?He worked as if he would live forever. He lived as if he would die tomorrow?, said a note found in Franklin Delano Roosevelt?s private papers after he died.
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Global Market Comments
April 25, 2016
Fiat Lux
Featured Trade:
(WHY THE BULL MARKET HAS TWO YEARS TO RUN),
(SPY), (TLT),
(TESTIMONIAL),
(QUANTITATIVE EASING EXPLAINED TO A 12 YEAR OLD)
SPDR S&P 500 ETF (SPY)
iShares 20+ Year Treasury Bond (TLT)
?
The bull market has at least two years to run, and possibly more.
This is the prediction that I have been hammering away at listeners with at my many speaking engagements, webinars, and global strategy luncheons all year.
But don?t take my word for it.
This also happens to be the opinion of my friend, Leon Cooperman, the legendary hedge fund manager at Omega Advisors.
I ran into my aged mentor in New York where we jointly analyzed and dissected our investment future.
Leon thinks that at a 17.5X earnings multiple, valuation are OK. He expects a total return for the S&P 500 (SPY) of 7-9%, including a 2% dividend. His outlook for all fixed income investments (TLT) is extremely negative.
There are only four possible causes of a recession from here:
1) Corporate earnings fall. But they are, ex energy,? in fact increasing at a respectable pace.
2) Stocks become overvalued. However, 16.5X is in the middle of its historic earnings multiple range. Many of the largest firms are trading at big market discounts. Apple (AAPL) is the prime example. It is the most widely owned stock in the world, and sells at a very modest 11X current cash earnings.
During the 2000 dotcom bubble top, Apple sold for 34X earnings (which today would value the company at a staggering $2.3 trillion, or 14% of US GDP!).
3) A hostile Federal Reserve would certainly take the punch bowl away. With deflation running amok globally, it is unlikely that the Fed moves until later this year. When they do, the action will be modest.
4) A geopolitical crisis would certainly throw a spanner in the works. These are unforecastable, and all the current ones (ISIS, Iran, Syria, Afghanistan, and the Ukraine) are inconsequential.
Cooperman observes that bear markets don?t arise from an immaculate conception, but a visible turn in the economic data flow. Given that, of the hundreds of data points Leon tracks on a weekly or months basis, not a single one is pointing towards recession.
That said, he cautions that the market historically peaks an average of seven months before every recession. Stock markets also rise an average of 30 months after the first Fed rate hike, taking in a typical 9.5% in the first year, which brings us to his two year upside target.
Don?t get too excited. The high returns of recent past years are now firmly in the year view mirror. The years ahead are more likely to bring a couple of yards forward and a cloud of dust, much like we witnessed in 2015.
Leon is urging his clients to take the most negative stance possible regarding their bond holdings. That means shortening duration (maturities), and moving up the credit curve. Shorter and safer is the way to go.
Avoid junk bonds like the plague, which are among the most overvalued in history.
A 2% GDP growth rate and a 2% inflation rate should give us a 4% yield on ten year Treasury bonds, not the lowly 1.89% we see on our screens today.
Look out below!
Cooperman is one of the few individuals I drop everything to listen to. He spent 25 years at Goldman Sachs (GS), eventually rising to the head of research.
He took off to start his own hedge fund in 1991, Omega Advisors, the same year I did, and became an early investor in my own fund. His returns have since been stellar, and Leon is regularly ranked as one of the top ten investment strategists in the country.
Ignore Leon at your peril.
Before we parted, Leon have me his short list of favorite stocks to own, many of which you already know and love from reading the Diary of a Mad Hedge Fund Trader. They include Google (GOOG), (GM), Citibank (C), (PCLN), (AER).
As a ringer, he also threw in (GULTU:US on NASDAQ), a high yield royalty trade spun off by none other than Freeport McMoRan (FCX), one of my biggest earnings last year.
With that, I thanked Leon for his always sage and prescient advice, and promised to revisit these issues with him in New York next month.
?If you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels,? said Oracle of Omaha, Warren Buffet.
Global Market Comments
April 22, 2016
Fiat Lux
Featured Trade:
(POPULATION BOMB ECHOES),
(POT), (MOS), (AGU), (WEAT), (CORN), (SOYB),
(TAKE A RIDE IN THE SHORT JUNK ETF),
(SJB), (JNK), (HYG),
(THE COOLEST TOMBSTONE CONTEST)
Potash Corporation of Saskatchewan Inc. (POT)
The Mosaic Company (MOS)
Agrium Inc. (AGU)
Teucrium Wheat ETF (WEAT)
Teucrium Corn ETF (CORN)
Teucrium Soybean ETF (SOYB)
ProShares Short High Yield (SJB)
SPDR Barclays High Yield Bond ETF (JNK)
iShares iBoxx $ High Yield Corporate Bd (HYG)
?
When you look at the profusion of new ETF?s being launched today, you find that they almost always correspond with market tops.
The higher the market, the greater the demand for the underlying, and the more leverage traders pay for it. The resulting returns for investors are disastrous.
But occasionally a blind squirrel finds an acorn, and if you fire buckshot long enough, you hit a barn.
That?s why I am getting interested in the ProShares Short High Yield ETF (SJB). After riding the bull move in junk all the way up with (JNK), (HYG), I have recently turned negative on the sector.
Junk bonds have moved too far too fast. Current spreads for junk paper are now only 200 basis points over equivalent term Treasury bonds, and investors at these levels are in no way being compensated for their risk.
If the stock market starts to roll over this summer, then the junk bond market will follow it in the elevator going down to the ladies underwear department in the basement.
Keep in mind that when shorting the junk market, you run into the same problem you have with the (TBT), a leveraged short ETF for the Treasury bond market.
Buy the (SJB) and you are short a 6.74% coupon, which works out to a monthly costs of more than 50 basis points. That is a big nut to cover. So timing for entry into this fund will be crucial.
Is Shorting Junk Bonds the Way to Go??
Global Market Comments
April 21, 2016
Fiat Lux
SPECIAL SPACE X ISSUE
Featured Trade:
(WILL SPACE X BE YOUR NEXT TEN BAGGER?)
? (TSLA), (SCTY), (BA), (LMT)
TESTIMONIAL
Tesla Motors, Inc. (TSLA)
SolarCity Corporation (SCTY)
The Boeing Company (BA)
Lockheed Martin Corporation (LMT)
John, you make me laugh. Following you has been awesome. If it weren?t for you, I'd have been a mega bear for the last three years.
Cheers
Justin
Western Australia
Global Market Comments
April 20, 2016
Fiat Lux
Featured Trade:
(BUY FLOOD INSURANCE WITH THE VIX),
?(VIX), (VXX), (UVXY),
(THE SOLAR MISSING LINK IS HERE!),
(SCTY), (FSLR), (SPWR), (TSLA)
VOLATILITY S&P 500 (^VIX)
iPath S&P 500 VIX ST Futures ETN (VXX)
ProShares Ultra VIX Short-Term Futures (UVXY)
SolarCity Corporation (SCTY)
First Solar, Inc. (FSLR)
SunPower Corporation (SPWR)
Tesla Motors, Inc. (TSLA)
I am one of those cheapskates who buys Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar because my eleven month return on capital comes close to 1,000%.
I also like buying flood insurance in the middle of the summer when the forecast here in California is for endless days of sunshine.
That is what we are facing now with the volatility index (VIX) where premiums have been hugging the 12%-14%% range recently. Get this one right, and the profits you can realize are spectacular.
The CBOE Volatility Index (VIX) is a measure of the implied volatility of the S&P 500 stock index, which has been melting since the ?RISK OFF? died a horrible death.
You may know of this from the talking heads, beginners, and newbies who call this the ?Fear Index?. Long-term followers of my Trade Alert Service profited handsomely after I urged them to sell short this index at the heady altitude of 47.
For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations.
The (VIX) is the square root of the par variance swap rate for a 30 day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever useful Black-Scholes equation. You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?
For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don?t know what an SAT test is, this is what you need to know. When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. End of story. Class dismissed.
The (VIX) is expressed in terms of the annualized movement in the S&P 500, which today is at 1,800. So a (VIX) of $14 means that the market expects the index to move 4.0%, or 72 S&P 500 points, over the next 30 days. You get this by calculating $14/3.46 = 4.0%, where the square root of 12 months is 3.46.
The volatility index doesn?t really care which way the stock index moves. If the S&P 500 moves more than the projected 4.0%, you make a profit on your long (VIX) positions.
Probability statistics suggest that there is a 68% chance (one standard deviation) that the next monthly market move will stay within the 4.0% range. I am going into this detail because I always get a million questions whenever I raise this subject with volatility-deprived investors.
It gets better. Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006. Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the ?hedge? in hedge fund.
But wait, there?s more. Now, erase the blackboard and start all over. Why should you care? If you buy the (VIX) here at $14, you are picking up a derivative at a nice oversold level. Only prolonged, ?buy and hold? bull markets see volatility stay under $14 for any appreciable amount of time.
If you are a trader you can buy the (VIX) somewhere under $14 and expect an easy double sometime in the coming months. If we get another 10% correction somewhere along that way, that would do it.
If you are a long-term investor, pick up some (VIX) for downside protection of your long-term core holdings. A bet that euphoria doesn?t go on forever and that someday something bad will happen somewhere in the world seems like a good idea here.
If you don?t want to buy the (VIX) futures or options outright, then you can always buy the iPath S&P 500 VIX Short Term Futures ETN (VXX). Easier still is the (UVXY), which is particularly useful for trading narrow ranges like the one we have had.
If you lose money on this trade, it will only be because you have made a fortune on everything else you made. No one who buys fire insurance ever complains when their house doesn?t burn down.
