squeezing every bit of leverage out of their clients they can find.
The Dow and (SPY) are already posting large negative numbers for 2016.
Of course, I saw all of this coming a mile off.
I have been banging drums, pulling fire alarms, shooting off flare guns, and otherwise warning readers that the technical situation for the market was terrible ever since I went 100% into cash in December.
When the breakdown appeared imminent, I shot out Trade Alerts to sell short the S&P 500 (SPY) in size as fast as I could write them. And I started buying outright (SPY) puts for the first time in ages.
As a result of these sudden tactical moves, my model-trading portfolio has been keeping its head above water all month, up 2%. The Dow Average is off by a nausea inducing -10.7% at today?s low.
Yes, yes! All the hard work and research is paying off!
Ignore my musings at your peril!
What is even more stunning is that these declines are occurring in the face of US macro economic numbers that are going from strength to strength. The blockbuster December nonfarm payroll report of 292,000 is the real writing on the wall.
Housing, which accounts for about one third of the US economy, has been on fire. I?m sorry, but if you can?t find a parking space at Target, there is no recession.
Another crucial leg of the US economy, auto manufacturing, has been in overdrive. Auto sales are at a record 18 million annual rate, and some summer production shut downs have been cancelled.
That is, everywhere except Volkswagen.
With two of the most important legs firing on all cylinders, it?s clearly not about the economy, stupid!
There certainly hasn?t been a geopolitical event to justify moves of this magnitude.
As far as I can tell, Hitler has not invaded Poland, nor have the Japanese attacked Pearl Harbor.
Sure, there is whining about China, which has the Shanghai Index approaching the 2,900 level once again, down 40% from the top.?
Which leads me to believe that all of this is nothing more than a temporary hiccup. A BIG Hofbrauhouse kind of hiccup, but a hiccup nonetheless.
In a zero interest rate world, stocks only have to fall back from a price earnings multiple of 18 to 15 to flush out a ton of buying, and they will have done just that when the (SPY) hits $174.
THAT IS MY LINE IN THE SAND.
If nothing else, corporate buybacks should reaccelerate here, which could reach $1 trillion in 2016. Some 75% companies exit their quiet period by February 5 and can resume buying.
That could signal an interim market bottom.
The great thing about this selloff is that the best quality companies have fallen the most. This has been a function of the heavy sovereign wealth fund selling the bridge oil deficits.
After all, when share prices are in free fall, you have to sell what you can, not what you want to. It is only human to realize profits rather than incur losses, so quality has been trashed.
I am therefore going to give you a list of ten of my favorite stocks to buy at the bottom, highlighting the sectors that will lead us into a yearend rally.
The themes here are home builders, consumer discretionary, autos, solar, old technology, and international. I?m sorry, but the entire interest sensitive sector is on hold for the rest of the year, thanks to likely Fed inaction.
Watch out, because when I sense that the market has burned itself out on the downside, the Trade Alerts are going to be coming hot and heavy.
You have been forewarned!
Read ?em and weep with joy!
10 Stocks to Buy at the Bottom
Lennar Homes (LEN)
Home Depot (HD)
Microsoft (MSFT)
General Electric (GE)
Tesla (TSLA)
Apple (AAPL)
First Solar (FSLR)
Palo Alto Networks (PANW)
Wisdom Tree Japan Hedged Equity (DXJ)
Wisdom Tree Europe Hedged Equity (HEDJ)
Finally, All the Hard Work is Paying OffGlobal Market Comments
January 20, 2016
Fiat Lux
Featured Trade:
(THE DEATH OF RETAIL),
(WMT), (AMZN), (M), (JWN), (BBY), (BABA),
(THE 1% AND THE BOND MARKET),
(TLT), ($TYX), (LQD), (MUB), (JNK)
Wal-Mart Stores Inc. (WMT)
Amazon.com, Inc. (AMZN)
Macy's, Inc. (M)
Nordstrom Inc. (JWN)
Best Buy Co., Inc. (BBY)
Alibaba Group Holding Limited (BABA)
iShares Trust - iShares 20+ Year Treasury Bond ETF (TLT)
Treasury Yield 30 Years (^TYX)
iShares Trust - iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
iShares National AMT-Free Muni Bond (MUB)
WisdomTree Trust - WisdomTree Emerging Markets Local Debt Fund (ELD)
SPDR Series Trust - SPDR Barclays High Yield Bond ETF (JNK)
I stopped at a Wal-Mart (WMT) the other day on my way to Napa Valley.
I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long stem roses would prove useful. I happened to know you could get these for $10 at Wal-Mart.
After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.
The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there.
So I was not surprised when the company announced that it was closing 267 stores worldwide. The closures amount to only 1% of Wal-Mart?s total floor space. Some 10,000 American jobs will be lost.
The Wal-Mart downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.
However, it now appears we have reached a tipping point, and a point of no return. The future is happening faster than anyone thought possible. Call it the Death of Retail.
I remember the first purchases I made at Amazon 20 years ago. The idea was so dubious that I made my initial purchases with a credit card with a low $1,000 limit. That way, if the wheels fell off, my losses would be limited.
This is despite the fact that I knew Jeff Bezos personally as a former Morgan Stanley colleague. And how stupid was that name, Amazon? At least he didn?t call it ?Yahoo?.
Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don?t have to fight traffic, engage in the parking space wars, or wait in line to pay.
It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!
A used 42-inch Sub Zero refrigerator with a front door icemaker and water dispenser? Have it there in two days, with free shipping.
In 2000, after the great ?Y2K? disaster that failed to show, I met with Bill Gates Sr. to discuss the foundation?s investments. It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds. It turned out to be a brilliant move, coming mere months before the Dotcom bust.
Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that unlike most other foundations their size, they hadn?t invested a dollar in commercial real estate.
It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers and rendering commuting unnecessary. Shopping malls would become low rent climbing walls and paint ball game centers.
Mr. Gates? prediction may finally be occurring. Some counties in the San Francisco Bay area now see 25% of their workers telecommuting.
It is becoming common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.
The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company, with no office. Everyone works at home across the country and around the world.
You may have noticed that I can work from anywhere and anytime (although sending a Trade Alert from the back of a camel in the Sahara Desert was a stretch).
The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we?re hiring, especially in marketing.
You can see this in the business prospects of traditional brick and mortar retailers last year, which were dire.
As a result, Macy?s (M) stock plunged by a shocking -53%, Nordstrom (JWN) by -43%, and Best Buy (BBY) by -39%. Value players have mistaken the present low prices and subterranean price earnings multiples for a ?Black Friday? sale.
It has been like leading lambs to the slaughter.
Yes, some of this was caused by record warm temperatures on the US East coast, which led many to cancel their purchases of a new winter coat. But it is also happening because the entire ?bricks and mortar? industry is getting left behind by the march of history.
Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of amazon, with higher prices. It is all ?Hour late and dollar short? stuff.
In the meantime, Amazon soared by 150%, and was one of the top performing stocks of 2015. It is thought that Amazon accounted for a staggering 25% of all the new growth in US retail sales last year.
And here is the bad news. Bricks and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!
There?s a good reason why you haven?t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.
I did this when I realized that management never knew beforehand which of their products would succeed, and which would bomb, and therefore were constantly clueless about future earnings.
The business for them was an endless roll of the dice. That is a proposition which I was unwilling to invest in. There were always better trades.
I confess that I had to look up the ticker symbols for this story, as I never use them.
However, I also missed the miracle at Amazon. I could never grasp their long tail strategy and their 100 X multiples. I have had to admire it from the sidelines. At least I wasn?t short.
You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers.
It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when ?cheap? was on its way to zero.
So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.
Or better yet, go shopping at Amazon. The deals are to die for.
To read ?An Evening with Bill Gates Sr.?, please click here.
The Death of Retail?
With the bond market confounding forecasters and prognosticators once again, I thought I?d delve into one of the more mysterious reasons why the bond market keeps going from strength to strength.
To a man, hedge fund traders expected bond prices to take a dive in 2014 and 2015 and for yields to soar. Isn?t that what?s supposed to happen in recovering economies?
Instead, we got the opposite, and yields have plunged, from 3.05% for the ten-year Treasury to as low as 2.80% this week.
There are many important lessons to be learned here. This is not your father?s bond market.
The internal dynamics of the fixed income markets have changed so much in the last three decades that it has become unrecognizable to long term practitioners, like myself.
A big factor has been the takeover of the bond market by the 1%, the richest segment of the US population and, indeed, the global economy. As wealth concentrates at the top, its character changes.
Let me stop here and tell you that the ultra rich are different from you and me, and not just because they have more money.
I have learned this after nearly half-century-long relationships with the planet?s wealthiest families, including the Rockefellers, Rothschilds, DuPonts, Morgans, and Pritzkers, first as important contacts of mine at The Economist, then as clients of mine at Morgan Stanley, then as investors in my hedge fund, and now as subscribers to The Diary of a Mad Hedge Fund Trader.
The wealthier families become the more conservative they get in their investment choices. Their goal shifts from capital appreciation to asset protection.
They lose interest in return on capital and become obsessed with return of capital. This is how the rich stay rich, sometimes for centuries. I have even noticed this among my newly minted billionaire hedge fund buddies.
What this means for the bond market is that they never sell. When they buy a 30-year Treasury bond, it is with the expectation of keeping it for the full 30 years until maturity.
That way they can avoid capital gains taxes and only have to pay taxes on the coupon interest. When they die, spouses get the step up in the cost basis, and then the wealth passes from one generation to the next. Taxes are never paid.
Back in the 1980s, when wealth was more evenly distributed, the top 1% only accounted for 1% of Treasury bond ownership. Today, that figure is closer to 25%.
Add this to the 50% of our national debt that is owned by foreign investors, primarily central banks, who also tend to hold paper for its full life. Central banks don?t pay taxes either.
China and Japan are the biggest holders with around $1 trillion each. This means that 75% or more of bonds are owned by investors who won?t sell. What does that mean for the rest of us? Bond prices that never go down.
With bonds very close to 30-year highs, keeping your bonds has been the right thing to do. I can?t tell you how many investment advisors I know who have distilled their practices down to managing fixed income instruments only.
This involves the entire coupon clipping space, including municipal bonds (MUB), corporates (LQD), junk (JNK), and even emerging market debt (ELD).
This is driven by customer demand, the 1%ers, not from any great insights or epiphanies they achieved on their own.
Of course, there is a certain amount of "driving with your eyes firmly fixed on the rear view mirror" going on here. Maybe the rich will finally sell their bonds once prices fall hard, stay down and then go down some more.
Inflation rearing its ugly head might also do the trick since it is always bad for bond prices as it reduces the purchasing power of money. Selling is certainly what they were doing in the early eighties, when the ten-year yield hit 12%.
Again, the rear view mirror effect, when bond were called ?certificates of wealth confiscation.?
There are other matters to consider with the 1% owning so much of the bond market and keeping it there.
This money is not getting invested in new start ups and creating jobs. It is money that is not being used to engender new economic growth. One of the fantasies of the last election was the claim that the 1% were creating so many jobs. They weren?t, not as long as their money was parked in a risk free bond market.
Instead, it is just stagnating. This is one reason why economic growth is so flaccid this decade and will remain so. This is fine for the 1%, but not so good for the rest of us.
The bottom line here is that while bonds are overbought and due for a pullback, they are not by any means going to crash. We could be living in the 2.60%-3.50% range for the 30-year for quite some time, maybe for years.
That is if the new Federal Reserve governor and my friend, ultra dove Janet Yellen, has anything to say about it. She has only just started and could be with us for another eight years.
Personally, I don?t foresee any appreciable rise in interest rates until we get well into the 2020s, when real inflation finally returns from the dead.
That is when bonds will become the asset class you don?t want to know, whether you?re in the 1% or not.
Bonds Will Stay Up Until Inflation Returns from the Dead