“We can lead, but we cannot carry,” said Mike Ryan, chief investment strategist at UBS, about America’s role in the global economy.
Global Market Comments
May 28, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE COMES THE HEAD AND SHOULDERS TOP)
I was perusing hundreds of charts over the weekend as I usually do looking for great trading insights when what I saw stunned, frightened, and gobsmacked me. A “Head and Shoulders” top is setting up for the major stock market indexes.
Take a look at the charts below and you will see it is clear as day for the Dow Average, the S&P 500, and the NASDAQ. The Russell 2000 chart shows a “Head and Shoulders” top that has already broken down into bear market territory for the stocks most sensitive to a recession.
I am normally not a big fan of technical analysis. I see it as the refuge of young and inexperienced traders who are unable or incapable of engaging in deep, meticulous, and time consuming fundamental analysis.
However, when the charts confirm what I already know is happing in the real economy, the hair stands up on the back of my neck. And that is exactly what is happening now.
To say that the China trade war has thrown the fat on the fire would be a vast understatement. Every business in the country is now taking a hard look at their business models trying to understand if they can survive a prolonged trade war or go out of business.
It turns out that you cannot manufacture ANYTHING in America without using Chinese parts. You know all of those products that claim they are 100% made in America? Many, if not most, of the parts are Chinese. Only the labor to assemble them is from the US. This has been the dirty little secret of the US economy for a long time.
While the administration is claiming these companies can easily source elsewhere, most of the needed parts are not available at the price or the volume needed to fill the gap, and many of these parts are ONLY made in China. It took 40 years to integrate the Chinese and US economies as an alternative to an endless war and the relationship is not going to be unwound overnight on a whim with a Tweet.
I am not the only one who has noticed this. JP Morgan (JPM) has dramatically cut their growth forecast from 3.2% in Q1 to a lowly 1% in Q2. The Federal Reserve itself warned that trade could demolish the recovery. You break it, you own it. Isn’t it amazing how quickly panics happen? Risk happens fast.
The president has said that trade wars are “easy to win,” but it depends on how you decline “winning.” If “winning” means that we go bankrupt slower than the Chinese, he is probably right. But we all go bankrupt nonetheless.
The impact of the trade war won’t be evident in the economic data for months. The advanced estimate of Q2 GDP won’t be released by the Bureau of Economic Analysis until July 26 (click here).
By the time the administration figures out that this war is unwinnable, we may already be solidly in recession and deep into a bear market for stocks.
And let me ask you this question. How hard do you think the Chinese are going to work to get Donald Trump reelected? They don’t have a presidential election to worry about next year. Someone else does. Better clean up that extra bedroom. The trade war isn’t staying overnight on the sofa. It is moving in as a permanent resident.
So, for the foreseeable future, I strongly advise you to sell into every substantial rally, reduce risk, and pare back your trading. Anything you keep, you have to be able to withstand a 40% drawdown. That’s what all the lead tech stocks did in December.
This is turning into the best “Sell in May and go away”. It might be the summer to take that long-postponed trip around the world. Hmmmm. That’s I’m doing.
Stocks dove last week on the trade war escalation, with technology taking the biggest hit. Fears of Chinese retaliation are rampant.
All markets are now signaling recession, with bonds up huge and everything else down huge, like all stocks, oil, commodities, and real estate. The bigger they are the harder they fall. Ten-year US Treasury yields plunged to 2.30%. It might be a good summer to take a round the world cruise.
Mad Hedge Market Timing Index plummeted to 28, from a high of 72 just weeks ago. That means stocks have more downside to go, and a solid “BUY” won’t appear for months.
No China meetings will be held for at least a month, says US Treasury Secretary Steven Mnuchin. Don’t expect any respite from this front. It seems preventing Trump’s tax returns from being released is taking up all his time. Also, the US government runs out of money at summer’s end, unless the Democratic-controlled House opens up the checkbook first.
In the cruelest move, China blocked the broadcast of the final episode of Game of Thrones, forcing fanatics to search the Internet for the final conclusion. It looks like this is going to be a no holds barred war.
Tesla finally broke $200, as fears of Chinese tariff hikes hit its parts supply. Analysts cite other “distractions” like the SEC and the margin call on Elon Musk’s leveraged long position in $500 million worth of the shares. Wait for the final capitulation. The “BUY” for (TSLA) is setting up. Electric car subsidies are to return on 2021 and the shares will soar. Expect institutions to front run this move by a year.
Some 90% of the net buying in the market now is corporate buybacks, shrinking the float of available shares by 4% this year, and more than 10% for single stocks like Apple (AAPL), Microsoft (MSFT), Cisco Systems (CSCO), and Oracle (ORCL). Buy ALL of the buyback stocks on big dips.
New Homes Sales were down 6.9%, in April. As in past cycles, they are seeing the recession first, despite ultra-low interest rates. Prices here still rising, thanks to trade war-induced rocketing materials and lumber costs.
Existing Home Sales shed 0.4%, to only 5.19 million units in April, despite year low mortgage interest rates. The good news is that inventory shrank to 4.2 months. A lot of homes are now for sale at “aspirational” prices, with sellers hanging on to last year’s prices. I don’t understand why investors are buying the homebuilder stocks, unless its anticipation of the return of SALT deductions in two years.
The Mad Hedge Fund Trader managed to hang on to new all-time highs last week, despite the horrific trading conditions.
Global Trading Dispatch closed the week up 15.72% year-to-date and is up 0% so far in May. My trailing one-year rose to +20.71%.
The Mad Hedge Technology Letter did fine, making money on longs in Microsoft (MSFT) and Amazon (AMZN). Some 10 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.
My nine and a half year profit jumped to +315.86%. The average annualized return popped to +33.24%. With the market's incredible and dangerously volatile, I am now 70% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter.
I’ll wait until the markets enjoy a brief short-covering rally before adding any short positions to hedge my longs.
The coming week will see only one report of any real importance, the Fed Minutes on Wednesday afternoon. Q1 earnings are almost done.
On Monday, May 27 at 8:30 AM, the markets are closed for the Memorial Day holiday.
On Tuesday, May 28, 9:00 AM EST, the Case Shiller CoreLogic National Home Price Index is out.
On Wednesday, May 29 at 4:00 AM, MBA Mortgage Applications are out for the previous week.
On Thursday, May 30 at 8:30 AM, Weekly Jobless Claims are published. So is the first revision of the Q1 GDP. A second update on Q1 GDP is also published.
On Friday, May 31 at 8:30 AM, we learn the April Core Inflation.
As for me, I’ll be leading the local Memorial Day parade with my fellow veterans. I always consider myself lucky at these events because they are well attended by men with missing arms and legs and rising in wheelchairs. I am heartened by the young kids I see siting on curbs waving small American flags.
I firmly believe that the world will never see a large army war again. WWII needed 17 million men under arms, Vietnam 9 million, and the War in Iraq
2.8 million. You can see the trend. The next war will be fought by a few thousand programmers….and we will win.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
May 27, 2019
Fiat Lux
SPECIAL MEMORIAL DAY ISSUE
Featured Trade:
(A TRIBUTE TO A TRUE VETERAN)
Global Market Comments
May 24, 2019
Fiat Lux
Featured Trade:
(MONDAY JULY 8 VENICE, ITALY GLOBAL STRATEGY LUNCHEON)
(FROM THE FRONT LINE OF THE TRADE WAR)
(SPY), (AAPL), (TLT)
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, 12% of its almonds.
By comparison, California imported 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 nations 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 one million workers at Foxconn assemble iPhones, Macs, iPads, and iPods. It took Apple 20 years to build this facility. It will take 20 more years to move it.
The Cupertino 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.
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 the largest surplus in services.
The last 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, 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 of 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-year high, I would say that the market doesn’t believe that for two seconds. The Chinese won’t cut off their nose to spite their face.
The administration is discovering to its great surprise that its base is overwhelming against a trade war. And as business slows down, it will become evident in the numbers as well.
The US was the big beneficiary of the global trading system. Why change the rules of a game we are winning?
Still, national pride dies hard.
How soon will the trade war end? Does China want to help Donald Trump get elected in 2020, or his opponent?
It looks like it is going to be a long slog.
Global Market Comments
May 23, 2019
Fiat Lux
Featured Trade:
(TUESDAY, JUNE 25 SYDNEY, AUSTRALIA STRATEGY LUNCHEON)
(DINING WITH THE BOTTOM 20%)
Global Market Comments
May 22, 2019
Fiat Lux
SPECIAL ARTIFICIAL INTELLIGENCE ISSUE
Featured Trade:
(HERE’S AN EASY WAY TO PLAY ARTIFICIAL INTELLIGENCE),
(BOTZ), (NVDA), (ISRG)
(FRIDAY, JULY 5 CAIRO, EGYPT GLOBAL STRATEGY DINNER)
We are now in the throes of a market correction that could last anywhere from a couple of more week to a couple of months. So, generational opportunities are starting to open up in some of the best long term market sectors.
Suppose there was an exchange-traded fund that focused on the single most important technology trend in the world today.
You might think that I was smoking California’s largest export (it’s not grapes). But such a fund DOES exist.
The Global X Robotics & Artificial Intelligence ETF (BOTZ) drops a golden opportunity into investors’ laps as a way to capture part of the growing movement behind automation.
The fund currently has an impressive $2.2 billion in assets under management.
The universal trend of preferring automation over human labor is spreading with each passing day. Suffice to say there is the unfortunate emotional element of sacking a human and the negative knock-on effect to the local community like in Detroit, Michigan.
But simply put, robots do a better job, don’t complain, don’t fall ill, don’t join unions, or don’t ask for pay rises. It’s all very much a capitalist’s dream come true.
Instead of dallying around in single stock symbols, now is the time to seize the moment and take advantage of the single seminal trend of our lifetime.
No, it’s not online dating, gambling, or bitcoin. It’s Artificial Intelligence.
Selecting individual stocks that are purely exposed to AI is a challenging endeavor. Companies need a way to generate returns to shareholders first and foremost, hence, most pure AI plays do not exist right now.
However, the Mad Hedge Fund Trader has found the most unadulterated AI play out there. A real diamond in the rough.
The best way to expose yourself to this AI trend is through Global X Robotics & Artificial Intelligence ETF (BOTZ).
This ETF tracks the price and yield performance of ten crucial companies that sit at the forefront of the AI and robotic development curve. It invests at least 80% of its total assets in the securities of the underlying index. The expense ratio is only 0.68%.
Another caveat is that the underlying companies are only derived from developed countries. Out of the 10 disclosed largest holdings, seven are from Japan, two are from Silicon Valley, and one, ABB Group, is a Swedish-Swiss multinational headquartered in Zurich, Switzerland.
Robotics and AI walk hand in hand, and robotics are entirely dependent on the germination prospects of AI. Without AI, robots are just a clunk of heavy metal.
Robots require a high level of AI to meld seamlessly into our workforce. The stronger the AI functions, the stronger the robot’s ability, filtering down to the bottom line.
AI-embedded robots are especially prevalent in military, car manufacturing, and heavy machinery. The industrial robot industry projects to reach $80 billion per year in sales by 2024 as more of the workforce gradually becomes automated.
The robotic industry has become so prominent in the automotive industry that they constitute greater than 50% of robot investments in America.
Let’s get the ball rolling and familiarize readers of the Global Trading Dispatch with the top 5 weightings in the underlying ETF (BOTZ).
Nvidia (NVDA)
Nvidia Corporation is a company I often write about as their main business is producing GPU chips for the video game industry.
This Santa Clara, California-based company is spearheading the next wave of AI advancement by focusing on autonomous vehicle technology and AI-integrated cloud data centers as their next cash cow.
All these new groundbreaking technologies require ample amounts of GPU chips. Consumers will eventually cohabitate with state of the art IOT products (internet of things), fueled by GPU chips coming to mass market like the Apple Homepod.
The company is led by genius Jensen Huang, a Taiwanese American, who cut his teeth as a microprocessor designer at competitor Advanced Micro Devices (AMD).
Nvidia constitutes a hefty 8.70% of the BOTZ ETF.
To visit their website, please click here.
Yaskawa Electric (Japan)
Yaskawa Electric is the world's largest manufacturer of AC Inverter Drives, Servo and Motion Control, and Robotics Automation Systems, headquartered in Kitakyushu, Japan.
It is a company I know well, having covered this former zaibatsu company as a budding young analyst in Japan 45 years ago.
Yaskawa has fully committed to improving global productivity through automation. It comprises the 2nd largest portion of BOTZ at 8.35%.
To visit Yaskawa’s website, please click here.
Fanuc Corp. (Japan)
Fanuc was another one of the hot robotics companies I used to trade in during the 1970s, and I have visited their main factory many times.
The 3rd largest portion in the (BOTZ) ETF at 7.78% is Fanuc Corp. This company provides automation products and computer numerical control systems and is headquartered in Oshino, Yamanashi.
They were once a subsidiary of Fujitsu, which focused on the field of numerical control. The bulk of their business is done with American and Japanese automakers and electronics manufacturers.
They have snapped up 65% of the worldwide market in the computerized numerical device market (CNC). Fanuc has branch offices in 46 different countries.
To visit their company website, please click here.
Intuitive Surgical (ISRG)
Intuitive Surgical Inc (ISRG) trades on Nasdaq and is located in sun-drenched Sunnyvale, California.
This local firm designs, manufactures, and markets surgical systems and is completely industriously focused on the medical industry.
The company's da Vinci Surgical System converts surgeon's hand movements into corresponding micro-movements of instruments positioned inside the patient.
The products include surgeon's consoles, patient-side carts, 3D vision systems, da Vinci skills simulators, da Vinci Xi integrated table motions.
This company comprises 7.60% of BOTZ. To visit their website, please click here.
Keyence Corp (Japan)
Keyence Corp is the leading supplier of automation sensors, vision systems, barcode readers, laser markers, measuring instruments, and digital microscope.
They offer a full array of service support and closely work with customers to guarantee full functionality and operation of the equipment. Their technical staff and sales teams add value to the company by cooperating with its buyers.
They have been consistently ranked as the top 10 best companies in Japan and boast an eye-popping 50% operating margin.
They are headquartered in Osaka, Japan and make up 7.54% of the BOTZ ETF.
To visit their website please click here.
(BOTZ) does have some pros and cons. The best AI plays are either still private at the venture capital level or have already been taken over by giant firms like NVIDIA.
You also need to have a pretty broad definition of AI to bring together enough companies to make up a decent ETF.
However, it does get you a cheap entry into many of the illiquid foreign names in this fund.
Automation is one of the reasons why this is turning into the deflationary century and I recommend all readers who don’t have their own robotic-led business pick up some Global X Robotics & Artificial Intelligence ETF (BOTZ).
And by the way, the entry point right here on the charts is almost perfect.
To learn more about (BOTZ), please visit their website by clicking here.
Global Market Comments
May 21, 2019
Fiat Lux
Featured Trade:
(TUESDAY JULY 2 NEW DELHI INDIA STRATEGY LUNCHEON),
(REPORT FROM THE 2019 LAS VEGAS SALT CONFERENCE)