Newsletter Archives - Mad Hedge Fund Trader

The Hard/Soft Data Conundrum

It is the greatest conundrum facing traders, investors, and financial advisors today.

The recent "soft" economic data says the economy is booming, animal spirits are roaring, and the Trump trade is alive and well.

The "hard" data indicates that the economy is fading, fear and uncertainty are rampant, and you should sell everything immediately.

It is the greatest hard/soft divergence in the modern history of the US economy.

What's a poor investor to do?

Get this one right, and you'll make a killing. Get it wrong, and your portfolio will turn to ashes.

The numbers are undeniable.

"Soft" data comprises various poll-driven reports, such as consumer confidence and business surveys. These have been running.

The University of Michigan Consumer Sentiment Index hit a decade high in January and is up enormously YOY. Business surveys of every description are breaking records.

That "hard" data comprises economic reports that measure actual activity, such as retail sales.

These have not rebounded nearly as much as the soft data. Retail sales, housing sales, and the negative wealth effect of a falling stock market have all been turning in in-line or disappointing prints.

Here's a further complicating factor. Soft data is forward looking, while hard data is decidedly backward focused, often turning in numbers that are months old.

As a result, many private economic forecasters, and even different agencies of the US government are coming up with spectacularly diverging economic predictions based on the hard/soft weighting of their models.

The Federal Reserve Bank of New York's model, which gives more weight to the soft data, is currently projecting a 3% gross domestic product "print" this year.

On the other hand, the Federal Reserve Bank of Atlanta's model, which incorporates less soft data, is expecting only a 1% print.

You might as well throw a dart at the wall in a dive bar and pick a number.

Dig deeper into the numbers, and your conclusions can only become more disturbing.

It turns out that the overwhelming bulk of positive sentiment is coming from largely small businesses in red Trump-supporting states. They're clearly drinking the Kool-Aid.

You get almost the opposite result on the East and West Coasts, or in surveys that only look at Fortune 500 companies.

Eventually, only one group will be right. Either the hard data will catch up with the soft data, or it won't.

With November midterm elections getting closer by the day, with no new legislation passed this year, I believe the Trump trade will take MUCH longer to play out than expected.

In fact, a major economy-shifting bill may not pass at all this year.

So don't dump your stocks on pain of death. The bull market in stocks probably has at least another year to run.

Just don't expect too much excitement for the next several months.

Sell every rally AND buy every dip. This is what the pros are doing, with great success, as well as the followers of the Diary of a Mad Hedge Fund Trader.

Is This One Hard, Soft, or Both?

March 29, 2018

Diary, Newsletter

Global Market Comments
March 29, 2018
Fiat Lux

Featured Trade:
(IS IT ALL OVER FOR ARTIFICIAL INTELLIGENCE?),
(GOOGL), (TSLA), (NVDA), (LRCX), (AMD), (BOTZ),
(CHINA'S COMING DEMOGRAPHIC NIGHTMARE)

Is It All Over for Artificial Intelligence?

Diary, Newsletter, Research

Take a look at the worst performing stocks of the past two weeks and they all have one theme in common: artificial intelligence.

You can trace the beginning of the move back to the Arizona crash by an Uber AI autonomous driven car that killed a pedestrian.

As all those who have studied chaos theory in mathematics, it's like the proverbial butterfly that flapped its wings in a Brazilian rain forest, which then triggered a typhoon in Japan.

Never mind that the pedestrian was jaywalking at night wearing dark clothes. AI is supposed to see this. My guess is that only a sensor failure could have caused the accident, a dud $5 part, which means it has nothing to do with AI.

This is the second autonomous driving death in three years. The last one, involving a Tesla Model S-1 in Florida, didn't see the back of a white truck while driving into the sun, and crashed into it, killing the driver.

And here is the problem if you are a trader or investor.

Autonomous driving has been a major theme in the entire tech sector for the past two years.

You can start with the car companies, Tesla (TSLA), Uber, and Google's (GOOGL) Waymo, and extend all the way out through the entire ecosystem.

That would include the chip makers, NVIDIA (NVDA), which is suspending its autonomous program, Intel (INTC), Advanced Micro Devices (AMD), and the chip equipment maker Lam Research (LRCX).

So, is it game over for these companies? Is it time to pick up our marbles and play elsewhere (there is nowhere else)?

I don't think so.

Let's look at the hard numbers involving automobile accidents. During the same three-year period that AI cars killed two people, human drivers killed a staggering 100,000, and left millions with injuries.

So there is absolutely no doubt that AI is the superior technology. AI-driven cars don't text while driving, drink, take drugs, drive while tired, overdo it with an afternoon of wine tasting in Napa Valley, or look down at their cell phones, as did the safety driver in the ill-fated Uber car in Phoenix.

AI is not just a self-driving car theme. It is permeating every aspect of the modern economy and will continue to do so at an accelerating pace. It is no one-hit wonder.

All that is happening now is that AI and tech stocks in general are backing off from grievously overbought conditions.

As we approach the next round of earnings reports in a month, the market focus rapidly will shift back from tedious and distressful technicals. That's when they will rocket again.

There is an old market term for the current state of technology stocks. It is known as a "Buying Opportunity."

I haven't been able to touch stocks I love for months because they were completing upward moves of 50% to 300% over the past two years.

They have just become touchable once again.

To watch the video of the Phoenix crash and the expression of the clueless safety driver, please click here.

China's Coming Demographic Nightmare

Diary, Newsletter, Research

Thanks to China's "one child only" policy adopted 30 years ago, and a cultural preference for children who grow up to become family safety nets, there are now 32 million more boys under the age of 20 than there are girls.

Large-scale interference with the natural male:female ratio has been tracked with some fascination by demographers for years and is constantly generating unintended consequences.

Until early in the last century, starving rural mothers abandoned unwanted female newborns in the hills to be taken away by "spirits."

Today, pregnant women resort to the modern day equivalent by getting ultrasounds and undergoing abortions when they learn they are carrying girls.

Millions of children are "little emperors," spoiled male-only children who have been raised to expect the world to revolve around them.

The resulting shortage of women has led to an epidemic of "bride kidnapping" in surrounding countries. Stealing of male children is widespread in Vietnam, Cambodia, Laos, and Mongolia.

The end result has been a barbell-shaped demographic curve unlike that seen in any other country.

The Beijing government says the program has succeeded in bringing the fertility rate from 3.0 down to 1.8, well below the 2.1 replacement rate.

As a result, the Middle Kingdom's population today is only 1.2 billion instead of the 1.6 billion it would have been.

Political scientists have long speculated that an excess of young men would lead to more bellicose foreign policies by the Middle Kingdom.

But so far the choice has been for commerce, to the detriment of America's trade balance and Internet security.

In practice, the one-child policy was only applied to those who live in cities or had government jobs. That is about two thirds of the population.

On my last trip to China I spent a weekend walking around Shenzhen city parks. The locals doted over their single children, while visitors from the countryside played games with their three, four, or five children. The contrast couldn't have been more bizarre.

Economists now wonder if the practice also will understate China's long-term growth rate. Parents with boys tend to be bigger savers, so they can help sons with the initial big-ticket items in life, such as an education, homes, and even cars.

The endgame for this policy has to be the Japan disease; a huge population of senior citizens with insufficient numbers of young workers to support them. The markets won't ignore this.

In the latest round of reforms announced by the Chinese government was the demise of the one-child policy.

But no matter how hard you try, you can't change the number of people born 30 years ago.

The boomerang effects of this policy could last for centuries.

March 28. 2018

Diary, Newsletter

Global Market Comments
March 28, 2018
Fiat Lux

Featured Trade:
(FRIDAY, APRIL 6, INCLINE VILLAGE, NEVADA, STRATEGY LUNCHEON)
(FROM THE FRONT LINES OF THE TRADE WAR),
(AAPL), (AVGO), (QCOM), (TLT),
(HOW THE MAD HEDGE MARKET TIMING ALGORITHM TRIPLED MY PERFORMANCE)

From the Front Line of the Trade War

Diary, Newsletter, Research

Poke your hand into a hornet's nest and you can count on an extreme reaction, a quite painful one.

As California is the growth engine for the entire US economy, accounting for 20% of US GDP, it is no surprise that it has become the primary target of Chinese retaliation in the new trade war.

The Golden State exported $28.5 billion worth of products to China in 2017, primarily electronic goods, with a host of agricultural products a close second.

In the most devious way possible, the Middle Kingdom targeted Trump supporters in the most liberal state in the country with laser-like focus. California exports 46% of its pistachios to China, followed by 35% of its exported plums, 20% of exported oranges, and 12% of its almonds.

By comparison, California imported a gargantuan $160.5 billion worth of goods from China last year, mostly electronics, clothing, toys, and other low-end consumer goods.

Some $16 billion of this was recycled back into the state via investment in real estate and technology companies.

Anecdotal evidence shows that figure could be dwarfed by the purchase of California homes by Chinese individuals looking for a safe place to hide their savings. Local brokers report that up to one-third of recent purchases have been by Chinese nationals paying all cash.

The Chinese tried to spend more. Their money is thought to be behind Broadcom's (AVGO) $105 billion bid for QUALCOMM (QCOM), which was turned down for national security reasons.

The next big chapter in the trade war will be over the theft of intellectual property, and that one will be ALL about the Golden State.

Also at risk is virtually Apple's (AAPL) entire manufacturing base in China, where more than 1 million workers at Foxconn assemble iPhones, Macs, iPads, and iPods.

The Cupertino, CA, giant could get squeezed from both sides. The Chinese could interfere with its production facilities, or its phones could get slapped with an American import duty.

So far, the trade war has been more bluff than bite. The US duties announced come to only $3 billion on $50 billion worth of trade. China responded with incredible moderation, only restricting $3 billion worth of imports.

By comparison, in 2017 the US imported a total of $505.6 billion in goods from China and exported $130.4 billion. Against this imbalance, the US runs a largest surplus in services.

The next Chinese escalation will involve a 25% tariff on American pork and recycled aluminum. Who is the largest pork producer in the US? Iowa, with $4.2 billion worth, and the location of an early presidential election primary.

Beyond that, Beijing has darkly hinted that is will continue to boycott new US Treasury bond auctions, as it has done for the past six months, or unload some if its massive $1.6 trillion in bond holdings.

Given the price action in the bond market today, with the United States Treasury Bond Fund (TLT) at a two-month high, I would say that the market doesn't believe that for two seconds. The Chinese won't cut off its nose to spite its face.

In the end, I think not much will come of this trade war. That's what the stock market told us yesterday with a monster 700-point rally, the biggest in three years.

The administration is discovering to its great surprise that its base is overwhelmingly against a trade war. And as business slows down, it will become evident in the numbers as well.

The US was the big beneficiary from the global trading system. Why change the rules of a game we are winning?

Still, national pride dies hard.

How the Mad Hedge Market Timing Algorithm Tripled My Performance

Diary, Newsletter

I couldn't believe my eyes.

Upon analyzing my performance data for the past year, it couldn't be clearer.

After a year of battle testing, the algorithm has earned its stripes. I started posting it at the top of every newsletter and Trade Alert, and will continue to do so in the future.

Once I implemented my proprietary Mad Hedge Market Timing Index in October 2016, the performance of my Trade Alert performance has more than tripled, from a 19.99% annual rate to 46.70% (see chart below).

As a result, new subscribers have been beating down the doors trying to get in.

Let me list the high points of having an algorithm looking over your shoulder on every trade.

Algorithms have become so dominant in the market, accounting for up to 80% of total trading volume that you should never trade without one.
It does the work of a seasoned 100-man research department in seconds.
It runs real time and optimizes returns with the addition of every new data point far faster than any human can. Image a trading strategy that upgrades itself 30 times a day!
It is artificial intelligence driven and self-learning.
Don't go to a gunfight with a knife. If you are trading against algos alone you WILL lose!
Algorithms provide you with a defined systematic trading discipline that will enhance your profits.

And here's the amazing thing. My Mad Hedge Market Timing Index correctly predicted the outcome of the presidential election, while I got it dead wrong.

You saw this in stocks such as US Steel, which took off like a scalded chimp the week before the election.

When my and the Market Timing Index's views sharply diverge, I go into cash rather than bet against it.

Since then, my Trade Alert performance has been on an absolute tear. In 2017, we earned an eye-popping 57.39%.

Here are just a handful of some of the elements of the Mad Hedge Market Timing Index analysis real time, 24/7.

50- and 200-day moving averages across all markets and industries
The Volatility Index (VIX)
The junk bond (JNK)/US Treasury bond spread (TLT)
Stocks hitting 52-day highs versus 52-day lows
McClellan Volume Summation Index
20-day stock bond performance spread
5-day put/call ratio
Stocks with rising versus falling volume
Relative Strength Index
12-month US GDP Trend
S&P CoreLogic Case-Shiller US National Home Price NSA Index

Of course, the Trade Alert service is not entirely algorithm driven. It is just one tool to use among many others.

Yes, 50 years of experience trading the markets is still worth quite a lot.

I plan to constantly revise and upgrade the algorithm that drives the Mad Hedge Market Timing Index continuously as new data sets become available.

It's All About the Inputs

Thank You, Mr. Algorithm!

March 27, 2018

Diary, Newsletter

Global Market Comments
March 27, 2018
Fiat Lux

Featured Trade:
(DON'T MISS THE MARCH 28 GLOBAL STRATEGY WEBINAR),
(TEN MORE UGLY MESSAGES FROM THE BOND MARKET),
(TLT), (TBT), (USO), (GLD), (GS), (SPY)
(FRIENDS WHO WILL EXECUTE MY TRADE ALERTS FOR YOU)

Don't Miss the March 28 Global Strategy Webinar

Diary, Newsletter

My next global strategy webinar will be held live from Silicon Valley on Wednesday, March 28, at 12:00 PM EST.

Co-hosting the show will be my friend Bill Davis of Mad Day Trader.

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 also will 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 in 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 yesterday entitled, "Next Bi-Weekly Webinar - March 28, 2018" or click here.

Friends Who Will Execute My Trade Alerts for You

Diary, Newsletter

Practically every day, I get emails from readers asking me to take over management of their retirement funds so I can execute my Trade Alerts for them.

With an 80% success rate and average annualized return of 34%, why wouldn't they?

Unfortunately, I have to turn these invitations down.

Watching the market, doing the research for new Trade Alerts, keeping up with a global speaking schedule, and running the Mad Hedge Fund Trader global empire is so demanding that I have little time for anything else.

On top of that, I have my unpaid "hobby" of advising various arms of the United States government, including, the US Treasury, The Federal Reserve, and the Joint Chiefs of Staff. When the call comes from Washington, D.C., to jump, I ask, "How high?"

Any other patriot would do the same.

In any case, actively managing someone else's money would raise conflicts of interest and regulatory problems. I learned early on at Morgan Stanley decades ago to stay miles away from the "gray" areas. Leave those marginal lines of business to competitors.

However there is one way I can help.

Hundreds of qualified, skilled, and well-intentioned financial advisors read this letter every day. They deliver great service and excellent performance for their clients, and don't charge much for the service.

If you think you would benefit from third-party assistance on trade execution, send an email to Nancy at customer support at support@madhedgefundtrader.com and put "FINANCIAL ADVSIOR ASSISTANCE" in the subject line.

Please include your contact information, phone number, age, level of financial sophistication, and assets until management. We will try to hook you up with someone in your area.

I won't be getting anything out of this. I merely wish that readers get the most out of our products and participate in the Mad Hedge Fund Trader global trading and investment community.

Anything I can do to enhance your profits and level the dreadfully uneven playing field with Wall Street is a win for me.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader