Global Market Comments
November 20, 2017
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR
DUCKING THAT PUNCH),
($INDU), (TLT), (BITCOIN), (UUP), (JNK), (SJB),
(SIGN UP NOW FOR TEXT MESSAGING OF TRADE ALERTS)
When I trained for the Japan National Karate Championships, fought in Tokyo's fabled Nippon Budokan 45 years ago, there was one rule my sensei never failed to beat into me.
Ducking the punch is far more important than landing one.
Certainly stock market traders took that rule to heart last week.
Four out of five days, a weak US dollar triggered a stock selloff in Europe that led to triple digit declines at the New York opening.
Yes, humble managers are becoming aware that they are not smart enough to achieve the returns they have made in 2017, therefore they are getting nervous.
In every case shares battled back to recover the losses.
The week ended with a push, and stocks largely unchanged. It was all a lot of work for absolutely nothing.
The Volatility Index (VIX) made a rare visit to the $14 handle, whereupon the entire planet sold into it.
You can blame the advanced age of this bull market, now approaching an eye popping nine years old.
Shares have not seen more than a 2% decline for 62 weeks, the most extended since 1965.
Indeed, we have seen the second longest bull market of the past half century, defined as a pull back from the top of more than 20%.
To beat the record, stocks have to rise for six more years to match the torrid 15 year run that started with the US national railroad strike in 1946 and ended with the Cuban Missile Crisis in 1962.
Looking at the chart below what is truly fascinating is how short bear markets are, usually measures in mere months.
You have to go all the way back to the Great Depression to find a bear that lasted two years and eight months.
Yes, hanging on to your stocks always IS the right thing to do.
The bigger questions is: Why aren't you leveraging 2:1 like a hedge fund does?
Much of the flip flopping this week can be traces to the violent evolution of the tax bill, which seemed to change shape by the hour, and is currently opposed by 59% of the voting population.
As if this weren't hard enough, the Republicans at the last minutes decided to also make it a health care bill, wiping out coverage for 13 million.
Here's your math.
Passing the House was the easy lift, where the Republicans hold a 56-seat majority. Still, it was only able to garner a 10-vote win.
The tax bill next has to pass the Senate, where Republicans hold a paper thin two seat majority, and five have already expressed their opposition.
My bet is that a bill will pass sometime in Q1, 2018 in highly diluted form, without the loss of deductions for mortgage interest, local and state taxes, or an estate tax repeal.
I also think the bill will fail its first vote in the Senate. That will NOT be a good day to be long the market.
Without this funding, the corporate tax rate will be cut to only 25% for the few who pay them.
This will be called a great victory.
This bill could be passed today, but it may take the GOP leadership three months to figure this out.
The net effect on the economy will be nil, and we can all go back to watching corporate earnings as the principal driver of share prices, as they should be.
I expect this will drive the indexes to new highs for at least the next one or two years.
Ironically, it will also move forward the next recession, as stimulating an already hot economy will move forward the next inverted yield curve and interest rate spike.
We could well be solidly in a bear market and recession before the next presidential election.
Certainly the global junk bond markets think so, where we saw the first signs of the smart money sitting down before the music stops playing.
The SPDR Barclays High Yield Bond ETF (JNK) managed a 2.3% swan dive to a three month low.
Certainly, prices had reached insane levels, with the spreads on some issues falling to a scant 200 basis points over US ten year Treasury bonds. In Europe junk yield are BELOW Treasury yields, if you can find any to buy.
However, these days insanity doesn't stop anyone from doing anything.
That's Why I recommended a tactical short position in junk bonds (SJB) a few weeks ago (click here for Take A Ride in the New Short Junk ETF)
The big revelation for me last week is that I finally understood WHY people were pouring money into bitcoin, which recently touched $8,000.
In one week, it crashed 20%, then soared 30%. It is almost the only place in
the world where you can find this kind of volatility.
I'm sure tulip prices saw the same price action in the early 17th century.
Trading looks to be dull, brutish, and boring in this holiday shortened week. Expect markets to remain flat ahead of the Senate vote on the bill, which I expect to fail.
Despite these hair-tearing trading conditions, I managed to push my Trade Alert performance up to new highs, adding 274.15% over the past eight years, generating an average annual return of 34.63%.
I am up 3.54% so far in November, and 56.62% over the past 12 months.
To leave you on a positive note, it's looking like your entire financial future may be determined by the 20% of eligible voters who turn out to vote for a new Senator on December 12.
On Monday, November 20, at 10:00 AM the Index of Leading Economic Indicators is published, a forward-looking basket of ten monthly data points.
On Tuesday, November 21 at 6:00 AM EST we get October Existing Home Sales. Since the data predates the Republican plan to deny mortgage interest and real estate tax deductions, the data should remain hot.
On Wednesday, November 22, most of the week's data bunch up due to the holidays. We obtain October Durable Goods at 8:30 AM. Weekly Jobless claims are out at the same time. October Consumer Sentiment comes out at 10:00 AM.
The weekly EIA Petroleum Status Report is out at 10:30 AM.
Thursday, November 23 the markets are closed for the US Thanksgiving holidays.
On Friday, November 24 at 1:00 PM, we receive the Baker-Hughes Rig Count, which lately has started to turn up again.
As for me, I will be foraging through the High Sierras, looking for the ideal Christmas Tree to take home. My USDA permit allows be to take two.
I Meet Some of the Most Interesting People
As a large number of new subscribers just poured in, I invite them to sign up for our text messaging service.
Paid subscribers are able to receive instantaneous text messages of my proprietary Trade Alerts. This eliminates frustrating delays caused by traffic surges on the Internet itself, and by your local server.
This service is provided free to paid members of the Global Trading Dispatch or Mad Hedge Fund Trader Pro.
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Time is of the essence in the volatile markets. Individual traders need to grab every advantage they can. This is an important one.
Good luck and good trading.
John Thomas
Global Market Comments
November 17, 2017
Fiat Lux
Featured Trade:
(WHY ENERGY WILL MAKE YOUR 2018 PERFORMANCE),
(USO), (XOM), (CVX), (OXY), (EPD), (AMLP), (MPLX),
(WHY YOUR OTHER INVESTMENT NEWSLETTER IS SO DANGEROUS)
I have traveled in the Middle East for 50 years.
When I first hitch hiked across North Africa in 1968, camels were everywhere, and most of the population was barefoot.
These are the things I recall when dictator Muammar Gaddafi was deporting me from Libya.
When I grew up a few years later, I covered the neighborhood wars for The Economist magazine during the 1970's.
While representing Morgan Stanley in the firm's dealings with the Saudi royal family in the 1980's, I paused to stick my finger in the crack in the Riyadh city gate left by a spear thrown by King Abdul Aziz al Saud when he captured the city in the 1920's, thus creating modern Saudi Arabia.
They only mistake I made in my Texas fracking investments is that I sold out too soon in 2005, when natural gas traded at $5 and missed the spike to $17.
By now, the only camels you ever see are tourist rides at the foot of the pyramids, the racing camels of the Gulf Emirates.
So let me tell you about the price of oil.
It's going up.
No matter how much oil there is in the world, it is tough to beat a global synchronized economic recovery.
China, Europe, and Japan all running hot at the same time. I bet you didn't know that all of these economies are currently beating America's 3% growth rate, in some cases by miles.
Giving a bow to my new long term forecasts, I don't see the end of global quantitative easing until October 2018. The current bull market in stocks should end in mid 2019, and the next recession won't hit until 2020.
So there is ample room to get one more trade here in oil.
You should do well buying majors like Exxon Mobile (XOM) or Chevron (CVX). You can probably beat those returns through investing in Occidental Petroleum (OXY).
But I'll tell you where the real money will be made:
Master Limited Partnerships, or MLP's.
I always find it a useful exercise to sift through the wreckage of past investment disasters. Not only are there valuable lessons to be learned, sometimes decent trades emerge.
I have been doing that lately in the energy sector, a hedge fund favorite these days, and guess what?
MLP's are back. And no, I'm not talking about the Maui Land and Pineapple Company (MLP) (yes, there is such a thing!).
But these are not your father's MLP's.
With overnight cash yields still at a paltry 0.50%, the allure of high yielding MLP's is still there.
Let me start with my investment thesis.
It is always better to invest in an asset class that has its crash behind it (energy) than ahead of it (equities, bonds).
And lets face it, the final bottom in oil at $25 is in.
We may bounce around in a $45-$60 range for a while. But eventually, I expect a global synchronized economic recovery to take it higher.
And while I have never been a fan of OPEC, they are showing rare discipline in honoring the production quotas negotiated in late 2016.
That eliminates much of the downside from MLP's for the next 18 months and makes it one of the more attractive risk/reward trades out there.
The fact is that the energy revolution in the U.S. remains very much intact.
Keep a laser like focus on the weekly Baker Hughes rig counts, as I do, and you see that we have been on a relentless upturn for nearly two years.
Except that this time it's different.
Thanks to hyper accelerating technology (yes, there's that term again), new wells employ a fraction of the labor of the old ones, and are therefore more profitable.
That means they can function, and even prosper, with a much lower oil price.
Since everything is political these days, I would remiss in not bringing this unsavory issue up.
To say that the new administration is friendly to the oil industry would be the understatement of the century.
Look no further than the Keystone pipeline, which after languishing for eight years, saw approval from the new president during his first week in office.
That means lower taxes, more subsidies, and less regulation of the business, all profit boosting measures.
There is another angle too.
By now, you should all be experts on inflation plays, since you read my opus on the subject in my newsletter only yesterday.
Oil is a great inflation play. As prices rise, consumers can pay ever-higher prices for energy.
The great thing for MLP investors is that many revenue streams are inflation-linked according to fixed formulas, much like TIPS, (Treasury Inflation Protected Securities).
But you have to be clever by half to take advantage of these new trends.
Thanks to the crash, the surviving MLP's are now a much better quality investment.
Balance sheet quality has improved as a result of deleveraging in the last three years, and the worst of the ratings downgrade cycle is behind us.
Importantly, some $50 billion- $60 billion worth of growth opportunities for MLPs are expected during FY2017-2020.
That makes the industry one of the great secular growth stories out there today.
As an old fracker myself I can tell you that the potential of the revolutionary new technology has barely been scratched.
Thanks to technology that is improving by the day, a Saudi Arabia's worth of energy reserves remain to be exploited, and maybe two, turning the US into an energy-exporting powerhouse.
Industry experts expect MLP distributions to grow by 3%-5% annually over the coming years. Few other industries can beat this.
That means avoiding upstream Exploration and Production companies; where there is still a ton of risk, and placing your bets on midstream companies that operate pipelines.
And by midstream I don't just mean pipelines, but also processing facilities for natural gas liquids and storage and terminal facilities.
You especially want to look at companies with high barriers to entry and attractive assets in high- growth and low-cost production regions.
Companies with a sustainable cost advantage, operated by experienced management with proven geological prowess are further pluses.
MLP's also stack up nicely as a diversifier for your overall portfolio.
Over longer time periods MLP's have generated similar returns to equities, with similar to slightly higher levels of volatility.
Historically they have traded at lower yields than high yield bonds, but currently they are yielding 250 basis points more.
And now for the warning labels.
This is not a new story.
As you can see from the charts below, MLP's have been rallying hard since oil bottomed in January, 2016.
Still, with yields in the 7%-10% range, a certain amount of pain is worth it.
Still interested?
Take a look at the Alerian MLP ETF (AMLP) (6.11%), the Global X MLP Energy Infrastructure ETF (MLPX) (6.11%), and Valero Energy Partners LP (VLP) (4.72%).
By the way, can any readers tell me if my favorite restaurant in Kuwait, the ship Al Boom, is still in business? The lamb kebab there was to die for.
Don't Throw Out the Baby With the Bathwater
Global Market Comments
November 16, 2017
Fiat Lux
Featured Trade:
(STANDBY FOR THE COMING GOLDEN AGE OF INVESTMENT),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)
"By historic, fundamental measures, stocks are extremely high. PE multiples are at 100 years highs. But if you look at stock prices relative to interest rates, they are exactly where they should be" said hedge fund legend, Stanley Druckenmiller.
Global Market Comments
November 15, 2017
Fiat Lux
Featured Trade:
(NVIDIA REPORTS...STOCK ROCKETS, AGAIN),
(NVDA), (IBM), (HPQ), (TSLA), (DVMT),
(IS USA, INC. A "SELL")
Last year, whenever anyone asked me for a stock most likely to double in 2017, I uniformly responded with the same name: NVIDIA (NVDA).
For me, it was a no-brainer.
The processor manufacturer occupied the nexus of the entire movement towards machine learning and artificial intelligence, and then was still relatively unknown.
I lied.
The stock didn't double, it more than tripled, from $67 to a high of $219.
These days, I am being asked the same question.
But this time, I'm going to be boring. Believe it or not, the name to double again in 2018 is (NVDA).
You would think I am MAD to be chasing the big winner of 2017.
But take a look at their blockbuster earnings announced last week first, which blew away the street's most optimistic expectations.
Q3 revenue leapt 54% to just over $2.64 billion, and net profits of $1.33 a share, up 33% YOY, and 41.5% greater than expected.
Their gross operating margin is an eye popping 59.7%.
It is dominating in the fastest growing sectors of the technology space, including AI, virtual reality, and fast data processing.
Every automobile company is basing its self-driving technology on its XP computer.
And now there is a new game in town.
(NVDA) is a major beneficiary of the exponential growth of cryptocurrencies, whose need for processing power is growing voraciously.
At this point, the company has a huge installed base of users on which to build on.
Look at the spec sheets of anything you buy these days and you will find NVIDIA parts somewhere in the guts.
I bought a Dell Alienware Area 51gaming PC to run the Oculus Rift virtual reality hardware for my kids this Christmas (they don't read this letter on a daily basis). It came with a state of the art NVIDIA GeForce GTX 1080 graphics card.
I also happen to know that NVIDIA chips are lurking somewhere in my Tesla (TSLA) Model S-1 and Model X.
Most companies have only one or two artificial intelligence experts. NVIDIA has over 1,000.
While the stock is priced for perfection, it is continuing to deliver just that. The shares actually fell on the earnings announcement.
But let's face it. The momentum of this stock has been unassailable.
However, the company is so far ahead of its competitors it is actually increasing its lead. Nobody has a chance of catching them.
The company is managing an industrywide migration of processing power from the CPU to the GPU. You have to use their architecture, or you will go out of business.
This is why every PC manufacturer, including Dell (DVMT) and Hewlett Packard (HPQ), are partnering with them. IBM (IBM) is using their chips in their high-end machines.
This is because (NVDA) is now first to market with everything important.
Nvidia's dominance of the high-end GPU market is allowing it to soak up all of the spending that would normally have been at least somewhat split between itself and AMD.
Gaming was the big revenue booster for Nvidia, which now accounts for 59% of sales.
Sales of Nvidia's flagship product, the passively cooled 16GB Tesla P100 GPU, is being ravenously consumed by data centers around the country, and should double again in 2018.
And the company has just started to ship its new Volta-based Tesla V100 GPU, which offers a tenfold increase over previous generations.
Hold one of these dense, wicked fast processors in your hand and you possess nothing less than the future of western civilization.
Over the long term, the picture looks even better. It should continue with annual earnings growth of at least 20%-30% a year for the foreseeable future.
At a minimum, the shares have at least another double in them. If I'm wrong, they'll only go up 50%.
Not a bad choice to have.
To learn more about Nvidia, please visit their website by clicking here.
For those of you who did the trade at the beginning, or better yet, bought deep out of the money one year option LEAPS, well done!
I am hearing of 800% returns, or better.
What would happen if I recommended a stock that had no profits, was losing billions of dollars a year, and had a net worth of negative $44 trillion?
Chances are, you would cancel your subscription to the Mad Hedge Fund Trader, demand a refund, unfriend me on Facebook, and unfollow me on Twitter.
Yet, that is precisely what my former colleague at Morgan Stanley, technology guru Mary Meeker, did.
Now a partner at venture capital giant, Kleiner Perkins, Mary has brought her formidable analytical talents to bear on analyzing the United States of America as a stand-alone corporation.
The bottom line: the challenges are so great they would daunt the best turnaround expert. The good news is that our problems are not hopeless or unsolvable.
The US government was a miniscule affair until the Great Depression and WWII, when it exploded in size. Since 1965 when Lyndon Johnson's "Great Society" egan, GDP rose by 2.7 times, while entitlement spending leapt by 11.1 times.
If current trends continue, the Congressional Budget Office says that entitlements and interest payments will exceed all federal revenues by 2025.
Of course, the biggest problem is health care spending which will see no solution until health care costs are somehow capped. Despite spending more than any other nation, we get one of the worst results, with lagging quality of life, life span, and infant mortality.
Some 28% of Medicare spending is devoted to a recipient's final four months of life. Somewhere, there are emergency room cardiologists making a fortune off of this. A night in an American hospital costs 500% more than in any other country.
Social Security is an easier fix. Since it started in 1935, life expectancy has risen by 26% to 78, while the retirement age is up only 3% to 66. Any reforms have to involve raising the retirement age to at least 70 and means testing recipients.
The solutions to our other problems are simple, but require political suicide for those making the case.
For example, you could eliminate all tax deductions, including those for home mortgage interest, charitable contributions, IRA contributions, dependents, and medical expenses. That would raise $1 trillion a year, and more than wipe out the current budget deficit in one fell swoop.
Mary reminds us that government spending on technology laid the foundations of our modern economy. If the old DARPANET had not been funded during the 1960s, Google, Yahoo, EBay, Facebook, Cisco, and Oracle would be missing in action today.
Global Positioning Systems (GPS) were also invented by and are still run by the government. They have been another great wellspring of profits (I got to use it during the 1980s while flying across Greenland when it was still top secret).
There are a few gaping holes in Mary's "thought experiment". I doubt she knows that the Treasury Department carries the value of America's gold reserves, the world's largest at 8,965 tons worth $576 billion, at only $34 an ounce versus an actual current market price of $1,280.
Nor is she aware that our ten aircraft carriers are valued at $1 each, against an actual cost of $5 billion each in today's dollars. And what is Yosemite worth on the open market, or Yellowstone, or the Grand Canyon or the Grand Tetons? These all render her net worth calculations meaningless.
Mary expounds at length on her analysis, which you can buy in a book entitled USA Inc. at Amazon by clicking here.
