Below please find subscriber Q&A for the Mad Hedge Fund Trader March Global Strategy Webinar with my guest co-host Anka Metcalf of TradeOutLoud.com.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: Will the CFIUS (the Committee on Foreign Investment in the United States) rejection of foreign mergers, such as the Qualcomm (QCOM) merger with Broadcom, hurt the American economy?
A: No, we have the superior technology—everybody in the world is always going to aim to buy that, especially Russians and Chinese. However, what this does do is take some of the takeover premium out of the target tech target companies, and that may be what really caused the big-tech sell off yesterday.
Q: What’s the catalyst that gets US Treasuries over 3%?
A: A red hot inflation number. One more 50 basis point, or .5% report on wage growth, and we will blast through 3% like there’s no tomorrow. You will not have a chance to sell, which is why we’re scaling into short bond (TLT) positions right now.
Q: What are your thoughts on Goldman Sacks changing CEOs?
A: It has no impact on Goldman whatsoever. They are run by a management committee (Morgan Stanley used to be run the same way) and they have an incredibly deep bench of talent there. You lose one managing director and there are 10 more great ones behind them.
Q: What will happen to volatility (VIX) for the rest of the year?
A: I’ll use J.P. Morgan’s famous quote, “It will fluctuate.” I think we’re going to see a lot more of these volatility spikes—we basically had none last year so we’re going to get a 3-year accumulation this year. A VIX of $15-$20 seems to be the new range and this is typical of late cycle bull markets, so I would watch out for that.
Q: What about lithium?
A: Long term we like lithium; what caused the recent 25% selloff is Chile, the world’s largest producer, increasing its quota for new lithium production by 400%. Eventually that new supply will get soaked up. Good entry points for all of the lithium stocks—and there are about half a dozen of them, like (SQM)—are setting up. So yes, we like lithium; the number of electric cars in the world is about to increase 100-fold, and a car uses 10,000 times more lithium than a phone.
Q: I’ve had poor results with calls on volatility spikes—I don’t understand it.
A: I can see what your problem is. When volatility spikes-implied volatilities on the options goes through the roof, you pay exceptionally high prices when you buy these things. Then you get eaten up by time decay as the volatility comes back down. You’ve stumbled into a perfect money destruction machine. That’s one of the reasons we do call spreads on volatility spreads—that way you have a short position offsetting a long position, and that eliminates the problem of time decay; the two offset each other.
Q: What to do about NVIDIA (NVDA)?
A: It looks like it’s breaking out to the upside; however, the main market keeps slapping it back every time it does this. These marginal new highs are worrisome; they suggest that we’re getting close to a final top—this stock is up nearly 10 times in 2 years, so I would not chase it up here. Even though my final target is 320, it may take a while to get there.
Q: In light of the move in Palo Alto Networks (PANW), do you also like FireEye (FEYE)?
A: Absolutely, yes. Big companies tend to buy products from all three of the major cyber security firms at the same time to hedge their bets, so prosperity in one automatically feeds over into the others.
Q: Can we assume Washington will provide traders with zero volatility if Gary Cohen’s demise did almost nothing?
A: The market has been moving under its own power for quite a long time. Any geopolitical selloff has been a buying opportunity for the last 3 years—that even includes the presidential election. So yes, I say zero impact by Washington, and thank goodness for that—you can imagine if the market started discounting all the chaos in Washington.
Q: Do you think the market (SPY) could sell off and retest the 200-day moving average?
A: Yes, it could do that. I think it will try and fail—we’re still in a bull market that has a year to run, but you never know what’s out there in Black Swan land. That’s why I’m advising you to be a little more cautious than you may have been in the last couple years.
Q: What are your expectations for next quarter earnings?
A: I’m looking at up 15% for the next reporting season that starts the end of April for Q1 2018. I think that will give us a new high on the market and after that, watch out. The first quarter of this year is when the first of the tax cut news really hit the market big-time—that’s why we had that huge melt up in January. That’s also flowing through to actual real business with companies. It should show extremely positive results, some of the best corporate results year over year, ever. After that you might want to take a hard look at a short play as we go into summer doldrums.
Q: Can the U.S. dollar (UUP) go any lower?
A: Yes, as long as exploding deficits are the focus of the market, you can expect the dollar to decrease significantly. You can essentially count on our deficits in the U.S. to rise dramatically. All of the figures that we have seen on estimates—$1.2 trillion budget deficit this year, the national debt rising from $20 trillion to $30 trillion—are low-ball numbers, optimistic numbers, best case scenarios missing crucial parts of the equation, which all means a lower dollar.
Q: What’s the best way to make money from a weaker dollar?
A: Wait for the next euro or yen rally and then buy in the money—put spreads on the yen (FXY) and the euro (FXE) —as I always do; it’s the safer play.
With all that said, good luck and good trading.
