Research Archives - Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Here's the Big Call

Well that tears it!

Flamethrowers! Yes, on the list of 125 products that China is imposing new 25% import duties are flamethrowers.

And I was so looking forward to getting a flamethrower of my own with which to singe lazy and errant stock analysts from whom we all are afflicted.

I guess I'll just have to buy American, which I already do with my cars (Teslas).

The real call here is that the NASDAQ has entered a well-defined trading range, from 6,600 to 7,600, where it will remain trapped for six months until the November midterm congressional elections. After that, we will rally 10% in year-end rally.

The deep in-the-money call spread strategy I employ is ideally suited to this kind of go-nowhere market. While other traders are tearing their hair out, you'll be raking in the money every month as if you've just been adopted by a new rich uncle.

The president, absolutely cacophonous about the riches created by a rising stock market, has developed lockjaw in a falling one.

The reason was provided by trade advisor Peter Navarro, who said quite simply that the markets were wrong in their belief that trade wars decimate share prices.

My half century of trading tells that markets are never wrong, only people are.

And while the chief architect of our China trade policy has never been there, I managed to find it in 1974. It's easy. You just head east.

Here are some harsh numbers to show you how quixotic the administration policies are. By imposing $25 billion in import duties to protect dying American industries, investors cut $3 trillion off of US stock market capitalization.

That is a 120:1 risk reward AGAINST us. That's NOT the kind of trade I'm used to strapping on.

I'm sure the Chinese are thinking, "How would you like to lose another $3 trillion?" "How about a recession and bear market?" and "See you $25 billion and raise you $50 billion!"

Here is a number that gets lost in translation of the $1 trillion in two-way trade between the US and China. Some 90% of the profits accrue to the US. It is an issue that officials in Beijing have been complaining to me about for decades, which essentially makes them the low-waged manufacturing colony.

That iPhone X that Foxconn makes for $100 Apple (AAPL) sells for $1,000 in the US.

One then has to ask the cogent question, "If you're winning the game, why change the rules?"

The Chinese are not a nation you want to antagonize. They endured 2 million casualties in Korea just to inflict 50,000 on us. Chosin Reservoir looms large in my family - the best fighting retreat in history carried out by the Marine Corp.

The Chinese can also suffer more pain than Americans, with most only one or two generations out of a $300 annual per capita income.

Will the US November congressional election affect economic fundamentals" I doubt it. The mere fact that the election is out of the way is worth a 10% stock market rally into year-end.

The March Nonfarm Payroll Report was a disappointment for the second month in a row, coming in at a feeble 103,000. The headline unemployment rate remains at a decade low of 4.1%.

The stock market didn't care, with the overwhelming focus now on trade issues.

The really important numbers now, Average Hourly Earnings, were up a slightly inflationary 0.3%, but no one noticed.

The January and February reports we revised downward by a steep 50,000.

Manufacturing gained 22,000 jobs, Health Care was up 22,000, and Professional and Business Services up 33,000. Construction lost 15,000 jobs, thanks to raising interest rates.

The Broader U-6 "Discouraged Worker" unemployment rate dropped 0.2% to 8.0%, a new decade low.

As a stand-alone number, the report is not important. However, look at it in the context of a rising tide of recent, slightly negative economic data reports and one has to start to get concerned. Is it the weather, or the beginning of something larger?

We are only a week off from when the Q1, 2018 earnings season kicks off, which will probably deliver some of the strongest reports in US history.

Until then, the data reports will be relatively benign.

On Monday, April 9, nothing of note is announced.

On Tuesday, April 10, we receive March NFIB Small Business Optimism Index.

On Wednesday, April 11, at 8:30 AM EST, we learn the all-important Consumer Price Index, the most important read on inflation. Bed Bath & Beyond (BBBY) reports.

Thursday, April 12, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a dramatic rise of 24,000 last week (another bad number). BlackRock (BLK) reports.

On Friday, April 13, at 10:00 AM EST, we get the JOLTS Report on private sector job openings. It is the big day for bank earnings, with Citigroup (C), JP Morgan (JPM), and Wells Fargo (WFC) all reporting.

The week ends as usual with the Baker Hughes Rig Count at 1:00 PM EST. Last week brought a drop of 2.

Followers of the Mad Hedge Trade Alert Service enjoyed one of their best weeks in years. Executing on the views above, I nailed the market bottom, hauling in an eye-popping 5.06% in performance in a single day.

I artfully used the huge sell-off days to pile on long positions in Google (GOOGL) and JP Morgan (JPM), and sell short US Treasury bonds and volatility (VXX). On the up days I bought gold (GLD).

It all worked like a charm, and every position is now profitable.

That brings April up to a +4.76% profit, my trailing one-year return to +49.72%, and my eight-year average annualized return up to 34.55%. We are an eyelash short of a new all-time performance high.

As for me, I'll be shutting down my Lake Tahoe estate for a while, not that the snow has turned to rain. The lake level is at a 118-year high, and Reno, NV, is worried about flooding. All the floodgates are open.

What a winter! I barely had time to tear myself away from my screens to visit the slopes.

Good Luck and Good Trading.

Is the Stock Market Calling a Democratic Win in November?

Diary, Newsletter, Research

If true, the implications for your stock portfolio could be momentous. So why is the stock market REALLY going down?

The oil industry would far and away be the worst affected. That explains why big companies such as Exxon Mobile (XOM) are hitting new one-year lows, even though the price of Texas tea has risen by an impressive 50% since the summer.

Also taken out to the woodshed for a spanking have been steel and coal. It is fascinating to note that the shares of the supposed beneficiaries of the trade war, coal (KOL) and steel (X), have on average dropped twice as much as the victims, such as technology, since the correction began in February.

China buys some 70% of all US coal exports, which is why the principal US rail routes have shifted from going from North-South to East-West.

Tape readers believe it is a direct outcome of the tit-for-tat trade war with China. But given the small numbers out so far I believe this is being vastly overexaggerated by the media.

The $100 billion out of $1 trillion in two-way trade, generating a total of $25 billion in new tariffs between the two countries, is too small to even affect the GDP numbers.

Academics and Fed watchers argue that the infinitesimal rate of interest rate hikes by our central banks, six in three years, is finally starting to bite. It's just a matter of time before the frog realizes that it has been boiled.

Technology is the lead sector in the market, and it doesn't borrow AT ALL, accounting for 25% of market capitalization, funding growth entirely through cash flow.

In Washington there is a different view.

Plunging share indexes, bringing the biggest intraday swings seen in a decade, can only mean one thing. The Democrats may be about to retake Congress.

The Democrats only need to seize 24 seats in the House and two seats in the Senate to achieve a simple majority.

So far, some 38 House Republicans have announced they are not running for reelection. It's not because they are tired of exercising power. It's because they don't believe they can survive either a Democratic onslaught, or a primary challenge from the far right wing of their own party.

They also are facing the lowest presidential popularity ratings ever seen for a midterm election. Until a few weeks ago, Trump was scraping the basement with a 36% approval, also it has ticked up recently.

So if the Dems take control, what are the investment implications?

A president from one party and a congress from the other is a fairly common occurrence. That was the state of affairs during the past six years of the Obama administration, and the past two years of George Bush's.

In other words, it's a survivable situation.

It has long been said that markets love gridlocked government. At the end of the day, they wish Washington would go away so everyone can get on with the important business of making money.

For a start, a Democratic win would assure that no important legislation would be passed into law for two years.

But it goes beyond that. Majority control means that the Democrats would get control of the chairmanships of every committee. That means that the investigation of Trump's various actions would escalate from a slow burn to a full-fledged flash fire.

While this may occupy the headlines of newspapers, it will have minimal impact on the markets or the economy. Only the hard cases will even notice.

And now for a quickie civics lesson, which I understand they don't teach in high school anymore.

A Democratic win in the Senate would almost certainly bring an impeachment trial, where only a simple major majority of 51 is required. That would stall markets for about three months.

And no matter how rosy the prospects are for Democratic gains, they are unlikely to reach the two-thirds majority needed for an actual conviction.

For that the Dems would have to win 94 seats, a near impossibility in this heavily gerrymandered country. Just to get a simple majority in the House, the Democrats have to win 58% of the popular vote. But they could reach a tipping point.

In short, it's all looking like 1975 all over again. What happened after 1975? After collapsing 45%, then rallying from a Nixon resignation low of a Dow Average of 550 to 1,000, it then took EIGHT YEARS for stocks to rally another 1,000 points.

Wall Street shrank dramatically, and many brokers become taxi drivers. It's not a pleasant prospect, except that today they would become Uber drivers.

I remember it like it was yesterday.

The endless bear market was a major reason why I started my career as a financial journalist for The Economist magazine in London rather than heading straight for Wall Street.

Once the new bull market started in 1983, I was inside Morgan Stanley (MS) within a year, while it was still private.

And thanks to Bob Baldwin for the job, a Navy man and Ivy Leaguer who lived to 95!

If the election was held tomorrow, the Democrats would almost certainly get control. But the election is not tomorrow, it is in seven months, and in politics that could be seven lifetimes.

Polls could improve for Trump. But then they could get a whole lot worse, too. And then there is Robert Mueller constantly lurking at the periphery.

In the end, markets might not do much of anything in a gridlocked government.

Much of the prosperity of America has occurred independent of the goings on in the nation's capital. It has taken place in spite of, not because of government policies.

Technology companies, now 25% of the economy (it was 26% two weeks ago) will continue to push the envelope forward at a hyperaccelerating rate, creating trillions of dollars in new shareholder value.

Thank goodness for that!

However, the volatility to get to nothing could be extreme, as we now are witnessing.

Dow Average 1972-83

The Crash Coming to a Market Near You

Diary, Newsletter, Research

I'm sure that most of you are spending your free time devouring the utterly fascinating pages of "Fire and Fury" these days, now in its 12th week on the New York Times best-seller list.

I, however, am reading slightly different subject matter.

As obscure, academic, and abstruse the "Global Dollar Credit: Links to US Monetary Policy and Leverage" may sound, published by the Bank for International Settlements (BIS), it has been an absolute blockbuster among strategists at the major hedge funds.

And given the apocalyptic conclusions of the report, it might well rank as one of the best horror stories of the year, worthy of the bloodiest zombie flick.

I'll give it to you in a nutshell.

Corporate borrowers outside the US have ramped up their borrowing astronomically over the past 17 years, from $2 trillion to $9 trillion.

This makes them extraordinarily sensitive to any rise in US interest rates and the dollar. Emerging market debt alone has doubled to $4.5 trillion.

Easy money has encouraged mal investment and overinvestment in projects that never would have seen the light of day if unlimited financing were not available at 1%. In other words, it is all a giant house of cards ready to collapse.

I know a lot of you thrive on folk-based economic theories you picked up on the Internet based on monetarism, Austrian economics, and the theories of Friedrich August von Hayek, that all have the dollar collapsing under a mountain of debt.

In fact, the complete opposite has come true. The global economy has become "dollarized," with companies and governments in almost all nations relying on the buck as their principal means of financing.

The end result of all this has been to vastly expand the power of the Federal Reserve far beyond America's borders. Even the smallest rise in US interest rates, such as the 1/4% hike mooted for June, could trigger a cascade of corporate defaults around the world.

Think of subprime, with a turbocharger, running on pure nitro.

This is having a huge deflationary effect on the economies of many emerging nations.

Malaysia's sovereign wealth fund has almost gone under after a series of bad bets against the dollar. There is thought to be another troubled dollar short coming out of Hong Kong worth $900 million.

This is forcing countries to liquidate their US Treasury Bonds to cover local losses.

Further exacerbating the situation has been the crash of the price of oil, which has turned producing countries from suppliers to takers of liquidity to the global credit markets. Even after last year's monster rally, oil is still trading at 60% below the 2011 peak.

The net net of all of this is to increase the risk of surprise blowups overseas, both by banks and the private borrowers. This will increase the volatility of financial instruments everywhere.

The Bank for International Settlements is an exclusive club of the world's central banks. It is based in Basel, Switzerland (great swimming in the Rhine there), with further offices in Hong Kong and Mexico City. Its goal is it to coordinate policies among different nations.

The BIS was originally founded in 1930 to facilitate payment of German reparations following the Versailles Treaty ending WWI.

As a regular groupie on the central banking scene, I have been reading the research publications for many decades.

It All Started Here in Versailles

Why You Should Care About the LIBOR Crisis

Diary, Newsletter, Research

You know those bond shorts you're carrying on my recommendation? They are about to pay off big time.

We are only one more capitulation sell-off day in the stock market from bonds starting to fall like a rock.

There is a financial crisis taking place overseas, which you probably don't know, or care about.

Here is my one-liner on this: You should care.

The London Interbank Offered Rate (LIBOR) is a measure of the cost of short-term borrowing in Europe. It is essentially their version of our own Fed funds rate. And here's the problem. It has been rising almost every day for two months.

If you read the financial press, you probably already know about LIBOR as the subject of a bid rigging scandal that prompted billion-dollar fines and jail terms for the parties involved.

You can take this as the opening salvo in the coming credit crisis. It probably won't start to seriously bite here in the US for two years. But it is already hurting the profitability of European banks now.

A staggering $350 trillion in loans in the US and abroad are tied to LIBOR-based loans, including $1.2 trillion in mortgages for high-end homeowners. Rising interest rates for this debt bring immediate pain.

You can see this clearly is the cost of funds around the world, as outlined by the charts below.

Saudi Arabia's cost of funds, or SAIBOR, historically a net supplier of funds to the continent thanks to its perennial oil surplus, has just been raised 60 basis points, the first such move in a decade.

It is causing cash squeeze in Hong Kong, as seen through escalating HIBOR rates. Even Australian banks, normally seen as the bedrock of the global financial system, have seen the sharpest rise in interest rates in eight years.

Of course, the reasons for the global credit squeeze here at home are screamingly obvious. The US government is in the process of tripling its annual borrowing needs, as the budgets deficit soars from $400 billion to $1.2 trillion.

Exacerbating the influence on the markets is the US Treasury's new preference for short-term borrowing instead of the long-term kind, thus boosting the cost of shorter-term money.

This is to reduce the immediate up-front cost of borrowing. Like so many administration policies, it is reaping a short-term paper advantage for a very much higher long-term real cost.

As we are just entering a 20-year bear market for bonds, the Feds should be borrowing as much long-term money as they possibly can.

This is what private corporations are doing, such as Apple (AAPL) and Goldman Sachs (GS), issuing 30- to 100-year bonds, even though they don't need the money.

The tax bill passed at the end of 2017 also has had the unintended side effect of raising European rates. US companies now are mobilizing some $2.5 trillion to bring home at minimal tax rates.

That has brought them to unload longer term investments and shift the funds into overnight commercial paper, further boosting rates.

You normally don't see this kind of divergence in domestic and foreign costs of money without some kind of credit crisis.

Nervous eyes are cast toward Germany's Deutsche Bank (DB), holder of the world's largest derivatives book, and whose share price has plunged a stunning 30% in two months. Clearly, the insider money is getting out. Expect to hear a lot more about Deutsche Bank in the coming months.

I have said all along that the true cost of the tax bill won't be in the immediate up-front price tag, but the long-range unintended consequences.

You don't turn America's $20.5 trillion economy on a dime without creating a lot of disruption. And now they want to pass a second tax bill!

Spiking Rates are Becoming a Real Headache

Market Outlook for the Week Ahead, or Goodbye the Quarter from Hell

Diary, Newsletter, Research

Well, that was some quarter! Call it the quarter from hell.

For as long as most traders and investors can remember, they are losing money so far this year. And they promised us such a rose garden!

The S&P 500 made a valiant, and so far successful effort to hold at the 200-day moving average at $256. We saw an unprecedented four consecutive days of 2% moves.

Yet, with all that tearing of hair, banging of heads against walls, and ulcers multiplying like rabbits, the (SPY) dropped only 5 points since January, off 1.8%, a mere pittance. It's been a whole lot of work and stress for nothing.

So far, the (SPY) has been bracketed by the 50-day moving average on the upside at $272, and the 200-day moving average on the downside. It could continue like this for six more months, forming a very long triangle formation with a year-end upside breakout.

Is the market going to sleep pending the outcome of the November midterm congressional elections?

But here's the catch. We now live in the world of false breakouts and breakdowns, thanks to algorithms. It happened twice in February and March to the upside.

What follows false upside breakouts? How about false downside breakdowns, which may be on the menu for us in April.

My bet is that we'll see one of these soon, taking the (SPY) down as low as $246. Then we'll rocket back up to the middle of the range in another one of those up 100-point days.

What will cause such a catharsis? An escalation of the trade war would certainly do it. Or maybe just a random presidential tweet about anything.

That's why I have been holding fire so far on my volatility shorts and more aggressive longs in stocks.

What will I be buying? Amazon (AMZN), which has essentially an unlimited future. Thank the president for creating a rare 16% selloff and unique buying opportunity with his nonsensical talk about antitrust action.

On what exactly does Amazon have a monopoly? Brilliance?

I also will be taking a look at laggard legacy old tech companies such as Intel (INTC) and Cisco Systems (CSCO). And how can you not like Microsoft here (MSFT)?

Of course, the mystery of the week was the strength in bonds (TLT) taking yields for the 10-year Treasury down to 2.75%. This is in the face of a Treasury auction on Wednesday that went over like a lead balloon.

I think it's all about quarter end positioning more than anything. Some hedge funds have big losses in stocks and volatility trading to cover, and what better way to do it than take profits on bond shorts through buying.

I already have started selling into the rally.

The scary thing about the bond action is that it has accelerated the flattening of the yield curve, with the two-year/10-year spread now only 50 basis points.

It also brings forward the inversion of the yield curve. And we all know what follows that with total certainty: a bear market in stocks and a recession.

The data flow for the coming week is all about jobs, jobs, jobs.

On Monday, April 2, at 9:45 AM, we get the March PMI Manufacturing Index.

On Tuesday morning, we receive March Motor Vehicle Sales, which have recently been weak at 17.1 million units.

On Wednesday, April 4, at 8:15 AM EST, the first of the trifecta of jobs reports comes out with the ADP Employment Report, a read on private sector high.

Thursday, April 5, leads with the Weekly Jobless Claims at 8:30 AM EST, which hit a new 49-year low last week at an amazing 210,000.

At 7:30 AM we get the March Challenger Job Cut Report.

On Friday, April 6, at 8:30 AM EST, we get the Big Kahuna with the March Nonfarm Payroll Report. Last month brought shockingly weak figures.

The week ends as usual with the Baker Hughes Rig Count at 1:00 PM EST. Last week brought a drop of 2.

As for me, I am headed up to Lake Tahoe, Nev., today for spring break to catch the last of the heavy snow. After a record 18 feet in March, Squaw Valley, Calif., has announced that it is keeping the ski lifts open until the end of May.

Good Luck and Good Trading.

Is It All Over for Artificial Intelligence?

Diary, Newsletter, Research

Take a look at the worst performing stocks of the past two weeks and they all have one theme in common: artificial intelligence.

You can trace the beginning of the move back to the Arizona crash by an Uber AI autonomous driven car that killed a pedestrian.

As all those who have studied chaos theory in mathematics, it's like the proverbial butterfly that flapped its wings in a Brazilian rain forest, which then triggered a typhoon in Japan.

Never mind that the pedestrian was jaywalking at night wearing dark clothes. AI is supposed to see this. My guess is that only a sensor failure could have caused the accident, a dud $5 part, which means it has nothing to do with AI.

This is the second autonomous driving death in three years. The last one, involving a Tesla Model S-1 in Florida, didn't see the back of a white truck while driving into the sun, and crashed into it, killing the driver.

And here is the problem if you are a trader or investor.

Autonomous driving has been a major theme in the entire tech sector for the past two years.

You can start with the car companies, Tesla (TSLA), Uber, and Google's (GOOGL) Waymo, and extend all the way out through the entire ecosystem.

That would include the chip makers, NVIDIA (NVDA), which is suspending its autonomous program, Intel (INTC), Advanced Micro Devices (AMD), and the chip equipment maker Lam Research (LRCX).

So, is it game over for these companies? Is it time to pick up our marbles and play elsewhere (there is nowhere else)?

I don't think so.

Let's look at the hard numbers involving automobile accidents. During the same three-year period that AI cars killed two people, human drivers killed a staggering 100,000, and left millions with injuries.

So there is absolutely no doubt that AI is the superior technology. AI-driven cars don't text while driving, drink, take drugs, drive while tired, overdo it with an afternoon of wine tasting in Napa Valley, or look down at their cell phones, as did the safety driver in the ill-fated Uber car in Phoenix.

AI is not just a self-driving car theme. It is permeating every aspect of the modern economy and will continue to do so at an accelerating pace. It is no one-hit wonder.

All that is happening now is that AI and tech stocks in general are backing off from grievously overbought conditions.

As we approach the next round of earnings reports in a month, the market focus rapidly will shift back from tedious and distressful technicals. That's when they will rocket again.

There is an old market term for the current state of technology stocks. It is known as a "Buying Opportunity."

I haven't been able to touch stocks I love for months because they were completing upward moves of 50% to 300% over the past two years.

They have just become touchable once again.

To watch the video of the Phoenix crash and the expression of the clueless safety driver, please click here.

China's Coming Demographic Nightmare

Diary, Newsletter, Research

Thanks to China's "one child only" policy adopted 30 years ago, and a cultural preference for children who grow up to become family safety nets, there are now 32 million more boys under the age of 20 than there are girls.

Large-scale interference with the natural male:female ratio has been tracked with some fascination by demographers for years and is constantly generating unintended consequences.

Until early in the last century, starving rural mothers abandoned unwanted female newborns in the hills to be taken away by "spirits."

Today, pregnant women resort to the modern day equivalent by getting ultrasounds and undergoing abortions when they learn they are carrying girls.

Millions of children are "little emperors," spoiled male-only children who have been raised to expect the world to revolve around them.

The resulting shortage of women has led to an epidemic of "bride kidnapping" in surrounding countries. Stealing of male children is widespread in Vietnam, Cambodia, Laos, and Mongolia.

The end result has been a barbell-shaped demographic curve unlike that seen in any other country.

The Beijing government says the program has succeeded in bringing the fertility rate from 3.0 down to 1.8, well below the 2.1 replacement rate.

As a result, the Middle Kingdom's population today is only 1.2 billion instead of the 1.6 billion it would have been.

Political scientists have long speculated that an excess of young men would lead to more bellicose foreign policies by the Middle Kingdom.

But so far the choice has been for commerce, to the detriment of America's trade balance and Internet security.

In practice, the one-child policy was only applied to those who live in cities or had government jobs. That is about two thirds of the population.

On my last trip to China I spent a weekend walking around Shenzhen city parks. The locals doted over their single children, while visitors from the countryside played games with their three, four, or five children. The contrast couldn't have been more bizarre.

Economists now wonder if the practice also will understate China's long-term growth rate. Parents with boys tend to be bigger savers, so they can help sons with the initial big-ticket items in life, such as an education, homes, and even cars.

The endgame for this policy has to be the Japan disease; a huge population of senior citizens with insufficient numbers of young workers to support them. The markets won't ignore this.

In the latest round of reforms announced by the Chinese government was the demise of the one-child policy.

But no matter how hard you try, you can't change the number of people born 30 years ago.

The boomerang effects of this policy could last for centuries.

From the Front Line of the Trade War

Diary, Newsletter, Research

Poke your hand into a hornet's nest and you can count on an extreme reaction, a quite painful one.

As California is the growth engine for the entire US economy, accounting for 20% of US GDP, it is no surprise that it has become the primary target of Chinese retaliation in the new trade war.

The Golden State exported $28.5 billion worth of products to China in 2017, primarily electronic goods, with a host of agricultural products a close second.

In the most devious way possible, the Middle Kingdom targeted Trump supporters in the most liberal state in the country with laser-like focus. California exports 46% of its pistachios to China, followed by 35% of its exported plums, 20% of exported oranges, and 12% of its almonds.

By comparison, California imported a gargantuan $160.5 billion worth of goods from China last year, mostly electronics, clothing, toys, and other low-end consumer goods.

Some $16 billion of this was recycled back into the state via investment in real estate and technology companies.

Anecdotal evidence shows that figure could be dwarfed by the purchase of California homes by Chinese individuals looking for a safe place to hide their savings. Local brokers report that up to one-third of recent purchases have been by Chinese nationals paying all cash.

The Chinese tried to spend more. Their money is thought to be behind Broadcom's (AVGO) $105 billion bid for QUALCOMM (QCOM), which was turned down for national security reasons.

The next big chapter in the trade war will be over the theft of intellectual property, and that one will be ALL about the Golden State.

Also at risk is virtually Apple's (AAPL) entire manufacturing base in China, where more than 1 million workers at Foxconn assemble iPhones, Macs, iPads, and iPods.

The Cupertino, CA, giant could get squeezed from both sides. The Chinese could interfere with its production facilities, or its phones could get slapped with an American import duty.

So far, the trade war has been more bluff than bite. The US duties announced come to only $3 billion on $50 billion worth of trade. China responded with incredible moderation, only restricting $3 billion worth of imports.

By comparison, in 2017 the US imported a total of $505.6 billion in goods from China and exported $130.4 billion. Against this imbalance, the US runs a largest surplus in services.

The next Chinese escalation will involve a 25% tariff on American pork and recycled aluminum. Who is the largest pork producer in the US? Iowa, with $4.2 billion worth, and the location of an early presidential election primary.

Beyond that, Beijing has darkly hinted that is will continue to boycott new US Treasury bond auctions, as it has done for the past six months, or unload some if its massive $1.6 trillion in bond holdings.

Given the price action in the bond market today, with the United States Treasury Bond Fund (TLT) at a two-month high, I would say that the market doesn't believe that for two seconds. The Chinese won't cut off its nose to spite its face.

In the end, I think not much will come of this trade war. That's what the stock market told us yesterday with a monster 700-point rally, the biggest in three years.

The administration is discovering to its great surprise that its base is overwhelmingly against a trade war. And as business slows down, it will become evident in the numbers as well.

The US was the big beneficiary from the global trading system. Why change the rules of a game we are winning?

Still, national pride dies hard.

Market Outlook for the Week Ahead, or The Week That Washington Finally Mattered

Diary, Newsletter, Research

After ignoring the constant chaos in Washington for 17 months, it finally mattered to the stock market.

Guess what was at the top of the list of retaliatory Chinese import duties announced last week?

California wine!

The great irony here is that half of the Napa Valley wineries are now owned by Chinese investors looking for a bolt-hole from their own government. Billionaires in China have been known to disappear into thin air.

And after years of trying, we were just getting Chinese consumers interested in tasting our fine chardonnays, merlots, and cabernet sauvignons.

It will be a slap in the face for our impoverished farmworkers who actually pick the grapes, who have just been getting back on their feet after last fall's hellacious fires.

Do you suppose they will call the homeless housing camps "Trumpvilles?"

California is on the front line of the new trade war with China.

Not only is the Middle Kingdom the largest foreign buyer of the Golden State's grapes, almonds, raisins, and nuts, it also is the biggest foreign investor, plowing some $16 billion in investments back here in 2016.

Down 1,700 Dow points on the week and a breathtaking 1,400 points in two days. It was the worst week for the markets in two years. And the technology and financial stocks suffered the worst spanking - the two market leaders. The most widely owned stocks are seeing the worst declines.

We certainly are paying the piper for our easy money made last year. The Dow Average is now a loser in 2018, off 4.1% and back to November levels.

The Dow 600 point "flash crash" we saw in the final two hours of trading on Friday was almost an exact repeat of the February 9 swoon that took us to the exact same levels.

There was no institutional selling. It was simply a matter of algorithms gone wild. The news flow that day was actually quite good.

Our favorite stock, Micron Technology (MU) announced blockbuster earnings and high target (for more depth, please read the Mad Hedge Technology Letter).

Dropbox (DBX) went public, and immediately saw its shares soar by 50% in the aftermarket. The president signed an emergency funding bill to keep the government open, despite repeated threats not to do so.

Which means the market fell not because of a fundamental change in the US economy. It is a market event, pure and simple.

I therefore expect a similar outcome. Only this time, we don't have an $8 billion unwind of the short volatility trade ($VIX) to deal with, as we did in February. That's why I thought markets would bottom at higher levels this time around.

There is only one problem with this theory.

The chaos, turmoil, and uncertainty in Washington is finally starting to exact a steep price on shareholders. Uncertain markets commend lower price earnings multiples than safer ones.

As a result, multiples are now 15% lower than the January high at 19.5X, and much more for individual stocks. And multiples have been falling even though earnings have been rising, quite substantially so. Such is the price of chaos.

Will markets bottom out here on a valuation basis as they did last time? Or will the continued destruction of our democracy command a higher price? We will find out soon.

Clearly the S&P 500 200-day moving average at $255.95 is crying out for a revisit, which we probably will see first thing Monday morning. Allow more shorts to get sucked in, and then you probably have a decent entry point to buy stocks for the rest of 2018.

Indeed, it was a week when the black swans alighted every day. First, the twin hits from Facebook (FB), followed by the worst trade war in eight decades. Then came the Chinese retaliation.

While the damage suffered so far has been limited, investors are worried about what is coming next.

One of the last supervising adults left the White House, my friend and comrade in arms, National Security Advisor H.R. McMaster. His replacement is Fox News talk show host John Bolton, who is openly advocating that the US launch a pre-emptive nuclear strike against North Korea.

Bolton has quite a track record. He is the guy who talked President Bush into invading Iraq. Now, that would trigger a new bear market in the extreme!

As I did not predict five black swans in five days, the Mad Hedge Trade Alert Service took a hit this week, backing off of fresh all-time highs.

The trailing 12-month return fell to 46.49%, the 8-year return to 284.01%, bringing the annualized average return down to only 34.08%.

Given all of the above, economic data points for the coming holiday shorted trading week seem almost quaintly irrelevant. But I'll give them to you anyway.

On Monday, March 26, at 10:30 AM, we get the February Dallas Fed Manufacturing Survey.

On Tuesday, March 27, at 9:00 AM, we receive an update on the all-important CoreLogic Case-Shiller National Home Price NSA Index for January. A 3-month lagging housing indicator.

On Wednesday, March 28, at 8:30 AM EST, the second read of Q1 GDP comes out.

Thursday, March 29, leads with the Weekly Jobless Claims at 8:30 AM EST, which hit a new 49-year low last week at an amazing 210,000. At 9:45 AM, we get the February Chicago Purchasing Managers Index. At 1:00 PM, we receive the Baker-Hughes Rig Count, which saw a small rise of three last week.

On Friday, March 30, the markets are closed for Good Friday.

As for me, I'll be doing my Christmas shopping early this year before the new Chinese import tariffs jack up the price for everything by 15% to 25%.

I'll be doing all of this courtesy of Amazon (AMZN), of course. Since I arrived here at Lake Tahoe, it has snowed 6 feet in two days in a storm of truly biblical proportions. We got a total of 18 feet of snow in March. By the time I dig out, it will be time to go home.

Good luck and good trading.

John Thomas

The Value Case for Facebook

Diary, Newsletter, Research

When it rains, it pours.

That is how Facebook founder Mark Zuckerberg must feel after suffering two black swans in two days.

First came the disclosures that a client, Cambridge Analytica, used the information from 50 million Facebook users to help the Russians influence the 2016 presidential election.

Today, we learned that the company is being investigated by the Federal Trade Commission for failure to keep customer information private.

As a result, the company has lost all of its 2018 year-to-date stock performance, and is now taking a big bite out of 2017.

The question now arises, what should you do about all of this as the educated investor?

Facebook is one of the most widely owned companies in the world, right after Apple (AAPL). It often is the largest single position of many major institutional investors. And there isn't one that isn't salivating at adding to its position at fire-sale prices.

For the first time in ages, Facebook is now selling at a screaming discount to the main market, with a PE multiple of only 16.5X at today's low, compared to 19X, and 14.5X if you strip out cash on the balance sheet. Facebook has in effect become another Apple (AAPL) in valuation terms.

Fundamentals have not changed. Some 66% of advertisers say they will increase their spend over the next year.

Regulatory fear is overdone, and it is difficult to imagine in what form that such regulation would take. What, an (FB) friend tax on your account? I would go broke.

If anything, more regulation could be a net positive for (FB), as it creates a deeper moat with which it can protect and grow its business. For more depth on this topic please read today's issue of the Mad Hedge Technology Letter.

The barriers to entry for new competitors, already huge, are about to become insurmountable.

The worst case is that founder Mark Zuckerberg may have to undergo an unpleasant appearance in front of the technophobes in congress.

The company is growing at a compound 30% annual rate and is far and away the dominant player in a deeply moated space. In other words, it is still a company whose shares you should die for.

We'll know for sure when the company gives its Q1, 2018 earnings report after the market close on May 2.

In Q4, 2017 it announced an earnings per share of $2.21, a beat of 26% over analyst expectations. Revenues rose by an eye-popping 47.2% to $12.97 billion for the quarter YOY, a beat of $420 million.

Full year 2017 free cash flow came to $17 billion. Q4 operating income came to $7.4 billion representing a 53% profit margin.

Some 89% of the company's ad revenues came through mobile phones.

There are now 2.1 billion people using Facebook, and 1.1 billion on a daily basis. Some 700 million come to the site daily to buy and sell things through Facebook market.

Its WhatsApp subsidiary has 1.5 billion users who transmit 60 billion messages a day.

Its Oculus Rift entry in the virtual reality gaming space, to which my own kids are hopelessly addicted, is the front-runner in the field.

You might want to wait for the smoke to clear and the dust to settle. However, right here right now at $162 a share it would be perfect for your long-term "buy and forget" portfolio, not only for you and your kids, but for your grandkids as well.

I'm Willing to Bet on the Zuk