Global Market Comments
September 4, 2018
Fiat Lux
Featured Trade:
(WEDNESDAY, OCTOBER 17, 2018, HOUSTON GLOBAL STRATEGY LUNCHEON),
(DON’T MISS THE SEPTEMBER 5 GLOBAL STRATEGY WEBINAR),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
THE WAR WITH CANADA STARTS ON TUESDAY),
(MSFT), (VXX), (TLT), (AAPL), (KO), (GM), (F)
I have spent all weekend sitting by the phone, waiting for the call from Washington D.C. to re-activate my status as a Marine combat pilot.
Failure of the administration to reach a new NAFTA trade agreement by the Friday deadline makes such a conflict with Canada inevitable.
And while you may laugh at the prospect of an invasion from the North, the last time this happened Washington burned. You can still see the black scorch marks inside the White House today.
This is all a replay for me, when in 1991, I enjoyed an all-expenses paid vacation courtesy of Uncle Sam. That’s when I spent a year shuttling American fighter pilots from RAF Lakenheath to forward bases at Ramstein, Aviano, Cyprus, and Dharan, Saudi Arabia.
It may seem unlikely that our nation’s military would require the services of a decrepit 66-year-old. However, in my last conflict I ran into another draftee who was then 66. It seems that the Air Force then had a lot of F-111 fighter bombers left over from Vietnam that no one knew how to fly.
That’s the great thing about the military. It never throws anything away. Not even me. The life of our remaining B-52 Stratofortress bombers at their final retirement in 2050 will be 100 years.
Perhaps Canada will decide that discretion is the better part of valor, and simply wait for the World Trade Organization to declare the Trump tariffs illegal, which they obviously all are.
That would then force the administration to withdraw from the organization the U.S. created at the end of WWII to regulate fair trade and go rogue. But then what else is new?
And while there was immense media time devoted to the NAFTA talks, which only oversees trade with partners with around $2 trillion each, China, the 800-pound gorilla, is still lurking out there. It has a $12.2 trillion GDP and Trump is imposing tariffs on another $200 billion of their imports there today.
The corner that Trump has painted himself into is that he has made himself SO unpopular abroad, insulting virtually everyone but Russia, that no leader is willing to risk doing a deal with him lest they get kicked out of office.
I certainly felt this in Europe this summer where the discussion was all about Trump all of the time. When you insult a nation’s leader you insult everyone in that country. I haven’t received that kind of treatment since the Vietnam War was running hot and heavy in 1968.
I’ll tell you, I’d much rather be flying combat missions over enemy territory without a parachute than trading a market like we had last week. For months now, it has been utterly devoid of low risk/high return entry points for all asset classes.
It’s been a slow-motion melt-up virtually every day against the most horrific news backdrop imaginable. Such is the wonder of massive global excess liquidity. It Trumps everything.
NASDAQ topped 8,000, proving that if you aren’t loaded to the gills with technology stocks, as I have been pleading all year, you are out of your freaking mind. If you don’t own Apple, you are doubly screwed.
I doubt that such data is available, but I bet the illiterate and the uneducated have been beating more literate types in performance by a huge margin.
The unresponsiveness to news isn’t the only thing afflicting this market. As the summer coughs and sputters its way to a close, we enter September, notorious as the most horrific trading month of the year. And we are launching into it with the Mad Hedge Market Timing Index stuck in the 70s, overbought territory, for weeks now.
Blockbuster earnings, the principal impetus for rising share prices in 2018, are now firmly in the rearview mirror, and won’t make a reappearance for another month. Then they die completely in 2019.
Perhaps this is why my long volatility position in the (VXX) is doing moderately well, even though the indexes have been hitting new all-time highs, with the S&P 500 briefing kissing $292. I rather practice my golf swing rather than try to outtrade this market, even though I don’t play golf.
Other than NAFTA, there was little to trade off of last week. Apple (AAPL) shares continue to break new records, hitting an incredible $228, in front of their big iPhone launch this month. Trump announced he was freezing wages on 1 million-plus federal employees next year. That will solve their tax problems for sure.
Coca-Cola (KO) bought British owned Costa for $5 billion, where I regularly breakfast while traveling abroad, in the hopes that perhaps its 501st new drink launch this year will be successful.
Amazon (AMZN) is within sofa change of becoming the next $1 trillion market cap company, making the parents of founder Jeff Bezos the most successful angel investors in history, worth $30 billion.
U.S. auto sales are in free fall. Car company shares (GM), (F) continued their slide as they are pummeled on every side by administration economic policies. One has to ask the question of how long the American economy can survive after losing a major leg like this one. Home sales, another vital component, are also suddenly awful.
Trump attacked big tech. The market yawned.
With the Mad Hedge Market Timing Index at 71 and bounces around in the 70s all week, I am not inclined to reach for trades here. All three of my current positions are making money, my longs in Microsoft (MSFT) and volatility (VXX) and my short in the U.S. Treasury bond market (TLT).
August finally brought in a performance burst in the final days, leaving us with a respectable return of 2.13%. My 2018 year-to-date performance has clawed its way back up to 25.30% and my nine-year return appreciated to 303.48%. The Averaged Annualized Return stands at 34.35%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 28.59%.
This coming week housing statistics will give the most important insights on the state of the economy.
On Monday, September 3, there was a national holiday, Labor Day.
On Tuesday, September 4, at 9:45 AM the PMI Manufacturers Index is out. August Construction Spending is out at 10:00 AM.
On Wednesday, September 5 at 7:00 AM, we learn MBA Mortgage Applications for the previous week.
Thursday, September 6 leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 3,000 last week to 213,000. Also announced at 9:45 AM are the August PMI Services Index.
On Friday, September 7 the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, the high point of my weekend was the funeral services for Senator John McCain. Boy, the Squids really know how to put on a ceremony. I suspect it may market a turning point for our broken American politics.
In the meantime, King Canute sits in his throne at the seashore ordering the tide not to rise.
Good luck and good trading.
Global Market Comments
August 31, 2018
Fiat Lux
Featured Trade:
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA, GLOBAL STRATEGY LUNCHEON),
(WATCH OUT FOR BEARS!), ($INDU),
(MORE BIOTECH AND PHARMA STOCKS TO SOAK UP)
I just got off the phone with a hedge fund veteran who I have long known and respected. He showered me with 27 reasons why stocks were peaking out and were about to crash.
I told him he was right on every point, but that these were all arguments that future historians will put forward giving the origins of a bear market that started years before.
Right now there is only one bit of analysis that counts for traders and that is the amount of cash in the system, and that indicator is screaming “BUY.”
There is $50 trillion is excess liquidity sitting in cash accounts around the world looking for a home. With both Europe and Japan still in the quantitative easing business that number is expanding.
And what is the primary target of all this money? U.S. stocks, particularly technology ones.
In fact, I have been recently showered with charts, reports, and even tea leaves showing that stock markets are ridiculously high and headed for a fall. Look at the chart below showing the yield curve for the bond market and it shows that whenever it inverts, recessions and bear markets follow in every single case!
Warning: Yield curves are only months away from inverting.
There is another chart below a friend sent in illustrating the ratio of stock prices to home prices for the past 123 years. It is now approaching a peak seen only three times over the past century.
And it’s not like home prices have been sitting stationary either. The price for your personal residence has been rocketing as well, no matter where you live.
However, this chart shows something far more important. Market tops aren’t one-off events. They can take five or more years to play out. And we have just entered one of those long-term topping processes now.
Roll back the video tape. Remember our old friend, Federal Reserve governor Alan Greenspan? He uttered his “irrational exuberance” prediction for the stock market in 1996.
The Dow Average ($INDU) rose for four more years, nearly doubling in the process. Portfolio managers who followed his sage advice were later seen driving taxis in Manhattan.
So, while markets may be topping, this action could continue for quite some time, possibly well into the next decade. Therefore, don’t let news like we received today about the president imposing tariffs on $200 billion worth of Chinese imports scare you out of the market.
And I say this in full knowledge that September and October are usually the worst-performing months of the year. The six months after a midterm election are usually the best, always.
One has to be truly impressed with the bounce in biotech and pharmaceutical stocks over the past month.
This is something to pay attention to, as biotech and technology will be two of the top-performing stock market sectors for the next 20 years.
If you want to be lazy, just buy these two sectors on every dip and you should outperform the main indexes (SPY), (INDU) by three or four to one.
Since June, there were sign that life was returning to this beleaguered sector.
Suddenly, every company has become a takeover target.
(GILD) followers like me had long bemoaned the company’s failure to profitably deploy its cash mountain by growing through M&A.
Something had to replace their its drug eventually, once everyone in the world was cured of the dread disease.
Once the top-performing sector, they went from heroes to goats, so fast that it made your head spin.
What I called “The ATM Effect” kicked in big time.
That’s when frightened investors run to the sidelines and sell their best stocks to raise cash.
After all, no one wants to sell other stocks for a loss and admit defeat, at least in front of their clients.
It’s not that the companies themselves were without blood on their hands.
Valuations were getting, to use the polite term, getting “stretched” after a torrid five-year run.
Gilead Sciences (GILD) soaring from $18 to $125?
Celgene (CELG) rocketing from $20 to $142?
It was a performance for the ages.
If a financial advisor wasn’t in health care during the salad days, chances are that he is driving a taxi for Uber in a bad neighborhood by now.
Raise your hand if you think Americans aren’t paying enough for their prescription drugs.
Yes, I thought so.
Here’s the key issue for health care and biotech for investors.
It’s all about politics.
Much remains to be seen about the future of health care in America.
Obamacare weathered the last assault by the administration. Will it survive the next one?
Remember, Obamacare passed by one vote only after a year of cantankerous infighting, and then, only when a member changed parties (the late Pennsylvanian Arlen Specter).
Nobody knows.
However our health care is fixed, open bidding for government contracts would be anathema to the industry, something from which they have, until now, been exempted.
I believe the United States will eventually stagger toward a national single payer system. But it may take another 20 years of turmoil to get there.
California will certainly take the first step. It is now considering a statewide single payer system that would provide full coverage to the state’s $39 million residents.
The bad news is that it would cost $400 billion. The good news is that it would save the state $375 billion in expenses, so it may be worth doing.
The state legislature in Sacramento is currently mulling alternatives.
It’s easy to understand why these stocks were so popular and are found brimming to overflowing in client portfolios and personal 401k’s and IRA’s.
We are just entering a Golden Age for biotech and health care.
Profit growth for many firms is exceeding 20% a year.
Hyper-accelerating biotechnology is rapidly bringing to market dozens of billion-dollar-earning drugs that were, until recently, considered in the realm of science fiction.
And we have only just gotten started.
Cures for cancer, heart disease, arthritis, diabetes, AIDS, and dementia?
You can take your pick. And the new CRISPR technology is accelerating everything further.
If you missed biotech and health care the first time around, you’ve just been given a second chance at the brass ring.
Here’s a list of five top-quality names to get your feet wet:
Gilead Sciences (GILD) – Has the world’s top hepatitis cure, which it sells for $80,000 per treatment. For a full report, clear here for “Keep Gilead Sciences on Your Radar."
Celgene (CELG) – A biotech firm that specializes in cancer cures (thalidomide) and inflammatory diseases. It also produces Ritalin for the treatment of ADHD.
Allergan (AGN) – Has the world’s third largest low-cost generic drug business. In addition, it has built a major portfolio of drug therapies through more than two dozen acquisitions over the past decade.
Regeneron (REGN) – Already has a great anti-inflammatory drug, and is about to market a blockbuster anti-cholesterol drug that will substantially reduce heart disease.
If you want a lower risk, more diversified play in the area, you can buy the Health Care Select Sector SPDR (XLV). Please note that a basket of stocks is going to deliver a fraction of the volatility of single stocks.
Therefore, we have to be more aggressive with our positioning to make any money, picking call option strikes that are closer to the money.
Johnson and Johnson (JNJ) is the largest holding in the (XLV), with a 12.8% weighting, while Gilead Sciences (GILD) is the fourth, with a 5.1% share. For a list of the largest components of this ETF, please click here.
The other classic play in this area is the Biotech iShares ETF (IBB) issued by BlackRock (click here for the link).
Their largest holding is Biogen (BIIB), followed by Gilead Sciences (GILD), Celgene (CELG), Amgen (AMGN), and Regeneron Pharmaceuticals (REGN).
I’ll be shooting out Trade Alerts on biotech and health care names as soon as I see another sweet entry point.
Until then, enjoy the ride!
Global Market Comments
August 30, 2018
Fiat Lux
Featured Trade:
(TUESDAY, OCTOBER 16, 2018, MIAMI, FL, GLOBAL STRATEGY LUNCHEON),
(IT’S TIME TO START LOOKING AT EMERGING MARKETS),
(EEM), (EPHE), (PIN), (FXI), (EWZ),
(INDUSTRIES YOU WILL NEVER HEAR ABOUT FROM ME)
With major moves down across the entire commodity space this year, it’s time to take another look at emerging markets (EEM).
Buying low and selling high is what the Mad Hedge Fund Trader service is all about. The natural tendency of individual investors is the opposite. Emerging markets are now approaching decade lows.
The worst-performing asset class in the world from 2014-2018, emerging stock markets were certainly taken out to the woodshed for a severe thrashing, just like my grandfather used to do when he caught me shooting at the local stop signs with my .22.
The problem is that a strong dollar is causing the debts of most private companies in these countries to increase dramatically. They usually borrow in dollars because of the lack of local currency indigenous debt markets. When the dollar is weak the math works in reverse, decreasing their debts.
All it would take is a weak dollar and a rebound in commodity prices and it will be off to the races for emerging markets once again. So, it is time to start putting emerging markets on your radar once again.
I managed to catch a few comments in the distinct northern accent of Jim O'Neil, the fabled analyst who invented the “BRIC” term, and who recently retired from the chairman's seat at Goldman Sachs International (GS) in London.
O'Neil thinks that it is still the early days for the space, and that these countries have another 10 years of high growth ahead of them.
I have spent the past half century traveling in emerging economies, starting in 1968 when I spent a summer hitchhiking around Tunisia, Algeria, and Morocco.
To keep from getting bored in college (the advanced math classes were too easy), I took a course in tropical diseases. I then spent the next decade catching them all in Southeast Asia.
As I have been carefully monitoring emerging markets since the inception of this letter in 2008, this is music to my ears.
The combined GDP of the BRICs, Brazil (EWZ), Russia (RSX), India (PIN), and China (FXI), is rapidly approaching that of the U.S. China alone has already surpassed one-third of the $20 trillion figure for American gross domestic product.
“BRIC” almost became the “RIC” when O'Neil was formulating his strategy a decade ago.
Conservative Brazilian businessmen were convinced that the newly elected Luiz Inacio Lula da Silva would wreck the country with his socialist ways.
He ignored them and Brazil became the top-performing market of the G-20 since 2000. An independent central bank that adopted a strategy of inflation targeting was transformative.
Still, with growth rates triple or quadruple our own, (EEM) will not stay “resting” for long.
You can start scaling into the broad iShares MSCI Emerging Markets (EEM) ETF now. Or you can take a rifle shot with the PowerShares India Portfolio ETF (PIN), which has the brightest outlook of the bunch.
Global Market Comments
August 29, 2018
Fiat Lux
Featured Trade:
(HOW TO RELIABLY PICK A WINNING OPTIONS TRADE)
Global Market Comments
August 28, 2018
Fiat Lux
Featured Trade:
(VERTICAL BULL CALL SPREADS REVISITED),
(HD), ($INDU),
(THE RECEPTION THAT THE STARS FELL UPON),
(TESTIMONIAL)
For those readers looking to improve their trading results and create the unfair advantage they deserve, I have posted training video on How to Execute a Vertical Bull Call Spread.
This is a pair of positions in the options market that will be profitable when the underlying security goes up, sideways, or down small in price over a defined period of time.
It is the perfect position to have onboard during markets that have declining or low volatility, much like we have experienced over the past year.
I have strapped on quite a few of these babies across many asset classes over the years and they are a major reason why I am up 54.28% on a trailing 12-month basis, with the Dow Average gaining a lowly 6.3%.
To understand this trade, I’ll outline the math on a Home Depot (HD) vertical bull call spread which I executed on August 7.
Followers of my Trade Alert service received text messages and emails to add the following position:
Trade Alert - (HD) - BUY
BUY the Home Depot (HD) September, 2018 $180-$185 in-the-money vertical BULL CALL spread at $4.10 or best
To accomplish this, they can execute the following trades:
Buy 24 September 2018 (HD) $180 calls at…….………$17.60
Sell short 24 September 2018 (HD) $185 calls at……….$13.50
Net Cost:………………………….…………..…….….....$4.10
Potential Profit: $5.00 - $4.10 = $0.90
(24 X 100 X $0.90) = $2,150 or 21.95% in 32 trading days.
This gets traders into the position at $4.10, which cost them $9,840 ($4.10 per option X 100 shares per option X 24 contracts).
The vertical part of the description of this trade refers to the fact that both options have the same underlying security (HD), the same expiration date (September 21, 2018) and only different strike prices ($180 and $185).
The great thing about these positions is that your risk is defined. You can’t lose any more than the $9,840 you put up.
If Home Depot goes bankrupt, we get a flash crash, or suffer another Brexit type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like them so much.
As long as Home Depot traded at or above $184.10 (The lower $180 strike price plus your $4.10 cost) on the September 21 expiration date, you will make a profit on this trade.
At the time I sent out this trade alert, Home Depot traded at $196.15. So, the stock could have fallen by $12.05, or a hefty 6.14% over the next 32 trading days, and you would still make a profit on the trade.
The shares only need to close at $185 on expiration day for you to capture the maximum potential profit, which can be calculated as:
$5.00 expiration value - $4.10 cost = $0.90 profit
($0.90 profit X 100 contracts per option X 24 contracts) = $2,160, or a gain of 21.95%.
That is not a bad profit in this ultra-low return world in only 32 days.
As it turned out my timing was perfect and Home Depot Shares have since risen to $202.06 a share. The current market value of the Home Depot (HD) September, 2018 $180-$185 in-the-money vertical BULL CALL spread is now $4.90.
This means you can take 88.88% of the maximum potential profit now without having to wait the extra 18 trading days until the September 21 option expiration.
Now you know why I like Vertical Bull Call Spread so much. So, do my followers.
Occasionally, these things don’t work. As hard as it may be to believe, I am not infallible.
So, if I’m wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a lot, you will lose money.
On those rare cases when that happens, I’ll shoot out a Trade Alert to you with stop-loss instructions before the damage gets out of control.
To watch the video edition of How to Execute a Vertical Bull Call Spread, complete with more detailed instructions on how to execute the position with your online platform, please click here.
