Global Market Comments
December 14, 2018
Fiat Lux
Featured Trade:
(DECEMBER 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (MU), (PYPL), (SPOT), (FXE), (FXY), (XLF), (MSFT), (AMZN), (TSLA), (XOM),
(SIGN UP NOW FOR TEXT MESSAGING OF TRADE ALERTS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader December 12 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader
Q: Is the bottom in on the S&P 500 (SPX) or are we going to go on another retest?
A: It’s stuck right in the 2600-2800 range, and I think that’s probably where we bounce off of 2600 again. The question is whether or not we can clear the top of the range at 2800. If we can’t, I would fully expect a retest of this bottom in which case I could see it going down to 2500.
Q: You say you’ll go 100% cash by Dec 21st but also stated that the S&P 500 will go up 5% by the year's end. Should we stay in until we get the up 5% move?
A: Yes, all of our options positions expire by the 21st but if you’re just long in stocks, I would stay long, probably through the end of the year.
Q: Will the Chinese-U.S. dispute ruin the Tech industry?
A: No, I think the Trump Administration will have to do some kind of deal and call it a victory, otherwise the trade war will pull the U.S. into recession. If we go into the next presidential election with another recession—well, no one has ever survived that. Even with the China-U.S. dispute, the U.S. is still dominant in the Tech industry and will continue to do so for decades to come.
Q: China has managed to duplicate Micron Technology’s (MU) biggest selling chip, undercutting prices—thoughts?
A: True, Micron is the lowest value added of the major chip producers, therefore their stock has gotten hit the worst of any of the chip stocks down by about 46%, but I know Micron very well and they have a whole range of chips they’re currently upgrading, moving themselves up the value change to compete with this. So, that makes it a great company to own for the long term.
Q: I’m up 90% on my PayPal (PYPL) position—should I take a profit?
A: Yes! Absolutely! How many 90% profits have you had lately? You are hereby excused from this webinar to go execute this trade. And well-done Dr. Denis! And thank you for the offer of a free colonoscopy.
Q: What can you say about Spotify (SPOT)?
A: No, thank you—there’s lots of competition in the music streaming business. We are avoiding the entire space. The added value is not great, and many of these companies will have a short life. And with China’s Tencent growing like crazy, life for Spotify is about to become dull, mean, and brutish.
Q: What’s your view on currencies?
A: So you’re looking to make another fortune? Yes, I think the Euro (FXE) and the Yen (FXY) really are looking hard to rally, and the trigger could be dovish language in the next Fed meeting. Once the Fed slows its rate of interest rates rises, the currencies should take off like a scalded chimp.
Q: Will the banks (XLF) rally in the next 6 months for a better sell?
A: Many people are waiting for a rally in the banks so they can unload them and haven’t gotten it—they’re back to pre-election price levels. The issue here is structural, and you don’t get recoveries from major structural changes in an industry. It’s significant that this is the first bull market that had no net new employment in the banks whatsoever; the business is fading away. They are the new buggy whip makers. These gigantic national branch networks will all be gone in ten years because the banks can’t afford them.
Q: Would you enter the Microsoft (MSFT) trade today?
A: I actually think I would; Microsoft only pulled back 10% when everything else was dropping 30%, 40%, or 50%. That shows you how many people are trying to get into this name so if you could take a little short-term pain (like 5%), the stock outright is probably a screaming buy here. I think it’ll go to $200 one day, so here at $110-$111 it looks like a pretty good deal. The story here is that Microsoft is rapidly taking market share from Amazon (AMZN) in the cloud business and that’s going to continue.
Q: When will you be updating your long-term model portfolio?
A: I usually do it at the end of the year, and rarely make any big changes. I’ll still be selling short bonds and still like Tesla (TSLA) and Exxon (XOM).
Q: I just joined your service. What is the best way to get started?
A: I’ll give you the same advice that I gave every starting trader at Morgan Stanley (MS). Start trading on paper only. When you are making money reliably on paper, move up to using real money, but only with one contract per position. When that is successful, slowly increase your size to 2, 3, 5, 10, and 20 contracts. Pretty soon, you will be swinging around 1,000 contracts a lot like I do. The further you move down the learning curve the greater you can increase your size and your risk. If you never get past the paper stage at least it’s not costing you any money.
I hope this helps.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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Good luck and good trading.
John Thomas
Global Market Comments
December 13, 2018
Fiat Lux
Featured Trade:
(WHAT’S THE MATTER WITH APPLE?),
(AAPL), (MSFT), (KO), (AMZN), (CLX), (NFLX),
(WHY YOUR OTHER INVESTMENT NEWSLETTER IS SO DANGEROUS)
It was 38 years ago today that Apple (AAPL) went public and has generated a 43,000% return since its $22 IPO price. If you bought one share of Apple way back then for $22 it would be worth a breathtaking $95,000 today.
I waited until the next crash and then bought it at $4, and it sits in one of my “no touch” ultra-long-term retirement portfolios today.
Suddenly, the torture I endured taking Steve Jobs around to visit the New York institutional investors during the early 1980s was worth it.
The great rule of thumb I have learned after 50 years of investment is that if you hold a stock long enough, the dividend will exceed your original capital cost, giving you a 100% a year annual cash flow.
Three months ago, Apple was the Teflon stock of the entire market, the company that could do no wrong, the only “safe” stock that traded. Any selling met a wave of buying from Oracle of Omaha Warren Buffet and Apple itself, limiting corrections to a feeble 4%.
What a difference three months make!
Now the shares have become a market pariah, targeted by algorithms and hedge funds alike, and beaten like the proverbial red-headed stepchild. As a result, the shares have plunged an eye-popping 29.61%, vaporizing $311 billion in market capitalization.
Which begs one to ask the question, “What’s the matter with Apple?” How can things go from so right to so wrong?
Just like success has many fathers, failure is an orphan.
The harsh truth is that Apple became too much of a good thing to too many people. Expectations had become excessive and it had become too widely owned by traders with weak hands. In other words, people like me.
I had been cautious of Apple for a while because if its massive China exposure. You don’t want to own a company that relies entirely on Middle Kingdom production during a running trade war. Apple sold an incredible 216 million iPhones in 2017, and all of them are made at the Foxconn factories in southern China.
Apple has become the whipping boy for both sides in the trade conflict. The company has always run the risk of its Foxconn workers arriving at work late someday, or not showing up at all at the prodding of Beijing. Recently, Trump said iPhones imported from China could be subject to the current 10%, soon to be 25% tariff.
The final nail in the coffin came on Monday morning when we learned of a lower Chinese court’s ruling against Apple in a lawsuit from QUALCOMM (QCOM). Never mind that the suit was years old and applied only to the company’s older phones. With the shares in free fall, that is just what investors DIDN’T want to hear.
However, Apple is not dead, it is just resting. Or, call it ripening.
Not only could Apple recover strongly from these abysmal levels, IT COULD DOUBLE IN VALUE.
The core of my argument (no pun intended) is that Apple is in the process of fundamentally evolving its business model. It is rapidly morphing from a one-time sale only hardware company to a recurring subscription services company. And that is where the big money is in the future.
Microsoft (MSFT) is already doing it, so are Amazon (AMZN) and Netflix (NFLX). In fact, everyone is doing it, even the Diary of a Mad Hedge Fund Trader.
In fact, Apple's services revenue could balloon to $100 billion in five years, compared to its estimated total sales this year of $265 billion.
This accomplishes several important things. It moves the company out of a 30% gross margin business to a 70% gross margin. It converts Apple from a highly cyclical to stable earnings growth. Stable earnings growth companies are awarded much higher share price multiples.
Look no further than my next-door neighbor, Clorox (CLX), which trades at a much loftier 23X multiple and Coca-Cola (KO) which can be found at generous 19X multiple. Earnings visibility is worth its weight in gold. This could make Apple’s current 14X multiple a thing of the past.
Of course, we are not going to see a straight line move from one dominant business to another, and the road along the road could be bumpy. We could easily see one more meltdown which takes us to the subterranean $160 handle.
But $10 of downside risk versus $170 of upside? I’ll take that all day long. I bet you will too!
Time for a Nibble?
Global Market Comments
December 12, 2018
Fiat Lux
Featured Trade:
(STANDBY FOR THE COMING GOLDEN AGE OF INVESTMENT),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)
Mad Hedge Fund Trader John Thomas was interviewed on a major news network a few days ago talking out the state of the global financial markets. I thought you would be interested in the Q&A that followed.
Q: Bonds (TLT) have come down a lot on sudden flight to safety bid, with the 30-year yield under 2.9%. Do you see yields going back up in the short term?
A: Absolutely, yes. This is a one-time only panic triggered by the failure of the G-20 Summit in Buenos Aires. And we got the second leg down from the arrest of the CFO of Huawei, one of China's biggest companies, so that has triggered a short-term panic. It's temporary and we're going to bounce back strong. In fact, we already have. Now is a great time to be shorting bonds and buying stocks.
Q: How bad are things at Facebook (FB)? Is the bad news priced into the stock?
A: No, all the bad things are not priced into the stock. That’s why we are telling people that Facebook is a “No touch.” Bad news seems to come out every day, it’s a black swan a day stock, you don’t want to be anywhere near it. They will get some regulation, but nobody knows what it is, or how much it will affect profitability. But when a big company has to change their business model in a hurry, you don’t want to be anywhere near it. Far easier to buy it on the way up than on the way down.
Q: Will a cut in the oil supply by OPEC stem the spiraling down price of Oil (USO)? Is there a trade here?
A: “Yes” to both questions. OPEC will probably announce some sort of price cut/production cut in the next meeting which will get prices off the floor. Everyone ramped up their production to try to beat price falls which then makes the price fall worse, which is always what happens. So, yes, I would be buying oil here. I'd be buying oil stocks here too. There is your trade.
Q: Will the markets hold the February Lows?
A: Yes.
Q: If it does not hold, how far can it fall?
A: Worst case, you may get a fall straight down sucking all the sellers. But if you flip the algorithms to the buy side then it’s off the races. Markets have a habit of doing that quite a lot this year, so I think the lows have been made and you want to be buying stocks here. The fundamentals behind the market are just too strong to get beyond what algorithms are doing, what damage algorithms can do on a day trading basis. So yeah, I don't think that we're going to new lows, these are the new lows right here.
Q: Do you see an American Recession by the end of 2019?
A: Yes, I see the bull market ending in the next 3 to 6 months and recessions starting after that. That said, there is plenty to be made on the upside in coming months and then there's a ton of money to be made on the downside after that. That’s when you want to be attending my short selling school which you also get with a subscription to my service.
Q: Will the Chinese (FXI) allow the Yuan to collapse to fuel imports AND stimulate their GDP growth rate?
A: Yes. They have largely offset all of the import duties imposed by the US by depreciating their currency by 10%. If we raise duties more, they'll just cut their currency value by the same amount, so the actual dollar landed price is unchanged. There's nothing the US can do about that. We're already playing our best cards so it’s not like we can do to retaliate if they devalue their currency more. That’s the problem you have shooting all of your arrows on the first attack.
Q: Would you rotate some growth to value-based stocks on the expectation of interest rising next year in crush and grow stocks.
A: You got it half right. I would sell the high growth stocks into the next big rally, take my profits, and then go into cash! You don't want to own defensive stocks in bear markets, you want to own cash. Defensive stocks go down in a bear market, only at a slower rate, but go down they do nonetheless. Cash is king. You can earn 3 or 4% on your cash these days. That is much better than a stock that is going down.
Q: I bought General Electric (GE) about a year ago at $17, and I thought it was a great deal at the time. Unfortunately, it was not, so can (GE) go any lower than it is now? I thought it would hold $10 dollars but then they cut their dividend to one cent and the shares have cratered to seven dollars. What should I do?
A: You're kind of asking me what to do after you close the barn door and the horses have already bolted. If you have (GE), I would keep it at seven dollars. The worst thing, it goes sideways from here. The best case is you get a strong rally and the stock doubles in coming months. This is not a chapter 11 situation as they have too many assets. It’s just a matter of how quickly they can turn around the company. By the way, we told people to stay away from (GE) from $31 all the way down to when it got to single digits. So, we missed that buy every dip mentality in (GE). Thank goodness for that.
Q: Why won’t banks benefit in a rising interest rate environment?
A: The answer is very simple. These are the new buggy whip makers. You don't want to own big banks as they're hobbled by these gigantic branch networks which cost a fortune, and which are all going to disappear in ten years. Fintech companies like Square (SQ) and PayPal (PYPL), these little tiny apps that you've never heard of, they're eating the banks’ businesses one by one. And by the way, even though interest rates are rising, loan volume is falling at a faster rate, so they're making a lot less money than they used to. They're not really allowed to trade markets anymore because the risk is too high. So, even if they knew how to trade markets, they can’t rely on those earnings like they used to. So, avoid the banks like the plague.
Q: Is there any scenario you see stocks rising 10% next year?
A: No. Absolutely not. We're trying to call the top of a 10-year bull market here. The total return on the market in 2019 will probably be negative and could be negative by quite a lot. Maybe by 10%, 15%, or more. So yeah, if you're hanging on for new highs, I would give up that theory and find another one. It could be a very long wait, like a five-year wait before we go back to the old highs we saw in September and before that in January.
Q: Will Geopolitics drive the market more than it did in 2018?
A: Absolutely, it will. In the geopolitics category, you can include the China trade war, the Europe trade war, the possibility that Congress does not approve the new NAFTA. There's a ton of new things that could go wrong next year. And by the way, the burden of proof is now on stocks to prove how good they are. Risk is rising in the market and volatility is rising, but there still is good money to be made for a year-end rally.
Q: Why has gold (GLD) not performed so far?
A: We don't have inflation and gold really needs to get a good ramp up in inflation to get some serious price performance. That said, I expect a return in inflation. The economic data you get lags reality by anywhere from 3 to 6 months, so you will get a rise in inflation well above 3%. That’s when you really start to move on gold, that’s why I'm saying buy the dip.
Q: Would you buy the dollar (UUP)?
A: No, I would not. It’s looking like we have a couple of interest rates rising next year. The dollar will remain strong into that but in some point next year in the whole strong dollar story disappears as the rise in interest rates stops. If the interest rates level, all of the weak dollar plays will take off like a rocket. Those would include the Euro (FXE), Yen (FXY), and emerging markets (EEM). So, watch those spaces very carefully. There are gigantic moves coming in all of those once we stop raising interest rates and once the dollar peaks out.
Q: Will we close at the lows of the year?
A: No, we will not. The lows of the year probably happened right before this interview. I expect a strong rally from here driven by algorithms. Yes, they work on the upside just as well as they do on the downside side. In fact, algorithms really don’t care which way they go just as long as they go.
Q: What securities do you cover?
A: We cover stocks, bonds, commodities, precious metals, real estate, and every trade alert has a recommendation for a stock, an ETF, and an options trade so that way you can tailor the trade alert to meet your own experience level and risk tolerance.
Q: When does the letter come out?
A: It comes out roughly at midnight EST every day before the next trading day. That way early risers can read the letter and then enter their trade alerts at the market opening. It also helps the Europeans read it as their day starts. We have a big following in Europe and an even bigger following in Australia so that is the answer to that question.
Q: Can beginners with no previous experience use your service?
A: Absolutely. Training beginners how to enter the markets for the first time is one of the primary goals of this newsletter. We have customers that range in size from $20 billion dollar hedge funds all the way down to students trading off their dorm room beds with minimal one-contract trades. So yes, it’s for everybody and every trade alert that we send out has a link to a video showing you exactly how to execute this trade on your own trading platform
Q: Are you an algorithm?
A: Well, if I made a machine noise that would help. All I can say is come to one of my global strategy luncheons. You can pinch me and if I bleed, I am real.
Q: You obviously have enough money, why do you do this?
A: Leveling the playing field for the average guy is why I do this. When I worked on Wall Street, I saw so many people get ripped off it used to make me sick. So, this is my chance to get even. Helping you learn how to make money is my way of getting even. That's why I do this.
At the beginning of the interview, I promised you a seasonal trade alert, here is one of the most popular ones, Buy Home Depot (HD) in the Summer before the hurricane season. That’s good every year for a 15% rally and that’s exactly what we got this year. A 15% rally, 2 big hurricanes, big profits, goodbye, and then see you again next year.
Q: Thank you for coming today, John. It was a real pleasure.
Global Market Comments
December 11, 2018
Fiat Lux
Featured Trade:
(JOHN THOMAS TV INTERVIEW Q&A)
(TLT), (FB), (USO), (GE), (PYPL), (SQ), (HD), (UUP), (FXE), (FXY)
The only good thing to be said about last week is that it only lasted four days. If it had been open a fifth, the Dow Average (INDU) might have fallen another 800 points.
This is the first time since 1972 that every single asset class lost money for the year, and we were in the heat of an oil shock back then.
To earn money to pay for college, I was running a handy little business buying junk heap Volkswagen Beetles in California, getting them repainted in Mexico, and then selling them for huge profits in Los Angeles. That’s me, ever the entrepreneur.
As it was, three consecutive 800-point drops are the sharpest selloff we have seen since the 1987 crash. But despite all the violence and handwringing, the market is exactly where it was nearly two months, six months, ten months, and one year ago.
Talk on the street is rife of hedge funds blowing up, fat finger trades, and algorithms run wild. This could be the first stock market correction untouched by human hands.
What we have seen is some of the most extreme volatility in history with no net movement. And you wonder why institutions are so relaxed.
Let’s face it, we have all had it way too easy way too long. Who makes an average annualized return of 33.87% for 10 years? Oops, that’s me.
What happens next? One more dive to truly flush out the last of the nervous leveraged longs and then the long-promised Christmas rally.
Remember, markets will always do what they have to do to screw the most people, and that would be stopping traders out of their positions and then closing the year at multi-month highs.
Apple (AAPL) in particular was pummeled mercilessly, besieged by analyst downgrades almost every day. Steve Jobs’ creation is now down a stunning $65, or $27.9%. It dropped 40% when Steve died. I’m sure both Apple and Warren Buffet are in there soaking up stock every day with the shares at a half-decade earnings multiple low and laughing all the way to the bank.
But here’s the problem with that logic. Fundamentals can be very dangerous in an out-and-out panic. As my friend John Maynard Keynes used to say, “Markets can remain irrational longer than you can remain liquid.” Apple and Warren Buffet can wait out this correction, but can you, especially if you are a trader? If the stock falls further, they’ll just buy more.
The week started with such promise in the euphoria and afterglow of the G-20 Summit in Buenos Aires. It only lasted 24 hours when we discovered that nothing the administration said was true, all refuted by the Chinese when they got home to Beijing.
On Thursday, we learned that while the president’s team was negotiating, they arrested of the scion of one of China’s top tech companies while changing planes in Canada for a vacation in Mexico. It was equal to arresting the number two at Apple.
That little tidbit alone was worth a drop of 1,600 Dow points. As a result, half of all senior executive visit to the Middle Kingdom were instantly cancelled. Who wants to have “Hostage” listed on their resume?
If that were the only thing to worry about, the market would have bounced back sharply the next day and we would all be back in the Christmas mood.
But it’s not. Recession forecasts are starting to multiply like rabbits.
The Fed is growing cautious with 4 of 12 districts reporting slowing growth, said the Wednesday Beige Book report. The word “tariffs” is mentioned 39 times and is cited as a major reason for the lack of business clarity, and therefore capital investment for 2019.
The bond market is calling for a recession as “inversion” become the word of the year. The 2 year-10 years spread has shrunk to 12 basis points, an 11-year low, while the 3 year-5 year is already inverted. Massive short covering of bonds by hedge fund has ensued.
The ensuing bond melt-up was the most extreme in years as heavily short hedge funds ran for the sidelines. Now that they’re out, it’s safe to sell short again.
The November Nonfarm Payroll came in at a weak 155,000, but headline unemployment still hugs a half-century low. I saw the first really solid evidence of a recession when I drove by a high-end housing project in an upscale neighborhood and saw that it was abandoned with all equipment and tools removed. The developer obviously froze construction to get out of the way of a rapidly slowing economy.
In fact, things have gotten so bad that they may start getting good again. Instead of raising rate three times like clockwork in 2019, the Fed may adopt a “one and done” policy in December. That is where the bond market received its recent shot of adrenaline.
I doubt it as our nation’s central bank is a profoundly backward-looking organization. If the economy was hot a year ago, that means interest rates have to be raised today.
When will someone start spiking the eggnog? An awful lot of people are starting to discount a 2019 recession no matter what the administration says. If the Santa Claus rally doesn’t start this week, it will be too short to notice.
My year-to-date return recovered to +28.42%, boosting my trailing one-year return back up to 30.17%. December is showing a modest gain at +0.62%. That last leg down in the NASDAQ really hurt and was a once-in-18-year event. And this is against a Dow Average that is down a miserable -1.6% so far in 2018.
My nine-year return nudged up to +304.89. The average annualized return revived to +33.87.
The upcoming week is light on data after last week’s fireworks. The CPI is the big one, out Wednesday. Hopefully, that will give us all time to attend our holiday parties.
Monday, December 10 at 8:30 AM EST, the November Producer Price Index is out.
On Tuesday, December 11, November Producer Price Index is out.
On Wednesday, December 12 at 8:30 AM EST, the all-important November Consumer Price Index is released, the most important read we have on inflation.
At 10:30 AM EST, the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.
Thursday, December 13 at 8:30 AM EST, we get the usual Weekly Jobless Claims.
On Friday, December 14, at 8:30 AM EST, we learn November Retail Sales.
The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I will be spending my weekend assembling the ski rack for my new Tesla model X P100D. I’ll be damned if I can get the pieces to fit together, and what is this extra bag of parts for? I hope the car is made better than this!
As for my VW trading business from 46 years ago, repair work done on US registered cars in Mexico was then subject to a 20% import duty. When the customs officer leaned against the car to ask if I had any work done recently, I fibbed. As he walked away I notice to my horror that the front of his pants was entirely covered with fresh green paint.
I never went back. Stocks looked like a better bet.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“A bear will come to Broad and Wall if Santa Claus fails to call,” says an old Wall Street saying I recall from my youth.
