Research Archives - Mad Hedge Fund Trader

What’s the Matter With Apple?

It was 38 years ago today that Apple (AAPL) went public and has generated a 43,000% return since its $22 IPO price. If you bought one share of Apple way back then for $22 it would be worth a breathtaking $95,000 today.

I waited until the next crash and then bought it at $4, and it sits in one of my “no touch” ultra-long-term retirement portfolios today.

Suddenly, the torture I endured taking Steve Jobs around to visit the New York institutional investors during the early 1980s was worth it.

The great rule of thumb I have learned after 50 years of investment is that if you hold a stock long enough, the dividend will exceed your original capital cost, giving you a 100% a year annual cash flow.

Three months ago, Apple was the Teflon stock of the entire market, the company that could do no wrong, the only “safe” stock that traded. Any selling met a wave of buying from Oracle of Omaha Warren Buffet and Apple itself, limiting corrections to a feeble 4%.

What a difference three months make!

Now the shares have become a market pariah, targeted by algorithms and hedge funds alike, and beaten like the proverbial red-headed stepchild. As a result, the shares have plunged an eye-popping 29.61%, vaporizing $311 billion in market capitalization.

Which begs one to ask the question, “What’s the matter with Apple?” How can things go from so right to so wrong?

Just like success has many fathers, failure is an orphan.

The harsh truth is that Apple became too much of a good thing to too many people. Expectations had become excessive and it had become too widely owned by traders with weak hands. In other words, people like me.

I had been cautious of Apple for a while because if its massive China exposure. You don’t want to own a company that relies entirely on Middle Kingdom production during a running trade war. Apple sold an incredible 216 million iPhones in 2017, and all of them are made at the Foxconn factories in southern China.

Apple has become the whipping boy for both sides in the trade conflict. The company has always run the risk of its Foxconn workers arriving at work late someday, or not showing up at all at the prodding of Beijing. Recently, Trump said iPhones imported from China could be subject to the current 10%, soon to be 25% tariff.

The final nail in the coffin came on Monday morning when we learned of a lower Chinese court’s ruling against Apple in a lawsuit from QUALCOMM (QCOM). Never mind that the suit was years old and applied only to the company’s older phones. With the shares in free fall, that is just what investors DIDN’T want to hear.

However, Apple is not dead, it is just resting. Or, call it ripening.

Not only could Apple recover strongly from these abysmal levels, IT COULD DOUBLE IN VALUE.

The core of my argument (no pun intended) is that Apple is in the process of fundamentally evolving its business model. It is rapidly morphing from a one-time sale only hardware company to a recurring subscription services company. And that is where the big money is in the future.

Microsoft (MSFT) is already doing it, so are Amazon (AMZN) and Netflix (NFLX). In fact, everyone is doing it, even the Diary of a Mad Hedge Fund Trader.

In fact, Apple's services revenue could balloon to $100 billion in five years, compared to its estimated total sales this year of $265 billion.

This accomplishes several important things. It moves the company out of a 30% gross margin business to a 70% gross margin. It converts Apple from a highly cyclical to stable earnings growth. Stable earnings growth companies are awarded much higher share price multiples.

Look no further than my next-door neighbor, Clorox (CLX), which trades at a much loftier 23X multiple and Coca-Cola (KO) which can be found at generous 19X multiple. Earnings visibility is worth its weight in gold. This could make Apple’s current 14X multiple a thing of the past.

Of course, we are not going to see a straight line move from one dominant business to another, and the road along the road could be bumpy. We could easily see one more meltdown which takes us to the subterranean $160 handle.

But $10 of downside risk versus $170 of upside? I’ll take that all day long. I bet you will too!

Time for a Nibble?

The Terrifying Chart Formation That is Setting Up

Diary, Newsletter, Research

The Mad Hedge Fund Trader is seeing its biggest one-day gains since the inception of our Trade Alert Service 11 years ago. By the time you read this, we will have picked up an astounding 11% profit for the entire portfolio in 24 hours.

However, this being Halloween, I don’t want to sound like I’m whistling by the graveyard. But what I am about to say will scare the daylights out of you.

I hate to say I told you so but my prediction a year ago that the bull market would end on May 10, 2019 at 4:00 PM is starting to look pretty good.

If I am right, the charts for the S&P 500 (SPY) are setting up a classic head and shoulders top. The left shoulder was created by the January 2018 rally to $282.

We just saw the head created at the beginning of October at $293. All that remains is to build the right shoulder back up to $282 by the spring. What will then follow is the crying.

This is not a matter of throwing a dart at a calendar or reciting a chant taught to me by a long-dead Yaqui Indian. It is a simple matter of math. Here’s how it goes:

*The Fed Raises funds rate 25 basis points per quarter for the next four quarters to 3.25%

*The Yields Curve Inverts, taking short rates higher than long rates now at 3.15%

*Bond yield spread trades increase massively going into the inversion as traders ramp up the size to make up for shrinking spreads.

*When the spread turns negative, they dump everything, creating an interest rate spike to 4% or 5%.

*Inverted yield curves last an average of 14 months or until February 2020 in this cycle when a recession begins.

*Stock markets peak on average seven months before recessions, and you arrive at Friday, May 10, 2019 at 4:00 PM EST as the date for the demise of the bull market. At that point, it will be ten years and two months old, the longest such move in history.
A lot of people asked why I sent out so few trade alerts during the summer and going into the fall.

In fact, the list of negatives has reached laughable proportions:

*Longest bull market in history

*In the face of rising interest rates

*In the face of rising oil prices

*Rising inflation

*Nothing else to buy

*Only bull market in the world

*Valuations approaching two-decade highs

*Overwhelmingly concentration in big cap tech

*Double top in the market on an Equal Weight S&P 500 chart

*Record retail inflows into ETFs

*Recession has already started in the auto industry

*Recession has already started in the housing industry

*Rotation to value defensive stocks underway

*Massive unicorn IPOs planned in 2019- $215 billion

*Slowing GDP Growth 4.2% to 3.5%

*Large amount of economic growth sucked forward from 2019 as businesses accelerate Chinese imports to beat the tariffs

*The same is going on in China to buy our exports

Should you throw up your hands, dump all your stocks, and hide out in cash?

Absolute not! In fact, the last six months of a bull market are often the most profitable. Many tech stocks like Micron Technology (MU) and Advanced Micro Devices (AMD) have dropped by half in recent months. That means they have to double to get back to their old highs.

Other big quality stocks such as Amazon (AMZN) and Netflix (NFLX) have plunged by 30% and only have to appreciate by 43% to hit highs. It is, in fact, the best entry point for large-cap tech stocks since 2015 with valuations at a three-year low.

If I am wrong, the trade war with China plunges us into recession and ends the bull market sooner. Almost all the “worry” items on the list above are getting worse by the day.

Save That Date!

Watch Out for the Unicorn Stampede in 2019

Diary, Newsletter, Research

I am always watching for market topping indicators and I have found a whopper. The number of new IPOs from technology mega unicorns is about to explode. And not by a little bit but a large multiple, possibly tenfold.

Six San Francisco Bay Area private tech companies valued by investors at more than $10 billion each are likely to thunder into the public market next year, raising buckets of cash for themselves and minting new wealth for their investors, executives, and employees on a once-unimaginable scale.

Will it kill the goose that laid the golden egg?

Newly minted hoody-wearing millionaires are about to stampede through my neighborhood once again, buying up everything in sight.

That will make 2019 the biggest year for tech debuts since Facebook’s gargantuan $104 billion initial public offering in 2012. The difference this time: It’s not just one company, and five of them are based in San Francisco, which could see a concentrated injection of wealth as the nouveaux riches buy homes, cars and other big-ticket items.

If this is not ringing a bell with you, remember back to 2000. This is exactly the sort of new issuance tidal wave that popped the notorious Dotcom Bubble.

And here is the big problem for you. If too much money gets sucked up into the new issue market, there is nothing left for the secondary market, and the major indexes can fall, buy a lot.

The onslaught of IPOs includes ride-sharing firm Uber at $120 billion, home-sharing company Airbnb at $31 billion, data analytics firm Palantir at $20 billion, FinTech company Stripe at $20 billion, another ride-sharing firm Lyft at $15 billion, and social networking firm Pinterest at $12 billion.

Just these six names alone look to absorb an eye-popping $218 billion, and that does not include hundreds of other smaller firms waiting on the sidelines looking to tap the public market soon.

The fear of an imminent recession starting sometime in 2019 or 2020 is the principal factor causing the unicorn stampede. Once the economy slows and the markets fall, the new issue market slams shut, sometimes for years as they did after 2000. That starves rapidly growing companies of capital and can drive them under.

For many of these companies, it is now or never. The initial venture capital firms that have had their money tied up here for a decade or more want to cash out now and roll the proceeds into the “next big thing,” such as blockchain, health care, or artificial in intelligence. The founders may also want to raise some pocket money to buy that mansion or mega yacht.

Or, perhaps they just want to start another company after a well-earned rest. Serial entrepreneurs like Tesla’s Elon Musk (TSLA) and Netflix’s Reed Hastings (NFLX) are already on their second, third, or fourth startups.

And while a sudden increase in new issues is often terrible for the market, getting multiple IPOs from within the same industry, as is the case with ride-sharing Uber and Lyft, is even worse. Remember the five pet companies that went public in 1999? None survived.

The move comes on the heels of an IPO market in 2018 that was a huge disappointment. While blockbuster issues like Dropbox (DB) and DocuSign (DOCU) initially did well, Eventbrite (EB), SurveyMonkey (SVMK), and Zuora (ZUO) have all been disasters.

Some 80% of all IPOs lost money this year. This was definitely NOT the year to be a golfing partner or fraternity brother with a broker.

What is so unusual in this cycle is that so many firms have left going public to the last possible minute. The desire has been to milk the firms for all they are worth during their high growth phase and then unload them just as they go ex-growth.

The ramp has been obvious for all to see. In the first nine months of 2018, 44 tech IPOs brought in $17 billion, according to Dealogic. That’s more than tech IPOs reaped for all of 2016 and 2017 combined.

Also holding back some firms from launching IPOs is the fear that public markets will assign a lower valuation than the last private valuation. That’s an unwelcome circumstance that can trigger protective clauses that reward early investors and punish employees and founders. That happened to Square (SQ) in its 2015 IPO.

That’s happening less and less frequently: In 2017, one-third of IPOs cut companies’ valuations as they went from private to public. In 2018, that ratio has dropped to one in six.

Also unusual this time around is an effort to bring in more of the “little people” in the IPO. Gig economy companies like Uber and Lyft are lobbying the SEC for changes in new issue rules that will enable their drivers to participate even though they may be financially unqualified.

As a result, when the end comes, this could come as the cruelest bubble top of all.

Don’t Get Run Over

Why the Stock Market is Bottoming Here

Diary, Newsletter, Research

All good things must come to an end, and that includes bull markets in stocks.

But this one is not over yet. If my calculations are correct, the current correction should end right around here over the next week or two. Like the famed Monte Python parrot, the bull market is not dead, it is only resting.

My logic is very simple. In February, the Dow Average suffered a 3,300 point downdraft. However, at least 1,000 points of this was due to the overnight implosion of the $7 billion short volatility industry that spiked the (VIX) up to $50.

That trade no longer exists, at least to the extent that it did in January. There is no Velocity Shares Daily Inverse VIX Short Term ETN (XIV) blow up in the cards at tomorrow morning’s opening.

With the Dow Average down 2,200 points, or 8.14%, from its September high, the major indexes ought to bottom out right around here. I also expect the Volatility Index to peak here at $30.

Incredible as it may seem, the Dow Average has given up almost all of its 2018 gains. Unchanged on the seems to be a point that the market wants to gravitate to, and then sharply bounce off of.

That means the 200-day moving average for the S&P 500 should hold as well near $274, down 6.4% from all-time highs made only last week. That has provided rock-solid support for the index since the bull market began in 2009, except for brief hickeys in 2011 and 2015.

At these prices the PE multiple for the S&P 500 has plunged back down to only 16 times, providing substantial valuation support that has held for years. The economy is still growing at a 4% clip and I expect that to continue through the end of 2018.

The hissy fit between the White House and the Federal Reserve was the principal cause for the Wednesday 831-point selloff. There is a reason why the president has never been allowed to control interest rates in the United States. Telling the citizenry that the “Fed is loco” does not inspire confidence among stock buyers.

If he could, they would be zero, all the time, forever, and the US dollar would have the same purchasing power as the Zimbabwe one or Weimar German Deutsche Mark.

Another crucial factor that investors are missing is that we are now in the blackout period for Q3 earnings when companies are not allowed to buy their own stocks. Companies have almost become the sole buyers of equities in 2018 and are expected to reach a record high of $1 trillion in purchases this year.

A blackout means that the nice guy who has been buying all those drinks has suddenly become stuck in the bathroom for an extended period of time.

That makes the biggest buyers of their own stock like Apple (AAPL), Cisco Systems (CSCO), Amazon (AMZN), and Amgen (AMGN) particularly interesting.

The shackles come off Apple’s buybacks when the Q3 earnings are announced after the close on November 1, a mere 14 trading days away. Apple CEO Tim Cook has committed to buying $100 billion worth of Apple shares.

Finally, my Mad Hedge Market Timing Index, which has been worth its weight in gold, just hit its all-time low at 4 and is flashing an extreme “BUY”. The last time this happened was at the February 8 capitulation low.

Of course, we will probably still see some heart-stopping volatility in the run up to the election. But after that, I still expect a burst to new all-time highs. If my 3,000 S&P 500 target is hit, that means there is a potential 9.5% gain from today’s low.

Investors raced to unload winners in the run up to yearend. Now that many of those winners have become losers, the selling should abate. Oh, and that bond collapse? Bonds have actually gone up since the big stock selling started two days ago, taking yields down from 3.25% to 3.13%. At some point, someone will notice.

Unfortunately, making money in the market is no longer the cakewalk that it used to be. There’s no more loading the boat, and then going on a long cruise. From now on, we are going to have to work for our money.

We may see a bottom this morning when banks announce their Q3 earnings. JP Morgan’s Jamie Diamond starts his conference call at 8:30 AM EST and the entire investment industry will be listening with baited breath.

Mad Hedge Market Timing Index

Correction? What Correction?

Reaching Peak Technology Stocks

Diary, Newsletter, Research

I drove into San Francisco for a client dinner last night and had to wait an hour at the Bay Bridge toll gate. When I finally got into town, the parking attendant demanded $50. Dinner for two at Morton’s steakhouse? How about $400.

Which all underlines the fact that we have reached “Peak” San Francisco. San Francisco just isn’t fun anymore.

The problem for you is that if the City by the Bay has peaked, have its much-loved big cap technology stocks, like Facebook (FB), Alphabet (GOOGL), and Netflix (NFLX) peaked as well?

To quote the late manager of the New York Yankees baseball team, Yogi Berra, “Nobody goes there anymore because it’s too crowded.”

What city was the number one creator of technology jobs in 2017?

If you picked San Francisco, you would have missed by a mile. Anyone would be nuts to start up a new business here as rents and labor are through the roof.

Competition against the tech giants for senior staff is fierce. What, no fussball table, free cafeteria, or on-call masseuses? You must be joking!

You would be much better off launching your new startup in Detroit, Michigan. Better yet, hyper-connected low-waged Estonia where the entire government has gone digital.

In fact, Toronto, Canada is the top job creator in tech now, creating an impressive 50,000 jobs last year. Miami, FL and Austin, TX followed. Silicon Valley was at the bottom of the heap.

It’s been a long time since peach orchards dominated the Valley.

Signs that the Bay Area economy is peaking are everywhere. Residential real estate is rolling over now that the harsh reality of no more local tax deductions on federal tax returns is sinking in.

To qualify for a home loan to buy the $1.2 million median home in San Francisco, you have to be a member of the 1%, earning $360,000 a year or better.

Two-bedroom one bath ramshackle turn of the century fixer uppers are going for $1 million in the rapidly gentrifying nearby city of Oakland, only one BART stop from Frisco.

Most school districts have frozen inter-district transfers because they are all chock-a-block with students. And good luck getting your kid into a private school like University or Branson. There are five applicants for every place at $40,000 a year each.

The freeways have become so crowded that no one goes out anymore. It’s rush hour from 6:00 AM to 8:00 PM every day.

When you do drive it’s dangerous. The packed roads have turned drivers into hyper-aggressive predators, constantly weaving in and out of traffic, attempting to cut seconds off their commutes. And there is no drivers ed in China.

I took my kids to the city the other day for a Halloween “Ghost Tour” of posh Pacific Heights. It was lovely spending the evening strolling the neighborhood’s imposing Victorian mansions.

The ornate gingerbread and stained-glass buildings are stacked right against each other to keep from falling down in earthquakes. It works. The former abodes of gold and silver barons are now occupied by hoody-wearing tech titans driving new Teslas.

We learned of the young girl forced into a loveless marriage with an older wealthy stock broker in 1888. She bolted at the wedding and was never seen again.

However, the ghost of a young woman wearing a white wedding address has been seen ever since around the corner of Bush Street and Octavia Avenue. Doors slam, windows shut themselves, and buildings make weird creaking noises.

Then I came to a realization walking around Fisherman’s Wharf as I was nearly poked in the eye by a selfie stick-wielding visitor. The tourist areas on weekdays are just as crowded as they were on summer weekends 30 years ago, except that now the number of languages spoken has risen tenfold, as has the cost.

It started out to be a great year for technology stocks. Amazon (AMZN) alone managed to double off its February mini crash bottom, while others like Apple (AAPL) rocketed by 56%. But traders may have visited the trough once too often

The truth is that technology stocks have not performed since June, right when the Mad Hedge Fund Trader dumped its entire portfolio. Only Microsoft (MSFT) and Amazon (AMZN) have managed to eke out new all-time highs since then, and only just.

The rest of tech has been moving either sideways in the most desultory way possible, or suffered cataclysmic declines like Facebook (FB) and Micron Technology (MU).

Of course, the trade wars haven’t helped. It’s amazing that big tech hasn’t already been hit harder given their intensely global business models.

Nor has rising interest rates. Big cap tech companies have such enormous cash balances that they are all net creditors to the financial system and actually benefit from higher interest rates. But dear money does slow the US economy and that DOES hurt their earnings prospects.

No, I’m not worried about tech for the long term. There is no analog company that can compete with a digital company anywhere in the world.

Accounting for 26% of the stock market capitalization and 50% of its profits, it’s only a question of when we get a major new up leg in share prices, not if.

The only unknown now is whether this next leg will take place before or after the next recession. Given the rate at which interest rates and oil prices are rising in the face of a slowing global economy, it’s looking like the recession may win the race.

As our tour ended, who did we see having dinner in the front window of one of the city’s leading restaurants? A young woman wearing a white wedding dress.

Yikes! Maybe the recession is sooner than I thought.

The Bull Case for Tesla

Diary, Newsletter, Research

Talk about a bad news factory.

A short interest of 26% in Tesla (TSLA) stock has the tendency to manufacture bad news on a daily basis, whether it is true or not. It really has been a black swan a day.

This really is the most despised stock in the market. But you have to expect that when you are simultaneously disputing the auto, oil, dealer, and advertising industries, and doing it all union-free.

It also doesn’t help that Tesla is on the Department of Justice speed dial, undergoing no less than three investigations since the advent of the new administration. I can’t imagine why this is happening, given that the White House is now packed with oil industry executives.

That’s why I have been advising investors to buy the car and not the stock.

That is until now.

The truth is that all of this negativity is generating the best entry point for Tesla shares in two years.

In the meantime, the San Francisco Bay Area has become flooded with new Tesla 3’s. These are suddenly everywhere and soon will outnumber the ubiquitous Toyota Prius, until now the favorite of technology employees.

Q3 production of Tesla 3’s reached an eye-popping 55,840, up from 18,440 the previous quarter, taking Tesla’s total output to 80,000 including the model X.

That puts the company on target to reach 250,000 units in 2019. Tesla may be about to see something it has not witnessed in the company’s 15-year history: a real profit.

When I picked up my first Tesla 1 in 2010, chassis no. 125, I was all alone and treated like I was visiting royalty. The sales staff fawned all over me, offering me free hats, coffee mugs, and other tchotchke. Today, a staggering 200 people a day are gleefully driving their new wheels away from the Fremont factory, and another 200 getting them home-delivered by semis. Take a number and wait in line.

I have pinned down several of these drivers in parking lots, shopping malls, and trailheads to quiz them about their new ride and the answer is always the same. It’s a car from 20 years in the future, the best they have ever driven, and they will never buy another marque again.

Sounds pretty good, doesn’t it?

So I perked up the other day when I heard my old pal, legendary value investor Ron Baron, make the bull case for Tesla.

Ron has never done things by halves. He expects Tesla’s market capitalization to soar from $43 billion today to $1 trillion by 2030, a mere 12 years away. By then, Tesla should be generating $150 billion a year in profits. That implies that a 23-fold increase in the share price to $5,570 is ahead of us.

Half of this will be generated by the auto sales, while the other half will be produced by a burgeoning battery business. Tesla will easily become the largest auto manufacturer in the world within a few years.

Tesla will sell 10-15 million cars a year by 2030, compared to the current 300,000 annual rate.

It already is the one American auto maker with the highest US parts content, nearly 100%. It has also been one of the largest creators of new jobs over the past decade, right behind Amazon (AMZN), at some 46,000.

It’s really all about the math. Today, Tesla is building its Tesla 3’s at a cost of $28,000 apiece and selling them for $62,000. That’s the high price they have been realizing with extra options like four-wheel drive, 300-mile extended range batteries, painted wheels, and all the other bells and whistles. That gives you a $34,000 profit per vehicle.

Tesla’s “cheap” cars, the stripped-down rear wheel drive Tesla 3’s that will sell for a modest but world-beating $35,000 won’t be available until early 2019.

At this rate, the entire company will become profitable when it hits a production rate of 10,000 units a week compared to the current 6,000 units. They should achieve that sometime in early 2019.

Much has been made of drone video footage showing vast parking lots in Fremont, CA chock-a-block with shiny new Tesla 3’s. This creates a false sense of poor sales.

The actual fact is that Tesla has no dealer network. All of those parked cars have been sold and are awaiting owners to pick them up. The months it takes from payment to actual delivery gives Tesla a free float on billions of dollars. That’s worth a lot in a world of steadily rising interest rates.

Oh, and those notorious tents? They could withstand a category 5 hurricane. However, like everything else the company does, they’re revolutionary. They enable bypassed permitting procedures and can be built very quickly and cheaply.

How are things going with the competition? Not so good. The traditional internal combustion car industry has hundreds of billions of dollars tied up in engine factories that will eventually become worthless. They really are the 21^st century equivalent of buggy whip makers.

General Motors (GM), Ford (F), and Chrysler are executing slow motion roll out of electric cars in order to squeeze a few more years of use out of these legacy plants. Electric cars don’t use engines. That is putting them ever further behind.

This is what the poor share performance of auto shares has been screaming at you all year despite one of the strongest economies and stock markets in history. Yes, “peak Auto” is at hand.

The high-end brands like Mercedes, BMW, Audi, and Porsche that just entered the all-electric market are a decade behind Tesla in autonomous software and manufacturing processes. They all have huge, expensive dealer networks.

Let’s see how sales go after they suffer their first fatal crash. In the meantime, Tesla has run up 200 million miles worth of driving data.

Factory insiders say a speed-up of new Tesla orders is in the works. Orders placed before December 31, 2018 are entitled to a $7,500 federal tax credit. That drops to $3,750 in the first half of 2019, only $1,750 in the second half, and zero in 2020.

In the meantime, the oil industry is still collecting $55 billion a year of federal oil depletion allowances. Go figure.

At the same time, many states like California, far and away Tesla’s largest market (Texas is no. 2), are either maintaining or expanding their own electric car subsidies or gas guzzler penalties. It is $2,500 per car in California.

Ron Baron is not alone in his admiration of Tesla. Macquarie Research has just initiated coverage with a strong “BUY” and a target of $430 a share, up 70% from today’s close.

Next in the works will be a Tesla Model Y, a small four-wheel drive based on the Tesla 3 chassis. A Roadster relaunch comes next in 2022, a $250,000 super car that will be doubtless aimed at Arab sheiks and billionaire car collectors.

By then the entire product line will spell SEXY. See! Elon Musk does have a sense of humor after all!

My First S-1

RIP

My New Wheels

The Market Outlook for the Week Ahead, or Get Me Off This Roller Coaster!

Diary, Newsletter, Research

After two years of somnolent complacency, the bond market finally broke out of a two-year range, putting the cat among the pigeons with investors everywhere.

In a mere six weeks, the yield on the ten-year US Treasury bond (TLT) soared by 45 basis points from 2.80% to 3.25%, and 25 basis points during last week alone. It is the kind of move one normally associates with major financial crisis, the bankruptcy of a leading bank, or a major geopolitical event.

Once the 3.11% top was taken out, there was a virtual melt up to 3.25%. Rumors of Chinese dumping of its massive bond holdings were rife. Apparently, trade wars DO have consequences.

The 30-year fixed rate mortgage hit 5%, shutting millions out of the housing market. If you haven’t sold your home by now you’re in for the duration.

Personally, I believe that it was Amazon’s wage hike for 250,000 workers from $12 to $15 an hour that had the bigger impact. The inflation train is obviously leaving the station.

The free ride we have enjoyed in equities since February ended abruptly. The long, long overdue correction is here. This has ignited a rush by managers to lock in gains by selling off their biggest winners, and that would be the large cap tech stocks we have all come to know and love.

It started to be a great week with the settlement of NAFTA 2.0. Suddenly, Canada was no longer deemed a national security threat, and our supply of maple syrup was safe once again. My “trade peace” stocks soared.

The shocker came the next day when Amazon announced that it was raising wages by 25% for its 250,0000 minimum wage US workers. Suddenly, this inflation thing was real. It was the stick that broke the camel’s back.

General Electric (GE) dumped its CEO, after only a year and the stock rocketed 17%. It looks like the hedge fund that makes light bulbs still hasn’t found the “ON” switch.

Tesla cut its deal with the SEC for a token amount, and the stock soared 20%. Then Elon tweeted once again, and it fell 20%. With the Defense Department now dependent on Musk to get their spy satellites into orbit there was no way the case against him was ever going anywhere.

General Motors Q3 sales collapsed by 11.1% YOY as new Tesla 3 sales wiped out the electric Chevy Bolt, down 44%. The two hurricanes didn’t help here either.

Oil prices soared, driven by our new sanctions against Iran, knocking the wind out of transportation stocks like airlines Delta (DAL) and Southwest (LUV). The short squeeze is on, as Europeans scramble to make up lost Iran supplies. The last time this happened we went into a recession.

Tying up the week with a nice bow was the September Nonfarm Payroll Report, which took the headline unemployment rate down to 3.7%, the lowest since 1969.

I remember that year well. I was earning a dollar an hour at the May Company snack bar. Kids who dropped out of my high school were sent off to Vietnam and were killed within weeks. Neither the snack bar nor the May Company nor South Vietnam still exists, but I do. I guess I’m too mean to kill.

Average hourly earnings improved by eight cents to $27.24, and are up 2.8% YOY. Although the print was a weak 134,000, the back month upward revisions for July and August were huge.

Leisure and Hospitality lost 17,000 jobs due to the hurricanes, as did Retail, which shed 20,000 jobs.

Professional and Business Services were up 54,000, Health Care was up 26,000, and Manufacturing gained 18,000.

The performance of the Mad Hedge Fund Trader Alert Service is down -1.42% so far in October. Now, it’s all about keeping positions small. I managed to get a nice bond short off before the big collapse. But the real money was made being long the Volatility Index (VIX) which I missed.

Those who took my advice in the Wednesday Strategy Webinar to buy the iPath S&P 500 VIX Short Term Futures ETN (VXX) March 2019 calls for 50 cents make a quickie 500%.

My 2018 year-to-date performance has retreated to 26.97%, and my trailing one-year return stands at 32.11%.

My nine-year return appreciated to 303.44%. The average annualized return stands at 34.30%. I hope you all feel like you’re getting your money’s worth. The goal here is to minimize losses so we can bounce back quickly to a new all-time high once the dust settles.

Yes, I am looking at BUYING the bond market with a bet that ten-year yields won’t rise above 3.35% in the next month.

This coming holiday shorted week will be pretty non-eventful after last week’s fireworks.

Monday, October 8, is Columbus Day. Stocks will be opened but bonds will be mercifully closed.

On Tuesday, October 9 at 6:00 AM, the September NFIB Small Business Optimism Index is announced.

On Wednesday October 10 at 8:30 AM, the September Producer Price Index is published.

Thursday, October 11 at 8:30 we get Weekly Jobless Claims. At the same time, we get the September Consumer Price Index, the most important inflation indicator.

On Friday, October 12, at 10:00 AM, we learn September Consumer Sentiment. The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, it’s fleet week so I’ll be watching the Parade of Ships come in under the Golden Gate Bridge. After that, the Navy’s Blue Angels will be flying overhead using my mountain top home as a key navigation point. I’ll be wishing I was in the air at the stick with them.

Good luck and good trading.

The Market Outlook for the Week Ahead, or Don’t Nominate Me!

Diary, Newsletter, Research

I have a request for all of you readers. Please do not nominate me for justice of the Supreme Court.

I have no doubt that I could handle the legal load. A $17 copy of Litigation for Dummies from Amazon would take care of that.

I just don’t think I could get through the approval process. There isn’t a room on Capitol Hill big enough to house all the people who have issues with my high school background.

In 1968, I ran away from home, hitchhiked across the Sahara Desert, was captured by the Russian Army when they invaded Czechoslovakia, and had my front teeth knocked out by a flying cobblestone during a riot in Paris. I pray what went on in Sweden never sees the light of day.

So, I’m afraid you’ll have to look elsewhere to fill a seat in the highest court in the land. Good luck with that.

The most conspicuous market action of the week took place when several broker upgrades of major technology stocks. Amazon (AMZN) was targeted for $2,525, NVIDIA (NVDA) was valued at $400, and JP Morgan, always late to the game (it’s the second mouse that gets the cheese), predicted Apple (AAPL) would hit a lofty $270.

That would make Steve Jobs’ creation worth an eye-popping $1.3 trillion.

The Mad Hedge Market Timing Index dove down to a two-month low at 46. That was enough to prompt me to jump back into the market with a few cautious longs in Amazon and Microsoft (MSFT). The fourth quarter is now upon us and the chase for performance is on. Big, safe tech stocks could well rally well into 2019.

Facebook (FB) announced a major security breach affecting 50 million accounts and the shares tanked by $5. That prompted some to recommend a name change to “Faceplant.”

The economic data is definitely moving from universally strong to mixed, with auto and home sales falling off a cliff. Those are big chunks of the economy that are missing in action. If you’re looking for another reason to lose sleep, oil prices hit a four-year high, topping $80 in Europe.

The trade wars are taking specific bites out of sections of the economy, helping some and damaging others. Expect to pay a lot more for Christmas, and farmers are going to end up with a handful of rotten soybeans in their stockings.

Barrick Gold (ABX) took over Randgold (GOLD) to create the world’s largest gold company. Such activity usually marks long-term bottoms, which has me looking at call spreads in the barbarous relic once again.

With inflation just over the horizon and commodities in general coming out of a six-year bear market, that may not be such a bad idea. Copper (FCX) saw its biggest up day in two years.

The midterms are mercifully only 29 trading days away, and their removal opens the way for a major rally in stocks. It makes no difference who wins. The mere elimination of the uncertainty is worth at least 10% in stock appreciation over the next year.

At this point, the most likely outcome is a gridlocked Congress, with the Republicans holding only two of California’s 52 House seats. And stock markets absolutely LOVE a gridlocked Congress.

Also helping is that company share buybacks are booming, hitting $189 billion in Q2, up 60% YOY, the most in history. At this rate the stock market will completely disappear in 20 years.

On Wednesday, we got our long-expected 25 basis-point interest rate rise from the Federal Reserve. Three more Fed rate hikes are promised in 2019, after a coming December hike, which will take overnight rates up to 3.00% to 3.25%. Wealth is about to transfer from borrowers to savers in a major way.

The performance of the Mad Hedge Fund Trader Alert Service eked out a 0.81% return in the final days of September. My 2018 year-to-date performance has retreated to 27.82%, and my trailing one-year return stands at 35.84%.

My nine-year return appreciated to 304.29%. The average annualized return stands at 34.40%. I hope you all feel like you’re getting your money’s worth.

This coming week will bring the jobspalooza on the data front.

On Monday, October 1, at 9:45 AM, we learn the August PMI Manufacturing Survey.

On Tuesday, October 2, nothing of note takes place.

On Wednesday October 3 at 8:15 AM, the first of the big three jobs numbers is out with the ADP Employment Report of private sector hiring. At 10:00 AM, the August PMI Services is published.

Thursday, October 4 leads with the Weekly Jobless Claims at 8:30 AM EST, which rose 13,000 last week to 214,000. At 10:00 AM, September Factory Orders is released.

On Friday, October 5, at 8:30 AM, we learn the September Nonfarm Payroll Report. The Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, it’s fire season now, and that can only mean one thing: 1,000 goats have appeared in my front yard.

The country hires them every year to eat the wild grass on the hillside leading up to my house. Five days later there is no grass left, but a mountain of goat poop and a much lesser chance that a wildfire will burn down my house.

Ah, the pleasures of owning a home in California!

Good luck and good trading.

We’re Taking Calls Now

What Will Trigger the Next Bear Market?

Diary, Newsletter, Research

To paraphrase Leo Tolstoy in Anna Karenina, all bull markets are alike; each bear market takes place for its own particular reasons.

Now that the wreckage of the past financial crises is firmly in our rearview mirror, it is time for us to start pondering the causes of the next one. I’ll give you a hint: It will all boil down to excessive debt…again.

Global quantitative easing has been going on for a decade now, keeping interest rates far too low for too long. The unintended consequences will be legion, and the day of atonement may be a lot closer than you think.

The 1991 bear market was prompted by the Savings & Loan Crisis, where too many unsophisticated financial institutions in a newly unregulated world dreadfully mismatched asset and liabilities.

Every time I drive by a former Home Savings and Loan branch, with its unmistakable quilt decorations and accents, I remember those frightful days. Back then, when I looked at buying a home in San Francisco, the seller burst into tears when the price I offered would have generated a negative equity bill due for him.

The 2000 Dotcom crash can easily be explained by the monstrous amounts of debt provided to stock speculators. The 2008 crash was produced by massive, unregulated, and largely unknown lending to the housing sector through complex derivatives that virtually no one understood, especially the buyers.

So, here we are in 2018 nearly a decade out of the last crisis. Potential disasters are lurking everywhere under the surface while blinder constrained investors blithely power ahead. Once they metastasize, they rapidly feed into each other, creating a domino effect. They always do.

Emerging Market Debt

Lacking domestic capital markets with any real depth, companies in emerging economies prefer to borrow in U.S. dollars. When the dollar is weak that’s great because it means liabilities on the balance sheet shrink when brought back into the home currency. When the greenback is strong, the opposite happens. Dollar debt can grow so large that it can wipe out a company’s total equity.

This is already happening in a major way in Turkey, where the lira has plunged 50% in the past year, effectively doubling their debt. And once it starts, a global contagion kicks in as all emerging companies become suspect. This is not a small problem. Emerging market debt has rocketed from 55% to 105% of GDP since 2008.

The Rise of Junk Borrowers

In recent years there has been a massive expansion in borrowing by marginal credits. This is taking place because fixed income investors are willing to accept a large increase in the amount of risk for only a small marginal rise in interest rates.

There is now $1.4 trillion in low grade BBB bonds outstanding, with one-third of this one downgrade away from junk. There has also been a dramatic rise in “covenant lite” issuance, which minimizes the rights of bond holders in the event of default. When the next round of trouble arrives, you can expect this market to shut down completely, as it did in 2008.

Student Loans

These have been the sharpest rising form of borrowing over the past decade, doubling to $1.5 trillion. Some 10% are now in default. This acts as a major drag on the economy as heavily indebted students don’t borrow, buy homes or cars, or really participate in the economy in any way, banned by lowly FICO scores. This is why millennials in general have been slow to enter the housing market for the first time.

Shadow Banking

Would you like to know today’s equivalent of subprime the lending that took the financial system down in 2008? That would be shadow banking, or off the books, unreported lending by hedge funds, private equity funds, and mortgage companies. Again, this is all in pursuit of high interest rates in a low interest rate world.

Yes, liars’ loans are back, just not to the extent we saw 10 years ago…yet. I’m waiting for my cleaning lady to get offered a great refi package again, just as she was in the run-up to the last crisis. How many of these loans are out there? No one has any idea, especially the Fed. As a result, nearly 50% of all mortgage lending is now from unregulated nonbank sources.

The Outlier

Remember when Sony (SNE) was almost put out of business by a hack attack from North Korea? What if they had done this to JP Morgan (JPM)? That would have created a chain reaction of defaults throughout the financial system that would have been impossible to stop. When this happened in 2008, it took the Fed three months to reopen markets such as commercial paper. If big bankers need a reason to lie awake at night, this is it.

I’m not saying that markets can’t go higher before they go lower. In fact, I dove back into Amazon (AMZN) only this morning.

However, as an Australian farmer told me on my last trip down under, “Be careful when you cross the field, mate. Deadly snakes abound.” Add up all the above and it will turn into a giant headache for investors everywhere.

Say Goodbye to That Gas Guzzler

Diary, Newsletter, Research

Do you want to get in on the ground floor of another major new trend?

Well, here’s another new trend. Get this one right and your retirement funds should multiple like rabbits.

There have been some pretty amazing announcements by governments lately.

The United Kingdom has banned the use of gasoline-powered engines by 2040.

China is considering doing the same by 2035.

And now the State of California is targeting 100% alternative energy use by 2040. That’s only 22 years away.

The only unknown is what such a planned obsolescence program will look like, and how soon it will be implemented.

With 20% of the U.S. car market, don’t take the Golden State’s ruminations lightly.

California was the first state to require safety glass, seat belts, and catalytic converters, and the other 49 eventually had to follow. Some 20% of the market is just too big to ignore.

The death of the car is now upon us, and it is still early, very early.

This is a very big deal.

Earlier in my lifetime, car production directly and indirectly accounted for about one-third of the U.S. economy.

Much of the growth during our earlier Golden Ages, in the 1920s and the 1950s, were driven by a never-ending cycle of upgrades of our favorite form of transportation, and the countless ancillary products and services needed to support them. Tail fins, radios, and tons of chrome assured you always had to have the next new model.

Today, 253 million automobiles and trucks prowl America’s roads, about half the world’s total, with an average age of 11.4 years.

The demise of this crucial industry started during the 2008 crash, when (GM) and Chrysler (owned by Fiat) went bankrupt. Only more conservatively run, family owned Ford (F) survived on its own.

The government stepped in with massive bailouts. That was the cheaper option for the Feds, as the cost of benefits for an entire unemployed industry was far greater than the cost of the companies absorbed.

If it hadn’t done so, the auto industry would have decamped for a new base near the technology hubs in California, and today would be a decade closer to their futures than they are now.

And remember, the government made billions of dollars of profits from its brief foray into the auto industry as an investor. It was one of the best returns on investment in history in major size.

I’ll breakout the major directions the industry is now taking. Hint: It doesn’t have much to do with traditional metal bashing.

The Car as a Peripheral

The important thing about a car today is not the car, but the various doodads, doohickeys, gizmos, and gadgets they stick in them.

In this category you can include 24/7 4G wireless, full Internet access, mapping software, artificial intelligence, and learning programs.

(GM) is now installing more than 100 microprocessors in its vehicles to control and monitor various functions.

Good luck doing your own tune-ups.

The Car as a Service

When you think about it, automobile ownership is a wildly inefficient use of capital. It is usually a family’s second largest expense, after their home, running $30,000 to $80,000.

It then sits unused in garages or public parking for 96% to 98% of the day. Insurance, maintenance, and liability costs can be off the charts.

What if your car was used 24/7, as is machinery in well-run industrial plants? Your cost drops by 96% to 98% to the point where it is almost free.

The sharing economy is the way to accomplish this.

We are already seeing several start-ups attempting to achieve this in major U.S. cities, such as Zipcar, Car2Go, Getaround, RelayRides, and City CarShare.

What happens to conventional car companies when consumers shift from ownership to sharing? Demand plunges by 96% to 98%.

Perhaps that is why auto shares (GM), (F) have performed so abysmally this year relative to technology and the main market.

Self-Driving Technology

This is the hottest development area in the industry, with Apple (AAPL), Alphabet (GOOG), and the big European carmakers committing thousands of engineers.

Let’s say your car is now comfortably driving you to work, allowing you to read the morning papers and catch up on your email. Or maybe you’re lazy and would rather watch the season finale of Game of Thrones.

What else is possible?

How about if, instead of parking, your car drops you off, saving that exorbitant fee.

Then it joins Uber, picking up local riders and paying for its own way. It then dutifully returns to pick you up at your office when it’s time to go home.

Since the crash rate for computers is vastly lower than for humans, car insurance rates will collapse, gutting that industry.

Ditto for life insurance, as 35,000 people a year will no longer die in car crashes.

Half of all emergency room visits are the result of car accidents, so that business disappears too, dramatically shrinking health care costs in the process.

I have been letting my new Tesla S-1 drive me since last year, and I can assure you that the car can drive better than I can, especially at night.

What better way to get home after I have downed a bottle of Caymus cabernet at a city restaurant?

Driverless electric cars are totally silent, increasing the value of land near freeways.

Nor do they require much maintenance, as they have so few moving parts. Exit the car repair industry.

I could go on and on, but you get the general idea.

For more on the topic, please read “Test Driving Tesla's Self Driving Technology” by clicking here.

Virtual Reality

After 30 years of inadequate infrastructure budgets, trying to get into any America city center is a complete nightmare.

Only last week, a cattle truck turned over on the Golden Gate Bridge, bringing traffic to a halt. Fortunately, a cowboy traveling to a nearby rodeo was able to unload his horse and lasso the errant critters (no, it wasn’t me!).

Even if you get into the city, you will be greeted by a $40 tab for a parking space. Hopefully, no one will smash your windows and steal your laptop (happened to me last year).

Why bother?

Thirty years ago, teleconferencing services pitched themselves as replacing the airplane.

Today, we are taking the next step, using Skype and GoToMeeting to conduct even local meetings, as we do at the Mad Hedge Fund Trader.

Virtual reality is clearly the next step, providing a 3D, 360 degree experience that makes you feel like you and your products are actually there.

Better to leave that car in the garage where it can get a top up on its charge. BART is cheaper anyway, when it runs.

New Materials

We are probably five years away from adopting the carbon fiber technology now used in the aircraft industry for mass-market cars. Carbon has one-tenth the weight of steel, with five times the strength.

The next great leap forward for electric cars won’t be through better batteries. It will come through a 70% reduction of the mass of a car, tripling ranges with existing technology.

San Francisco Becomes the Car Capital of the World

This will definitely NOT happen, as sky-high rents assure that the city by the bay will never attract large, labor-intensive industries.

Instead, the industry will develop much as the one for smartphones. The high value-added aspects, design and programming, will stay in California.

The assembly of the chassis, the body, and the rest of the vehicle will be best done in low-cost, tax-free states with a lot of land, such as Texas and Nevada.

What will happen to Detroit? It has already become a favored destination of new venture capital financial start-ups - the cost of offices and housing is virtually free.