I can't tell you how much I enjoy your blog. It is the first place I go every morning, and I miss you on the weekends.
I stumbled upon your site about four months ago and have been addicted to it since day one. I really appreciate not only your insight into the markets, but also your global and historical perspectives.
All of this served up with your great sense of humor makes it a must read! Thanks for all your hard work.
Chip
"It doesn't take Herculean assumptions to get to $170 for S&P 500 earnings this year. Slap a 17.5 multiple on that, and you get 3,000 for the index," said Brian Jacobsen of Wells Fargo Asset Management.
Global Market Comments
July 2, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE FUTURE IS HAPPENING FAST),
(HOG), (TLT), (ROM), (MU), (NVDA), (LRCX),
(SPY), (AMZN), (NFLX), (EEM), (UUP), (WBA),
(THE WORST TRADE IN HISTORY), (AAPL)
I feel like I'm living life in fast forward these days.
First we got a slap across the face with a wet mackerel on Monday with a 328 plunge in the Dow Average on yet another trade war escalation.
Harley Davidson (HOG) said it was moving a factory out of the country to bypass new European duties imposed in response to ours. If Harley is doing this you can bet there are 10,000 other companies thinking about it.
And even though robust economic growth should assure us that we remain in a new bear market for bonds, traders think otherwise. A 10-year Treasury bond (TLT) yield at 2.81% says that we're already in the next recession, we just don't know it yet.
As always happens with the ebb and flow of the trade war, technology got hammered. My favorite early retirement vehicle, the ProShares Ultra Technology 2X ETF (ROM), plunged some 11.19% to an even $100. Chip stocks such as Micron Technology (MU) and Lam Research (LRCX) get particularly hurt as China buys 80% of their processors from the U.S.
In the meantime, Tesla (TSLA) continues its phoenixlike rise from the ashes yet again, burning the shorts for the umpteenth time. The shares are now taking another run at a new all-time high. You would think people would learn but they don't. Einstein's definition of insanity is repeating the same thing over and over again and expecting a different result.
While bearish analysts predicted the imminent demise of the company, I saw a steady stream of trucks delivering new Tesla 3s from the Fremont factory while driving back from Los Angeles last weekend. Nothing beats on-the-ground research.
I'm sorry, but there is definite disconnect from reality with this company. The most hated company in America has produced the fifth best performing stock in over the past eight years, up more than 2,000%. I guess that's what happens when you disrupt big oil, Detroit, the U.S. dealer network, and the entire advertising industry all at the same time.
Interestingly, we caught three of the five best performers early on, including Tesla, NVIDIA (NVDA), and Netflix (NFLX).
Emerging markets (EEM) continue their death spiral, pummeled by the twin threats of trade wars and a soaring dollar (UUP). Most big emerging companies have their debt in dollars.
Sometimes you have to forget what you know to make money, and that has certainly been the case for me with emerging countries, where I spent a large part of my life.
The future is happening fast. Amazon (AMZN) single-handedly demolished the drug sector when it announced its takeover of online pharmacy company PillPack. The traditional brick-and-mortar retail pharmacy sector lost $9 billion in market capitalization just on the announcement. Walgreens (WBA) alone dropped a gut churning 10%.
If anyone can slash America's bloated health care bill it is Jeff Bezos. Just ask any former bookseller or toy maker.
And for a final middle finger salute to investors, the president said he wants to withdraw from the World Trade Organization, which the U.S. itself created after WWII. That means the United Nations is next on the chopping block.
America is rapidly becoming rogue nation No. 1, the next failed state. And failed states don't have great stock markets. Just check out the Somalia Stock Exchange.
They net of all of this is that the rest of the global economy is rolling over like the Bismarck, while the U.S. remains a sole beacon of strength. That's not good when half of S&P 500 earnings come from abroad.
However, that strength is based on a temporary one-time-only stimulus from massive deficit spending and corporate tax cuts that runs out of juice next year.
So keep tap dancing on the edge of the Grand Canyon. We'll miss you when you're gone. And before you ask, the best hedge in this kind of market is cash, which has huge option value that almost no one recognizes.
Despite all the chaos, uncertainty, and massive headline risk, I managed to tiptoe between the raindrops, keeping the Mad Hedge Fund Trader Alert Service performance just short of a new all-time high.
I closed out the month of June at a healthy 4.45%, my 2018 year-to-date performance rose to 24.82% and my 8 1/2-year return catapulted to 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.
This coming holiday shortened week will be all about the jobs, jobs, jobs. Also, the Fed will raise interest rates by 25 basis points on Wednesday to an overnight rate of 2.00%.
On Monday, July 2, at 9:45 AM, the May PMI Manufacturing Index is out.
On Tuesday, July 3, at 10:00 AM, the May Factory Orders are published.
On Wednesday, July 4, U.S. markets are closed for Independence Day. I will be watching the fireworks display over New York's Hudson River from the top of a Midtown Manhattan skyscraper.
Thursday, July 5, sees a huge bunching up of data thanks to the Fourth of July. It leads with the ADP Employment Report for private sector jobs at 8:15 AM EST. The Weekly Jobless Claims follow at 8:30 AM EST, which saw a rise of 9,000 last week to 227,000. Also announced is the all-important 25 basis point interest rate rise from the Federal Reserve and the FOMC Minutes at 2:00 PM, a reading of what was discussed at the last Fed meeting.
On Friday, July 6 at 8:30 AM EST, we get the June Nonfarm Payroll Report. Then the Baker Hughes Rig Count is announced at 1:00 PM EST. I will be sipping a glass of champagne as I board the Queen Mary 2 at the Brooklyn Cruise Terminal. I look forward to all those who signed up for my Seminar at Sea.
As for me, I will be hurriedly packing for the 2018 Mad Hedge European Tour.
Unfortunately, traveling in the grand style of the 19th century Belle Epoque involves bringing 200 pounds of luggage.
Now where are those darn black dress socks? And why am I missing a stud for my formal shirt?
Good Luck and Good Trading.
Time to Get Off the Merry-Go-Round
"Not investing in technology now is like not investing in industrial companies during the Industrial Revolution," said one portfolio manager.
Global Market Comments
June 29, 2018
Fiat Lux
Featured Trade:
(WHY THE WORLD IS ABOUT TO END),
(TLT), (TBT), (HYLD), (LQD), (JNK), (SPG),
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA, CONFERENCE, OCTOBER 26-27, 2018)
I am basically a positive person. I never have been much of a Cassandra who predicts the end is near and the world is about to end. Nor have I ever been one to exaggerate. In this day, the raw facts are strange enough.
But you know what? The end really IS near and the world IS about to end.
If you knew that a trillion-dollar trade was about to unwind wouldn't you like to get in front of it? If you could you would be able to make a fortune for yourself.
Well guess what? Just such an opportunity is staring you in the face.
I am talking about the inversion of the yield curve, which I have been warning you about for the past two years. Now the mainstream media is finally getting on the bandwagon and starting to focus on this arcane concept.
During expanding economies, long-term interest rates are always higher than short-term ones to compensate investors for the greater risk that extended duration implies. The longer the life of a bond, the more things that can go wrong. They also need to be protected from rising inflation.
Inverted yield curve takes place when long-term interest rates are lower than short-term ones. This takes place when the Federal Reserve raises overnight rates to higher-than-normal levels to cool an overheating economy. This is a rare event, as the Fed action brings results usually in months. Yield curves are only inverted about 10% of the time, or about one year in every 10.
It turns out that the yield curve is the best predictor of recessions and bear markets out there. Take a look at the charts below, which I lifted from my friends at The New York Times. They show a yield curve inverting in 2007. The Great Recession and a 52% slide in the S&P 500 followed. It turns out that every recession of the past 60 years was preceded by an inverted yield curve.
It isn't just the yield curve that is anticipating the end of the Great Bull Market of the 2010s. The headline unemployment rate is also raising a red flag. The current jobless rate is now at 3.8%, an 18-year low. The last time we saw numbers this robust was, you guessed it, back in 2007.
In fact, I am seeing a whole range of data points warning that this economic cycle is coming to an end. As a hedge fund friend of mine told me the other day, "A year from now we'll be kicking ourselves over why we didn't sell. All the signs were there."
With the government about to report a US Q2 GDP figure of anywhere from 3% to 4% you must think I'm smoking California's largest cash crop (it's not grapes).
But having been through nine bull markets during my lifetime, I can tell you this is exactly what tops look like. Business is booming, you can't hire anyone, there are long lines everywhere, and nary a space is to be found in a shopping mall parking lot. This is when economies exhaust themselves, by overheating and pulling growth in from future years.
Now about that trillion-dollar trade.
Back in 2011, the spread between the two-year and 10-year Treasury paper (TLT) was a generous 3.0%. Bond traders made money hand over fist borrowing short, lending long, and leveraging this trade up anywhere from 10 to 100 times. The risk reward was so great that the aggregate value rose to the tens of trillions of dollars.
Today, that spread is on 34 basis points. Traders are still putting it on but keeping every close eye on the exit. After all, 34 basis points X 10 is 3.40%, which still handily beats overnight deposit rates.
When the spread turns negative the sushi hits the fan, and they sell everything, taking the rest of the world with it.
What will they be dumping? The entire long dated maturity range of not just Treasury bonds (TLT), but ALL bonds (LQD), (JNK) and high yielding stocks (HYLD), ETFs, MLPs (AMLP), and REITs (SPG). They call this a "bear market."
What's the cleanest way to play this? Sell short the (TLT) or buy the inverse 2X short Treasury ETF (TBT). Right here, with yield at a five-month low and prices at five-month highs, is a great entry point.
Just thought you'd like to know.
"Every time there's a dip, you are going to see investors come in from the sidelines because they're underinvested. On the other hand, the market is going nowhere because of growth. So, every time the market sticks its head up, they are going to sell the rallies. You are going to see this over and over again," said hedge fund manager, Mark Fisher, of MBF Clearing Corp.
Global Market Comments
June 28, 2018
Fiat Lux
Featured Trade:
(FRIDAY, AUGUST 3, 2018, AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(TRAPPED IN PURGATORY),
(INDU), (SPY), (NASDAQ), (IWM), (TLT)
I can't believe my eyes.
Here we are at the midpoint of 2018 and the main markets are virtually unchanged. The Dow Average is down 1.5%, the S&P 500 is up +1%, NASDAQ has gained 8.79%, and the Russell 2000 has tacked on 7.18%.
Despite all the promises that happy days are here again, here we are dead in the water. Since the passage of one of the most simulative tax bills in December, we have gone absolutely nowhere.
We are essentially stuck in stock market purgatory.
Of course, you can blame the trade wars, the onset of which marked the top of the bull market on January 24 at 26,252.
The president got one thing right. Trade wars are easy to win, but for dictatorships not for democracies.
If you complain about trade policies in China you are told to shut up or face getting sent to a re-education camp. Worst case you might disappear in the night as has happened to a number of Chinese billionaires lately.
In America any restraint of trade anywhere invites 10,000 highly paid lobbyists desperate to reverse the action. Offer any resistance and the reprobates are thrown out of office, as may happen here in four months.
The Chinese have one weapon against which we have no defense. They can go hungry. They'll just tell their people to toughen up for the greater good of the nation. When I first arrived in the Middle Kingdom 45 years ago they were still recovering from the aftereffects of a famine that killed 50 million (there are NO substitutes for food). Try doing that in the U.S.
The Chinese have another secret weapon at their disposal. They paid $3.63 a week for a subscription to the New York Times (including Sundays). Because of this they know that the president is going into the midterm elections with the lowest approval ratings in history.
And they are doing this running on a policy of sending children to concentration camps, which they don't even do in China anymore. This will cost the party votes in every state except in Oklahoma.
So the Chinese are content to hang tough, meet every tit with a tat, match every escalation, and wait out the current administration. The only question for them is whether the president will be gone in 2 1/2 years or in six months, so it pays to stall.
This is a country where history is measured in millennia. When I asked premier Zhou Enlai in the 1970s what the outcome of the 1792 French Revolution was, he responded "It's too early to say."
None of this is good for stock prices.
So I will continue with my now five-month-old prediction that markets will remain trapped in narrow ranges until before the midterms, and then rally strongly. It will do this not because of who wins, but because of the mere fact that it is over.
If you are a trader, unless you can buy stocks on those horrific capitulation panic days and sell on the most euphoric peaks, it's better just to stay away. I can do that, but I bet most of you can't. But then I've been practicing for 50 years. This is why I dumped the last of my positions yesterday morning at the highs of the day, shooting out three Trade Alerts in rapid succession.
By the way, these are excellent reasons to avoid the bond market as well. While the fundamentals tell us that interest rates should continue to rise for years, the charts tell us a different story.
With 10-year U.S. Treasury bond yields (TLT) hitting a five-month low today, it is hinting that a recession isn't a 2019 event, it in fact has already started. Bulls better fall down on their knees and pray to their chosen idol that this is nothing more than an extended short covering rally.
It all sounds like a great time to take a long cruise to me.
China in 1973