Traders, investors, and pundits alike have bemoaned the lackluster performance of Apple shares since July, when it double topped at $132.50 a share.
In little more than a month, it gave back a heart rending 31% at the August 24 flash crash low, wiping out a breathtaking $232 billion in market capitalization.
The bad news is that conditions at Steve Jobs? creation are about to get a lot worse. At the very least, the $92 handle cries out for a revisit on the next bad day, or earnings disappointment.
Let me give you a list of seven worries if you happen to be an unfortunate Apple shareholder.
1) The iPhone 6s doesn?t have the juice to produce new highs in year on year sales. There are just not a lot of ?wow factor? new features to justify an upgrade for most iPhone 6 owners, including me.
iPhones account for 75% of the profits of the company, and 100% of the growth. All the rest, Apple TV, Macs, laptops, iPads, iPods, and even cars are just so much hot air.
2) Wage inflation in China is rampant, running at a 20% annual rate for skilled workers. That?s why workers in China change jobs every February, to capture a pay hike. Higher manufacturing costs will squeeze Apple?s profit margins.
Watch out for more suicides at Foxcon, the Chinese company that makes the phones.
3) The ?ATM effect? is hitting Apple?s share price big time. That is when investors sell winners to raise cash levels. Apple stock was, at one point, up 91% from where I sent out a Trade Alert to buy it at $385 two years ago.
4) Expect President Hillary to make taxation of foreign profits earned by US multinationals a top priority. Guess who has the biggest overseas stash? Apple, which keeps a major portion of its $200 billion cash horde parked in offshore bank accounts. Pass the suntan lotion!
5) I know this one is an oldie, but it is still a goodie. Everyone in the whole world already owns this stock, either directly, or indirectly through pension funds, ETF?s, NASDAQ index baskets (QQQ), or technology funds. If everyone is already fully committed, where does the marginal new buyer come from.
6) So is the law of large numbers. With a market capitalization at a staggering $630 billion, to eke a mere 10% gain in the stocks requires roughly $63 billion worth of new investment, and possibly more. That is more than the entire stock market sees on a good day.
7) With interest rates rising sooner or later, support from the company?s 1.88% dividend yield will become less helpful.
Mind you, I have not suddenly become an Apple hater. But there are legions of those out there, mostly outside of California. There always have been.
However, I don?t think the next run to a new all time high will begin until next year. That?s when the stock will start discounting the new iPhone 7. That product will have all the new features and gizmos, with different screen sizes and colors. (Rose gold? Really?).
People will pay through the nose to get that, and yes, including me. That?s if my current iPhone 6 doesn?t get stolen first and end up in on the black market China, get hijacked by one of my kids, or dropped in a toilet by my daughter.
This should provide enough rocket fuel for Apple shares to make it to $150, or higher.
You heard it here first.
I Hear They?re Diversifying
https://www.madhedgefundtrader.com/wp-content/uploads/2014/06/Apple-Trucking.jpg239321Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-10-08 01:08:112015-10-08 01:08:11Seven Worries You Don?t Want to Know About Apple
I am going to continue to use this correction in the stock market as an opportunity to put new names in front of you for inclusion in your investment portfolio.
That way, when the markets turn, you can strike with the speed of a rattlesnake in returning to a ?RISK ON? posture.
Major turnarounds are not the time to engage in deep, fundamental research. It is when you should be pulling the trigger on Trade Alerts, which you have wisely spent time lining up.
This brings me back to my three core sectors for long-term investment, technology, health care, and energy. For a four cyclical play, you can add the financials as an interest rate play.
Which brings me to one of my perennial favorites, Gilead Sciences (GILD). Long-term readers will recall this big momentum name, which I first recommended last December at $75 a share. It hit $125 in June, last week, and could fly as high as $200 in 2016.
Obamacare is proving to by one of the greatest windfalls in the history of the health care industry. More than 45 million new individuals now enjoy government guaranteed payments for health care services for the first time. In addition, millions more are signing up for private insurance.
One of the cleanest shots at this new profit stream is Gilead Sciences. The ticker symbol seems so appropriate for this new Golden Age for the health care industry.
(GILD) is an American biotechnology company that discovers, develops and commercializes treatments for a range of different diseases. The California based firm initially concentrated on antiviral drugs to treat patients infected with HIV, hepatitis B, or influenza.
In 2006, Gilead acquired two companies that were developing drugs to treat patients with pulmonary diseases.
These are all expected to be huge growth areas in the future, and the company has become a favorite of hedge fund traders. Both the shares and the sector have been on fire all year.
Don?t rush out and buy (GILD) today. Rather, I?d wait until the last of the sellers get flushed out in this correction, which will probably not be until well into October.
Take a look at the charts below, and they suggest that the S&P 500 could reach as low as 1,976, or down another 160 handles from here.
That will give us another top to bottom pullback of 12.52%, which certainly qualifies as a healthy correction. This will be the time to load the boat with (GILD).
Keep close tabs on your text message service and email, and I?ll let you know when it is time to lay your cajones on the line once more.
Yes, It?s $1,000 a Pill
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/Pills-e1411767040932.jpg226400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-10-01 01:06:142015-10-01 01:06:14Keep Gilead Sciences on Your Radar
Who?s really reading Your email? I bet you?d like to know!
Another day, another hack attack.
Today we learned that 5.6 million fingerprint records kept by the Office of Personal Management were recently stolen.
This is the agency that functions as the US government?s human resources department, maintaining records on 21.5 million current and former employees.
The timing couldn?t be more inauspicious, as the announcement was made during a visit by Chinese President Xi Jinping, whose military was almost certainly the origin of the attack.
Great! Now the enemy has the fingerprints of every FBI and CIA agent!
There must be a way to make money out of this.
Wait! There is!
Palo Alto Networks (PANW) is a San Francisco Bay area cyber security company that offers companies and governments an innovative firewall platform solution for big, network wide security problems.
In the P&L sweet spot they are.
I know the company well, and have been recommending to my followers that they buy the shares for the past year, during which time it tripled.
What? You want me to buy a stock that has just tripled?
No, I have not just started smoking California's largest agricultural product (no, it?s not almonds or grapes).
By chance, I happened across a senior officer of the Palo Alto Networks at a dinner party last week. Prospects for the firm are booming, with sale growth running at a torrid 30% YOY rate.
Yet, (PANW) has only 10% market share of an industry that is currently exploding. This is an aggressive, extremely well managed $15 billion company that is about to become a $150 billion company.
Keeping in contact with the Joint Chiefs of Staff on a weekly basis, I am constantly concerned at how serious the cyber security threat has become, yet how little understood it is by the public.
You don?t have to go any further than the management of Sony (SNE), one of the world?s largest multinationals, which was almost wiped out last November by hackers from one of the poorest and most backward countries in the world.
Upset by the take down of their leader, Kim Jong-un, in a low budget comedy, The Interview, North Korean hackers were able to bring the firm to its knees.
They downloaded the entire contents of Sony?s hard drives, leaking the juicy parts to online journalists (Angelina Jolie?s pay, etc.), and then wiped them clean, destroying some 3,000 computers and 8000 servers. It was the hacking equivalent of a full-scale nuclear attack.
Sony had to revert to snail mail, couriers, and landline telephone calls to survive. They couldn?t even pay their employees. Some $6 billion in market capitalization was wiped out.
Now here is the scary part.
The FBI has confided in me that if the S&P 500 were subjected to a Sony level attack, 90% are unlikely to survive. And the Sony attack was actually a primitive, simplistic, low-level attack.
A lot of countries don?t like the United States for any number of reasons. Now they can do something about it. That is a problem. And a market.
Palo Alto maintains the world?s largest database of viruses and malware. That enabled it to trace the Sony attack to the Hermit Kingdom within hours.
It contained several lines of code that were identical to the ?Dark Soul? attack against South Korean banks in 2013, which incinerated 40,000 bank computers and caused $700 million worth of damages.
What the Sony attack revealed was a long history of massive under investment in cyber security by corporations and governments in the US, Europe, and Asia.
The potential future market for cyber security products and services is being wildly underestimated.
The great irony here is that the attack is not against systems, which are usually pretty secure. It is their human users that have become the problem.
Unfortunately, we are have become familiar with ?spoofing? emails where an innocuous email asks the user to ?click here? for an Adobe upgrade, a notice from Yahoo, or a request from PayPal to update your password.
Do so, and you invite lines of code that will eventually make it to your system administrator. Once they have his password, they can access or do anything.
Don?t think only dummies fall for this.
My friend, retired FBI chief Robert Mueller, had his personal account at the Bank of America cleaned out in a similar fashion. What was unusual in his case, they caught the transgressor, after a huge expenditure of bureau resources.
(Hint: if an incoming email appears the slightest bit suspicious, hover your mouse over the sender?s name, and the sending email address will appear. If it looks anything but belt and braces safe, don?t open it and mark it as SPAM. Especial watch for the last three letter of the address, which are always a tip off).
The FBI estimates that there are up to 10,000 hackers in the world with the capability of a Sony level attack, many operating from China, Russia, Eastern Europe, or other locations beyond the reach of US extradition treaties.
The global cyber war has been going on for about 15 years now, and the public hears very little of it.
In recent years, Iran attacked Saudi Arabia?s Aramco, destroying 30,000 computers, and briefly shutting down a portion of the country?s oil production.
A major attack was launched against the Venetian Hotel in Las Vegas, which is owned by prominent Israel supporter and major Republican Party contributor, Sheldon Adelson.
There is a happy ending to this piece. You don?t need to place your entire wealth into gold bricks and bury them in the backyard to keep it safe.
If North Korea is a bicycle in the hacking arms race, the US is the F-35 Lightening next generation stealth fighter.
We are winning the cyber war hands down, but you?d never know it. This is a war fought silently, online, and in dark shadows.
President Obama in fact authorized a measured counter attack on North Korea?s information infrastructure, which proved devastating. But it was only a pinprick relative to what we could have done.
Our real cyber weapons are reserved for an actual shooting war sometime in the future. That?s to prevent the enemy from learning our true capabilities and preparing for them.
Imagine a country trying to defend itself with snail mail, couriers, and landline telephone calls from an American assault. Think the Sony attack times 10,000. Nothing would work.
It couldn?t be done.
Congress has so far refused to fund a substantial increase in America?s cyber warfare arsenal, preferring instead to spend money on old heavy metal weapons systems, like aircraft carriers, tanks, and the above mentioned F-35.
It?s all about sucking money out of Washington to create local jobs in red states to win elections. A stepped up cyber program would focus money almost entirely in Silicon Valley.
Don?t want to do that!
This is how General George Armstrong Custer was sent to the Battle of the Little Big Horn with antiquated 16 year old Civil War trapdoor Springfield carbines, while the Sioux had state of the art Winchester ?yellow boy? repeaters.
And we know how that one turned out!
But don?t get mad. Get even. Take another look at Palo Alto Networks, FireEye (FEYE), and the Pure Funds ISE Cyber Security ETF (HACK).
Guess Who May Be Looking at Your Records
https://www.madhedgefundtrader.com/wp-content/uploads/2015/09/Kim-Jong-un-e1443128747953.jpg264400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-09-25 01:06:012015-09-25 01:06:01Cashing In On Cyber Security
I think the bull market has at least three more years to run, but I?ll tell you why later.
In the meantime, we have to survive October first.
That is easier said than done.
October has long earned a notorious reputation as a wealth confiscation month for both professional traders and long-term investors.
If you go broke during this always challenging month, you won?t have any money left to play the coming price rises.
Over the weekend, I did my usual scan of the 200 most important charts for the global financial markets. The technical picture that leapt out at me was nothing less than atrocious.
Failure to break the old support/new resistance level in the (SPY) at $203 means we now have to retest the August 24 lows at $186, or $182 in the intraday futures.
If $182 doesn?t hold, then we?re breaking to new lows, and entering a new bear market.
Every technical service I subscribe to was repeating the identical pattern. This is rare enough that when it does occur, I stand to attention.
Look out below!
This year, October will be particularly vexing.
The newly elevated level of volatility has scared the daylights out of a lot of stockholders.
Look no further than last Friday, September 18. Just when everyone thought it was safe to nibble on some new longs, the Dow Averaged came out of the blue and whacked them with a 300-point loss.
I don?t even recall the reason. But it is irrelevant. Traders were gun-shy. No one wanted to hold a position over the weekend, and risk that China would have a bad Monday (it did).
It get?s worse.
Congress is now threatening another shutdown. Be it over Planned Parenthood funding or the Iran Treaty, it makes no difference. Closed is closed.
This is exactly what the market doesn?t want to hear.
Then we have three more months of Fed torture to endure. Failure to move on September 17 means that uncertainty surrounding the first interest rate reversal in nine years has been given another fresh three months of life.
As if we didn?t have enough to worry about!
It all adds up to a nightmare for neophyte traders. No one has the slightest idea of what the market will do next. If they pretend to, they?re lying.
That is, unless you happen to have a half-century of trading experience, as I do. Then it?s a piece of cake.
Just hit the mute button on the TV and close your eyes. Then buy every big dip and sell every substantial rally. Don?t try to rationalize this in any way. This is trading and investment totally devoid of the thought process.
Overthinking your trades right now can be hazardous to your wealth. Just let your primordial brain stem take over for now.
And it works like a charm.
Just look at my trades of the last few days. When the market opened high, I bought the October (SPY) $204-$207 vertical bear put spread.
When it then dove 300 points I bought the Home Depot (HD) October $105-$110 vertical bull call spread as a hedge.
When the market popped 200 points on the following Monday morning opening (and 300 points if you count the overnight Asia low), I kicked out Home Depot for a nice little 6.2% one day profit.
I then rolled down and purchased the (SPY) October $203-$206 vertical bear put spread to double up my short exposure.
I ended up +0.91% on the day on my total portfolio, just 1.23% short of a new all time high, and ahead 37.14% so far in 2015.
I don?t normally trade this fast. But they?re running the movie on triple fast forward now. A month?s worth of price movement is occurring in a day.
Bob and weave, bob and weave. We have to trade the market we have, not the one we want.
While a technical breakdown is looming, and the fundamentals seem to be backing it up, I don?t think a real bear market will appear.
Historically, stock markets continue rising an average of 30 months after the first Federal Reserve interest rate hike. That hourglass won?t even get turned over until December, or maybe even not until 2016.
The longest data point on this chart is 73 months. That means the Fed inaction means THE BULL MARKET COULD HAVE ANOTHER SIX YEARS TO RUN!
Yikes!
Beyond the hysterical, oops, I mean the historical analogies, the economy is just too darn strong to grease the skids for a true bear market.
I had to call three restaurants to get a dinner reservation in San Francisco this weekend, and finally got one only because it was a dive. I can?t get a plumber to unblock my toilet because he is too busy. And these were the guys who were collecting unemployment checks only four years ago.
For more glorious detail on the current state of the economy, please click here for ?The Bear Market That Isn?t?.
The dreaded October effect traces back to the 19th century, when agriculture accounted for 50% of the US GDP. Right before crops were harvested in the fall, farmer outlays to pay for the inputs of seed, fertilizer, and labor were the greatest.
Yet, the crops hadn?t been sold yet, so farmer borrowing also hit a peak. The aggregate of all this hit the financial markets with an enormous cash call, which led to the inevitable crashes.
Once the trend was established, it became a self-fulfilling prophecy, even though agriculture presently accounts only for 2% of the American economy now.
It is traders that sweat October now, not farmers.
Back for a Replay?
https://www.madhedgefundtrader.com/wp-content/uploads/2015/09/Black-Tuesday-Newspaper-e1442932274731.jpg400331Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-09-22 01:07:392015-09-22 01:07:39Will the Market Crash in October?
One of the most impressive moves in the wake of the Fed?s Thursday move to maintain ultra low interest rates was to be found in gold.
In the run up to the flash headline on the Fed non-announcement, the yellow metal rocketed $40. The action was even more impressive in silver (SLV), which tacked on 90 cents, or 6.6%.
Now, here is the really bad new.
The fundamentals for the barbarous relic are about to turn from bad to worse. The prospect is sending perma bulls rushing to update their life insurance policies.
This is the dilemma. To sell, or not to sell?
Gold does well when interest rates are low or falling. That reduces the opportunity cost of owning the barbarous relic, which doesn?t pay any interest or dividends. It just sits there, shines, and collects dust.
It also runs up storage and insurance fees, effectively hampering it with a real negative yield.
So what happens when the fundamentals flip from good to bad?
WARNING: if you have been carefully salting away one ounce American gold eagle coins in your safe deposit box for the past several years, you are not going to want to read this.
If I am right, and we have put in a generational high in bond prices and a low in yields, interest rates are going to rise. Initially, for the first couple of years, they may not do it a lot. But eventually they will.
That is terrible news for gold owners.
The market clearly thinks this is happening. Take a look at the charts below. Gold is making its third run at support at $1,100 over the past 18 months. Break this and cascading, stop loss selling will ensue, taking gold down to $1,000.
That, by the way, is my jeweler?s downside.
Caution: My jeweler is always right. There he plans to load the boat with bullion, which his business consumes in creating baubles for clients, like me.
It wasn?t supposed to be like this, as the arguments in favor of buying the yellow metal were so clear five years ago.
The exploding national debt was about to force the US government to default on its debt. It almost did, thanks to congressional gamesmanship.
Massive trade deficits with China and the Middle East were supposed to collapse the value of the US dollar.
The election of Barack Obama was predicted to lead to the creation of a socialist paradise. We were all going to need gold coins to bribe the border guards in order to get out of the country with only what we could carry.
The problem is that none of this happened.
The US budget deficit is falling at the fastest rate in history, from a $1.5 trillion peak to as low as $400 billion this year. Foreign capital pouring into the US has pushed the greenback to multiyear highs, and loftier altitudes beckon.
Since the 2009 inauguration, the S&P 500 has tripled off its intraday low. This has enriched the 1% more than any other group, who have seen their wealth increase at the fastest pace on record.
The trade deficit with China is now balancing out with America?s own burgeoning surpluses in services and education. As for the Middle East, we make our own oil now, thanks to fracking, so why bother.
To see such dismal price action in the barbarous relic now is particularly disturbing. Traditionally, the Indian ?Diwali? gift giving season heralded the beginning of a multi month bull run in gold. It ain?t happening.
In fact the dumping of speculative long positions by long-term traders used to this is accelerating the melt down. That?s because gold, silver, or any other inflation hedges have no place in a deflationary, reach for yield world.
Mind you, I don?t think gold is going down forever.
Eventually, emerging central banks will bid it back up, as they have to buy an enormous amount just to bring their reserve ownership up to western levels. Inflation is likely to return in the 2020?s, as my ?Golden Age? scenario picks up speed.
In the meantime, you might want to give those gold eagles to your grand kids. By the time they go to college, they might be worth something.
?
Better to Look than to Buy
https://www.madhedgefundtrader.com/wp-content/uploads/2014/07/John-Thomas-Gold-e1455831491219.jpg297400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-09-21 01:07:422015-09-21 01:07:42The Death of Gold
Long time readers of this letter have known for years that the Alibaba IPO was coming, that it had massive implications for the market, and could well signal an interim market top.
I?m sticking to my guns.
You have to hand it to the underwriters of the company?s initial public offering, the largest in history.
Some $25 billion in capital was raised.? At the all time high of $118, Alibaba had a market capitalization of $300 billion, making it the 8th largest in the US, right after Wal-Mart (WMT).
At that price, the lucky few insiders who received allocations had a paper profit of 74% from the $68 IPO price.
To get this deal off successfully, the managers had to orchestrate one of the greatest onslaughts of hype, hyperbole, and euphoria of all time.
Of course, you want to buy a company that represents Amazon (AMZN), PayPal, and Ebay (EBAY) combined, in the fastest growing major country in the world!
As my old boss at Morgan Stanley used to hammer into me, ?stocks are not bought, they?re sold.?
What artificially boosted the price of the shares in the aftermarket was the unusual allocation of the shares.
CEO Jack Ma personally hand picked the top 25 institutions that received 50% of the shares. His goal was to place them with the largest, longest-term holders, basically, people who never sell.
Hedge funds were banned from participation, as were most individuals.
That shut out thousands of investors who were forced to chase stock in the after market. This is how you get such a dramatic initial gains. They?re always engineered.
The final insult was the ?green shoe?, which increased the deal size by 15% at the last minute at the underwriters? discretion. When these guys finally get in, look out below.
Look carefully at what you get as an Alibaba shareholder, and you might have second thoughts.
This is not your father?s joint stock company. It is a share in a profit stream into a Cayman Islands holding company, the amount of which is at the discretion of Jack Ma. It is more like a hedge fund limited partnership than a publicly listed company.
In some court cases in China, the structure has already been ruled illegal. One could only imagine what would happen in a liquidation. There are no assets, just a post office box on a remote Caribbean island.
Not exactly widows and orphans stuff.
If you had any doubt about (BABA)?s next move, better take a look at the shares of its two largest shareholder?s, Softbank (SFTBY) (-46%) and Yahoo (YHOO) (-47%). They have both done an outstanding rendition of a swan dive.
Some of this is no doubt the result of new Alibaba holders hedging their position by selling short (SFTBY) and (YHOO). But it could also mean that (BABA) is grotesquely over valued and has to fall to come in line with reality.
Keep in mind, also, that non-dividend yielding stocks tend to have greater volatility than those that do pay out.
I am inclined to hold back until (BABA) hits the low $40 handles. That is still a big discount to the IPO price. Some brokers have already issued reports suggesting that the shares will get there shortly.
By the way, my old friend, Softbank?s Masayoshi Son?s $20 million initial investment in Alibaba, made in 2004, is now worth $100 billion at the peak. That has to be one of the greatest trades of all time.
Good for you, Mas, and the next dinner is one you!
?
The $25 Billion Dollar Man
I?m Sticking to My Guns on Alibaba
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/Masayoshi-Son.jpg328325Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-09-21 01:06:422015-09-21 01:06:42Don?t Buy Alibaba, Yet
I?m not a person inclined to chase winning positions. Making money on one trade is certainly no guarantee that you will repeat the win on the next. Lightening doesn?t strikes twice in the same place.
Well, actually it does sometimes, especially when it comes to selling short the Currency Shares Euro Trust (FXE). Selling short the Euro (EUO) has been one of my most consistently winning trades for all of 2015.
It?s like suddenly being adopted by a generous rich uncle, a continental one that drinks espresso, eats croissants, and smokes Galois cigarettes.
Given the European Central Bank?s dramatic action weeks ago to implement an aggressive program of quantitative easing, the entire world has been trying to sell short the beleaguered continental currency.
This means running the Euro printing presses non-stop, much like the Federal Reserve started doing five years ago.You saw the results here.
Overnight Euro interest rates have already been chopped to negative numbers. Even my cleaning lady, Cecelia, knows she should be unloading her Euros.
The trouble is that the currency has already plunged 37 cents, or almost 27% since its mid 2014 top. In the currency world, this is a big move, and puts China's piddling 4.4% move in the Yuan to shame.
However, we needed an event, or an uncertainty removed, before we could go back in on the short side.
We got that yesterday with Janet's move on interest rates.
You have to go to the weekly charts to find the next support levels, but its clear that $1.00, and then $0.90 eventually beckons one.
We live in a world of chase now. All asset classes, from stocks to bonds, currencies, precious metals, oil, and even food, are at the extended end of very large one-way moves. So pickings on the trading front are becoming increasingly thin.
Think of it as buying the US stock market in 2009. I?d rather sell the (FXE) at the beginning of a five year move, than buy in the middle of a 10 year appreciation, which is what we are seeing in US stocks now.
This is also a play on the US bond market. Any fall in Treasury bond prices and rise in yields, a pretty safe bet over the medium term. This will be happening while Euro interest rates are falling, giving a huge yield advantage to the greenback.
As regular readers of this letter know, INTEREST RATES DIFFERENTIALS ARE THE LARGEST DRIVER OF CHANGES IN FOREIGN EXCHANGE RATES.
It's as simple as that.
If you need a third argument for this position, it is a bet on the continued virility of the US fracking industry.
Every additional barrel we produce in America means one less imported from the Middle East, and (as of today) $47 less sold in the foreign exchange markets.
Frackers have already cut our import bill from $400 billion to $200 billion in the past five years, prompting a staggering decline in our dollar outflows.
They are also eliminating our country?s need to maintain expensive ground forces there to protect oil supplies. Every fracking job created in the windswept planes of North Dakota means one less soldier stationed abroad.
This savings will eventually eliminate the government?s present $400 billion budget deficit.
Our newest war in the bleak sands of Syria and Iraq, fought with F-16?s, drones, and Special Forces for targeting, will cost pennies on the dollar when compared to previous conflicts.
I may not be selling short the Euro this second, today, or this week. But I will continue to smack substantial rallies. I might also pick up some Wisdom Tree Europe Hedged Equity ETF (HEDJ), which benefits mightily from a weak continental currency.
Call me old fashioned, but I like to sell high and buy low.
Run Those Printing Presses, Mario!
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/Printing-Press.jpg267400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-09-18 01:06:242015-09-18 01:06:24Why I?m Chasing the Euro
It?s fall again, when my most loyal readers are to be found taking transcontinental railroad journeys, crossing the Atlantic in an a first class suite on the Queen Mary 2, or getting the early jump on the Caribbean beaches.
What better time to spend your trading profits than after all the kids have gone back to school, and the summer vacation destination crush has subsided.
It?s an empty nester?s paradise.
Trading in the stock market is reflecting as much, with increasingly narrowing its range since the August 24 flash crash, and trading volumes are subsiding.
Is it really September already?
It?s as if through some weird, Rod Serling type time flip, August became September, and September morphed into August. That?s why we got a rip roaring August followed by a sleepy, boring September.
Welcome to the misplaced summer market.
I say all this, because the longer the market moves sideways, the more investors get nervous and start bailing on their best performing stocks.
The perma bears are always out there in force (it sells more newsletters), and with the memories of the 2008 crash still fresh and painful, the fears of a sudden market meltdown are constant and ever present.
In fact, nothing could be further from the truth.
What we are seeing unfold here is not the PRICE correction that people are used to, but a TIME correction, where the averages move sideways for a while, in this case, some five months.
Eventually, the the moving averages catch up, and it is off to the races once again.
The reality is that there is a far greater risk of an impending market meltup than a melt down. But to understand why, we must delve further into history, and then the fundamentals.
For a start, most investors have not believed in this bull market for a nanosecond from the very beginning. They have been pouring their new cash into the bond market instead.
Now that bonds have given up a third of 2015?s gains in just a few weeks, the fear of God is in them, and dreams of reallocation are dancing in their minds.
Some 95% of active managers are underperforming their benchmark indexes this year, the lowest level since 1997, compared to only 76% in a normal year.
Therefore, this stock market has ?CHASE? written all over it.
Too many managers have only three months left to make their years, lest they spend 2016 driving a taxi for Uber and handing out free bottles of water. The rest of 2015 will be one giant ?beta? (outperformance) chase.
You can?t blame these guys for being scared. My late mentor, Morgan Stanley?s Barton Biggs, taught me that bull markets climb a never-ending wall of worry. And what a wall it has been.
Worry has certainly been in abundance this year, what with China collapsing, ISIL on the loose, Syria exploding, Iraq falling to pieces, the contentious presidential elections looming, oil in free fall, , the worst summer drought in decades, flaccid economic growth, and even a rampaging Donald Trump.
We also have to be concerned that my friend, Fed governor Janet Yellen, is going to unsheathe a giant sword and start hacking away at bond prices, as she has already done with quantitative easing (I?ve been watching Game of Thrones too much).
This will raise interest rates sooner, and by more.
Let me give you a little personal insight here into the thinking of Janet Yellen. It?s all about the jobs. Any hints about rate rises have been head fakes, especially when they come from a small, anti QE Fed minority.
When in doubt, Janet is all about easy money, until proven otherwise. Until then, think lower rates for longer, especially on the heels of a disappointing 173,000 August nonfarm payroll.
So I think we have a nice set up here going into Q4. It could be a Q4 2013 lite--a gain of 5%-10% in a cloud of dust.
The sector leaders will be the usual suspects, big technology names, health care, biotech (IBB), and energy (COP), (OXY). Banks (BAC), (JPM), (KBE) will get a steroid shot from rising interest rates, no matter how gradual.
To add some spice to your portfolio (perhaps at the cost of some sleepless nights), you can dally in some big momentum names, like Tesla (TSLA), Netflix (NFLX), Lennar Husing (LEN), and Facebook (FB).
You Mean it?s September Already?
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/John-Thomas3-e1410875977629.jpg314323Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-09-16 01:07:362015-09-16 01:07:36The Bull Market is Alive and Well
But I think the choppy, volatile, trendless, trading conditions we are all suffering right now will continue for a few more weeks, and possibly all the way out to the September 17-18 Federal Reserve interest rate decision.
Man! I wish I were still back in the Sahara Desert. There, I only had to worry about scorpions, poisonous snakes, heat stroke, and raiding Berber tribesmen.
I can afford to be flippant. I have just enjoyed my best trading summer ever, adding 10% to the value of my trading book since I took off for Europe in June.
This, I did with rickety Internet access, only occasional access to market information, and a six-hour time difference.
My secret? I kept my book small, my cash levels high, and didn?t check prices every 15 minutes.
Above all, I stayed patient, holding back from buying stocks that suddenly became cheap. Apple (AAPL) at $120? Disney (DIS) at $110? Tesla (TSLA) at $250?
Most importantly, whenever I thought about buying energy or commodity plays, I lay down and took a long nap instead. When I woke up, the temptation went away.
That said, we are clearly in a capitulation mode for the entire oil space (USO), and could reach a bottom in weeks, given the current rate of decay (an old nuclear physics term). The $30 handle seems to be begging for attention.
In fact, a bottom in energy could signal a bottom for the entire market, and trigger one of the great generational buys of all time. China, the marginal big buyer of all things energy, hasn?t died; it is just resting.
So back to the stock market.
Since April, I have seen a long sideways triangle unfolding for the S&P 500 (SPY). I think we will reach an apex in September, right around a confluence of several news events (Fed decision, energy bottom).
The initial direction will be down, probably through the 200 day moving average. But that will be a head fake, and the real move will start right after that.
Around then, the calendar will flip from hostile to friendly, as we enter the half year period which sees the greatest amount of stock buying (at least it has for the past 60 years). Also about now, the daily data releases will show a dramatic improvement in the economy.
That presents us with a rally into 2016 and a new all time high.
Sectors? You want to know about sectors? Jeez, you?re a tough crowd to please.
I think we can go back to our old reliables of technology (QQQ), health care (GILD), consumer discretionaries (DIS), cyber security (PANW), and biotech (IBB).
This coming cycle will see some new additions. They include interest sensitives, like banks (GS) and regional banks (KBE), homebuilders (LEN), energy (XOM), (OXY), (COP) and solar (SCTY), (FSLR), if oil doesn?t go to zero.
As for Apple, expect the slumber to continue until the next new product cycle for the iPhone 7 launches next year. In between cycles is never a great time to buy Apple, although we may get a pop going into the Christmas selling season.
For those who have been prudently sitting on their hands all year waiting for a chance to put more long term, non-trading money to work, this is it. Your entry point will open up over the next few weeks.
Let me tell you that I have an unfair advantage in making market calls like this that are bold, confident, and possibly bordering on hubris.
I have the good fortune to live in the San Francisco Bay area. It is like living 10-20 years in the future.
The GDP here is definitely not growing at a feeble 2% annual rate, as it may be for much of the rest of the country (like North Dakota, Oklahoma, and Texas). It is really growing at a 5% rate, and possibly much more.
The technology boom in the City by the Bay is reaching a 1990?s fever pitch. You can?t get restaurant reservations or lease office space. Companies have launched serial poaching of staff with only the most limited experience at eye-popping salaries. Contractors everywhere have turned into prima donnas.
Housing is a joke. A friend of mine managed to score a tiny, rent controlled pre-war studio apartment for $2,000 a month after winning a lottery against 50 other entrants. He had to pay a $100 ?application fee? just to enter the lottery.
Oh, and since this is one of the few dog friendly buildings in the city, the whole place smells like crap and dog hair, as every resident owns a pet. Open the door, and you get a slap in the face.
Yes, I know that the United States is not San Francisco. However, the tools and services they are creating here, at a breakneck pace, can be used by the rest of the world to dramatically improve productivity and profitability. That boosts growth and share valuations everywhere.
By the way, if any of you has a twenty something kid looking for a job and a purpose in life, send them to San Francisco immediately. With any luck, they will be able to gain a foothold and pick up some skills before the next crash occurs.
As for me, I am going to try and maintain discipline and not chase every little gyration of the market.
You can?t take advantage of the coming best buying opportunity in a year if you blew all your money trying to catch the small fry.
I Much Prefer Being Here Than in the Market
https://www.madhedgefundtrader.com/wp-content/uploads/2015/07/John-Thomas1-e1436361891975.jpg389400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-08-17 01:04:142015-08-17 01:04:14My Yearend Stock Market View
Don?t waste your time trying to analyze financial markets right now.
There is only one ticker symbol you need to know about, that for the Shanghai Stock Exchange Composite Index, the ($SSEC).
When Shanghai goes up, the rest of the world?s risk assets happily join the party. When it drops, ?RISK OFF? fever goes pandemic.
China upped the ante this week when it allowed its currency, the Yuan, or the renminbi as it is known locally (the people?s currency), to float freely for the first time in 25 years. That produced a two-day devaluation of 3.6%.
In the very long history of currency debasements, this one was barely a whimper.
Ancient Sumerians used to shave the edges off of gold and silver coins 5,000 years ago.
When President Nixon took the US off of the gold standard in 1973, the dollar eventually fell 75% against the European currencies.
More recently, the Euro has given up 37% against the greenback, moving from a position of grotesque over valuation to dealing with the Greek credit crisis.
So Beijing?s move this week barely tips the needle in the official history of devaluations.
What it does do is create a giant psychological effect, and therein lies the problem.
Since June, the Mandarins in China have been pulling out all the stops to halt a free fall in the country?s share prices.
It has cut interest rates and relaxed reserve requirements. It banned high frequency trading, blaming the collapse on foreign short sellers (sound familiar?). It has even made stock selling illegal in roughly 94% of the country?s free float.
Still, the bears remain emboldened by their recent success.
By cutting the value of the Yuan, the government is providing a modest boost to the economy. A cheaper currency means less expensive exports and more of them, thus, making local businesses more profitable and creating jobs.
But not by much.
There are not a lot of products that live or die on a 3.6% margin. America has not just lost a chunk of its own exports from the additional competition, contrary to the claims of the TV networks and bogus newsletters with which I compete.
But by taking the first such move to undercut the Yuan in 25 years, it is showing the world how serious a problem is the stock crash.
Will the stock collapse feed into the main economy? Is 10% of the world?s GDP going into a Great Recession? Yikes!
SELL, SELL!
There are a few other problems with the Chinese firecracker.
It violates a secret agreement with the US government, made a decade ago, to allow a steady 3-4% a year appreciation of the Yuan against the dollar.
This was designed to slowly eliminate the artificial under valuation of the Yuan that gave the Middle Kingdom an unfair export advantage. The arrangement was responsible for the 20% rise of the Yuan since 2009.
(Sorry Donald, but you?re holding the chart upside down. Yes, I know, stock charts can be pesky things).
Reneging on the deal is ruffling feathers at the US Treasury in Washington. But it won?t amount to more than that, as long as it is temporary.
Which it will be.
China still has a massive trade surplus with the United States. In 2014, it totaled a staggering $343 billion. It maintained that heady pace, totaling $171 billion during the first half of 2015.
There are an awful lot of Chinese clothes, electronics, and toys sitting on the shelves of American retailers.
Its imports are falling, thanks to the collapse of the price of oil and other bulk commodities.
The natural state of the currency of any country running such huge surpluses is for it to rise in value. That will continue in China?s case for the foreseeable future.
Once the waters settle in the stock market, you can count on the Yuan to regain its upward path.
However, this isn?t going to happen in a day. It could be weeks or months until order returns to Chinese equity markets. Until then, expect some scary days there and here as well.
Compound these problems with the uncertainty over the Federal Reserve?s decision on interest rates in September and slower than expected US growth.
It certainly leaves traders and investors alike, with a full plate of issues to consider.
As if we didn?t have enough to worry about.
For some background on my 45 year coverage of the Middle Kingdom, please click here for my 2011 SPECIAL CHINA ISSUE.
Surprise!
https://www.madhedgefundtrader.com/wp-content/uploads/2015/08/China-Firecracker-e1439470828256.jpg272400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-08-13 01:05:262015-08-13 01:05:26China?s Firecracker Surprise
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