Global Market Comments
January 18, 2018
Fiat Lux
Featured Trade:
(MAD HEDGE JANUARY 17 STRATEGY WEBINAR Q&A),
(SPY), (GE), (TLT), (TBT), (EDIT), (GS), (BHGE), (USO),
(WMT), (NTLA), (BABA), (LMT), (TRN), (FXA)
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (DXJ)
Q: Will deflation outpace inflation given the rapid pace of technology?
A: The answer is yes. We will get some inflation but not much. That's why I am calling the top in this interest rate cycle in the bond market at 4% instead of the 6%, 8%, or 10% we saw in earlier economic cycles. There have really been no real wage increases to really affect the big macro picture. Yes, we got the $2 an hour wage increase at Walmart (WMT), but in the grand scheme of things, that's really not much money. You'll make money on those bond shorts but you won't get a bond crash.
Q: What market is the best way to hedge market risk now?
A: The answer is that the S&P 500 (SPY) has the best hedging tools out there. Go with a deep out-of-the-money, long-dated (SPY) put. And when I say deep-out-of-the-money I'd say 10%, so you should be buying $250 puts on the (SPY), and when I say long dated, go out to June or July, or six months so time decay doesn't kill you. In that situation, just a 5% correction in the market will cause your $250 put to double in value. That will give you a 100% return and a lot of hedging value for a little bit of money if you need downside protection, which your financial advisors absolutely need to be putting on right now.
Q: What about the dividends on those puts (SPY)?
A: If you are long a put, you also can become liable for the quarterly dividend payment on the S&P 500. The way to avoid the assignment risk is to put on put option spreads in the Russel 2000, where there is a much lower dividend payment. It's too small to make an exercise worth it. The other way is to never do quarterly expiration options when the dividends are payable in only a few days. Going forward, do February puts, skip March, and then do April, May options to avoid assignment risk.
Q: Do we buy General Electric (GE)?
A: The answer is no. It?'s trading at $17 and the breakup value of this company is $15. This was a classic widow and orphan stock. Everybody in the universe owned this and it was in the Dow average. There's a lot of long term capitulation selling going and they may break the company up. There is a ton of stuff that could happen you have no insider advantage of what is going to happen, so just stay away. This has become a special situation stock. There are too many better things to buy right now than (GE).
Q: How will AMD earnings turn out?
A: The answer is they should be good. I like the whole chip sector. It had a sell off on the intel chip design flaw and the actual fact is that I have another Trade Alert already written to buy the stock with a call spread because the charts for the whole chip sector are setting up pretty nicely. That's my view on (AMD).
Q: Is it time to buy Goldman Sachs (GS)?
A: I would say yes. This is a good entry point. You wanted a dip to buy on? This is the dip. Eventually rising interest rates will bail out (GS) and increase bond trading volume where they really make their money, not on the directional call but on the volume. Last quarter the bond trading volume was terrible that generated losses, and by the way, the tax bill allowed them to take a one off write off of $5 billion on their 2017 earnings. That was included in the loss that they announced this morning. Give it one more day, let it sell off a little more, then look to buy. I doubt it will drop below the 200-day average at $231 and we may not even break the 50-day at $248.
Q: What do you think about Alibaba (BABA)?
A: The answer is I like it as a Chinese FANG. Alibaba is essentially a combination of Amazon (AMZN), Alphabet (GOOGA), and PayPal (PYPL) in China, it has had a near doubling over the past year, and I still think there is more in it. I am positive on the FANG'S this year but I don't think you'll get the same meteoric returns we got last year.
Q: Will NVIDIA (NVDA) really double again?
A: The answer is yes, but only off that $180 low that we got in December, and we are already well on the way there. A year ago, I said Nvidia would double and that was the one stock you had to buy. And this year I am also saying Nvidia is my double for the year. The trends in technology are so overwhelmingly in favor of this one name that you absolutely have to buy it on every dip. Don't even ask any questions.
Q: Is TBT more for trading than investing?
A: It is because you have a negative carry on the TBT of about 6% per year. You have to pay two times the US Treasury coupon on an annualized basis, which today is 2.55%, plus the management fees. So ideally, it's a trade and not a long-term investment. Any short play in a high yielding security like this is going to cost money to run over time.
Q: Where do you think TLT will be at the end of February?
A: I would say lower. I'm hoping we will break the $120 level. So here at the $125 level it looks pretty attractive on the short side. Again, we aren't talking gigantic numbers. When we used to see bond sell offs we were talking about 10 to 20 points, now we are looking at 3 to 5 points.
Q: Should i double my (TLT) short position?
A: The answer is yes, but let's see if we can squeeze a little more upside action out of it to $126 like I just mentioned.
Q: Should I keep buying the CRISPR stocks on dips like Intellia Therapeutics (NTLA) and Editas (EDIT)?
A: Absolutely yes, this is like the first floor of a 100-story building. These CRISPR stocks have a lot more to go, and by the way, every single of one of these guys are a takeover target from a major pharma company. I am very bullish.
Q: What about the Aussie dollar (FXA)?
A: It is a commodity currency and we have a commodity boom going on. Eventually, the Aussie should hit US$1.00, so if Australians have any foreign bills to pay, delay them. They will become cheaper by 10% in the next couple of months. This a classic commodity currency because their biggest exports are iron ore, coal, etc.
Q: Should I sell Baker Hughes (BHGE) now?
A: I would take profits here. This company is 60% owned by (GE) and given all the ruckus going on in (GE), this company could get sold and might threaten the 30% gain in one month that we just had. No one ever got fired for taking a profit.
Q: Should we put on an options bull call spreads in the various oil names?
A: Answer is yes, but I would go deep-in-the-money, so when we get the inevitable correction, you won't get shaken out of your position. Also, I'd go short dated which is another way of controlling your risk by only buying the front month call spreads and just adding new ones as the old ones expire. It's a classic late cycle trading strategy.
Q: Do you have any comments on defense companies?
A: I would stand aside at this point because these stocks, like Raytheon (RTN) and Lockheed Martin (LMT) have all doubled in the last year or two. We've had no new wars and we've had no increase in defense spending approved by congress. Too many other better things to play and it's very late in the cycle for defense at this point.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
January 17, 2018
Fiat Lux
Featured Trade:
(THE BIG WINNER FROM INTEL'S CHIP DESIGN FLAW),
(INTC), (NVDA), (AMD),
(THE CONTINUING DEATH OF RETAIL),
(AMZN), (WMT), (M), (JWN),
(TESTIMONIAL)
Buy Intel (INTC) on the dip. That is the only conclusion you can reach after watching the company go through the meat grinder after revelations of its chip design flaws were made public.
After following this company for four decades, that is always the correct kneejerk reaction. Certain industries suffer from inherent idiosyncratic risks unique to them, and this is one of them.
Some 25 years ago, I had dinner with the late Intel CEO Andy Grove (we shared the same doctor), and I asked what was his biggest fear. He answered that the company would spend $1 billion on a new fab, then flipped the switch on opening day, and nothing happed.
Intel has a disaster something like that on its hands today.
Samsung knows this lesson too well from 2016, the makers of the Galaxy S7 smartphone, which took a huge blow when their batteries continually burst into flames in 2016. Apparently, their testers didn't find this flaw until after delivering the first large batch of new phones.
The news went viral and Samsung had a PR disaster of mega proportions, a battery design catastrophe, and quality control crisis on their hands all at the same time. You may recall that every airport had signs at the boarding gate reminding passengers to leave behind their flaming Samsung phones.
In the fickle market of premium smartphones, Samsung was taken out to the woodshed and severely beaten by the Chinese consumer, and their market share in the biggest smart phone market dropped from a robust 18.7% in 2013 to pitiful 2.2% in Q4 2017.
They have never recovered.
Intel's (INTC) disclosure of the design flaw exposed in their CPU was a terrible start to 2018.
Predictably, Intel shares were hammered.
Hardware companies cannot afford sacrificing whole product cycles. The wasted R&D and the brand damage is lamentable and it will take time to recover, not to mention the multibillion dollar cost.
You can bet that a comprehensive review has been set in motion for the designs in all lucrative hardware products at all companies. Expect a gradual trickle of bad news to come out from other players too.
Intel noted the problem was known for "a few months" but did not fix it immediately. This is awful. Brian Krzanich, CEO of Intel, also suspiciously sold a good chunk of Intel stock during this period. He is already in the SEC's sites.
Hiding architectural problems for months does not exactly breed shareholder trust.
Intel replied, "There have been no examples of the flaw being exploited by hackers". Unawareness does not exactly equate to safety. It's highly possible the future trickle of bad headlines will detail the criminal element that took advantage of this gaping hole.
Will the tech naivety continue unabashed? Will the contagion be worse next time?
Hardware reliability is truly something consumers and companies must ponder about.
Companies have more room to maneuver in the future when negotiating CPU contracts with Intel because of this debacle. That will hurt profit margins.
Technically, the patches will slow certain processors by up to 30% according to Intel officials.
The Intel CPU flaw brings up deeper questions. Is it safe to store important data on the cloud? Can hackers steal entire sets of cloud data and resell it to the highest bidder?
Another option is returning to the good old days when data was kept on external hard drive storage away from the tentacles of professional hackers. By the way, that's what we do here at Mad Hedge Fund Trader, who have never trusted the cloud.
The vast amount of data in 2018 makes this strategy highly inefficient for the biggest firms.
If storage risks flare up, the industry shifts closer to an inflection point and alternative measures will float around about how and where to store data.
Running apps on any platform requires more processing power each passing day as we expand the functionality and integration of smartphone and computing apps into our daily lives.
This higher opportunity cost of operating a slower CPU will be passed onto the user, much to their chagrin, but the problem will subside as the design architecture in new CPU's will be absent design defects.
Companies will also increase overhead. Additional quality control and design specialists to ensure that components produce products as advertised will be added to payroll. This will add higher costs, more stringent development guidelines, further pressuring margins.
The tech industry was the darling of Wall Street for many years and still is in most quarters. But some cracks are starting to form around its core foundations and ethos.
Fortunately, Wall Street still favors the tech sector and the accelerated earnings growth narrative remains intact albeit with a small chink in their armor.
The net net is tech companies will take on more operational risk.
Vulnerability will be a key theme in 2018 and entwined in this game of cat and mouse are cybersecurity firms and rogue hackers.
As the total global revenue for semiconductors revs up towards $80 billion, there will be multiple winners as the pie expands. Intel shares look stupidly cheap at 13x forward PE and looks substantially cheaper than AMD which trades at an insane 33x forward PE.
Comparably, the best of breed in this space is NVIDIA (NVDA) which trades at 50x forward earnings and the high multiple is justified as earnings consistently surprises to the upside.
That acrophobic multiple is well deserved, as NVIDIA represents the vanguard of several monster trends in the semiconductor industry and lead in the autonomous driving and AI spaces.
Ultimately, sales of chips could migrate up the industry chain; a natural flight to quality. Intel's slip up highlights Nvidia's top notch quality and the countdown starts again for the next batch of compromised hardware. The losers are the chip companies that are perceived as smaller, lower quality and their sell-offs are dramatic when related names roll over.
As with every other major industry trend, all signs still point to NVIDIA. But I wouldn't mind picking up some (INTC) on this dip either as the CPU market is a duopoly between AMD (AMD) and Intel (INTC).
These days, all problems for equity investors seem to be temporary.
While the Global Trading Dispatch focuses on investment over a one week to six-month time frame, Mad Options Trader, provided by Matt Buckley, will focus primarily on the weekly US equity options expirations, with the goal of making profits at all times. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
January 16, 2018
Fiat Lux
Featured Trade:
(JANUARY 17 GLOBAL STRATEGY WEBINAR),
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE DUMB MONEY FINALLY COMES OUT OF THE WOORDWORK),
(SPY), (TLT), (AA), (WMT), (XLE), (XLK), (IBKR),
(C), (BAC), (SLB), (USO), (KSU), (OXY)
