Research Archives - Mad Hedge Fund Trader

Welcome to the Deflationary Century

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

Meet deflation, up-front and ugly.

If you looked at a chart for data from the United States, consumer prices are showing a feeble 2.5% YOY price gain. This is slightly above the Federal Reserve's own 2% annual inflation target, with most of the recent gains coming from rising oil prices.

And here's the rub. Wage growth, which accounts for 70% of the inflation calculation, has been practically nil. So, don't expect inflation to rise much from here, despite an unemployment rate at a 17-year low.

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

If so, it will not be the first one.

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

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

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

The causes of 19^th century price collapses were easy to discern. A technology boom sparked an industrial revolution that reduced the labor content of end products by 10 to hundredfold.

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

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

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

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

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

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

Probably tens of millions.

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

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

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

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

Amazingly, the top in rates in the coming cycle may only reach the bottom of past cycles, around 3% for 10-year Treasury bonds (TLT), (TBT).

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

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

So, the bottom line here is that there is additional room for bond prices to fall and yields to rise is pretty limited. But not by that much, given historical comparisons. Think of singles, and not home runs.

It really will just be a trade. Thought you'd like to know.

Yup, This Will Be a Real Job Killer

Why I'm Selling Short the Stock Market

Diary, Newsletter, Research

All good things must come to an end, and I think the latest rally in stocks has just about run out of steam.

Up 12 out of 14 days, and the stock market is starting to reach a point of exhaustion. The S&P 500 (SPY) is now at the top end of a four-month trading range.

In addition, we are now well into a seasonally negative period for stocks, the six months when the total return on indexes is zero. The summer slowdown is upon us, and the declining trading volume is screaming at us loud and clear.

Please note that for the past months, stocks have been rising on small volume and falling on big volume. That is classic late cycle market action and is increasingly making me afraid of my own shadow.

We have just had an onslaught of surprise good news that took us up this high, thus giving us a fabulous short side entry point.

That would include a China trade war temporarily going on hold, the administration's free pass for Iran sanctions busting for the multinational Chinese telecom company ZTE, and Micron Technology's (MU) announcement of a $10 billion share buyback. Good news tends to happen in three's, and on the third one you sell.

So, a shot on the short side is reasonable here. However, doing ANY trade with the Volatility Index (VIX) down here at the $12 handle is a bit of a stretch. But I have only sent out one Trade Alert so far in May, and my traders are starving for fresh red meat.

I am not turning bearish, nor do I expect a recession to strike imminently. That will take place in late 2019 at the earliest. I'm just executing a short-term trade here to keep from being bored to death.

It is all just a matter of numbers. The American labor force is currently growing at 0.5% a year, while productivity is expanding by 1.5%. Add them together and that gives you 2% annual trend growth. Add in a 2% inflation rate and you get a 4% nominal GDP growth rate.

That growth rate means the Fed funds overnight interest rate should be 2.5%, a full 1% above the present 1.5%, so four more 25 basis point Fed rate hikes are a sure thing. It will get to 2.5% in a year.

Similarly, a 4% nominal growth rate historically brings you a 4% 10-year U.S. Treasury bond yield versus the current 3.07%, so we have another year to get to 4% as well.

That means our short strategy in the (TLT) is alive and well, we're just waiting for a better entry point. A 4% Treasury bond targets $98 on the downside in the (TLT), or down another $19 from today's close.

With a price earnings multiple 17X and an assumed earnings per share of $155, that puts the fair value for the S&P 500 of $2,720, or exactly where it is right now.

So the stock market isn't expensive, rich, or euphoric. Nor is it at bargain basement throwing the baby out with the bathwater cheap. It is dead in the middle.

And bull markets never end with fair valuation; they end with valuation upside blowouts. We dallied there at the end of January, but only for a few days. We may not see those high numbers again until the end of 2018.

And here's the bad news. Trading conditions could remain like this for another five months, until the November midterm congressional elections.

Just thought you'd like to know.

China's Big Trade Win

Diary, Newsletter, Research

My phone started ringing on Sunday afternoon as soon as the futures markets opened in Asia. The U.S. had reached agreement with China on trade and the Dow futures were up 200 points.

Had the next leg of the bull market begun? ?Was it time to buy?

I asked what were the specifics of the deal. There weren't any. I asked about generalities. Those were absent as well.

All they knew was that the U.S. was suspending threatened tariff increases in exchange for a vague Chinese promise to buy more U.S. exports over the long term.

It was in effect a big Chinese win. The development allows the Middle Kingdom to do nothing but stall for time until the next U.S. administration comes to power regardless of which party wins. The Chinese think in terms of centuries, so waiting three more years for a better negotiating backdrop is no big deal.

It vindicates my own call on how the Chinese trade war would play out. After a lot of threats and saber rattling, the administration would achieve nothing, declare victory, and go home.

Traders should NOT be buying this pop in stock prices on pain of death. All that will happen is that stocks will trade back up to the top of the recent range, and then stall out once again as we slide back into slow summer trading. In fact, all we have accomplished is to revisit last week's high in stocks.

Stocks (SPY) weren't buying this trade agreement for two seconds, nor were bonds (TLT), foreign exchange (UUP), gold (GLD), or energy (USO). Not even the agricultural markets were believing it. Soybeans (SOYB), the commodity most affected by the China trade, were up a measly 2.45%. If markets really believed something substantial was afoot they would be limit up three days in a row. I've seen this happen.

It was obvious that little was accomplished when you saw the endless parade of administration officials praising the deals merits. My half century of trading experience has taught me when someone is working so hard to sell you a bridge, you look the other way.

And here is the problem. Beyond cutting-edge technology, there's nothing that China HAS to buy from the U.S. China's largest imports are in energy and foodstuffs, both globally traded commodities.

The oil and gas coming out of America looks pretty much like the Saudi Arabian and Russian kind. U.S. energy infrastructure is already groaning at the seams as it approaches 11 million barrels a day.

To double that from current levels just to fill the trade gap with China would require a multi-decade effort financed with trillions of dollars in private capital just to produce more oil with prices at a three-year high. In other words, it isn't going to happen.

The same is true with agriculture. I doubt there is a single farmer in the country willing to risk his own money to increase production on the back of the China deal. Rainfall is a much bigger concern.

In the end, stocks will eventually rise to new highs by the end of the year, just not right now. And they will do so on the back of the prodigious earnings growth of U.S. companies, which has been expanding at a breakneck pace for nearly a decade.

It is notable that the only major index that hit new highs today was the small cap Russell 2000 (IWM) where the constituent companies essentially do NO trade with China.

To believe otherwise would be giving the cock the credit for the sun rising, which happens every morning like clockwork.

It Worked Again!

How to Use Your Cell Phone Abroad

Diary, Newsletter, Research

I constantly receive emails from readers around the world inquiring how I accomplish this or that in my far-reaching travels around the globe.

After all, I have visited 125 countries over the past 50 years. What's more, I have run the Mad Hedge Fund Trader Global Empire for the past 10 years, on the fly, from a laptop and a cell phone.

Given that Europe is now 20% cheaper than last year, and 40% less expensive than four years ago, an increasing number of you are going to cross the pond for your summer vacation.

That certainly was the case this year, when I saw a substantially larger number of American families traveling with children.

For the first time in decades, I am finding gaggles of American students in train stations backpacking their way around the continent with a Eurail Pass, much like I did in the 1960s.

With the right information, your cell phone can make your trip vastly more enjoyable, while preventing it from becoming wildly expensive. In fact, it is hard to imagine how we got along without them. So here goes:

1) Hardware

U.S. issued phones only work abroad if you have an international SIM card, as do most iPhones. Before you leave, call your cell phone provider and ask if you have an international SIM card in your phone.

Each company has exactly one person who knows how this works. If you don't have one, get one. The person at Verizon is named Maria.

Upon arriving abroad, the truly adventurous remove their American SIM cards and install a local one, signing up for a local plan. This can cut your international bill to as little as $10 a month.

You just reinstall your U.S. SIM card when you return home. However, as SIM cards are too small for me to see, I have yet to attempt this bit of technological acrobatics.

If you keep your U.S. SIM card, to make a call when abroad you have to assume you are still in the United States, since you have a U.S. number.

To call another country in Europe just hold down the "0" in your phone number pad until a + sign appears. Then dial 011 for the international exchange, and the numbers for the local country and city codes.

To call the U.S. from abroad, hold the "0" until a + sign appears, then dial 1, then the area code and number.

2) Roaming

International roaming can cost a fortune. Before I figured out the game, I was spending $500 a week downloading email, newspapers, and research reports. TED talks are the worst, costing at least $25 each to watch over foreign air.

So it is crucial to turn off the roaming feature on your phone. On an iPhone you do this by going into settings, then cellular data, and then turning the cellular data function off. Do this, and you will still be able to receive voice calls, such as from a lost traveling companion in distress.

Here is the key rule: Only access the Internet through the free Wi-Fi at your hotel. Download all your big files, news, email here. This saves you a ton of money.

You will need to turn on you cellular roaming to get your apps to work. But if you have already downloaded the big files, the additional cost to check your stock prices, weather forecast, or the way to a sought-after restaurant will be minimal.

Another tactic is to de spam your email accounts. Find all of those useless, unsolicited marketing emails promising get rich quick schemes, dating opportunities, or male enhancements. Then mark them as spam (unless they are from me). When you do use your cellular roaming, they won't eat up all of your data budget.

Warning: Start doing this every day a month before you leave. That's how much spam is out there. You can always unmark email as spam from senders you like, such as the local public library, when you return home.

American companies finally now offer international plans. This year Verizon is offering 250 MB of data, 250 emails and text messages, and 250 minutes of talk time for $80 a month. This is nowhere near enough, but it is a start.

Every time you cross a border, the local cell phone company will text you with usage and overage rates, which is usually $25 per 100 MB of data, or 10 cents a minute for voice or messaging.

You can find the Americans on a train when their phones all ping at once, often when you cross a bridge, or come out of a tunnel, or land at an airport.

3) Apps

Google Maps can provide perfect, detailed directions on how to reach the most remote destinations, whether you are in the Istanbul Bazaar, the Marrakech Medina, or the back alleys of Rome.

You can choose instructions whether you are on foot or driving. As soon as you arrive at your hotel, type in the address so you can always find home. The really great thing about Google Maps is that, unlike paper maps, it tells you where you are.

Just be careful not to bump into another traveler who is similarly staring at his cell phone to find his way (I walked straight into a concrete lamppost once in Tokyo and almost knocked myself out).

Be sure to download a free flashlight app before you leave home. These are great for navigating your way down dark streets, reading a menu in an ill lit restaurant, or finding the keyhole in your door.

The weather app is indispensable. It will allow you to fine-tune your travel plans up to a week in advance.

Being an ex-Boy Scout, I find a compass app particularly useful. Knowing where magnetic north is comes in handy when using those free tourist maps.

Stock market apps will bring you the assurance that the Mad Hedge Fund Trader Alerts are working well and paying for the entire trip. Remember that the New York Stock Exchange opens at 3:30 PM on the European continent because of the time change.

Travel in Europe is made much easier when you speak seven languages, although it's hard to find a living Roman centurion to practice your Latin. Limited to the King's English?

No problem! Get free language apps for the countries of your destination. Sometimes, the translation of a single word can mean the difference between life and death.

It's better to pay a couple of bucks and get the expanded vocabulary apps so you never come up short. That is how I found out yesterday that "sardi" is a type of Italian pasta unique to Northern Italy, and not a sardine.

You may have your own special apps you use. I like to visit my Tesla occasionally, verifying that it is still in my garage and fully charged. I also like to check the daily output of my solar panels to prove that my house is still standing.

Coming from California, I can never be sure. Google Earth is useless here because the pictures can be up to six months old. They are obviously lacking on satellite time.

4) Security

Identity theft is exploding in Europe, thanks to the close proximity of a hacker's paradise in unpoliced Eastern Europe. Never access your financial accounts through a free public network that is not password protected. It's like leaving your wallet in the middle of Saint Mark's Square in Venice and expecting to find it there an hour later.

Don't even attempt an innocent checking of balances. And I don't mean a password like 123456789. You can count on your accounts getting cleaned out. There is no greater bummer than being told by a hotel clerk that you can't check out because all of your credit cards have been canceled.

If you do need to check your balance on the run, do it only through your cell phone, and only over a cell network (no Wi-Fi), where an extra level of security is provided. The same is true with inter-account transfers. This can be expensive, but it is worth it.

Please note, that in China, the security situation is becoming so severe that many multinationals will not permit employees to bring their laptops. They have adopted "cell phone only" policies in the Middle Kingdom, where the security is so much better.

Too many western visitors were getting their entire hard drives copied by these crooks searching for western intellectual property, in addition to the easy pickings among bank accounts.

5) Entertainment

OK, so watching Wheel of Fortune in German, French, or Italian is not your cup of tea. Before you leave home and still have reasonable broadband, download a batch of old movies from iTunes, Netflix, or Amazon to your laptop.

That way, you have something to do in the middle of the night waiting for your jet lag to adjust. Bring a 6-foot HDMI cable and you can change the input channel on your hotel TV, plug in, and watch your flick there.

6) Bandwidth

European bandwidth can vary all over the map, from lightning fast (the Ritz Carlton in Barcelona) to painfully slow (Agadir, Morocco). Europeans just don't seem to grasp how fast apps are growing, and bandwidth demand is accelerating.

More than a few times, I have had to crawl under front desks and reboot routers to get systems working again.

Suffice it to say, the more you pay, the faster your Wi-Fi. If you check into your hotel and see half the residents sitting in the lobby checking their email, it is not a good sign.

Wi-Fi was invented in the U.S., where 2-by-4 wooden studs and 1-inch sheetrock used in construction is common.

Two-foot thick stonewalls typical in historic European city centers (where you will want to stay) are terrible for Wi-Fi range, and it is not unusual to have no access from your room.

If Apple or Microsoft want to upgrade your operating system on the road, wait until you get home. Otherwise, you might crash your system and not be able to use your device until you return home.

7) Tickets

It is now possible to do a search of your next foreign city for coming events while you are on a train, buy tickets online, and show the ticket on your phone to gain admission.

I also have settled a couple of checkout disputes proving that I prepaid hotel stays by displaying proof of payment from my PayPal or bank account.

Incredible, but true.

I will be following this piece up with another on general travel tips in a couple of weeks entitled Travel Tips from a Pro, which I am now working on.

In the meantime, enjoy your trip.

Market Outlook for the Week Ahead, or No Trade

Diary, Newsletter, Research

That was the most boring week of 2018.

Not only did we get no net movement; the range was an infinitesimal 200 Dow points. It was hardly enough to make a dog's breakfast.

Of course, the big news was the yield on the 10-year U.S. Treasury bond (TLT), which rose to 3.12%, a seven-year high. You might have expected this to prompt a complete stock market rout. It didn't. Maybe that is next week's business.

It is rare that the bullish and bearish arguments reach a perfect balance, but that is what we got. In the meantime, trading volume is shrinking, never a good sign. Will the last one to leave please shut out the lights?

Which is all an indication of what I have been warning you about for months. This is setting up to be a dreadful summer. If you've already made your year, with a 19.88% gain like I have, you're better off taking a long cruise than trying to outsmart the algorithms.

I managed to squeeze off only one trade so far this month. I sold short the S&P 500 (SPY) right at the high of the week. However, when the downside momentum failed, and a Volatility Index (VIX) spike failed to confirm, I bailed for a small profit. Pickings are indeed thin.

Whenever my trading slows down, I get the inevitable customer complaints. My answer is always the same. Reach for the marginal trade and you will get your fingers bit off. Don't be in such a hurry to lose money. As my wise Latin professor used to say, "Festina lente," or "make haste slowly."

My May return is +0.53%, my year-to-date return stands at a robust 19.83%, my trailing one-year return has risen to 56.25%, and my eight-year profit sits at a 296.30% apex.

And remember, the market is making this move in the face of rising oil prices and interest rates, always bull market killers.

To mix a few metaphors, when the sun, moon, and stars line up once again I'll go pedal to the metal with the Trade Alerts once again.

If you held a gun to my head and ordered me to tell you how the markets will play out for the rest of the year, try this.

We remain is this narrowing trading range for months, ending with a final decisive break of the 200-day moving average to the downside, now at 23,909. But we find a new low only 1,000 points, or 4% below that.

Then we launch into the post midterm election year-end rally, which could take stocks up 15% to 20% from the 23,000 low. This is why I have been saying that the best trades of 2018 are ahead of us.

So, renew that subscription!

To witness how cruel and stock specific the current market is, look no further than hapless Campbell Soup (CPB), the first ticker symbol I have had to look up this year. There is probably not a reader alive who was not nursed back to health by its iconic red canned chicken noodle soup.

A surprise earnings loss triggered a hellacious 14% one-day plunge. It is the first big victim of the new steel tariffs. Although it amounts to only a few pennies a can, that can be disastrous in this hyper-competitive world. It also turns out that Millennials prefer eating fresh food rather that the canned stuff.

Give thanks for small mercies. With three daughters I am at ultimate risk for a tab for three weddings. The nuptials for Meghan Markle and Prince Harry are thought to cost $45 million, most of it on security. Hopefully I will not someday become the father-in-law of a prince.

This coming week has a plethora of Fed speakers, some key housing numbers, and that's about it.

On Monday, May 21, at 8:30 AM, we get April Chicago Fed National Activity Index.

On Tuesday, May 22, nothing of note is announced.

On Wednesday, May 23, at 10:00 AM, the April New Home Sales.

Thursday, May 24, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 11,000 last week from a 43-year low. At 10:00 AM, we get April Existing Home Sales.

On Friday, May 25, at 8:30 AM EST, we get April Durable Goods Orders.
We wrap up with the Baker Hughes Rig Count at 1:00 PM EST.

As for me, I will be spending the weekend putting the finishing touches on my 2018 Mad Hedge European Tour.

Thanks to rising U.S. interest rates and a strong dollar, the price of a continental trip has dropped about 10% since the beginning of the year. Got to love that Swiss franc at 1:1 parity with the greenback. Maybe I can afford an extra cheese fondue.

Good Luck and Good Trading.

Yes, It All Looks Like Magic

Why the "Midterm Effect" Rules the Markets

Diary, Newsletter, Research

If I had a dime for every trading nostrum I have heard over the past 50 years I would be as rich as Croesus by now. And here's a whopper for you.

A 20% corporate growth rate, a 2% inflation rate, and a 0% stock market: These are numbers you never would expect to see in the same sentence.

Yet, that is what we have at the close today, believe it or not.

And what's worse, this condition could last for another five months. It is clear that something is going on here.

For the past six months, my trading has been wildly successful betting that the stock market would go nowhere until the November 6 midterm elections.

While we have covered an awful lot of ground during this time with a very wide 3,300-point range in the Dow Average (INDU), we have gone absolutely nowhere. As a result, the Mad Hedge Trade Alert Service stands with a 19.83% so far in 2018.

It turns out that trading around midterm congressional elections is far more successful than any other market traditions, like "Sell in May and go Away." Call it the Midterm Effect.

Since the Dow Average was first created on May 26, 1896, the six months going into a midterm produced a feeble 1.4% gain, while the six months after hauled in a whopping 21.8% increase.

In fact, "Sell in May and go away" only works because of the enormous cyclicality of the Midterm Effect, which takes place only every four years. The other three years of that cycle are usually pretty wishy-washy or go the opposite way. Here we are in mid-May, and so far, the Midterm Effect looks pretty good.

The effect only works for midterm elections. It is much less predictive than the Presidential Election Cycle, another popular piece of folk wisdom.

The reason the Midterm Effect works so well is because of human psychology. Investors absolutely hate uncertainty. They are much more inclined to sit on their hands and do nothing ahead of a major market moving event even one 10 months away, when we entered the current range.

They would much rather pay a premium after an event for any securities they might buy rather than being wrong. Money managers tend to be a conservative lot, and this is how conservatism works.

The outcome of the election would have an enormous effect on corporate earnings. According to PredictIt, an online betting site, there is a 67% chance that the Democrats will take the House in November.

If that occurs, no major changes to the economy nor laws pass for at least two years. If that doesn't occur, the president will have a free hand to pursue his existing policies unfettered. However, the election is not for another five months, and in politics that could be five lifetimes.

So range trading it is. Buy the small dips and sell the small rallies for the foreseeable future. Wake me up around Halloween.

The Lawsuits Are Piling Up on the (XIV)

Diary, Newsletter, Research

One of the most painful experiences of my half century long trading life involved the Credit Suisse VelocityShares Daily Inverse VIX Short-Term ETNs (XIV).

I was certain that the Volatility Index (VIX) would peak for the year at the Wednesday, February 5, 8:30 AM market opening. So, I shot out a Trade Alert to place only 10% of your capital into the (XIV), a bet that the (VIX) would fall. There was only a 15-minute window before the market closed during which readers could get in. A few managed to do it.

The (XIV) had just fallen from $147 to $95.00. We got in at $97.08, and it closed the day at $100. The (VIX) closed at $37. And we had made money many times selling short volatility over the past decade on spikes just like this one. The (XIV) had been the fastest growing of 3,500 ETFs over the past five years. So far, so good.

Then an hour after the close, I received an urgent call from a client. The (XIV) was trading at $14. What's up?

My initial instinct was that a major hedge fund had either gone bankrupt or had a margin call and was suffering a forced liquidation in the aftermarket.

Overnight, the (XIV) traded as low as $6.50. I later heard that Credit Suisse itself was the major buyer of volatility in the aftermarket, in fact was the ONLY buyer, and that it was deliberately attempting to bankrupt its own fund to limit its liability. Those in management in Zurich were afraid that if the (VIX) shot up to $100 it might take the entire bank down. In short, they panicked.

The next morning they issued notice that they were closing the fund in 10 days. I was certain that the managers were guilty of insider trading and securities fraud in ordering the emergency short cover, and that it was just a matter of time before the class action suits emerged.

Three months later, the lawsuit has been filed by the Gibbs Law Group in Oakland, CA, in the Southern District of New York for unspecified damages, expenses, and legal fees, with a jury trial demanded.

The last time I was involved with one of these was with the MF Global bankruptcy in 2011, where I and most of the rest of the trading community had an account.

I was initially offered 25 cents on the dollar. I refused, expecting to eventually get paid in full. I knew that the MF assets in question were never lost, they were just caught up in a conflict between U.S. and U.S. bankruptcy law that would eventually be resolved. That is what happened, and I was paid in full three years later.

The (XIV) case is much more complicated because there was a huge real loss, about $2 billion, and it involved complex mathematically constructed derivatives. Since the managers behaved so reprehensibly, and because the evidence of their misdeeds is so overwhelming, it is unlikely that the case will ever come to trial. Instead, there will be an out-of-court settlement.

If the SEC takes action it will further strengthen the plaintiffs' hands. There is currently an investigation of Credit Suisse underway and it ultimately could get banned from doing business in the United States.

My bet is that investors will get at least half their money back, if not more. But it could take years to get it, and in a class action the lawyers get a big chunk of any awards for their efforts, usually one-third. Sometimes, class actions can last as long as 10 years.

As for my own followers, most followed my advice to put no more than 10% of their capital into the trade. As it turned out, they made back the 9% loss in less than a month, half of it through selling volatility short again. But this time I used put spreads on the iPath S&P 500 VIX Short-Term Futures ETN (VXX), a long volatility play that will never go to zero overnight.

To read the suit in its entirety, please click here.

To learn more about the suit, please click here and here.

Or you can call the Gibbs Law Group directly at 510-350-9700. I'm sure they'd love to hear from you.

Trading Volatility Can Be Hazardous to Your Wealth

Get Ready for the Coming Golden Age

Diary, Newsletter, Research

I believe that the global economy is setting up for a new golden age reminiscent of the one the United States enjoyed during the 1950s, and which I still remember fondly.

This is not some pie in the sky prediction. It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.

What I call "intergenerational arbitrage" will be the principal impetus. The main reason that we are now enduring two "lost decades" of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million "Gen Xers."

When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and "RISK ON" assets such as equities, and more buyers of assisted living facilities, health care, and "RISK OFF" assets such as bonds.

The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.

Fast forward six years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.

That is when you have 65 million Gen Xers being chased by 85 million of the "millennial" generation trying to buy their assets.

By then we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes.

The middle-class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.

The stock market rockets in this scenario. Share prices may rise very gradually for the rest of the teens as long as tepid 2% growth persists. A 5% annual gain takes the Dow to 28,000 by 2019.

After that, after a brief dip, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 100,000 by 2030. If I'm wrong, it will hit 200,000 instead.

Emerging stock markets (EEM) with much higher growth rates do far better.

This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well.

The 100-year supply of natural gas (UNG) we have recently discovered through the new "fracking" technology will finally make it to end users, replacing coal (KOL) and oil (USO). Fracking applied to oilfields is also unlocking vast new supplies.

Since 1995, the United States Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC's share of global reserves is collapsing.

This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.

Mileage for the average U.S. car has jumped from 23 to 24.7 miles per gallon in the past couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five-year low.

Alternative energy technologies will also contribute in an important way in states such as California, accounting for 30% of total electric power generation by 2020, and 50% by 2030.

I now have an all-electric garage, with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. The net result of all of this is lower energy prices for everyone.

It will also flip the U.S. from a net importer to an exporter of energy, with hugely positive implications for America's balance of payments. Eliminating our largest import and adding an important export is very dollar bullish for the long term.

That sets up a multiyear short for the world's big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.

Accelerating technology will bring another continuing positive. Of course, it's great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos.

But at the enterprise level this is enabling speedy improvements in productivity that are filtering down to every business in the U.S., lowering costs everywhere.

This is why corporate earnings have been outperforming the economy as a whole by a large margin.

Profit margins are at an all-time high. Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development.

When the winners emerge, they will have a big cross-leveraged effect on economy.

New health care breakthroughs will make serious disease a thing of the past, which are also being spearheaded in the San Francisco Bay area.

This is because the Golden State thumbed its nose at the federal government 10 years ago when the stem cell research ban was implemented. It raised $3 billion through a bond issue to fund its own research, even though it couldn't afford it.

I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday.

What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver's seat on these innovations? The USA.

There is a political element to the new golden age as well. Gridlock in Washington can't last forever. Eventually, one side or another will prevail with a clear majority.

This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but for which nobody wants to be blamed.

That means raising the retirement age from 66 to 70 where it belongs and means-testing recipients. Billionaires don't need the maximum $30,156 annual supplement. Nor do I.

The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cuts defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.

I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up.

A Pax Americana would ensue.

That means China will have to defend its own oil supply, instead of relying on us to do it for them. That's why they have recently bought a second used aircraft carrier. The Middle East is now their headache.

The national debt then comes under control, and we don't end up like Greece.

The long-awaited Treasury bond (TLT) crash never happens. The Fed has already told us as much by indicating that the Federal Reserve will only raise interest rates at an infinitesimally slow rate of 25 basis points a quarter.

Sure, this is all very long-term, over-the-horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won't kick in for another decade.

But some individual industries and companies will start to discount this rosy scenario now.

Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.

Dow Average 1908-2018

Another American Golden Age is Coming

The Market Outlook for the Week Ahead, or Taking Another Bite at the Apple

Diary, Newsletter, Research

What happens after markets test the top end of a range? They test the bottom end of the range. So, the game here is to pick where and when is the next short-term top.

Now that Q1 earnings are out of the way, there is no major positive driver of the market for two more months, until the end of July, when the Q2 earnings start to roll out. And they will be good.

That leaves us only geopolitical shocks and chaos from Washington as the major market influences, and none of those are going to be positive. When traders shift from a focus on earnings to fear, the result is usually negative for share prices.

One major event that occurred last week but was totally ignored by the media was the administration's trade negotiating team scampering back from China completely empty handed. They called his bluff. So, the trade war is still on, it's just moved from the front burner to the back burner. Don't get complacent.

And here is the worrisome issue for the bulls. Q1 earnings were up 25.5% YOY, one of the best in my long career. Revenues accounted for 8.3%, margin improvements 8.1%, new tax breaks 7.6%, and share buybacks 1.5%. This means that 35.6% of the total earnings were from one-time only benefits that aren't going to be there next year.

Given that the global economy is slowing down, revenue and margin improvement will probably drop by half next year. That means the best case for Q1 2019 earnings will show a drop from 25.5% to only 8.2%.

It's not a matter of IF the market will top out, but WHEN. Enjoy the bull move while it lasts. It isn't going to be there next year.

I decided to sit out the current leg up in the market. I didn't think it would be big or sustained enough to squeeze in another round trip. Besides, after shooting out 26 Trade Alerts in April earning an eye-popping 12.54% profit, not only was my staff exhausted, so were the followers.

My year-to-date return stands at a robust 19.30%, my trailing one-year returns have risen to 55.59%, and my eight-year sits at an 295.77% apex.

And remember, the market is making this move in the face of rising oil prices and interest rates, always bull market killers.

Of course, nobody at Apple (AAPL) cares about any of this one wit, as its stock blasted through to new all-time highs every day last week. Steve Jobs' creation is on a race to a $1 trillion market capitalization and was worth $930 billion at the market high. That's when Apple will have the same GDP as Russia or Australia.

The dividend yield has fallen to 1.56%. The company is increasingly being viewed as a luxury brand commanding a much higher multiple than the 9X that it earned when it was perceived as a lowly hardware company. By the way, Ferrari (RACE) has a price earnings multiple of 39X versus Apple's current 16X ex-cash.

I'll be raising my target for the stock from $200 to $220 as soon as I get time to write the report. Steve Jobs must be smiling down from Heaven. By the way, this service first recommended Apple as a strong "BUY" in 2010 when the shares traded at $10. That's a gain of 1,900%. Click here for the link.

Apple's stellar gains were part of a much broader move back into technology, which we expected. It turns out that the semiconductor cycle IS NOT ending after all, as predicted by the neophyte coverage of UBS.

Suddenly, all is forgiven at Facebook (FB), as the shares are now 2% short of an all-time high. Amazon is going from strength to strength, with Amazon Web Services' cloud business now accounting for an impressive $50 billion of sales and is growing at a breakneck 50% a year.

It all goes back to my seminal rule of investing that has worked for my entire 50-year career. While much of the rest of the U.S. economy is slowly fading from the scene, TECHNOLOGY ALWAYS COMES BACK!

The last of the Q1 earnings reports will dribble out this week.

On Monday, May 14, at 3:00 PM, we get a deluge of Feds speakers, now that the quiet period from the last meeting is over.

On Tuesday, May 15, at 8:30 AM EST, we receive the April Retail Sales, which has been red hot as of late. Home Depot (HD), a long-time Mad Hedge favorite, reports.

On Wednesday, May 16, at 8:30 AM, the April Housing Starts. Cisco Systems (CSCO) reports.

Thursday, May 17, leads with the Weekly Jobless Claims at 8:30 AM EST, which remained unchanged last week at 211,000, a 43-year low. At 10:00 AM EST, the April Index of Leading Economic Indicators is released, a compilation of 10 forward-looking statistics compiled by the private Conference Board. Applied Materials (AMAT) reports.

On Friday, May 18, we wrap up with the Baker Hughes Rig Count at 1:00 PM EST. Deere & Co. (DE) reports.

As for me, I'll be working in the garden this weekend. It's time to plant the pumpkins if I want nice jack-o-lanterns by Halloween, the tomatoes are thriving, and I will have an ample supply of fresh pepper this coming winter.

Good Luck and Good Trading.

Rolling in the Clover

Farewell to David Rockefeller

Diary, Newsletter, Research

Watching Sotheby's sell off the possessions of David Rockefeller, the memories came flooding back.

A Picasso went for a staggering $115 million, while a Monet fetched $80 million. A leather easy chair estimated at $300 sold for $8,000.

I've seen then all, either at the downtown headquarters of Chase Manhattan Bank, which Rockefeller turned into an art museum, or at dinner parties at his posh Upper East Side mansion.

I was sitting across the desk from Bob Baldwin, the chairman of Morgan Stanley. It was 1982, and I was 30 years old.

He carefully studied my resume in his hand. Then he picked up the phone and hit a button on speed dial to call David Rockefeller.

Rockefeller, the chairman of Chase Manhattan Bank, picked up.

Baldwin said, "I have a John Thomas sitting in front of me." He paused a second, and then hung up.

"He says you're alright," and Bob offered me a job on the spot to get the firm into the international equity business.

That's how I started a long and illustrious career at Morgan Stanley.

I eventually became one of the most successful traders in the company, and at one point accounted for 80% of equity division profits.

It is also where I learned the knowledge that I am passing on to you today through the Diary of a Mad Hedge Fund Trader and my trade mentoring service.

I have David Rockefeller to thank for getting me started.

So, it was with a heavy heart that I learned that he passed away recently at the ripe old age of 101.

Rockefeller was the youngest grandson of oil baron John D. Rockefeller, the founder of the Standard Oil Company. The modern-day spin-offs include ExxonMobil, Chevron, Amoco, and parts of British Petroleum.

The Sherman Antitrust Act was passed specifically to break up Rockefeller's oil refining monopoly.

Rockefeller was America's first billionaire.

Rockefeller could have had an easy life of moneyed leisure in high society.

He chose otherwise.

He grew up in a Manhattan 54^th Street mansion attended by armies of nannies and servants, where his parents dressed black tie for dinner every night.

He remembers his doting grandfather, John D., who only gave him dimes "to keep us thrifty."

His mother founded the New York Museum of Modern Art in 1929, for which Rockefeller became chairman in later years.

He took the trouble to get a PhD in Economics from the University of Chicago in 1940, supporting Franklin Delano Roosevelt's deficit spending to end the Great Depression.

The family was horrified, as FDR's 90% maximum tax rate substantially whittled down the family's fortune by the time John Kennedy repealed it in 1962.

I got to know David Rockefeller well during the 1970s when I covered U.S. banking for The Economist magazine, and he spearheaded Chase Manhattan Bank's aggressive international expansion.

Rockefeller became the unofficial ambassador for the brash, unvarnished capitalism of the day. He wreaked establishment.

For a decade, whenever I interviewed major world leaders, such as Zhou Enlai of China, Ferdinand Marcos of the Philippines, Emperor Hirohito of Japan, or Margaret Thatcher of Great Britain, I would often bump into Rockefeller on the way out.

It was a bygone era, when major clients were courted primarily through the social register.

Eventually, international business came to account for 80% of Chase Manhattan's total profits.

It is perhaps fitting that Rockefeller was an early supporter of the construction of the original World Trade Center in downtown Manhattan, just walking distance from his bank.

I used to meet Rockefeller in his cavernous office on the 65^th floor of the Chase Manhattan building near Wall Street. He sat behind a polished hardwood desk the size of Montana.

Also known for his immense art collection, almost every floor of the building was decorated with favorite pieces from his personal collection. There was even a Chagall on the way to the men's room.

In perhaps the greatest compliment every paid me, he told me he had 70,000 names in his Rolodex, and I was one of them.

Wow! To be in David Rockefeller's Rolodex! Did you get that mom?

Rockefeller was always charming and gracious to a T. He was the guy who was friendly to everyone, with a great sense of humor, even when he didn't have to be.

He was offered the post of U.S. Treasury Secretary by multiple administrations and turned them down every time. He preferred to spend more time on his prized collection of beetles instead, the largest in the world.

He worked well into his 90s and maintained an office on the 56^th floor at Rockefeller Center, which his father had built to create jobs in New York during the Great Depression.

Because I was one of a handful of Morgan Stanley officers who spoke fluent Japanese, I was recruited to the team that sold Rockefeller Center to the Japanese for $1.3 billion in 1989. It was one of the largest real estate transactions in history at that time.

The last time I saw Rockefeller was at a gala black tie event for his 90^th birthday at the Museum of Modern Art, where tables were selling for $90,000 a piece.

Rockefeller used the event to announce a staggering $100 million gift to the museum.

So, thank you David Rockefeller for all your help, and a life well lived.

They don't make them like you anymore.

You will be missed.