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MHFTR

April 20, 2018

Diary, Newsletter

Global Market Comments
April 20, 2018
Fiat Lux

Featured Trade:
(DON'T MISS THE APRIL 25 GLOBAL STRATEGY WEBINAR),
(AN EVENING WITH BILL GATES, SR.),

(TESTIMONIAL)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2018-04-20 01:09:202018-04-20 01:09:20April 20, 2018
MHFTR

Don't Miss the April 25 Global Strategy Webinar

Diary, Newsletter

My next global strategy webinar will be held live from Silicon Valley on Wednesday, April 25, at 12:00 PM EST.

Co-hosting the show will my friend, options expert Mike Pisani.

I'll be giving you my updated outlook on stocks, bonds, commodities, currencies, precious metal, and real estate.

The goal is to find the cheapest assets in the world to buy, the most expensive to sell short, and the appropriate securities with which to take these positions.

I will also be opining on recent political events around the world and the investment implications therein.

I usually include some charts to highlight the most interesting new developments in the capital markets. There will be a live chat window with which you can pose your own questions.

The webinar will last 45 minutes to an hour. International readers who are unable to participate in the webinar live will find it posted on my website within a few hours.

I look forward to hearing from you.

To log into the webinar, please click on the link we emailed you entitled, "Next Bi-Weekly Webinar - April 25, 2018" or click here.

https://www.madhedgefundtrader.com/wp-content/uploads/2018/04/JT-and-friend-story-1-image-1-e1524178263549.jpg 400 300 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2018-04-20 01:08:262018-04-20 01:08:26Don't Miss the April 25 Global Strategy Webinar
MHFTR

An Evening with Bill Gates, Sr.

Diary, Newsletter

I had a chat with Bill Gates, Sr. recently, co-chairman of the Bill and Melinda Gates Foundation, the world's largest private philanthropic organization. There, a staff of 800 help him manage $36.8 billion.

The foundation will give away $3.5 billion this year, a 10% increase over last year. Some $1.5 billion will go to emerging national health care, and another $750 million to enhance American education.

The foundation's spending in Africa has been so massive that it is starting to have a major impact on conditions and is part of the bull case for investing there.

The fund happens to be one of the best managed institutions out there, having sold the bulk of its Microsoft (MSFT) stock just before the dot-com bust and moving the money into Treasury bonds.

Mr. Gates' pet peeve is the precarious state of the US K-12 public education system, where teaching is not as good as it could be, expectations are low, and financial incentives and national standards are needed.

When asked about retirement, he said, "Having a son with a billion dollars puts a whole new spin on things."

Now a razor-sharp 92 and towering over me at 6'7", his favorite treat is the free NetJets miles he gets for Christmas every year from his son, Bill Jr.

In his memoir Showing up for Life, he says a major influence on his life was his Scoutmaster 70 years ago.

Being an Eagle Scout myself, I quickly drilled him on some complex knots, and he whipped right through all of them.

The world needs more Bill Gates Srs.

 

A Bowline Knot

https://www.madhedgefundtrader.com/wp-content/uploads/2018/04/Bill-Gates-Jr-and-Sr.-story-2-image-1.jpg 222 296 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2018-04-20 01:07:412019-08-07 01:18:04An Evening with Bill Gates, Sr.
MHFTR

Testimonial

Diary, Newsletter

Nice work! You do great analysis and execution. I got a 100% overnight profit on the (UVXY) calls!

Zev
Potomac, Maryland

 

https://www.madhedgefundtrader.com/wp-content/uploads/2018/04/John-on-rock-story-3-image-2-e1524177504491.jpg 300 400 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2018-04-20 01:06:152018-04-20 01:06:15Testimonial
MHFTR

April 19, 2018

Diary, Newsletter

Global Market Comments
April 19, 2018
Fiat Lux

Featured Trade:
(DIVING BACK INTO THE VIX),
(VIX), (VXX), (SPX),
(THE GREAT AMERICAN JOBS MISMATCH)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2018-04-19 01:08:082018-04-19 01:08:08April 19, 2018
MHFTR

Diving Back Into the (VIX)

Diary, Newsletter, Research

I think we are only days, at the most weeks, away from the next crisis coming out of Washington. It can come for any of a dozen different reasons.

Wars with Syria, Iran or North Korea. The next escalation of the trade war with China. The failure of the NAFTA renegotiation. Another sex scandal. The latest chapter of the Mueller investigation.

And then there's the totally unexpected, out of the blue black swan.

We are spoiled for choice.

For stock investors, it's like hiking on the top of Mount Whitney during a thunderstorm with a steel ice axe in hand.

So, I am going to buy some fire insurance here while it is on sale to protect my other long positions in technology and financial stocks.

Since April 1, the Volatility Index (VIX) has performed a swan dive from $26 to $15, a decline of 42.30%.

I have always been one to buy umbrellas during parched summers, and sun tan lotion during the frozen depths of winter. This is an opportunity to do exactly that.

Until the next disaster comes, I expect the (VXX) to trade sideways from here, and not plumb new lows. These days, a premium is paid for downside protection.

The year is playing out as I expected in my 2018 Annual Asset Class Review (Click here for the link.). Expect double the volatility with half the returns.

So far, so good.

If you don't do options buy the (VXX) outright for a quick trading pop.

You may know of the Volatility Index from the many clueless talking heads, beginners, and newbies who call (VIX) the "Fear Index."

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. Period.

End of story. Class dismissed.

The (VIX) is expressed in terms of the annualized movement in the S&P 500, which today is at $806.06.

So, for example, a (VIX) of $15.48 means that the market expects the index to move 4.47%, or 121.37 S&P 500 points, over the next 30 days.

You get this by calculating $15.48/3.46 = 4.47%, where the square root of 12 months is 3.46 months.

The volatility index doesn't really care which way the stock index moves. If the S&P 500 moves more than the projected 4.47%, you make a profit on your long (VIX) positions. As we know, the markets these tumultuous days can move 4.47% in a single day.

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.

If you make money on your (VIX) trade, it will offset losses on other long positions. This is how the big funds most commonly use it.

If you lose money on your long (VIX) position, it is only because all your other long positions went up.

But then no one who buys fire insurance ever complains when their house doesn't burn down.

 

 

 

 

"Chance Favors the Prepared," said French scientist Louis Pasteur.

https://www.madhedgefundtrader.com/wp-content/uploads/2018/04/John-and-swans-story-1-image-4-e1524088218881.jpg 250 300 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2018-04-19 01:07:062018-04-19 01:07:06Diving Back Into the (VIX)
MHFTR

The Great American Jobs Mismatch

Diary, Newsletter, Research

With the Weekly Jobless Claims bouncing around a new 43-year low at 220,000, it's time to review the state of the US labor market.

Yes, I know this research piece isn't going to generate an instant Trade Alert for you.

But it is essential in your understanding of the big picture.

There are also thousands of students who read my website looking for career advice, and I have a moral obligation to read the riot act to them.

With a 4.1% headline unemployment rate, the US economy is now at its theoretical employment maximum. If you can't get a job now, you never will.

We may see a few more tenths of a percent decline in the rate from here, but no more. To get any lower than that you have to go all the way back to WWII.

Then there was even a shortage of one-armed, three-fingered, illiterate recruits with venereal disease, the minimum US Army recruitment standards of the day.

Speaking to readers across the country and perusing the Department of Labor data, I can tell you that not all is equal in the jobs market today.

You can blame America's halls of higher education, which are producing graduates totally out of sync with the nation's actual skills needs.

Take a look at this table of graduating majors to job offers, and you'll see what I am talking about:

Major - Job Offers Offered per Graduating Major

Computer Science - 21:1
Engineering - 15:1
Physical Sciences (oil) - 13:1
Humanities - 5:1
Business and accounting - 4:1
Economics - 4:1
Agriculture - 2:1
Education - 0.4:1
Health Sciences - 0.2:1

To clarify the above data, there are 21 companies attempting to hire each computer science graduate today, while there are five kids battling it out to get each job in Health Sciences.

To understand what's driving these massive jobs per applicant disparities, take a look at the next table nationally ranking graduating majors desired by corporations.

Graduating Majors Desired by Employers

81% - Business and Accounting
76% - Engineering
64% - Computer science
34% - Economics
21% - Physical Science
12% - Humanities
5% - Agriculture
2% - Health Science

There is something screamingly obvious about these numbers.

Colleges are not producing what employers want.

This is creating enormous imbalances in the jobs market.

It explains why computer science students are landing $150,000-a-year jobs straight out of school, complete with generous benefits and health care. Many employers in Silicon Valley are now offering to pay down student debt in order to get the most desirable candidates to sign a contract.

In the meantime, Health Sciences and Humanities graduates are lucky to land a $25,000-a-year posting at a nonprofit with no benefits and Obamacare. And there are no offers to pay down student debt, which can rise to as much as $200,000 for an Ivy League degree.

Agriculture grads usually go to work on a family farm, which they eventually inherit.

As a result of these dismal figures, the character of American education is radically changing.

With students now graduating with an average of $35,000 in debt, no one can afford to remain jobless upon graduation for long.

That's why the number of Humanities graduates has declined from 9% in 2012 to 6% today.

Colleges are getting the message. Since 1990, one-third of those with the words "liberal arts" in their name or prospectus have dropped the term.

Students who do stick with anthropology, philosophy, English literature, or history are learning a few tricks as well.

Add a minor in Accounting and Management and it will increase your first-year salary by $13,000. Toss in some Data Base Management skills, and the increase will be even greater.

And online marketing? The world is your oyster!

These realities have even come home to my own family.

I have a daughter working on a PhD in Education from the University of California, and the mathematics workload is enormous, especially in statistics.

It is all so she can qualify for government research grants upon graduation.

The students themselves are partly to blame for this mismatch.

While recruiters report an average of $45,000 a year as an average first year offer, the graduates themselves are expecting an average first-year income of $53,000.

Companies almost universally report that interviewees have a "bloated" sense of their own abilities, poor interviewing skills, and unrealistic pay expectations.

Some one-third of all applicants are unqualified for the jobs for which they are applying.

The good news is that everyone gets a job eventually. A National Association of Colleges and Employers survey says that companies plan to hire 5% more college graduates than last year.

And where do all of those Humanities grads eventually go.

A lot become financial advisors.

Just ask.

 

Sorry, STEM Students Only!

https://www.madhedgefundtrader.com/wp-content/uploads/2018/04/College-photo-story-2-image-1-e1524087053435.jpg 225 300 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2018-04-19 01:06:582018-04-19 01:06:58The Great American Jobs Mismatch
MHFTR

April 18, 2018

Diary, Newsletter

Global Market Comments
April 18, 2018
Fiat Lux

Special Residential Real Estate Issue

Featured Trade:
(WHY THE HOMEBUILDERS ARE NOT DEAD YET),
(DHI), (TOL), (LEN), (ITB), (KBH)

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MHFTR

Why the Homebuilders Are Not Dead Yet

Diary, Newsletter, Research

It was as if someone had turned out the lights.

The homebuilders, after delivering one of the most prolific investment performance of any sector until the end of January, suddenly collapsed.

Since then, they have been dead as a door knob, flat on their backs, barely exhibiting a breath of life. While most of the market has since seen massive short covering rallies, the homebuilders have remained moribund.

The knee-jerk reaction has been to blame rising interest rates. But in fact, rates have barely moved since the homebuilders peaked, the 10-year US treasury yield remaining confined to an ultra-narrow tedious 2.72% to 2.95% yield.

The surprise Canadian limber import duty has definitely hurt, raising the price of a new home by an average of $3,000. But that is not enough to demolish the entire sector, especially given long lines at homebuilder model homes.

Are the homebuilders gone for good? Or are they just resting.

I vote for the later.

For years now, I have begged, pleaded, and beseeched readers to pour as much money as they can into residential real estate.

Investing in your own residence has generated far and away the largest returns on investment for the past five years, and this will continue for the next 10 to 15 years.

For we are still in the early innings of a major real estate boom.

A home you buy today could increase in value tenfold by 2030, and more if you do so on the high-growth coasts.

And while I have been preaching this view to followers for years, I have been assaulted by the slings and arrows of naysayers predicting that the next housing crash is just around the corner - only this time, it will be worse.

I have recently gained some important new firepower in my campaign.

My friends at alma mater UC Berkley (Go Bears!), specifically the Fisher Center for Real Estate and Urban Economics, have just published a report written by the Rosen Consulting Group that is blowing the socks off the entire real estate world.

The implications for markets, and indeed the nation as a whole, are nothing less than mind-blowing.

It's like having a Marine detachment of 155 mm howitzers suddenly come in on your side.

The big revelation is that only a few minor tweaks and massaging of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 could unleash a new tidal wave of home buyers that will send house prices, and the shares of homebuilders (ITB) ballistic.

The real estate industry would at last be restored to its former glory.

That's the happy ending. Now let's get down to the nitty gritty.

First, let's review the wreckage of the 2008 housing crash.

Real estate probably suffered more than any other industry during the Great Recession.

After all, the banks received a federal bailout, and General Motors was taken over by the Feds. Remember Cash for Clunkers?

No such luck with politically unconnected real estate agents and homebuilders.

As a result, private homeownership in the US has cratered from 69.2% in 2006 to 63.4% in 2016, a 50-year low.

Homeownership for married couples was cut from 84.1% to 79.6%.

Among major cities, San Diego led the charge to the downside, an area where minority and immigrant participation in the market is particularly high, with homeownership shrinking from 65.7% to a lowly 51.8%.

Home price declines were worse in the major subprime cities of Las Vegas, Phoenix, and Miami.

There were a staggering 9.4 million foreclosures during 2007-2014, with adjustable rate loans accounting for two-thirds of the total.

Some 8.7 million jobs were lost from 2007-2010, while the unemployment rate soared from 5.0% to 10%. The collapse in disposable income that followed made a rapid recovery in home prices impossible.

As a result, real estate's contribution to US GDP growth fell from 17.9% of the total to only 15.6% in 2016.

That is a big hit for the economy and is a major reason why growth has remained stuck in recent years at a 2% annual rate.

While the ruins were still smoking, Congress passed Dodd-Frank in 2010. The bill succeeded in preventing any more large banks from going under, with massive recapitalization requirements.

As a result, US banks are now the strongest in the world (and also a great BUY at these levels).

But it also clipped the banks' wings with stringent new lending restrictions.

I recently refinanced my homes to lock in 3% interest rates for the long term, since inflation is returning, and I can't tell you what a nightmare it was.

I had to pay a year's worth of home insurance and county property taxes in advance, which were then kept in an impound account.

I was forced to supply two years worth of bank statements for five different accounts.

Handing over two years worth of federal tax returns wasn't good enough.

To prevent borrowers from ginning up their own on TurboTax, a common tactic for marginal borrowers before the last crash, they must be independently verified with a full IRS transcript.

Guess what? A budget constrained IRS is remarkably slow and inefficient at performing this task. Three attempts are common, while your loan sits in limbo.

(And don't even think of asking for Donald Trump's return when you do this. They have NO sense of humor at the IRS!)

Heaven help you if you have a FICO score under 700.

I had to hand over a dozen letters of explanation dealing with assorted anomalies in my finances. My life is complicated.

Their chief goal seemed to be to absolve the lender from any liability whatsoever.

And here's the real killer.

From 2014, banks were forced to require from borrowers a 43% debt service to income ratio. In other words, your monthly interest payment, property taxes, and real estate taxes can't exceed 43% of your monthly gross income.

This hurdle alone has been the death of a thousand loans.

It is no surprise then that the outstanding balance of home mortgages has seen its sharpest drop in history, from $11.3 trillion to $9.8 trillion during 2008-2014. It is down by a third since the 2007 peak.

Loans that DO get done have seen their average FICO scores jump from 707 to 760.

Rocketing home prices are making matters worse, by reducing affordability.

Only 56% of the population can now qualify to buy the mean American home priced at $224,000, which is up 7.7% YOY.

Residential fixed investment is now 32% lower than the 2005 peak.

Also weighing on the market was a student loan balance that rocketed by 400% to $1.3 trillion since 2003. This eliminated a principal source of first-time buyers from the market, a major source of new capital at the low end.

Now for the good news.

Keep Dodd-Frank's capital requirements, but ease up on the lending standards only slightly, and all of the trends that have been a drag on the market quickly reverse.

And yes, some 2.3% in missing US GDP comes back in a hurry, and then some. That's a whole year's worth of economic growth at current rates.

Rising incomes generated by a full employment economy increase loan approvals.

Foreclosure rates will fall.

More capital will pour into homebuilding, alleviating severely constrained supply.

More investment in homes as inflation hedges steps up from here.

The entry of Millennials into the market in a serious way for the first time further increases demand.

Promised individual tax cuts will add a turbocharger to this market.

There is one way the Trump administration could demolish this housing renaissance.

If the deductibility of home mortgage interest from taxable income on Form 1040 Schedule "A" is cut back or eliminated to pay for tax cuts for the wealthy, a proposal now being actively discussed in the White House, the whole party is canceled.

The average American will lose his biggest tax break, and the impact on housing will be huge.

A continued war on immigrants will also hurt, which accounted for one-third of all new households from 1994-2015.

You see, we let them in for a good reason.

Assuming this policy self-inflicted wound doesn't happen, the entire homebuilding sector is a screaming "BUY."

On the menu are Toll Brothers (TOL), DH Horton (DHI), and Pulte Homes (PHM).

You can also add the IShares US Home Construction ETF (ITB), a basket of the leading homebuilding names (For the prospectus, click here.)

To read the UC Berkeley report in its entirety, entitled Homeownership in Crisis: Where Are We Now? a must for any serious real estate professional or investor, please download the PDF file for free by clicking here.

The bottom line here is that after a three-month break, the stirrings of a recovery in homebuilders may be just beginning.

 

 

 

 

 

Where It's Hot

 

It's Always Better on the Coasts

https://www.madhedgefundtrader.com/wp-content/uploads/2018/04/Coast-image-6-e1524006948851.jpg 327 580 MHFTR https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png MHFTR2018-04-18 01:06:012018-04-18 01:06:01Why the Homebuilders Are Not Dead Yet
MHFTR

April 17, 2018

Diary, Newsletter

Global Market Comments
April 17, 2018
Fiat Lux

Featured Trade:
(HAS THE RECESSION ALREADY STARTED?)
(WHERE THE ECONOMIST "BIG MAC" INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (CYB)

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There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.

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