Posts

October 17, 2019

Global Market Comments
October 17, 2019
Fiat Lux

Featured Trade:

(UPDATING THE MAD HEDGE LONG TERM MODEL PORTFOLIO),
(USO), (XLV), (CI), (CELG), (BIIB), (AMGN), (CRSP), (IBM), (PYPL), (SQ), (JPM), (BAC), (EEM), (DXJ), (FCX), (GLD)

October 14, 2019

Global Market Comments
October 14, 2019
Fiat Lux

Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or UNICORNS AND CANDY CANE)
(AAPL), (FDX), (SPY), (IWM), (USO), (WMT), (AAPL), (GOOGL),
(X), (JPM), (WFC), (C), (BAC)

The Market Outlook for the Week Ahead, or Unicorns and Candy Cane

I have to tell you that flip-flopping from extreme optimism to extreme pessimism and back is a trader’s dream come true. Volatility is our bread and butter.

Long term followers know that when volatility is low, I struggle to make 1% or 2% a month. When it is high, I make 10% to 20%, as I have for two of the last three months.

That is what the month of October has delivered so far.

To see how well this works, the S&P 500 is dead unchanged so far this month, while the Mad Hedge Fund Trader alert service is up a gangbuster 10% and we are now 70% in cash.

While the market is unchanged in two years, risk has been continuously rising. That’s because year on year earnings growth has fallen from 26% to zero. That means with an unchanged index, stocks are 26% more expensive.

Entire chunks of the market have been in a bear market since 2017, including industrials, autos, energy, and retailers. US Steel (X), which the president’s tariffs were supposed to rescue, has crashed 80% since the beginning of 2018.

The great irony here is that while the Dow Average is just short of an all-time high, all of the good short positions have already been exhausted. In short, there is nothing to do.

So, the wise thing to do here is to use the 1,200-point rally since Thursday to raise cash you can put to work during the next round of disappointment, which always comes. If we do forge to new highs, they will be incremental ones at best. That’s when you let your passive indexing friends pick up the next bar tab, who unintentionally caught the move.

In the meantime, we will be bracing ourselves for the big bank earnings due out this week which are supposed to be dismal at best. JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) are out on Tuesday and Bank of America (BAC) publishes on Wednesday.

That’s when we find out how much of this move has been about unicorns and candy canes, and how much is real.

Trump demoed his Own trade talks, creating a technology blacklist and banning US pension investment into the Middle Kingdom. He also hints he’ll take a small deal rather than a big one. Great for American farmers but leaves intellectual property and forced joint ventures on the table, throwing the California economy under the bus. I knew it would end this way. It’s very market negative. Without a trade deal, there is no way to avoid a US recession in 2020.

The Inverted Yield Curve is flashing “recession.” The three-month Treasury yield has been above the 10-year bond yield since May, and that always says a downturn is coming. The time to batten down the hatches is now.

US Producer Prices plunged in September, down 0.3%, the worst since January. It’s another recession indicator but also pushes the Fed to lower rates further.

Inflation was Zero in September, with the Consumer Price Index up 1.8% YOY. Slowing economy due to the trade war gets the blame, but I think that accelerating technology gets the bigger blame.

New Job Openings hit an 18-month low, down 123,000 to 7.05 million in August, as employers pull back in anticipation of the coming recession. Trade war gets the blame. The smart people don’t hire ahead of a recession.

FedEx (FDX) is dead money, says a Bernstein analyst, citing failing domestic and international sales. No pulling any punches, he said “The bull thesis has been shredded.” Not what you want to hear from this classic recession leading indicator. Nobody ships anything during a slowdown.

Loss of SALT Deductions cost you $1 trillion, or about 4% per home, according to an analysis by Standard & Poor’s. Quite simply, losing the ability to deduct state and local tax deductions creates a higher after-tax cost of carry that reduces your asset value. If you bought a home in 2017 you lost half of your equity almost immediately. The east and west coast were especially hard hit.

Fed to expand balance sheet to deal with the short-term repo funding crisis, which periodically has been driving overnight interest rates up to an incredible 5%. Massive government borrowing is starting to break the existing financial system. What they’re really doing is trying to head off to the next recession.

The Fed September minutes came out, and traders seem to be expecting more rate cuts than the Fed is. Trade is still the overriding concern. The next meeting is October 29-30. It could all end in tears.

Apple (AAPL) raised iPhone 11 Production by 10%, to 8 million more units, according Asian parts suppliers. Great news for its $1,089 top priced product ahead of the Christmas rush. It turns out that an Apple app is helping Hong Kong protesters manage demonstrations. I’m keeping my long, letting the shares run to a new all-time high. Buy (AAPL) on the dips.

The Mad Hedge Trader Alert Service has blasted through to yet another new all-time high. My Global Trading Dispatch reached new apex of +347.48% and my year-to-date accelerated to +47.24%. The tricky and volatile month of October started out with a roar +9.82%. My ten-year average annualized profit bobbed up to +35.64%. 

Some 26 out of the last 27 trade alerts have made money, a success rate of 94%! Underpromise and overdeliver, that’s the business I have been in all my life. It works. This is rapidly turning into the best year of the decade for me. It is all the result of me writing three newsletters a day.

I used the recession fear-induced selloff after October 1 to pile on a large aggressive short-dated portfolio which I will run into expiration. I am 60% long with the (SPY), (IWM), (USO), (WMT), (AAPL), and (GOOGL). I am 10% short with one position in the (IWM) giving me a net risk position of 50% long. All of them are working.

The coming week is pretty non-eventful of the data front. Maybe the stock market will be non-eventful as well.

On Monday, October 14, nothing of note is published.

On Tuesday, October 15 at 8:30 AM, the New York Empire State Manufacturing Index is released. JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) kick off the Q3 earnings season with reports.

On Wednesday, October 16, at 8:30 AM, we learn the September Retail Sales. Bank of America (BAC) and CSX Corp. (CSX) report.

On Thursday, October 17 at 8:30 AM, the Housing Starts for September are out. Morgan Stanley (MS) reports.

On Friday, October 18 at 8:30 AM, the Baker Hughes Rig Count is released at 2:00 PM. Schlumberger (SLB), American Express (AXP), and Coca-Cola (KO) report.

As for me, I’ll be going to Costco to restock the fridge after last week’s two-day voluntary power outage by PG&E. Expecting Armageddon, I finished off all the Jack Daniels and chocolate in the house. We managed to eat all of our frozen burritos, pork chops, steaks, and ice cream in a mere 48 hours. But that’s what happens when you have two teenagers.

Hopefully, it will rain soon for the first time in six months bringing these outages to an end.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

October 9, 2019

Global Market Comments
October 9, 2019
Fiat Lux

Featured Trade:

(HOW FINTECH IS EATING THE BANKS’ LUNCH),
(BAC), (C), (WFC), (SQ), (PYPL),
 (WCAGY), (FISV), (INTU), (BABA),

How Fintech is Eating the Banks’ Lunch

It was another dreadful DAY for the banks. All bank shares are now down in 2019 with the sole exception of JP Morgan, which is up a modest 10% since January 1. Although their core business is good, the share price hasn’t even bothered to mail it in.

So, I thought it would be time to take another look at what is disrupting the 200-year-old business model of this sector. And that would be Fintech, shorthand for Financial Technology.

To say that fintech was gobbling up the financial industry’s lunch would be a vast understatement. But here’s the problem. Fintech is taking over the world one transaction at a time in an industry that sees billions of transactions a year. The change is almost invisible. If someone were blowing up bank branches on a large scale this would be a far easier trend to see, but the net effect is the same.

The potential market is enormous. While the world’s physical money totals $5 trillion, actual assets controlled by banks today total a staggering $90 trillion.

Why this is all happening now is due to a confluence of several independent technologies. The number of people on the Internet has soared from 1.8 billion in 2010 to 4 billion today, to 8 billion by 2024.

Smartphone usage is diffusing at a similar rate. The roll out of 5G wireless assures that all communications will occur seamlessly, quickly, including financial transactions. Blockchain is enabling encryption on an industrial scale.

This has enabled the rise of a number of online firms over just the last few years that are rapidly taking over a number of traditional banking functions.

So far, the greatest impact has been overseas. Many countries that lack banking infrastructure are leapfrogging straight to mobile. It makes a ton of sense. Poor countries lack the capital to build expensive branch networks to raise fund, and the expertise on how to invest the deposits once in hand.

Good Money (https://goodmoney.com ) is an example of the new online banks that have burst onto the scene. The company offers depositors a generous 1.8% interest rate on overnight funds. Legacy banks are still paying close to zero, even though the Fed has raised rates seven times in three years.

US banks charge an average of $400 in fees a year for a full-service account. Good Money charges nothing. 

You will never know where the money goes when you place it with Citibank (C), Bank of America (BAC) or Wells Fargo (WFC). At Good Money, you can specify that your funds be lent to a certain industry or even a specific company. While this means nothing to you or me, it is important issue to oriented Millennials.

Such efforts are called Crowdlending. It first took off in the US with startups like Prosper and Lending Club in the mid 2000s. We’re not talking small potatoes here, or a market that might develop someday. In 2018, some 22,000 businesses extended $380 billion in such loans.

There are other big markets ripe for disruption. I had to pay a Filipino developer $500 for some work he did on my website. Wells Fargo wanted to charge me $50 and the wire transfer would have taken a week. An outfit called Payoneer, Israel-based, did it for $5 and it took 5 seconds.

Wire transfer fees are in fact a global industry worth billions of dollars a year that is there for the taking. The SWIFT international transfer network alone processes some 24 million transactions per day.

It may not surprise many of you that China already has a huge lead in this area. It’s logical since their established banking system is primitive at best. China has three times more mobile phones than the US, five times more Internet customers, sees 10 times more eat-out orders, and 50 times more mobile transactions. In a future where data is currency, this is huge.

Ant Financial, an affiliate of Alibaba (BABA), is in the forefront, facilitating an eye-popping $8 trillion worth of transactions in 2017. Using artificial intelligence to scour public records for past borrowing, income, education, web surfing preferences, and even political leanings, smart finance can use artificial intelligence to gin up a quickie FICO score and generate a new $200 micro loan in as little as eight seconds.

Bank of America eat your heart out.

What gives the Chinese such an advantage here is their huge market, with some 800 million online participants. The money Ant Financial makes isn’t important now. It’s the digitized data they’re collecting and the way it can be manipulated with artificial intelligence. That gives them immense market power. Remember, in the new world, data is the new currency and the Chinese are creating more than we ever will.

The problem with early, under-the-radar but broad-ranging trends, it can be tough to flesh out pure investment plays. Listed liquid tradable stocks are few and far between. You can simply go out and buy Square (SQ) and PayPal (PYPL) and you’d be half the way there in getting some good exposure.

Here’s the problem with that plan. PayPal has tripled in the last two years, while Square has gone ballistic with a 2,000% gain. I expect further appreciation from here, but those ships have already sailed.

A better way to participate might be the Global X Fintech Thematic ETF (FINX), granted you have all the usual problems with specialized ETFs here such as liquidity, high management fees, and tracking error. But you do get exposure to a number of companies that are either domiciled abroad or are not yet publicly listed.

The five largest holdings of (FINX) include Square (SQ), Wirecard AG (WCAGY), Temenos Group AG, Fiserve Inc (FISV), and Intuit (INTU).

You could also simply buy Alibaba. However, as long as America’s trade war with China continues, all Chinese stocks will perform poorly. Given the stubbornness of both sides, the earliest that can happen is January, 2021.

To learn more about (FINX), please go to the manager’s website by clicking here.

 

 

 

 

 

Days Gone By

September 9, 2019

Global Market Comments
September 9, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or SAVED BY A HURRICANE)
(FXB), (M), (XOM), (BAC), (FB), (AAPL),
 (AMZN), (ROKU), (VIX), (GS), (MS),

 

The Market Outlook for the Week Ahead, or Saved by a Hurricane

This was the week when the stock market was saved by Hurricane Dorian.

Why a hurricane?

Because it gave President Trump something else to Tweet about beside China and Jay Powell. The White House went totally silent, at least on matters concerning the stock market. There, the focus instead turned on whether Trump predicted Dorian was going to hit Alabama (it didn’t).

Thank goodness for small favors.

Instead, investors got to hear about progress was purported to be made on the China trade talks with a possible October meeting.

It all reminds me of the 1968 Paris peace talks, which I visited, where I remember Ambassador Avril Harriman storming out of the Majestic Hotel with a very stern expression on his face. They had just spent a year arguing with the North Vietnamese over the shape of the table (they finally settled on an oval).

Brexit finally started lurching towards its inevitable demise. Hard Brexit failed in Parliament, a disaster for Prime Minister Boris Johnson, whose own party and even his own brother voted against him.

Elections will follow which will finally plunge a dagger through the heart of Britain’s attempt to leave the European Community. If this happens, it will be a huge positive for risk markets globally. This is the beginning of the end. Get ready to buy the pound (FXB).

The bad news? Don’t count on this happening again this week, unless we get another hurricane. When a stock market rally is led by sectors with the worst fundamentals, like retail (M), energy (XOM), and banks (BAC), you want to run a mile. It means the rally was driven by short-covering, we are now at a market high, and the short players have a ton of cash.

I have been pounded with questions all week if the bottom is in and if it’s time to load the boat with tech stocks yet again. I have to answer with a firm “Not yet!” We still have three weeks to go in September with plenty of time for more volatility.

If the Fed cuts interest rates by 25 basis points, the Dow average could crater by 1,000 points. If they don’t cut, which I give a 50/50 chance, it will be down by 2,000 points.

They will be encouraged to cut by an August Nonfarm Payroll Report that came in at a tepid 130,000. The headline Unemployment Rate remained unchanged at 3.7%, a 50-year low. Average Hourly Earnings were an inflationary 0.4%, or 3.2% YOY. June and July were revised down.

The 2020 census was a big factor in August, where the US government hired 25,000 workers to prepare for next year. Without this, August would have come in at a weak 105,000 jobs.

Manufacturing hiring amounted to only 3,000, while Retail lost 11,000 jobs for the seventh consecutive monthly decline. The broader U-6 “discouraged worker” unemployment rate rose from 7.0% to 7.2%.

To demonstrate how much value you are gaining with this service, I generated the chart below. Since January 26, 2018 when the S&P 500 peaked, the total return has been zero, with a lot of heart-stopping volatility, including one 20% drawdown.

That has been the cost to the stock market of the trade war, which started only a few days later. The profit created by the Mad Hedge Fund Trader during the same period has been 58.97%.

You couldn’t even beat the Mad Hedge Fund Trader by pouring all your money into big technology stocks. Over the same time, Facebook (FB) fell 4.1%, Apple (AAPL) rose 21.7%, and Amazon (AMZN) by 22.2%.

The only way you could have topped my performance was to pour your life savings into Roku (ROKU), right when Amazon was about to put it out of business. Jeff Bezos partnered with Roku instead of delivering a 225% pop in the shares.

You might think such a performance is blown out of proportion, exaggerated, and fake. However, it is perfectly consistent with the numbers generated for the in-house trading books by senior traders at Goldman Sachs (GS) and Morgan Stanley (MS) where I come from.

In fact, during my day, if a trader earned less than 30% a year on his capital, he got fired or transferred over to covering retail accounts because the firm had so many better places to invest. They are also consistent with the performance of the top-end hedge managers, of which I used to be one.

Chinese Manufacturing Activity fell for four consecutive months taking the Purchasing Managers Index below a recessionary 50. If you wreck the economy of the world’s largest customer, the rest of the world goes into recession.

US Manufacturing hit a three-year low, the ISM Manufacturing PMI diving from an average 56.5 to 49.1 in August. Anything below 50 is a recession indicator. Hoping that China will bleed worse than us in a trade war is not a winning strategy. Stocks dove 300 points and the Volatility Index (VIX) shot up to $21 on the news. Avoid risk, as this is going to be a terrible month.

The prospect of a China meeting popped stocks 400 points, with an agreement to meet in October, citing progress on a phone call. Boy, I’m getting tired of this. When can we go back to looking at earnings, dividends, and book value?

The European Central Bank will almost certainly ease this week. It hasn’t worked for ten years so let’s try it again. They’re obviously not printing enough Euros. Overnight rates will fall from -0.4% to -0.6%. Some 30 billion euros a month will hit the economy in a new QE.

The Atlanta Fed downgraded the economy, cutting its Q3 GDP growth forecast from 2.0% to 1.5%. Expect a string of poor data points in the coming months as the delayed effect of an escalated trade war. However, the non-manufacturing service economy remains strong. That’s me, and probably you too.

The Mad Hedge Trader Alert Service has posted its best month in two years. Some 22 or the last 23 round trips, or 95.6%, have been profitable, generating one of the biggest performance jumps in our 12-year history.

My Global Trading Dispatch has hit a new all-time high of 334.48% and my year-to-date shot up to +34.35%. My ten-year average annualized profit bobbed up to +34.30%. 

Better yet, since July 31, we generated a 20% profit for the trade alert service while the gain in the Dow Average was absolutely zero!

I raked in an envious 16.01% in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.

As long as the Volatility Index (VIX) stays above $20, deep in-the-money options spreads are offering free money. I am now 40% long big tech. It rarely gets this easy.

The coming week will be a snore, as it always is after the jobs data.

On Monday, September 9 at 11:00 AM, August Consumer Inflation Expectations are out.

On Tuesday, September 10 at 12:00 PM, the NFIB Business Optimism Index for August is released.

On Wednesday, September 11, at 8:30 AM, the US Producer Price Index is announced.

On Thursday, September 12 at 8:30 AM, the Weekly Jobless Claims are printed. At the same time, the US Inflation Rate is published.

On Friday, September 13 at 8:30 AM, the US Retails Sales are printed. The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I’ll be driving up to Lake Tahoe to make final preparations for the October 25-26 Mad Hedge Lake Tahoe Conference. A record number of black bears have been breaking into homes this summer and I just want to make sure my lakefront estate is OK.

It seems that Airbnb tenants have been leaving trails of cookies to their front doors and painting their refrigerators with peanut butter so they can get better selfies with their ursine neighbors.

Not a good idea.

I’ll be avoiding Interstate 80. A truck carrying 1,000 live chickens crashed there yesterday and the California Highway Patrol was last seen chasing them down the freeway.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

March 5, 2019

Global Market Comments
March 5, 2019
Fiat Lux

Featured Trade:

(THE BIPOLAR ECONOMY),
(AAPL), (INTC), (ORCL), (CAT), (IBM),
(TESTIMONIAL)

March 4, 2019

Global Market Comments
March 4, 2019
Fiat Lux

Featured Trade:

(THE MARKET FOR THE WEEK AHEAD, or THE RECESSION HAS BEGUN),
(SPY), (TLT), (GLD), (AAPL)

March 1, 2019

Global Market Comments
March 1, 2019
Fiat Lux

Featured Trade:

(OH, HOW THE MIGHTY HAVE FALLEN),
(BRK/A), (AXP), (AAPL), (BAC), (KO), (WFC), (KHT),
(AMGEN’S BIG WIN), (AMGN), (SNY), (REGN)