Research Archives - Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Pouring Gasoline on the Fire

Pour gasoline on a fire and you get a reaction. It's a simple matter of physics. That is the natural result of hitting the economy with tax cuts, fiscal stimulus, and low interest rates all at once. But at what price?

Of course, the headline number of the week was the first read on Q2 GDP growth, which came in at a strong 4.1%, the hottest number in four years. What was one of the biggest contributors? Soybean sales, as buyers rushed to beat the imposition of retaliatory Chinese tariffs. Consumers also hit the stores hard, spending their rising by a robust 4%.

The big question now is how much of this is sustainable? The answer is probably not much, which leaves investors with the queasy feeling that by coming in now they risk buying the absolute peak in the stock market. By temporarily pulling forward so much growth you may be creating a growth hole in Q3. So better mark your calendars now.

Q2 almost always delivers a string rebound from a usually weak Q1. The tax cuts delivered a one-time-only boost. But the investment spending that the administration had hoped for hasn't materialized, with a disproportionate portion of corporate profits going into share buybacks instead. Inventories are rising sharply, which is always bad.

We'll know for sure in a year when a recession will most likely begin. And remember, this extra growth is at the expense of an increase in the national debt by 10%, from $21 trillion to $23 trillion. And that is definitely NOT sustainable, but everyone in the world seems to have forgotten that, except me!

Interestingly, the report placed the current inflation rate dead on the Fed's target at 2.0%. That is a guarantee that any continued economic strength will be offset by rising interest rates.

The Facebook (FB) earnings highlighted the poor risk/reward of buying tech stocks at these elevated levels. Facebook shares plunged by 20% on their earnings announcement, creating the largest single day loss of market capitalization in history, some $120 billion. It was obviously a "kitchen sink" quarter.

If you get an earnings beat, as you did with Microsoft (MSFT) and Amazon (AMZN), you get a 2-, 3-, 4% pop in the stock price. If you disappoint, as did Facebook, Netflix (NFLX), and Twitter (TWTR), they crater by 10% to 20%. It is all typical end-of-cycle price action.

On the other hand, Amazon knocked the cover off the ball with its earnings, which came in at double analyst forecasts. The company is about to reach my end 2018 target of $2,000 a share. That is double the February lows.

Amazon Web Services delivered a stunning $6.1 billion quarterly revenue, up 49% YOY. Advertising is now becoming a major factor, as the company challenges Google (GOOG) and Facebook. For more on the longer-term prospects of Jeff Bezos's incredible company please see the special report that I published yesterday.

Bonds (TLT) continued their moribund price action, barely eking out a gain in yields to 2.97%. Either they are already discounting the next recession, are flooded with cash from a global QE hangover, or are getting a nice flight to safety bid brought on by multiple trade wars. Most likely it is all three.

Better to opine from the sidelines than to attempt to trade in the least volatile bond market conditions in 30 years.

As for gold, it continues to be a trader's worst nightmare as it plums new 2018 lows. Clearly, globally rising interest rates are not of what bull markets in gold are made. It doesn't help that Venezuela continues to hammer the market by liquidating its entire gold reserves on its way to national bankruptcy. Whenever distress liquidations take place, they are bad for everyone, not just the seller. Competition from crypto currencies for the speculative dollar doesn't help either.

As I have been sitting on top of an Alp contemplating the future and out of the markets, my 2018 year-to-date performance remains unchanged at an eye-popping 24.82% and my 8 1/2- year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.

It will be a big week on the data front, with an FOMC Meeting and an onslaught of jobs data.

On Monday, July 30 at 10:00 AM we obtain the June Pending Home Sales.

On Tuesday, July 31 at 9:00 AM EST, then we get the May S&P CoreLogic Case-Shiller National Home Price Index.

On Wednesday, August 1 at 2:00 PM, the Fed announces its decision on interest rates. Given the hot 4.1% Q2 GDP report, another 25-basis point rate rise is entirely possible.

Thursday, August 2, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 9,000 last week to 219,000.

On Friday, August 3 at 9:15 AM EST we get the July Nonfarm Payroll Report. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, the highlight of the week was being handed the keys to the City of Zermatt by the mayor for visiting for the 50^th year. Yes, I camped out here at the Youth Hostel in 1968. Also, with the honor came a Swiss Army knife with my name on it and a beautiful 10-pound coffee table book outlining the route I usually take to the Matterhorn summit.

I am now contemplating my return to the U.S., which is always hellish. It will require two trains (to Visp and Geneva), two flights (to Amsterdam and San Francisco), the last one of which lasts a punishing 10 1/2 hours. Then there is the eight hours of jet lag to deal with when I get home. So, I'll be getting up at 2:00 AM for a while. During those days I will be posting some of my favorite pieces from the past.

Still, to see the 14,692-foot Matterhorn from where I am sitting in the brilliant sunshine in all its glory, listening to an Alpine river rushing outside my window, and watching the swaying pines, it is all worth it.

Good luck and good trading.

Stocks to Buy on the Outbreak of Trade Peace

Diary, Newsletter, Research

So, how will the trade war end? It could be the crucial trading call of 2018.

"That which can't continue, won't," I paraphrase the noted economist Herbert Stein. I think that logic neatly applies to our global trade wars today.

In 1970, some 25% of world GDP was accounted for by international trade. Today it is 52%. Germany has been the powerhouse, with trade growing from 25% to 80%, largely through exploding auto exports. Trade growth in the U.K. has been pitiful as the old colonial ties loosened, improving only from 40% of GDP to 52%.

In the U.S., trade has grown from 10% to 25% of GDP during this time. It is far lower than the rest of the G7 nations because of the massive size of its domestic economy.

Still, placing restraints on 25% of U.S. GDP, or about $5 trillion, is quite a big hit. Think an imminent recession, quite possible a severe one. The $13 billion in subsidies offered the agriculture sector is but a drop in the bucket. It would be like killing off the goose that laid the golden egg.

Trump has a weak hand, which is growing weaker by the day. It is just a matter of time before he folds. Not to do so would entirely wipe out the benefits of the December tax package, yet still leave the U.S. government with $2 trillion in new debt. It is a perfect money destruction machine.

My bet is that Trump will claim victory at some point soon, regardless of what transpires on the negotiation front. Take the trade war away, and stocks will immediately jump 10%. That's what the stock market thinks, with NASDAQ (QQQ) at an all-time high, and the S&P 500 (SPY) just short of one. Stocks are trading over the medium term as if Donald Trump doesn't exist.

Which stocks should you buy when trade peace breaks out? Buy those that have suffered the most. The ags have to be at the top of your list, such as Soybeans (SOYB), Corn (CORN), and Wheat (WEAT), the worst hit. The old industrials such as Caterpillar (CAT), John Deere (DE), and Boeing (BA) also have to be a priority.

In the technology area you have to rotate out of the FANGs and into chip stocks, the worst performers of the sector this year. Perhaps this is what the market is shouting at us with the horrific one-day decline in Facebook (FB) yesterday. China relies on the U.S. for 80% of its chips and all of its high-end graphics cards.

China's canceling of the QUALCOM (QCOM) takeover of its NXP Semiconductors shows to what extent it is willing to retaliate in the tech area. Chip stocks to buy for the rebound should include Micron Technology (MU), Cirrus Logic (CRUS), and Lam Research (LRCX).

Even if the trade war ends tomorrow, business conditions will never be the same. Confidence in American reliability will never completely recover. Sure, Trump will be gone in 2 1/2 years. But what if he is replaced by someone worse? Trading with the United States now incurs a level of political risk not seen since the War of 1812, when Washington burned.

But no trade war is certainly better than a trade war if you are a trader or investor.

Telling the Captain How to Steer the Ship

So Where Did Those Amazon Earnings Really Come from and Where Are They Going?

Diary, Newsletter, Research

Amazon earnings come out after the close today so it's a good time to bone up on the history of the online retail giant. Forewarned is to be forearmed.

Is to time to cash in on the huge profits you have already attained or is it time to load the boat some more?

Jeff Bezos, born Jeff Jorgensen, is the son of an itinerant alcoholic circus clown and a low-level secretary in Albuquerque, New Mexico. When he was three, his father abandoned the family. His mother remarried a Cuban refugee, Miguel Bezos, who eventually became a chemical engineer for Exxon.

I have known Jeff Bezos for so long he had hair when we first met in the 1980s. Not much though, even in those early days. He was a quantitative researcher in the bond department at Morgan Stanley, and I was the head of international trading.

Bezos was then recruited by the cutting-edge quantitative hedge fund, D.E. Shaw, which was making fortunes at the time, but nobody knew how. When I heard in 1994 that he left his certain success there to start an online bookstore, I thought he'd suffered a nervous breakdown, common in our industry.

Bezos incorporated his company in Washington state later that year, initially calling it "Cadabra" and then "Relentess.com." He finally chose "Amazon" as the first interesting word that appeared in the dictionary, suggesting a river of endless supply. When I learned that Bezos would call his start-up "Amazon," I thought he'd gone completely nuts.

Bezos funded his start-up with a $300,000 investment from his parents who he promised stood a 50% chance of losing their entire investment. But then his parents had already spent a lifetime running Bezos through a series of programs for gifted children, so they had the necessary confidence.

It was a classic garage start-up with three employees based in scenic Bellevue, Washington. The hours were long with all of the initial effort going into programming the initial site. To save money, Bezos bought second-hand pine doors, which stood in for desks.

Bezos initially considered 20 different industries to disrupt, including CDs and computer software. He quickly concluded that books were the ripest for disruption, as they were cheap, globally traded, and offered millions of titles.

When Amazon.com was finally launched in 1995, the day was spent fixing software bugs on the site, and the night wrapping and shipping the 50 or so orders a day. Growth was hyperbolic from the get go, with sales reaching $20,000 a week by the end of the second month.

An early problem was obtaining supplies of books when wholesalers refused to offer him credit or deliver books on time. Eventually he would ask suppliers to keep a copy of every book in existence at their own expense, which could ship within 24 hours.

Venture capital rounds followed, eventually raising $200 million. Early participants all became billionaires, gaining returns of 10,000-fold or more, including his trusting parents.

Bezos put the money to work, launching into a hiring binge of epic proportions. "Send us your freaks," Bezos told the recruiting agencies, looking for the tattooed and the heavily pierced who were willing to work in shipping late at night for low wages. Keeping costs rock bottom was always an essential part of the Amazon formula.

Bezos used his new capital to raid Wal-Mart (WMT) for its senior distribution staff, for which it was later sued.

Amazon rode on the coattails of the Dotcom Boom to go public on NASDAQ on May 15, 1997 at $18 a share. The shares quickly rocketed to an astonishing $105, and in 1999 Jeff Bezos became Time magazine's "Man of the Year."

Unfortunately, the company committed many of the mistakes common to inexperienced managements with too much cash on their hands. It blew $200 million on acquisitions that, for the most part, failed. Those include such losers as Pets.com and Drugstore.com. But Bezos's philosophy has always been to try everything and fail them quickly, thus enabling Amazon to evolve 100 times faster than any other.

Amazon went into the Dotcom crash with tons of money on its hands, thus enabling it to survive the long funding drought that followed. Thousands of other competitors failed. Amazon shares plunged to $5.

But the company kept on making money. Sales soared by 50% a month, eventually topping $1 billion by 2001. The media noticed Wall Street took note. The company moved from the garage to a warehouse to a decrepit office building in downtown Seattle.

Amazon moved beyond books to compact disc sales in 1999. Electronics and toys followed. At its New York toy announcement Bezos realized that the company actually had no toys on hand. So, he ordered an employee to max out his credit card cleaning out the local Hammacher Schlemmer just to obtain some convincing props.

A pattern emerged. As Bezos entered a new industry he originally offered to run the online commerce for the leading firm. This happened with Circuit City, Borders, and Toys "R" Us. The firms then offered to take over Amazon, but Bezos wasn't selling.

In the end Amazon came to dominate every field it entered. Please note that all three of the abovementioned firms no longer exist, thanks to extreme price competition from Amazon.

Amazon had a great subsidy in the early years as it did not charge state sales tax. As of 2011, it only charged sales tax in five states. That game is now over, with Amazon now collecting sales taxes in all 45 states that have them.

Amazon Web Services originally started out to manage the firm's own website. It has since grown into a major profit center, with $17.4 billion in net revenues in 2017. Full disclosure: Mad Hedge Fund Trader is a customer.

Amazon entered the hardware business with the launch of its e-reader Kindle in 2007, which sold $5 billion worth in its first year. The Amazon Echo smart speaker followed in 2015 and boasts 71.9% market share. This is despite news stories that it records family conversations and randomly laughs.

Amazon Studios started in 2010, run by a former Disney executive, pumping out a series of high-grade film productions. In 2017 it became the first streaming studio to win an Oscar with Manchester by the Sea with Jeff Bezos visibly in the audience at the Hollywood awards ceremony.

Its acquisitions policy also became much more astute, picking up audio book company Audible.com, shoe seller Zappos, Whole Foods, and most recently PillPack. Since its inception, Amazon has purchased more than 86 outside companies.

Sometimes, Amazon's acquisition tactics are so predatory they would make John D. Rockefeller blush. It decided to get into the discount diaper business in 2010, and offered to buy Diapers.com, which was doing business under the name of "Quidsi." The company refused, so Amazon began offering its own diapers for sale 30% cheaper for a loss. Diapers.com was driven to the wall and caved, selling out for $545 million. Diaper prices then popped back up to their original level.

Welcome to online commerce.

At the end of 2018, Amazon boasted some 306,000 employees worldwide. In fact, it has been the largest single job creator in the United States for the past decade. Also, this year it disclosed the number of Amazon Prime members at 100 million, then raised the price from $80 to $100, thus creating an instant $2 billion in profit.

The company's ability to instantly create profit like this is breathtaking. And this will make you cry. In 2016, Amazon made $2.4 billion from Amazon gift cards left unredeemed!

In 2017, Amazon net revenues totaled an unbelievable $177.87 billion. It is currently capturing about 50% of all new online sales.

So, what's on the menu for Amazon? There is a lot of new ground to pioneer.

1) Health Care is the big one, accounting for $3 trillion, or 17% of U.S. GDP, but where Amazon has just scratched the surface. Its recent $1 billion purchase of PillPack signals a new focus on the area. Who knows? The hyper-competition Bezos always brings to a new market would solve the American health care crisis, which is largely cost driven. Bezos can oust middle men like no one else.

2) Food is the great untouched market for online commerce, which accounts for 20% of total U.S. retail spending, but sees only 2% take place online. Essentially this is a distribution problem, and you have to accomplish this within the prevailing subterranean 1% profit margins in the industry. Books don't need to be frozen or shipped fresh. Wal-Mart (WMT) will be target No. 1, which currently gets 56% of its sales from groceries. Amazon took a leap up the learnings curve with its $13.7 billion purchase of Whole Foods (WFC) in 2017. What will follow will be interesting.

3) Banking is another ripe area for "Amazonification," where excessive fees are rampant. It would be easy for the company to accelerate the process through buying a major bank that already had licenses in all 50 states. Amazon is already working the credit card angle.

4) Overnight Delivery is a natural, as Amazon is already the largest shipper in the U.S., sending out more than 1 million packages a day. The company has a nascent effort here, already acquiring several aircraft to cover its most heavily trafficked routes. Expect FedEx (FDX), UPS (UPS), DHL, and the United States Post Office to get severely disrupted.

5) Amazon is about to surpass Wal-Mart this year as the largest clothing retailer. The company has already launched 76 private labels, with half of them in the fashion area, such as Clifton Heritage (color and printed shirts), Buttoned Down (100% cotton shirts) and Goodthreads (casual shirts) as well as subscription services for all of the above.

6) Furniture is currently the fastest growing category at Amazon. Customers can use an Amazon tool to design virtual rooms to see where new items and colors will fit best.

7) Event Ticketing firms like StubHub and Ticketmaster are among the most despised companies in the U.S., so they are great disruption candidates. Amazon has already started in the U.K., and a takeover of one of the above would ease its entry into the U.S.

If only SOME of these new business ventures succeed, they have the potential to DOUBLE Amazon's shares from current levels, taking its market capitalization up to $1.8 trillion. Amazon will easily win the race to become the first $1 trillion company. Perhaps this explains why institutional investors continue to pour into the shares, despite being up a torrid 83% from the February lows.

Whatever happened to Bezos's real father, Ted Jorgensen? He was discovered by an enterprising journalist in 2012 running a bicycle shop in Glendale, Arizona. He had long ago sobered up and remarried. He had no idea who Jeff Bezos was. Ted Jorgensen died in 2015. Bezos never took the time to meet him. Too busy running Amazon, I guess. Worth $160 billion, Bezos is now the richest man in the world.

From a Garage to This

The Market Outlook for the Week Ahead, or It's Suddenly Become Crystal Clear

Diary, Newsletter, Research

Maybe it's the calming influence of the sound of North Atlantic waves crashing against the hull outside my cabin door for a week. Maybe it was the absence of an Internet connection for seven days, which unplugged me from the 24/7 onslaught of confusing noise.

But suddenly, the outlook for financial markets for the rest of 2018 has suddenly become crystal clear.

I'll give you the one-liner: Nothing has changed.

Some nine years and four months into this bull market, and the sole consideration in share pricing is earnings. Everything else is a waste of time. That includes the Greece crisis, the European debt crisis that drove MF Global under, two presidential elections, the recent trade wars, even the daily disasters coming out of the White House.

Keep your eye focused on earnings and everything else will fade away into irrelevance. It that's simple.

As I predicted, the markets are stair-stepping their way northward ahead of each round of quarterly earnings reports.

And now that we know what to look at, the future looks pretty good.

The earnings story, led by big tech, is alive and well. After a torrid Q1, which saw corporate earnings grow by a heart palpitating 26%, we are looking for a robust 20% for Q2, 23% in Q3, and another 20% in Q4.

The sushi hits the fan when Q1 2019 earnings grow by a mere 5% YOY as the major elixir of tax cuts wear off, leaving us all with giant hangovers.

Amazon (AMZN), Netflix (NFLX), and Microsoft (MSFT), all Mad Hedge recommendations over the past year, account for 70% of the total market gains this year.

Look at the table below and you see there has only been ONE trade this year and that has been to buy technology stocks. Everything else, such as oil, the S&P 500 (SPY), the U.S. dollar (UUP) has been an also-ran, or an absolute disaster. And we nailed it. Some 80% of our Trade Alerts this year have been to buy technology stocks.

The gasoline poured on the fire by the huge corporate tax cuts are only now being felt by the real economy. Q2 GDP growth could run as hot as 4%. But there is a sneaking suspicion in the hedge fund industry that these represent peak earnings for the entire economic cycle.

Corporate stock buybacks hit a new all-time high in Q2, as companies repatriate cash hoards from abroad at extremely preferential tax rates to buy back their own shares.

Trade wars are certainly a worry. But retaliation is directed only at Trump supporting red states, which accounts for only a tiny share of U.S. corporate profits. Technology stocks, which account for half of all American profits, have largely been immune, except for the chip sector (MU), (LRCX), which has its own cyclical problems.

Yes, we know this will all end in tears. The yield curve will invert in a year, taking short-term interest rates higher than long-term ones, triggering a recession and a bear market. But the final year of a bull market is often the most profitable as prices go ballistic. You would be a fool to stay scared out of stocks by headline risk and an uncertain Twitter feed.

Yes, early leading indicators of a coming recession are popping up everywhere now. A stunning 12.3% drop in June Housing Starts has to be at the top of anyone's worry list, as rising home mortgage rates and disappearing tax deductions take their pound of flesh. It was the worst report in nine months.

The trade wars promise to leave the Detroit auto industry in substantially reduced form, or at least, the stock market believes so. And a 10-year U.S. treasury bond yield that has been absolutely nailed in a 2.80% to 2.90% range for three months is another classic marketing topping indicator.

I'll let you know when it is time to pull up stakes and head for higher ground. Just keep reading the Diary of a Mad Hedge Fund Trader.

As I have been at sea and out of the markets, my 2018 year-to-date performance remains unchanged at an eye-popping 24.82%, and my 8 1/2-year return sits at 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.

This coming week will be a very boring week on the data front.

On Monday, July 23, there will be nothing of note to report.

On Tuesday, July 24 at 8:30 AM EST, the May Consumer Price Index is released, the most important indicator of inflation.

On Wednesday, July 25 at 7:00 AM, the MBA Mortgage Applications come out. At 2:00 PM EST the Fed is expected to raise interest rates by 25 basis points. At 2:30 Fed governor Jerome Powell holds a press conference.

Thursday, July 26, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 13,000 last week to 222,000. Also announced are May Retail Sales.

On Friday, July 27 at 9:15 AM EST we get May Industrial Production. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, I am going to attempt to think of more great thoughts this afternoon while hiking up to the Hornli Hut at 11,000 feet on the edge of the Matterhorn, a climb of about 5,000 feet out the front door of my chalet. I always seem to think of my best ideas while hiking uphill. The liter of Cardinal beer and a full plate of bratwurst with rosti potatoes will make it all worth it.

Good luck and good trading.

America's Native Indian Economy

Diary, Newsletter, Research

When I was remodeling my 160-year-old London house, the chimney was in desperate need of attention. After the bricklayer crawled up the fireplace, he found a yellowed and somewhat singed envelope addressed to Santa Claus.

Thinking it was placed there by my kids, he handed it over to me. In it was a letter penned in a childlike scrawl, written with a quill and ink, dated Christmas, 1910, asking for a Red Indian suit.

Europeans have long had a fascination with our Native Americans. So, in preparation for my upcoming European strategy luncheon tour, I thought I would get myself up to date about our earliest North American residents.

Business is booming these days on Indian reservations, or it isn't, depending on where they live.Of the country's 565 reservations, some 239 have moved into the casino business and the cash flow has followed.

In 2010, Indian gaming reaped some $26.7 billion in revenues, or some $9,275 per indigenous native. That is a stunning 44% of America's total casino revenues.

Some, like the Pequot tribe's massive Foxwoods operation just two hours from New York City, now the world's largest casino, once had money raining down upon it.

But the casino grew so large that it entirely occupied the diminutive Connecticut reservation allocated to it by an obscure 17^th century treaty.

During the salad days, the profits were so enormous that an annual $250,000 stipend was paid to each officially registered tribal member.A poker boom helped.

No surprise that the tribe grew from 167 to 665 members during the past 30 years.Today, the operation is burdened with $2.5 billion in debt, thanks to some bad investments and an ill-timed expansion.

Casinos in more rural locations in the far west, distant from population centers, have fared less well.Those that contracted out for professional management from Las Vegas and Atlantic City firms, such as Harrah's, MGM and Caesars, earn a modest living.

But the reservations attempting local management on their own fall victim to inefficiencies, incompetence, corruption, nepotism, over hiring of locals and outright theft.

Believe it or not, it is possible to lose money in the casino business, and some have had to shut down.

Overbuilding is another problem. In northern New Mexico you can find several casinos within five miles of each other competing for the same customers. Most of their clients (read losers) are in fact local tribal members, the same individuals these houses are intended to help.

The 326 tribes that avoided the casino industry do so at the cost of a big hit to their standard of living.

That explains why Native American median household income reaches only $35,062, compared to $50,046 for the U.S. as a whole. Many, such as the numerous Hopi, shun it because of their religion.

Without gambling there are few economic opportunities on the reservations, which is why they were given the land in the first place.

The parched conditions of the west limit farming. Unemployment runs as high as 80% on some reservations, such as the White Mountain Apaches.

As a result, a high proportion of the country's 2.9 million Native Americans are wards of the federal government, living on food stamps and other government handouts.

That's not how it was supposed to be. The first modern reservation was set up for the Navajo tribe in 1851 at a baking hellhole on the Pecos River, with the intention of enforcing a primitive form of apartheid to ensure their survival.The legendary scout Kit Carson was hired to herd the hapless Indians to their new home.

He did it by burning all the crops in their homelands and cutting down every tree.Because they surrendered early rather than fight, today they are the most populous tribe, with 160,000, owning the largest reservation, at 24,000 square miles, mostly in Arizona.

Those who signed treaties early survived, which gave them status as an independent nation but ceded all matters regarding defense to the federal government.In fact the Iroquois, Sioux, and the Chippewa separately declared war on Germany during WWII.

Some even issued their own passports to attend the last Olympics. Those who didn't had to settle for much smaller reservations, or got wiped out.

In 1975, Congress passed the Indian Self-Determination and Education Assistance Act, which devolved power from the government to the tribes.

Florida's Seminole tribe won the right in court to open a casino in 1981, which was confirmed by the Supreme Court in 1987. After that, it was off to the races, with Indian bingo parlors sprouting across the country.

During the 19^th century Indian wars when hundreds of thousands died, the practice was to attack a wagon train, kill all the men, marry the women and adopt the children.

As a result, I am descended from three different tribes, the Delaware, Sioux, and the Cherokee, as are about a quarter of native Californians my age. So I tried to cash in on government largess by applying for tribal scholarships to go to college.

It was to no avail. Only those who can trace their lineage to a 1941 Bureau of Indian Affairs census and are one-eighth Native American can qualify.When whites married Indians 150 years ago, the common practice was to baptize them and give them western names, obliterating their true heritage.

They were also pretty casual with marriage records in the Wild West. Jumping over a broom doesn't exactly make it into the county records. But we still have many of the wedding photos, and it's clear who they are.

I never did find out if that little boy got his Red Indian suit for Christmas, but I hope he did.

So, Should I Double Down?

July 5, 2018 - Quote of the Day

Diary, Quote of the Day, Research

"It is difficult to get a man to understand something when his salary depends upon his not understanding it," said the Pulitzer Price winning author, Upton Sinclair."

The Market Outlook for the Week Ahead, or The Future is Happening Fast

Diary, Newsletter, Research

I feel like I'm living life in fast forward these days.

First we got a slap across the face with a wet mackerel on Monday with a 328 plunge in the Dow Average on yet another trade war escalation.

Harley Davidson (HOG) said it was moving a factory out of the country to bypass new European duties imposed in response to ours. If Harley is doing this you can bet there are 10,000 other companies thinking about it.

And even though robust economic growth should assure us that we remain in a new bear market for bonds, traders think otherwise. A 10-year Treasury bond (TLT) yield at 2.81% says that we're already in the next recession, we just don't know it yet.

As always happens with the ebb and flow of the trade war, technology got hammered. My favorite early retirement vehicle, the ProShares Ultra Technology 2X ETF (ROM), plunged some 11.19% to an even $100. Chip stocks such as Micron Technology (MU) and Lam Research (LRCX) get particularly hurt as China buys 80% of their processors from the U.S.

In the meantime, Tesla (TSLA) continues its phoenixlike rise from the ashes yet again, burning the shorts for the umpteenth time. The shares are now taking another run at a new all-time high. You would think people would learn but they don't. Einstein's definition of insanity is repeating the same thing over and over again and expecting a different result.

While bearish analysts predicted the imminent demise of the company, I saw a steady stream of trucks delivering new Tesla 3s from the Fremont factory while driving back from Los Angeles last weekend. Nothing beats on-the-ground research.

I'm sorry, but there is definite disconnect from reality with this company. The most hated company in America has produced the fifth best performing stock in over the past eight years, up more than 2,000%. I guess that's what happens when you disrupt big oil, Detroit, the U.S. dealer network, and the entire advertising industry all at the same time.

Interestingly, we caught three of the five best performers early on, including Tesla, NVIDIA (NVDA), and Netflix (NFLX).

Emerging markets (EEM) continue their death spiral, pummeled by the twin threats of trade wars and a soaring dollar (UUP). Most big emerging companies have their debt in dollars.

Sometimes you have to forget what you know to make money, and that has certainly been the case for me with emerging countries, where I spent a large part of my life.

The future is happening fast. Amazon (AMZN) single-handedly demolished the drug sector when it announced its takeover of online pharmacy company PillPack. The traditional brick-and-mortar retail pharmacy sector lost $9 billion in market capitalization just on the announcement. Walgreens (WBA) alone dropped a gut churning 10%.

If anyone can slash America's bloated health care bill it is Jeff Bezos. Just ask any former bookseller or toy maker.

And for a final middle finger salute to investors, the president said he wants to withdraw from the World Trade Organization, which the U.S. itself created after WWII. That means the United Nations is next on the chopping block.

America is rapidly becoming rogue nation No. 1, the next failed state. And failed states don't have great stock markets. Just check out the Somalia Stock Exchange.

They net of all of this is that the rest of the global economy is rolling over like the Bismarck, while the U.S. remains a sole beacon of strength. That's not good when half of S&P 500 earnings come from abroad.

However, that strength is based on a temporary one-time-only stimulus from massive deficit spending and corporate tax cuts that runs out of juice next year.

So keep tap dancing on the edge of the Grand Canyon. We'll miss you when you're gone. And before you ask, the best hedge in this kind of market is cash, which has huge option value that almost no one recognizes.

Despite all the chaos, uncertainty, and massive headline risk, I managed to tiptoe between the raindrops, keeping the Mad Hedge Fund Trader Alert Service performance just short of a new all-time high.

I closed out the month of June at a healthy 4.45%, my 2018 year-to-date performance rose to 24.82% and my 8 1/2-year return catapulted to 301.29%. The Averaged Annualized Return stands at 35.10%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 38.69%.

This coming holiday shortened week will be all about the jobs, jobs, jobs. Also, the Fed will raise interest rates by 25 basis points on Wednesday to an overnight rate of 2.00%.

On Monday, July 2, at 9:45 AM, the May PMI Manufacturing Index is out.

On Tuesday, July 3, at 10:00 AM, the May Factory Orders are published.

On Wednesday, July 4, U.S. markets are closed for Independence Day. I will be watching the fireworks display over New York's Hudson River from the top of a Midtown Manhattan skyscraper.

Thursday, July 5, sees a huge bunching up of data thanks to the Fourth of July. It leads with the ADP Employment Report for private sector jobs at 8:15 AM EST. The Weekly Jobless Claims follow at 8:30 AM EST, which saw a rise of 9,000 last week to 227,000. Also announced is the all-important 25 basis point interest rate rise from the Federal Reserve and the FOMC Minutes at 2:00 PM, a reading of what was discussed at the last Fed meeting.

On Friday, July 6 at 8:30 AM EST, we get the June Nonfarm Payroll Report. Then the Baker Hughes Rig Count is announced at 1:00 PM EST. I will be sipping a glass of champagne as I board the Queen Mary 2 at the Brooklyn Cruise Terminal. I look forward to all those who signed up for my Seminar at Sea.

As for me, I will be hurriedly packing for the 2018 Mad Hedge European Tour.

Unfortunately, traveling in the grand style of the 19^th century Belle Epoque involves bringing 200 pounds of luggage.

Now where are those darn black dress socks? And why am I missing a stud for my formal shirt?

Good Luck and Good Trading.

Time to Get Off the Merry-Go-Round

Why the World is About to End

Diary, Newsletter, Research

I am basically a positive person. I never have been much of a Cassandra who predicts the end is near and the world is about to end. Nor have I ever been one to exaggerate. In this day, the raw facts are strange enough.

But you know what? The end really IS near and the world IS about to end.

If you knew that a trillion-dollar trade was about to unwind wouldn't you like to get in front of it? If you could you would be able to make a fortune for yourself.

Well guess what? Just such an opportunity is staring you in the face.

I am talking about the inversion of the yield curve, which I have been warning you about for the past two years. Now the mainstream media is finally getting on the bandwagon and starting to focus on this arcane concept.

During expanding economies, long-term interest rates are always higher than short-term ones to compensate investors for the greater risk that extended duration implies. The longer the life of a bond, the more things that can go wrong. They also need to be protected from rising inflation.

Inverted yield curve takes place when long-term interest rates are lower than short-term ones. This takes place when the Federal Reserve raises overnight rates to higher-than-normal levels to cool an overheating economy. This is a rare event, as the Fed action brings results usually in months. Yield curves are only inverted about 10% of the time, or about one year in every 10.

It turns out that the yield curve is the best predictor of recessions and bear markets out there. Take a look at the charts below, which I lifted from my friends at The New York Times. They show a yield curve inverting in 2007. The Great Recession and a 52% slide in the S&P 500 followed. It turns out that every recession of the past 60 years was preceded by an inverted yield curve.

It isn't just the yield curve that is anticipating the end of the Great Bull Market of the 2010s. The headline unemployment rate is also raising a red flag. The current jobless rate is now at 3.8%, an 18-year low. The last time we saw numbers this robust was, you guessed it, back in 2007.

In fact, I am seeing a whole range of data points warning that this economic cycle is coming to an end. As a hedge fund friend of mine told me the other day, "A year from now we'll be kicking ourselves over why we didn't sell. All the signs were there."

With the government about to report a US Q2 GDP figure of anywhere from 3% to 4% you must think I'm smoking California's largest cash crop (it's not grapes).

But having been through nine bull markets during my lifetime, I can tell you this is exactly what tops look like. Business is booming, you can't hire anyone, there are long lines everywhere, and nary a space is to be found in a shopping mall parking lot. This is when economies exhaust themselves, by overheating and pulling growth in from future years.

Now about that trillion-dollar trade.

Back in 2011, the spread between the two-year and 10-year Treasury paper (TLT) was a generous 3.0%. Bond traders made money hand over fist borrowing short, lending long, and leveraging this trade up anywhere from 10 to 100 times. The risk reward was so great that the aggregate value rose to the tens of trillions of dollars.

Today, that spread is on 34 basis points. Traders are still putting it on but keeping every close eye on the exit. After all, 34 basis points X 10 is 3.40%, which still handily beats overnight deposit rates.

When the spread turns negative the sushi hits the fan, and they sell everything, taking the rest of the world with it.

What will they be dumping? The entire long dated maturity range of not just Treasury bonds (TLT), but ALL bonds (LQD), (JNK) and high yielding stocks (HYLD), ETFs, MLPs (AMLP), and REITs (SPG). They call this a "bear market."

What's the cleanest way to play this? Sell short the (TLT) or buy the inverse 2X short Treasury ETF (TBT). Right here, with yield at a five-month low and prices at five-month highs, is a great entry point.

Just thought you'd like to know.

Trapped in Purgatory

Diary, Newsletter, Research

I can't believe my eyes.

Here we are at the midpoint of 2018 and the main markets are virtually unchanged. The Dow Average is down 1.5%, the S&P 500 is up +1%, NASDAQ has gained 8.79%, and the Russell 2000 has tacked on 7.18%.

Despite all the promises that happy days are here again, here we are dead in the water. Since the passage of one of the most simulative tax bills in December, we have gone absolutely nowhere.

We are essentially stuck in stock market purgatory.

Of course, you can blame the trade wars, the onset of which marked the top of the bull market on January 24 at 26,252.

The president got one thing right. Trade wars are easy to win, but for dictatorships not for democracies.

If you complain about trade policies in China you are told to shut up or face getting sent to a re-education camp. Worst case you might disappear in the night as has happened to a number of Chinese billionaires lately.

In America any restraint of trade anywhere invites 10,000 highly paid lobbyists desperate to reverse the action. Offer any resistance and the reprobates are thrown out of office, as may happen here in four months.

The Chinese have one weapon against which we have no defense. They can go hungry. They'll just tell their people to toughen up for the greater good of the nation. When I first arrived in the Middle Kingdom 45 years ago they were still recovering from the aftereffects of a famine that killed 50 million (there are NO substitutes for food). Try doing that in the U.S.

The Chinese have another secret weapon at their disposal. They paid $3.63 a week for a subscription to the New York Times (including Sundays). Because of this they know that the president is going into the midterm elections with the lowest approval ratings in history.

And they are doing this running on a policy of sending children to concentration camps, which they don't even do in China anymore. This will cost the party votes in every state except in Oklahoma.

So the Chinese are content to hang tough, meet every tit with a tat, match every escalation, and wait out the current administration. The only question for them is whether the president will be gone in 2 1/2 years or in six months, so it pays to stall.

This is a country where history is measured in millennia. When I asked premier Zhou Enlai in the 1970s what the outcome of the 1792 French Revolution was, he responded "It's too early to say."

None of this is good for stock prices.

So I will continue with my now five-month-old prediction that markets will remain trapped in narrow ranges until before the midterms, and then rally strongly. It will do this not because of who wins, but because of the mere fact that it is over.

If you are a trader, unless you can buy stocks on those horrific capitulation panic days and sell on the most euphoric peaks, it's better just to stay away. I can do that, but I bet most of you can't. But then I've been practicing for 50 years. This is why I dumped the last of my positions yesterday morning at the highs of the day, shooting out three Trade Alerts in rapid succession.

By the way, these are excellent reasons to avoid the bond market as well. While the fundamentals tell us that interest rates should continue to rise for years, the charts tell us a different story.

With 10-year U.S. Treasury bond yields (TLT) hitting a five-month low today, it is hinting that a recession isn't a 2019 event, it in fact has already started. Bulls better fall down on their knees and pray to their chosen idol that this is nothing more than an extended short covering rally.

It all sounds like a great time to take a long cruise to me.

China in 1973

The Market Outlook for the Week Ahead, or is this a 1999 Replay?

Diary, Newsletter, Research

Another week, another trade war.

The stock market did not take well the administration's escalation of international tensions by threatening to increase Chinese imports subject to punitive duties from $50 billion to $250 billion.

Today, it got much worse with our government now targeting French luxury goods, including wine, handbags, and Roquefort cheese.

Please! Anything but the Roquefort cheese!

In the meantime technicians are getting increasingly nervous about the market concentration. Take out the top-performing 15 stocks, such as big tech and Boeing (BA) and we are already in a bear market. Some 60% of S&P 500 stocks are below their 200-day moving averages and in solid downtrends.

One manager told me that a year from now we will be kicking ourselves for not selling, for all the signs to get out of Dodge were there.

In the meantime, I am hearing an alternative theory about technology stocks. The earnings growth is so prolific that they could continue to melt up for the rest of 2018. Indeed, Amazon (AMZN), Facebook (FB), Netflix (NFLX), and Salesforce (CRM) all hit new all-time highs this week.

Tech stocks are melting up because of blowout earnings expected in a month. After all, in this industry great quarters are followed by more great quarters.

By my calculation the shares prices of technology stocks have to double to bring their market capitalization of only 26% in line with their 50% share of the S&P 500 total earnings.

By the way, California now accounts for 19% of the U.S. population, 21% of U.S. GDP, but a staggering 35% of corporate profits, with two of four FANGs just spitting distance from my office.

Holy smokes! Are we seeing a replay of 1999, the notorious dot-com bubble top?

I hope not. Tech earnings multiples now average 25X compared to 100X back in the day. But this analysis does neatly fit in with my prediction that stocks top in the May-September 2019 time frame.

Last week also saw the shares of General Electric (GE) tossed on the ashcan of history, and the stock was taken out of the Dow Average, to be replaced by sedentary drug store Walgreens (WBA).

That's what a decade of lousy management gets you, which has vaporized a half trillion dollars of market capitalization since 2000. Back then, GE was the largest market cap company in the world, the equivalent of Apple (AAPL) today.

During this same time Apple created $900 billion in new market cap, the shares rocketing from $2.50 to $195. What a trade! Long Apple, short (GE) for 18 years.

As for Apple, it is unique among the FANGs in having the biggest exposure to China. It employs 1 million there, sells more iPhones in the Middle Kingdom than in the U.S., and is crucial to the company's long-term growth plans. The rest of the FANGs have virtually NO China exposure.

This realization caused me to stop out of my position in Apple shares for a loss during its $12 plunge off its all-time high at $195. That brought my 2018 year-to-date performance down to 24.91% and my 8 1/2 year return to 301.38%.

Fortunately, aggressive longs in Amazon, Salesforce, Microsoft, and the iShares Nasdaq Biotechnology ETF (IBB) still have me up +4.54% in June, my 12^th consecutive positive month.

This coming week will be all about the May real estate and housing data, which we already know will be hotter than a pistol.

On Monday, June 25, at 10:00 AM, May New Home Sales are out.

On Tuesday, June 26, at 9:00 AM, the S&P CoreLogic Case-Shiller National Home Price Index for April is released. May Consumer Confidence is out at 10:00 AM.

On Wednesday, June 27, at 8:30 AM, May Durable Goods is published. May Pending Home Sales are out at 10:00 AM.

Thursday, June 28, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 3,000 last week to 218,000. Also announced is another read on US Q1 GDP. The last report came in at a moderate 2.2%.

On Friday, June 29, at 9:45 AM EST, we get the May Chicago Purchasing Managers Index. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, I will be headed to Los Angeles for my one beach weekend this year. Got to keep those body surfing skills finely tuned, and I'll have a chance to work on my tan before going to sea for a week in July.

In California it's all about the tan.

Good Luck and Good Trading.