Join Us at the Mad Hedge Lake Tahoe, Nevada Conference on October 25-26, 2019

Tickets for the Mad Hedge Lake Tahoe Conference are selling briskly. If you want to obtain a ticket that includes a dinner with John Thomas and Arthur Henry, you better get your order in soon.

The conference date has been set for Friday and Saturday, October 25-26.

Come learn from the greatest trading minds in the markets for a day of discussion about making money in the current challenging conditions.

How much longer can the Fed keep boosting the market?

Will the recession start in 2020, or will we have to wait until 2021, and how soon will the stock market start discounting it?

How will you guarantee your retirement in these tumultuous times?

Will the next bear market be as bad as 2008-2009, or worse? And is it worth selling out everything now?

What will destroy the economy first, rising interest rates, collapsing earnings, a trade war, or all three?
 
Who will tell you what to buy at the next market bottom?

John Thomas is a 50-year market veteran and is the founder,  CEO and publisher of the Diary of a Mad Hedge Fund Trader. John will give you a laser-like focus on the best-performing asset classes, sectors, and individual companies of the coming months, years, and decades. John covers stocks, options, and ETFs. He delivers your one-stop global view.

Arthur Henry is the author of the Mad Hedge Technology Letter. He is a seasoned technology analyst and speaks four Asian languages fluently. He will provide insights into the most important investment sector of our generation.

The event will be held at a five-star resort and casino on the pristine shores of Lake Tahoe in Incline Village, NV, the precise location of which will be emailed to you with your ticket purchase confirmation.

It will include a full breakfast on arrival, a sit-down lunch, coffee break. The wine served will be from the best Napa Valley vineyards.

Come rub shoulders with some of the savviest individual investors in the business, trade investment ideas, and learn the secrets of the trading masters.

 

Ticket Prices

Copper Ticket – $699: Saturday conference all day on October 26, with buffet breakfast, lunch, and coffee break, with no accommodations provided

Silver Ticket – $1,399: Two nights of double occupancy accommodation for October 25 & 26, Saturday conference all day with buffet breakfast, lunch and coffee break

Gold Ticket – $1,598: Two nights of double occupancy accommodation for October 25 & 26, Saturday conference all day with buffet breakfast, lunch, and coffee break, and an October 26, 7:00 PM Friday night VIP Dinner with John Thomas

Platinum Ticket – $1,599: Two nights of double occupancy accommodation for October 25 & 26, Saturday conference all day with buffet breakfast, lunch, and coffee break, and an October 27, 7:00 PM Saturday night VIP Dinner with John Thomas

Diamond Ticket – $1,999: Two nights of double occupancy accommodation for October 25 & 26, Saturday conference all day with buffet breakfast, lunch, and coffee break, an October 25, 7:00 PM Friday night VIP Dinner with John Thomas, AND an October 26, 7:00 PM Saturday night VIP Dinner with John Thomas

Schedule of Events

Friday, October 25, 7:00 PM

7:00 PM – Exclusive dinner with John Thomas and Arthur Henry for 12 in a private room at a five-star hotel for gold and diamond ticket holders only

Saturday, October 26, 8:00 AM

8:00 AM – Breakfast for all guests

9:00 AM – Speaker 1: Arthur Henry – Mad Hedge Technology Letter editor Arthur Henry gives the 30,000-foot view on investing in technology stocks

10:00 AM – Speaker 2: TBA

11:00 AM – Speaker 3: John Thomas – An all-asset class global view for the year ahead

12:00 PM – Lunch

1:30 PM – Speaker 4: Arthur Henry – Mad Hedge Technology Letter editor on the five best technology stocks to buy today

2:30 PM – Speaker 5: TBA

3:30 PM – Speaker 6: John Thomas

4:30 Adjourn to the bar with a spectacular Lake Tahoe view

7:00 PM – Exclusive dinner with John Thomas for 12 in a private room at a five-star hotel for Platinum or Diamond ticket holders only

To purchase tickets, click here.

 

 

How the Mad Hedge Market Timing Algorithm Works

Since we have just taken in a large number of new subscribers from around the world, I will go through the basics of my Mad Hedge Market Timing Index one more time.

I have tried to make this as easy to use as possible, even devoid of the thought process.

When the index is reading 20 or below, you only consider “BUY” ideas. When it reads over 80, it’s time to “SELL.” Everything in between is a varying shade of grey. Most of the time, the index fluctuates between 20-80, which means that there is absolutely nothing to do.

To identify a coming market reversal, it’s good to see the index chop around for at least a few weeks at an extreme reading. Look at the three-year chart of the Mad Hedge Market Timing Index.

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

Once I implemented my proprietary Mad Hedge Market Timing Index in October 2016, the average annualized performance of my Trade Alert service has soared to an eye-popping 34.61%.

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

Let me list the highpoints of having a friendly algorithm looking over your shoulder on every trade.

*Algorithms have become so dominant in the market, accounting for up to 90% 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. Imagine 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 like 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%. In 2018, I clocked 23.67% while the Dow Average was down 8%, a beat of 31%. So far in 2019, we are up 18.10%.

Here are just a handful of some of the elements which the Mad Hedge Market Timing Index analyzes 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 Indicator

12-month US GDP Trend

Case Shiller S&P 500 National Home Price Index

Of course, the Trade Alert service is not entirely algorithm-drive. 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 Seems I’m Not the Only One Using Algorithms

Playing the Short Side with Vertical Bear Put Debit Spreads

note: This is a repeat article for our many new subscribers.

For me, the glass is always half full, not half empty, and it’s usually darkest just before the dawn. After all, over the past 100 years, markets rise 80% of the time, and that includes the Great Depression.

However, every now and then, conditions arise where it is prudent to sell short, or make a bet that a certain security will fall in price.

This could happen for myriad reasons. The economy could be slowing down. Companies might disappoint on earnings. “Sell in May, and go away?” It works….sometimes.

Other securities have long-term structural challenges, like the US Treasury bond market (TLT). Exploding deficits as far as the eye can see assure that government debt of every kind will be a perennial short for years to come, but not yet.

Once you identify a short candidate, you can be an idiot and just buy put options on the security involved. Chances are that you will overpay and that accelerated time decay will eat up all your profits even if you are right and the security in question falls. All you are doing is making some options trader rich at your expense.

For outright put options to work, your stock has to fall IMMEDIATELY, like in a couple of days. If it doesn’t, then the sands of time run against you very quickly. Something like 80% of all options issued expire unexercised.

And then there’s the right way to play the short side, i.e., MY way. You go out and buy a deep-in-the-money vertical bear put debit spread.

This is a matched pair of positions in the options market that will be profitable when the underlying security goes down, sideways, or up small in price over a defined limited period of time. It is called a “debit spread” because you have to pay money to buy the position instead of receiving a cash credit.

It is the perfect position to have on board during bear markets which we will almost certainly see by late 2019 or 2020. As my friend Louis Pasteur used to say, “Chance favors the prepared.”

I’ll provide an example of how this works with the United States Treasury Bond Fund (TLT) which we have been selling short nearly twice a month since the bond market peaked in July 2016.

On October 23, 2018, I sent out a Trade Alert that read like this:

Trade Alert – (TLT) – BUY

BUY the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November, 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.60 or best.

At the time, the (TLT) was trading at $114.64. To add the position you had to execute the following positions:

Buy 37 November, 2018 (TLT) $120 puts at…….………$5.70

Sell short 37 November, 2018 (TLT) $117 puts at…….$3.10

Net Cost:………………………….………..………….……..$2.60

Potential Profit: $3.00 – $2.60 = $0.40

(37 X 100 X $0.40) = $1,480 or 11.11% in 18 trading days.

Here’s the screenshot from my personal trading account showing you where I get the price:

This was a bet that the (TLT) would close at or below $117 by the November 16 options expiration day.

The maximum potential value of this position at expiration can be calculated as follows:

+$120 puts
–  $117 puts
+$3.00 profit

This means that if the (TLT) stays below $117, the position you bought for $2.60 will become worth $3.00 by November 16.

As it turned out, that was a prescient call. By November 2, or only eight trading days later, the (TLT) had plunged to $112.28. The value of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread had risen from $2.60 to $2.97.

With 92.5% of the maximum potential profit in hand (37 cents divided by 40 cents), the risk/reward was no longer favorable to carry the position for the remaining ten trading days just to make the last three cents.

I, therefore, sent out another Trade Alert that said the following:

Trade Alert – (TLT) – TAKE PROFITS

SELL the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.97 or best

In order to get out of this position, you had to execute the following trades:

Sell 37 November 2018 (TLT) $120 puts at………………………$7.80

Buy to cover short 37 November 2018 (TLT) $117 puts at….$4.83

Net Proceeds:…………………..…………….………..………….……..$2.97

Profit: $2.97 – $2.60 = $0.37

(37 X 100 X $0.37) = $1,369 or 14.23% in 8 trading days.

 

Of course, the key to making money in vertical bear put spreads is market timing. To get the best and most rapid results, you need to buy these at market tops.

If you’re useless at identifying market tops, don’t worry. That’s my job. I’m right about 90% of the time and send out a STOP LOSS Trade Alert very quickly when I’m wrong.

With a recession and bear market just ahead of us, understanding the utility of the vertical bear put debit spread is essential. You’ll be the only guy making money in a falling market. The downside is that your friends will expect you to pick up every dinner check.

But only if they know.

 

 

Understanding Bear Put Spreads is Crucial in Falling Markets

How to Buy a Solar System

It’s just a question of how long it takes Moore’s law type efficiencies to reach exponential growth in the solar industry.

Accounting for 4% of the country’s electrical power supply today, we are only five doublings away from 100% when energy essentially becomes free.

The next question beyond the immediate trading implications is, “What’s in it for you?”

I should caution you that after listening to more than 20 pitches, almost all of the information you get from fly-by-night solar installation salesmen is inaccurate. Most don’t know the difference when it comes to a watt, an ohm, or a volt.

I think they were mostly psychology or philosophy majors, if they went to college at all.

The promised 25-year guarantees are only as good as long as the firms stay in business, which for many will not be long.

Talking to these guys reminded me of the aluminum siding salesmen of yore. It was all high pressure, exaggerated benefits, and relentless emailing.

I come to this issue with some qualifications of my own, as I have been designing and building my own solar systems for the past 50 years.

During the early 1960s when solar cells first became available to the public through Radio Shack (RIP), I used to create from scratch my own simple sun-powered devices. But when I measured the output, I would cry, finding barely enough power to illuminate a flashlight bulb.

We have come a long way since then. For years, I watched my organic bean-sprout eating, Birkenstock wearing neighbors install expensive, inefficient arrays because it was good for the environment, politically correct, and saved the whales.

However, when I worked out the breakeven point compared to conventional power sources, it stretched out into decades. So, I held off.

It wasn’t until 2015 when solar price/performance hit the breakeven sweet spot acceptable for me, about six years. Four years in, and it’s looking like I’ll probably get my money back in five. Thanks to global warming, my solar system is becoming more efficient, not less. Why, I can’t imagine.

Then I really launched into overdrive, attempting to get the best value for money and game the many financing alternatives.

The numbers are now so compelling that even a number-crunching, blue state hating Texas oilman should be installing silicon on his roof.

A lot are.

My effort was the father of the many solar research pieces and profitable Trade Alerts you have received since.

Here are my conclusions up front: Learn about “tier shaving” from your local utility, and buy, don’t lease. All electrical utility plans are local.

First, about the former.

Every utility has a tiered system of charging customers on a prorated basis. A minimal amount of power for a low-income family of four living in a home with less than 1,500 square feet, about 20% of the U.S. population, costs about 10 cents a kilowatt hour.

This is a function of the high level of public power utility regulation in the U.S. where companies are granted local monopolies. There are a lot of trade-offs, local politics, and quid pro quos that are involved in setting electric power rates.

My local supplier, PG&E (PGE) has five graduated billing tiers, with the top rate at 55 cents a kWh for mansion dwelling energy hogs like me (one Tesla in the garage and another on the way).

In order to minimize your up-front capital cost, you want to buy all the power you can at the poor person rate, and then eliminate the top four tiers entirely. Do this and you can cut the cost of your new solar system by half.

Your solar provider will ask for your recent power bills and will help you design a system of the right size.

Warning! They will try to sell you more than you need. After all, they are in the solar panel selling business, not the customer-value-for-money delivery business.

On the other hand, if you are a scientist or engineer, you can simply calculate these figures yourself. In my case, I use 18,000 kWh a year, but by installing only a 9,000 kWh/year system, my monthly power bill dropped from $500 to $50 a month.

This system cost me $32,000, or $22,400 net of the 30% alternative energy investment tax credit, giving me a breakeven point of four years and eight months. Hurry up because this tax credit expires in 2020.

Don’t focus too much on the panels themselves, as they are only 25% of a system’s costs. The big installers constantly play a myriad of panel manufacturers off against each other to get the cheapest bulk supplies.

The majority of the expense is for labor, the inverter needed to convert DC solar power to AC wall plug power, and permitting.

As for me, Mr. First Class All the Way, I specified only 19 of the best American-made, most efficient 335 kWh SunPower (SPWR) panels.

If I had settled for lower cost 250 kWh imported panels and just bought more of them, I would have saved a few thousand bucks. That’s fine if you have the roof space.

One other frill I ordered was a top-of-the-line SunPower SPR-6000m inverter, which includes two 110-volt AC outlets. Many solar systems won’t work without access to the grid to run the inverter and software.

This will enable me to operate independent of the grid in case it is knocked out by an earthquake or storm, and power a few select appliances, such as my refrigerator, cells phones, laptop, and, of course, my car.

Once you get your connection notice from your utility, you enter electricity Nirvana, selling power at a premium during the day and buying it back at a discount at night.

You are, in effect, using the grid as a giant storage device or battery.

You can then log into your account online and measure how much your solar panels are generating in San Francisco even from places as remote as Africa as I did last summer.

My statement is posted below showing my roof is happily generating about 38 kW a day or one full Tesla 100kW battery recharge every 2 1/2 days.

Since my system is in California, it also expresses the solar energy produced in terms of gallons of gasoline equivalent, tree seedlings grown over 10 years, an average home’s power consumption for one year, or number of tons of waste sent to a landfill.

Call this “feel good” with a turbocharger.

At the end of every 12 months, the utility will then perform a “gross up” calculation. If you produced more power than you used, the utility owes you a check.

Buzzkill warning!

PG&E has to pay me only its lowest marginal cost of power, or 4 cents/kWh. That is why is pays to under build your system, which for me cost $2.49/kWh to install, net of the tax credit.

This was the quid pro quo that enabled PG&E to agree to the whole plan in the first place. So, you won’t get rich off your solar system.

I am now protected against any price increase for electricity for the next 25 years!

PG&E has already notified me of back-to-back 7.5% annual rate increases for the next two years to pay for replacement of their aging, dilapidated infrastructure, a problem that is occurring nationally.

Oh, and my $32,000 investment has increased the value of my home by $64,000, according to my real estate friend.

Now for the lease or buy question. If you don’t have $32,000 for a solar installation, (or $16,000 for a normal size house with no Teslas), or you want to preserve your capital for your trading account, you may want to lease from a company such as Solar City.

The company will design and install an entire system for you for no money down and lease it to you for 20 years. But after your monthly lease payment, Solar City will end up keeping half the benefit, and raise your cost of electricity annually.

In my case, my monthly power bill will have dropped from $450 to $250. And you don’t get any 30% investment tax credit. However, this is still cheaper than continuing to buy conventional power.

So if you can possibly afford it, buy, don’t rent.

This being Silicon Valley, niche custom financing firms have emerged to let you have your cake and eat it, too.

Dividend Solar (click here for their site) will lend you the money to buy your entire system yourself, thus qualifying you for the investment tax credit.

As long as you use the tax credit to repay 30% of your loan principal within 15 months, the interest rate stays at 6.49% for the 20-year life of the loan. Otherwise, the interest rate then rises to a credit card like 9.99%. A FICO score of only 690 gets you in the door.

There are a few provisos to add.

You can’t install solar panels on clay or mission tile roofs popular in the U.S. Southwest (where the sun is), or tar and gravel roofs, as the breakage or fire risk is too great. The racks that hold the panels down in hurricane force winds simply won’t fit.

If you want to maintain your aesthetics, you can take the mission tiles off, install a simple composite shingle roof, bolt your solar panels on top, then put back the clay tiles back around the edges. That way it still looks like you have a mission tile roof.

Also, it is best to install your system in the run-up to the summer solstice when the days are longest and the sunshine brightest. Solar systems produce 400% more power on the longest day of the year compared to the shortest because of the lower angle of the sun’s rays hitting the Northern Hemisphere.

Tesla (TSLA) has added a whole new chapter to the solar story.

It announced the launch of the Power Wall, a 7 or 10 kW home storage battery that will cost up to $5,000 (click here for “The Solar Missing Link is Here!”)

The development is made possible by the enormous economies of scale for battery manufacturing made possible by the new Gigafactory now coming on line near Reno, Nevada.

The Gigafactory will double world’s lithium ion battery capacity in one shot. Plans for a second Gigafactory are already in the works.

This will permit homeowners to use their solar panels to charge batteries during the day, and then run off them at night making them fully energy-independent.

Yes, a total American solar energy supply in 24 years sounds outrageous, insane, and even ludicrous (to use some of Elon Musk’s favorite words).

But, so did the idea of a 3-gigahertz laptop microprocessor for a mere $1,000 24 years ago where Moore’s law first applied.

Sounds like the investment opportunity of the century to me. And you don’t have to rush. In a rare compromise with Congress, the 30% alternative energy tax subsidy has been extended to 2021.

The graphics for my own solar power supply are below:

 

 

 

 

 

SunPower SPR-6000m

 

The Tale of Two Economies

I’m looking at my screens this morning and virtually every stock sold short by the Dairy of a Mad Hedge Fund Trader cratered to new six-month lows.

Call it lucky, call it fortuitous. All I know is that the harder I work the luckier I get.

If you are in the right economy, that of the future, you are having another spectacular year. If you aren’t, you are probably posting horrific losses for 2019. Call it the “Tale of two Economies.”

I suspected that this was setting up over the last couple of weeks. No matter how much bad news and uncertainty dumped on these companies, the shares absolutely refused to go down. Instead, they flat lined just below their 2019 highs. It was a market begging for a selloff.

When the Facebook (FB) hacking scandal hit, investors were ringing their hands about the potential demise of Mark Zuckerberg’s vaunted business model and the shares plunged to $123.

However, while analysts were making these dire productions, I knew that Facebook itself was signing a long-term lease for a brand new 46-story skyscraper in downtown San Francisco just to house its Instagram operations.

Months later, and the company that misused Facebook’s data, Steve Bannon’s Cambridge Analytica, is bankrupt, and (FB) is trading at $185, a new high. Facebook was right, and the Cassandras were wrong.

Amazon was given up for dead during the February melt down as the shares withered from a daily onslaught of presidential attacks threatening antitrust action. Today, the shares are up a mind-blowing 38% above those lows.

And when Apple announced its earnings, the shares tickled $222, putting it squarely back into the ranks of the $1 trillion club ($949 billion at today’s close).

It turns out that technology companies are immune from most of the negative developments that have caused the rest of the stock market to drag. I’ll go through these one at a time.

Falling Interest Rates

Tech companies are sitting gigantic cash mountains, some $245 billion in Apple’s case, which means that as net lenders to the credit markets, they are beneficiaries of the credit markets. This makes tech companies immune from the credit problems that will demolish old economy industries during the next rate spike.

Rising Oil Prices

While tech companies are prodigious consumers of electricity, many power these with massive solar arrays and they sell periodic excess power to local utilities. So as net energy producers, they profit from rising energy prices.

Rising Inflation

Since the output of technology companies is entirely digital, they can handily increase productivity faster than the inflation rate, whatever it is. Traditional old economy companies, like industrials and retailers can’t do this.

Remember that while analogue production grows linearly, digital production grows exponentially, enabling tech companies to handily beat the inflation demon, leaving others behind in the dust.

Share Buybacks

While technology companies account for only 26% of the S&P 500 stock market capitalization, they generate 50% of the profits. Thanks to the massive tax breaks and low tax repatriation of foreign profits enabled by the 2017 tax bill, share buybacks are expected to rocket from $500 billion to $1 trillion this year. Companies repurchasing their own shares have become the sole net buyers of equities in 2019.

And companies with the biggest profits buy back the most stock. This has created a virtuous cycle whereby higher share prices generate more buybacks to create yet higher share prices. Old economy companies with lesser profits are buying back little, if any, of their own shares.

Of course, tech companies are not without their own challenges. For a start, they have each other to worry about. FANGs will simultaneously cooperate with each other in a dozen areas, while fight tooth and nail and sue on a dozen others. It’s like watching Silicon Valley’s own version of HBO’s Game of Thrones.

Also, occasionally, the tech story becomes so obvious to the unwashed masses that it creates severe overbought conditions and temporary peaks, like we saw in January.

 

 

Have We Seen “Peak Auto Sales”?

There is no limit to my desire to get an early and accurate read on the US economy, which at the end of the day is what dictates the future returns on our investments.

I flew over one of my favorite leading economic indicators only last week.

Honda (HMC) and Nissan (NSANY) import millions of cars each year through their Benicia, California facilities where they are loaded on to hundreds of rail cars for shipment to points inland as far as Chicago.

In 2009, when the US car market shrank to an annualized 8.5 million units, I flew over the site and it was choked with thousands of cars parked bumper to bumper in their white plastic wrappings, rusting in the blazing sun and bereft of buyers.

Then, “cash for clunkers” hit (remember that?). The lots were emptied in a matter of weeks, with mile-long trains lumbering inland, only stopping to add extra engines to get over the High Sierras at Donner Pass. The stock market took off like a rocket, with the auto companies leading.

I flew over the site last weekend, and guess what? The lots are full again. Not only that, the trains lined up to take them away are gone. US Auto Sales peaked in October 2017 when they fell just short of a 19 million annualized rate. As of the end of June this year, they had fallen to a 15.1 million annualized rate. July is looking worse still.

And this is what I’m worried about. Auto Sales may not only be peaking for this economic cycle. They may be peaking for all time.

This is my logic.

As they slowly age, Millennials are about to become the principal buyers of automobiles. The problem is that Millennials are purchasing cars at a far slower rate than previous generations.

This is because they have a much higher concentration in urban areas where the cost of car ownership is the most expensive in history. $40 for parking for an evening? Give me a break. But good luck finding free on-street parking, and if you do, your windows will probably get smashed.

In cities like San Francisco, public transportation, bicycles, and electric scooters are the preferred mode of transportation.

It doesn’t help that this generation is shouldering the burden of the bulk of $1.5 trillion in student loan debt. When you owe $2,000 a month in interest, there is little room for a car payment, and you probably don’t have the credit rating to buy a car anyway.

When they do buy cars, all-electric is their first choice, if they can get access to overnight charging. A lot of companies are making this easy by offering free charging for electric commuters in corporate parking lots. This explains why Tesla (TSLA) has taken deposits from 400,000 for their low-end Tesla 3, which has a two-year waiting list for new buyers.

When Millennials do drive, such as on business, for weekend trips or summer vacations, they either rent or “share.” Driving around the city, you see cars parked everywhere with bizarre names like Upshift, Getaround, Zipcar, Turo, and Casual Carpool.

Indeed, Detroit takes the car-sharing threat so seriously that the Big Three have all bought into the technology, with General Motors taking a stake in Maven. (GM) plans to start its own peer-to-peer car-sharing service this summer.

This is all a mystery for my generation, which grew up tearing apart old cars and putting them back together. I spent a year trying to put the engine on my 1955 Volkswagen back together. When I gave up, I towed the car and a big box full of greasy parts to a local mechanic, a German Army veteran. When he finished, even he had four parts left over.

Do you know who believes my rash, possible MAD theory? Investors in auto stocks, one of the worst-performing sectors of the stock market this year. Shares like those of General Motors (GM) keep breaking new valuation lows.

What was (GM)’s price earnings multiple today? Try a miserable zero since the company loses money, one of the lowest of all S&P 500 stocks. Hapless portfolio managers keep getting sucked into the shares, which have become one of the ultimate value traps.

It is all further evidence that my cautious view on the US economy is correct, that multiple crises overseas are ahead of us, and that the stock market could drop 5%-10% at any time. The auto industry should lead the charge to the downside, especially General Motors (GM) and Ford (F).

As for Tesla (TSLA), better to buy the car than the stock.

Sorry, the photo is a little crooked, but it’s tough holding a camera in one hand and a plane’s stick with the other while flying through the turbulence of the San Francisco Bay’s Carquinez Straight.

Air traffic control at nearby Travis Air Force base usually has a heart attack when I conduct my research in this way, with a few joyriding C-130s having more than one near miss.

 

 

 

 

 

 

Welcome to the Deflationary Century

Ignore the lessons of history, and the cost to your portfolio will be great. Especially if you are a bond trader!

Meet deflation, upfront and ugly.

If you looked at a chart for data from the United States, consumer prices are showing a feeble 1.6% YOY price gain. This is below the Federal Reserve’s own 2.0% annual inflation target, with most of the recent gains coming from rising oil prices.

And here’s the rub. Wage growth, which accounts for 70% of the inflation calculation, has been practically nil. So, don’t expect inflation to rise much from here despite an unemployment rate at a 50-year low.

We are not just having a deflationary year or decade. We may be having a deflationary century.

If so, it will not be the first one.

The 19th century saw continuously falling prices as well. Read the financial history of the United States, and it is beset with continuous stock market crashes, economic crisis, and liquidity shortages.

The union movement sprung largely from the need to put a break on falling wages created by perennial labor oversupply and sub living wages.

Enjoy riding the New York subway? Workers paid 10 cents an hour built it 120 years ago. It couldn’t be constructed today, as other more modern cities have discovered. The cost would be wildly prohibitive.

The causes of 19th-century price collapse were easy to discern. A technology boom sparked an industrial revolution that reduced the labor content of end products by ten to a hundredfold.

Instead of employing 100 women for a day to make 100 spools of thread, a single man operating a machine could do the job in an hour.

The dramatic productivity gains swept through the developing economies like a hurricane. The jump from steam to electric power during the last quarter of the century took manufacturing gains a quantum leap forward.

If any of this sounds familiar, it is because we are now seeing a repeat of the exact same impact of accelerating technology. Machines and software are replacing human workers faster than their ability to retrain for new professions.

This is why there has been no net gain in middle class wages for the past 30 years. It is the cause of the structural high U-6 “discouraged workers” employment rate as well as the millions of millennials still living in parents’ basements.

To the above, add the huge advances now being made in healthcare, biotechnology, genetic engineering, DNA-based computing, and big data solutions to problems.

If all the major diseases in the world were wiped out, a probability within 10 years, how many healthcare jobs would that destroy?

Probably tens of millions.

So the deflation that we have been suffering in recent years isn’t likely to end any time soon. If fact, it is just getting started.

Why am I interested in this issue? Of course, I always enjoy analyzing and predicting the far future using the unfolding of the last half-century as my guide. Then I have to live long enough to see if I’m right.

I did nail the rise of eight-track tapes over six-track ones, the victory of VHS over Betamax, the ascendance of Microsoft (MSFT) operating systems over OS2, and then the conquest of Apple (AAPL) over Microsoft. So, I have a pretty good track record on this front.

For bond traders especially, there are far-reaching consequences of a deflationary century. It means that there will be no bond market crash, as many are predicting, just a slow grind up in long-term bond prices instead.

Amazingly, the top in rates in this cycle only reach the bottom of past cycles at 3.25% for ten-year Treasury bonds (TLT), (TBT).

The soonest that we could possibly see real wage rises will be when a generational demographic labor shortage kicks in during the 2020s. That could be a decade off.

I say this not as a casual observer but as a trader who is constantly active in an entire range of debt instruments.

 

 

 

Yup, This Will Be a Real Job Killer

The Secret Fed Plan to Buy Gold

The recent appointment of my old acquaintance, Judy Shelton, to the Fed places a monetary policy once considered impossible solidly on the table. For your see, Judy has long advocated that the US return to the gold standard.

If the American economy moves into the next recession with interest rates already near zero, the markets will take the rates for all interest-bearing securities well into negative numbers. This has already happened in Japan and Germany.

At that point, our central bank’s primary tool for stimulating US businesses will become utterly useless, ineffective, and impotent.

What else is in the tool bag?

How about large-scale purchases of Gold (GLD)?

You are probably as shocked as I am with this possibility. But there is a rock-solid logic to the plan. As solid as the vault at Fort Knox.

The idea is to create asset price inflation that will spread to the rest of the economy. It already did this with great success from 2009-2014 with quantitative easing, whereby almost every class of debt securities were Hoovered up by the government.

“QE on steroids”, to be implemented only after overnight rates go negative, would involve large scale purchases of not only gold, but stocks, government bonds, and exchange-traded funds as well.

If you think I’ve been smoking California’s largest cash export (it’s not the raisins), you would be in error. I should point out that the Japanese government is already pursuing QE to this extent, at least in terms of equity type investments and ETFs and already owns a substantial part of the Japanese stock market.

And, as the history buff that I am, I can tell you that it has been done in the US as well, with tremendous results.

If you thought that president Obama had it rough when he came into office in 2009 with the Great Recession on, it was nothing compared to what Franklin Delano Roosevelt inherited.

The country was in its fourth year of the Great Depression. US GDP had cratered by 43%, consumer prices crashed by 24%, the unemployment rate was 25%, and stock prices vaporized by 90%. Mass starvation loomed.

Drastic measures were called for.

FDR issued Executive Order 6102 banning private ownership of gold, ordering them to sell their holdings to the US Treasury at a lowly $20.67 an ounce.

He then urged congress to pass the Gold Reserve Act of 1934, which instantly revalued the government’s holdings at $35.00, an increase of 69.32%. These and other measures caused the value of America’s gold holdings to leap from $4 to $12 billion. That’s a lot of money in 1934 dollars, about $208 billion in today’s money.

Since the US was still on the gold standard back then, this triggered an instant dollar devaluation of more than 50%. The high gold price sucked in massive amounts of the yellow metal from abroad creating, you guessed it, inflation.

The government then borrowed massively against this artificially created wealth to fund the landscape altering infrastructure projects of the New Deal.

It worked.

During the following three years, the GDP skyrocketed by 48%, inflation eked out a 2% gain, the unemployment rate dropped to 18%, and stocks jumped by 80%. Happy days were here again.

Monetary conditions are remarkably similar today to the those that prevailed during the last government gold buying binge.

There has been a de facto currency war underway since 2009. The Fed started when it launched QE, and Japan, Europe, and China have followed. Blue-collar unemployment and underpayment is at a decades high. The need for a national infrastructure program is overwhelming.

However, in the 21st century version of such a gold policy, it is highly unlikely that we would see another gold ownership ban.

Instead, the Fed would most likely move into the physical gold market, sitting on the bid for years, much like it recently did in the Treasury bond market for five years. Gold prices would increase by a multiple of current levels.

It would then borrow against its new gold holdings, plus the 4,176 metric tonnes worth $200 billion at today’s market prices already sitting in Fort Knox, to fund a multi trillion-dollar infrastructure-spending program.

Heaven knows we need it. Millions of blue-collar jobs would be created and inflation would come back from the dead.

Yes, this all sounds like a fantasy. But negative interest rates were considered an impossibility only years ago.

The Fed’s move on gold would be only one aspect of a multi-faceted package of desperate last ditch measures to extend economic growth into the future which I outlined in a previous research piece (click here for “What Happens When QE Fails” .

That’s assuming that the gold is still there. Treasury Secretary Stephen Mnuchin says he saw the gold himself during an inspection that took place of the last solar eclipse over Fort Knox in 2018. The door to the vault at Fort Knox had not been opened since September 23, 1974. But then Steve Mnuchin says a lot of things. Persistent urban legends and Internet rumors claim that the vault is actually empty or filled with fake steel bars painted gold.

 

 

 

The Next QE?

The Market Outlook for the Week Ahead, or The Bad Omens are There

The Omens are there.

I am normally a pretty positive guy.

But I was having a beer at Schwarzee at the base of the Matterhorn the other day, just having completed the climb up to the Hornli Hut at 10,758 feet. I carefully watched with my binoculars three helicopters circle the summit of the mountain, around the Solvay Hut.

These were not sightseeing tours. The pilots were taking great risks to retrieve bodies.

I learned at the Bergfuhrerverein Zermatt the next day that one of their men was taking up an American client to the summit. The man reached for a handhold and the rock broke loose, taking both men to their deaths. The Mountain Guide Service of Zermatt is a lot like the US Marine Corps. They always retrieve their dead.

It is an accident that could have happened to anyone. I have been over that route many times. If there was ever an omen of trouble to come, this was it.

The markets are sending out a few foreboding warnings of their own. Friday’s Q2 GDP report came in at a better than expected 2.1%, versus 3.1% in Q1.

Yet the Dow Average was up only a meager 51.47 points when it should have gained 500. It is an old market nostrum that if markets can’t rally on good news, you get the hell out of Dodge. Zermatt too.

It is the slowest US growth in two years. The trade war gets the blame, with falling exports offsetting healthy consumer spending. With the $1.5 trillion tax cut now spent, nothing is left but the debt. 2020 recession fears are running rampant, so paying all-time highs for stock prices is not a great idea.

You might be celebrating last week’s budget deal which heads off a September government shutdown. But it boosts the national debt from $22 to $24 trillion, or $72,000 per American. As with everything else with this administration, a short-term gain is achieved at a very high long-term cost.

Boris Johnson, the pro-Brexit activist, was named UK prime minister. It virtually guarantees a recession there and will act as an additional drag on the US economy. Global businesses will accelerate their departure from London to Paris and Berlin.

The end result may be a disunited kingdom, with Scotland declaring independence in order to stay in the EC, and Northern Ireland splitting off to create a united emerald island. The stock market there will crater and the pound (FXB) will go to parity against the greenback.

The European economy is already in a downward spiral, with German economic data flat on its back. GDP growth has shrunk from 2.0% to 0.7%. It seems we are not buying enough Mercedes, BMWs, and Volkswagens.

Yields on ten-year German bunds hit close to an all-time low at -0.39%. The Euro (FXE) is looking at a breakdown through parity. The country’s largest financial institution, Deutsche Bank, is about to go under. No one here wants to touch equities there. It’s all about finding more bonds.

Soaring Chip Stocks took NASDAQ to new high. I have to admit I missed this one, not expecting a recovery until the China trade war ended. Chip prices are still falling, and volume is shrinking. We still love (AMD), (MU), and (NVDA) long term as obviously do current buyers.

Existing Home Sales fell off a cliff, down 1.7% in June to a seasonally adjusted 5.27 million units. Median Home Prices jumped 4.7% to $287,400. A shortage of entry-level units at decent prices get the blame. Ultra-low interest rates are having no impact.

JP Morgan (JPM) expects stocks to dive in Q3, driven by earnings downgrades for 2020. Who am I to argue with Jamie Diamond? Don’t lose what you made in H1 chasing rich stocks in H2. Everyone I know is bailing on the market and I am 100% cash going into this week’s Fed meeting up 18.33% year-to-date. I made 3.06% in July in only two weeks.

Alphabet (GOOGL) beat big time, sending the shares up 8% in aftermarket trading. Q2 revenues soared 19% YOY to an eye-popping $39.7 billion. It’s the biggest gain in the stock in four years, to $1,226. The laggard FANG finally catches up. The weak first quarter is now long forgotten.

Amazon (AMZN) delivered a rare miss, as heavy investment spending on more market share offset sales growth, taking the shares down 1%. Amazon Prime membership now tops 100 million. Q3 is also looking weak.
 
Intel (INTC) surged on chip stockpiling, taking the stock up 5% to $54.70. Customers in China stockpiled chips ahead of a worsening trade war. Q3 forecasts are looking even better. Sale of its 5G modem chip business to Apple is seen as a huge positive.
 
I’ve finally headed home, after a peripatetic six-week, 18-flight trip around the world meeting clients. I bailed on the continent just in time to escape a record heatwave, with Paris hitting 105 degrees and London 101, where it was so hot that people were passing out on the non-air conditioned underground.

Avoid energy stocks. The outcry over global warming is about to get very loud. I’ll write a more detailed report on the trip when I get a break in the market.

My strategy of avoiding stocks and only investing in weak dollar plays like bonds (TLT), foreign exchange (FXA), and copper (FCX) performed well. After spending a few weeks out of the market, it’s amazing how clear things become. The clouds lift and the fog disperses.

My Global Trading Dispatch has hit a new high for the year at +18.33% and has earned a robust 3.09% so far in July. Nothing like coming out of the blocks for an uncertain H2 on a hot streak. I’m inclined to stay in cash until the Fed interest rate decision on Wednesday.

My ten-year average annualized profit bobbed up to +33.23%. With the markets now in the process of peaking out for the short term, I am now 100% in cash with Global Trading Dispatch and 100% cash in the Mad Hedge Tech Letter. If there is one thing supporting the market now, it is the fact that my Mad Hedge Market Timing Index has pulled back to a neutral 60. It’s a Goldilocks level, not too hot and not too cold.

The coming week will be a big one on the data front, with one big bombshell on Wednesday and the Payroll data on Friday.

On Monday, July 29, the Dallas Fed Manufacturing Index is out.

On Tuesday, July 30, we get June Pending Home Sales. A new Case Shiller S&P National Home Price Index is published. Look for YOY gains to shrink.

On Wednesday, July 31, at 8:30 AM, learn the ADP Private Employment Report. At 2:00 PM, the Fed interest rate decision is released and an extended press conference follows. If they don’t cut rates, there will be hell to pay.

On Thursday, August 1 at 8:30 AM, the Weekly Jobless Claims are printed.

On Friday, August 2 at 8:30 AM, we get the July Nonfarm Payroll Report. Recent numbers have been hot so that is likely to continue.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, by the time you read this, I will have walked the 25 minutes from my Alpine chalet down to the Zermatt Bahnhoff, ridden the picturesque cog railway down to Brig, and picked up an express train through the 12-mile long Simplon Tunnel to Milan, Italy.

Then I’ll spend the rest of the weekend winging my way home to San Francisco in cramped conditions on Air Italy. Yes, I had to get a few more cappuccinos and a good Italian dinner before coming home.

Now, on with the task of doubling my performance by yearend.

Good luck and good trading.

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

 

 

 

 

 

 

 

Testing Tesla’s Self-Driving Technology

I knew I was on the right track when the salesman told me that the customer who just preceded me for a Tesla Model X 90D SUV was the Golden Bay Warriors star basketball player, Steph Currie.

Well, if it’s good enough for Steph, then it’s good enough for me.

Last week, I received a call from Elon Musk’s office to test the company’s self-driving technology embedded in their new vehicles for readers of the Diary of a Mad Hedge Fund Trader.

I did, and prepare to have your mind blown!

I was driving at 80 MPH on CA-24, a windy eight-lane freeway that snakes its way through the East San Francisco Bay Area mountains. Suddenly the salesman reached over a flicked a lever on the left side of the driving column.

The car took over!

There it was, winding and turning along every curve, perfectly centered in the lane. As much as I hated to admit it, the car drove better than I ever could. It does especially well at night, a valuable asset for senior citizens whose night vision is fading fast.

All that was required was for me to touch the steering wheel every two minutes to prove that I was not sleeping.

The cars do especially well in rush hour driving, as it is adept at a stop and go traffic. You can just sit there and work on your laptop, read a book, or watch a movie on the built-in 4G WIFI HD TV.

When we returned to the garage, the car really showed off. When we passed a parking space, another button was pushed, and we perfectly backed 90 degrees into a parking space, measuring and calculating all the way.

The range is 290 miles, which I can recharge at home at night from a standard 220-volt socket in my garage in seven hours. The chassis can rise as high as eight inches off the ground so it can function as a true SUV.

The “ludicrous mode,” a $10,000 option, take you from 0 to 60 mph in 2.9 seconds. However, even a standard Tesla can accelerate so fast that it will make the average passenger carsick.

Here’s the buzz kill.

Tesla absolutely charges through the nose for extras.

The 22-inch wheels, the third row of seats to get you to seven passengers, the premium sound, the leather seats, and the self-driving software can easily run you $30,000-$40,000.

A $750 tow hitch will accommodate a ski rack on the back. There is a $1,000 delivery charge, even if you pick it up at the Fremont factory.

It’s easy to see how you can jump from an $84,990 base price to a total cost of $162,500, including taxes, for the ultra-luxury Performance model.

My company will be purchasing the car under Section 179 of the International Revenue Code. The car qualifies because it weighs over 6,000 pounds and is, therefore, a truck under tax law.

This allows me to deduct the entire $162,500 cost of the vehicle upfront, plus the maintenance and insurance costs for the entire life of the car. However, I will have to maintain a mileage log as a hedge against any future IRS audits.

Ironically, Section 179 was enacted as a subsidy for consumer purchases of the eight-mile per gallon Hummer, which was originally built by AM General and owned by General Motors (GM).

After several attempts to sell, the division failed, production was permanently shut down. However, the tax subsidies live on for any like designed vehicle.

It looks like I’ll have to buy two Teslas this year.

As for “drop dead’ curb appeal, nothing beats the Model X. Buy the stock on every 20% dip.

 

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