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The Market Outlook for the Week Ahead, or the 200-Days are in Play

Six months into the quarantine, I feel like I’ve been under house arrest with no visiting privileges. And if I go outside for even a few minutes, I have to inhale the equivalent of a pack of cigarettes as I am surrounded by three monster fires.

All I can say is that I’m getting a heck of a lot of work done.

We are in the middle of a 20-year move in the Dow Average from 6,500 to 120,000. We have just completed a fourfold move off the 2009 bottom. All that remains is to complete a second fourfold gain by 2030.

The move is being driven by hyper-accelerating technology on all fronts. The first half of this move was wrought with constant fear and disbelief. The second half will be viewed as a new “Golden Age” and a second “Roaring Twenties.” The euphoria of July and August were just a foretaste.

And here is the dilemma for all investors.

The Dow has just pulled back 6.1% from the all-time high of 29,300 to 27,500. Should you be buying here, keeping the eventual 120,000 target in mind? Or should you hold back and wait for 26,000, 25,000, or 24,000?

The risk is that if you lean out too far to grab the brass ring, you’ll fall off your horse. By getting too smart attempting to buy the bottom, you might miss the next 93,000 points.

And now, I’ll make your choice more complicated.

The president has recently whittled away at his deficit in the polls, however slightly, typical of the run-up to the November elections. That increases the uncertainty of the election outcome and increases market volatility (VIX). Ironically, the better Trump does, the lower stocks will fall. So, if you do hang out for the lower numbers you might actually get them, and then more.

That puts the 200-day moving averages in play, not only for the major indexes but for single stocks as well. That could take Apple (AAPL) from a high of $137 to $80, a Tesla down from a meteoric $500 to $300.

Hey, if this were easy, your cleaning lady would be doing this for a tiny fraction of the pay.

Did I just tell you the market may go up, down, or sideways? I sound like a broker.

The 200-day moving averages are definitely in play. The 200-day moving average for the Dow Average is 26,298, down an even 10% from the high for the year. The technology-heavy S&P 500 could fall as much as 14% to its 200-day at 3,097.

Don’t bet against the Fed as Tuesday’s 700-point rally in the Dow Average sharply reminded traders. Don’t bet against the global scientific community either. That’s why I am fully invested and within spitting distance of a new all-time high. After a pre-election low, the market will soar to new highs. Even if Trump loses the election, quantitative easing and fiscal stimulus will continue as far as the eye can see.

The elephant unwinds. Softbank dumped $718 million worth of technology call options deleveraging in a hurry. (NFLX), (FB), and (ADBE) were the targets according to market makers. They still own $1.66 billion worth of long positions in call options. Softbank’s position has grown so large that even my cleaning lady and gardener know about them.

The Tesla bubble popped, down a record 22% in one day after traders learned it would NOT be added to the S&P 500. Tesla approached my medium-term downside target of down 40%, or $300 a share. It seems too much of its earnings were coming from non-recurring EV subsidies from the Detroit carmakers. With a peak market cap for an eye-popping $450 billion, it’s probably the largest company ever turned down from the Index.

Google ditched Irish office space, putting on ice a plan to rent additional office space for up to 2,000 people in Dublin. The retreat from global office space continues. The company was close to taking 202,000 sq ft (18,766sq m) of space at the Sorting Office building before the virus hit.

AstraZeneca halted their vaccine trial after a patient fell ill. It’s not clear if the vaccine killed off the phase 3 trial volunteer, a preexisting condition felled them, or an unrelated illness hit. The company was developing the “Oxford” vaccine, which had been the best hope for developing Covid-19 immunity. It definitely creates a pause for the headline rush to develop a vaccine. Notice the tests are being held in South Africa where patients have little legal recourse. Keep buying (AZN) on dips.

“Skinny” failed, tanking the Dow Average by 450 points. A Republican Senate failed to provide even $500 billion to support a COVID-19-ravaged economy. There will be no more stimulus until a new administration takes office. Until then, unemployment will remain in the high single digits, tens of thousands of small businesses will fail, and home foreclosures will explode. The stock market cares about none of this, as it is dominated by large, heavily subsidized companies.

Nikola crashed, down 33%, in response to a damning report from a noted short-seller. They don’t have a truck, they lack a claimed hydrogen fuel source, and the founder is milking the company for every penny he can. It’s all hype, thanks to endless quantitative easing. None of the Tesla wannabees are going anywhere. General Motors (GM), which just bought 11% of the company, has egg on its face. With a market cap of $20 billion, Nikola is this year’s Enron. Sell short (NKLA) on rallies.

US inflation jumped, with the Consumer Price Index up 1.3% YOY in August, compared to only 1% in July. Soaring used car prices accounted for the bulk of the gain. More proof that the economy lives. Is this the beginning of the end or the end of the beginning?

Goldman Sachs moved global stocks to “overweight”. They’re preparing for the post-pandemic world. Cyclical “recovery” stocks like banks will take the lead. It fits in nicely with my view of a monster post-election rally and a Dow 120,000 by 2030.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.

My Global Trading Dispatch clocked its second blockbuster week in a row, thanks to aggressively loading up on stocks at the previous week’s bottom (JPM), (C), (AMZN). My long in gold (GLD) looked shinier than ever. I bet the ranch again on a massive short in the US Treasury bond market (TLT) which paid off big time. My short position in the (SPY) is looking sweet.

My only hickey was an ill-fated long in Apple (AAPL), which I stopped out of at close to cost. Notice that I am shifting my longs away from tech and toward domestic recovery plays.

You only need 50 years of practice to know when to bet the ranch.

That takes our 2020 year-to-date back up to a blistering 35.51%, versus -2.93% for the Dow Average. September stands at a robust 8.96%. That takes my 11-year average annualized performance back to 36.41%. My 11-year total return has reached to another new all-time high at 391.42%. My trailing one year return popped back up to 58.13%.

It will be a dull week on the data front, with only the Federal Reserve Open Market Committee Meeting drawing any attention.

The only numbers that really count for the market are the number of US Coronavirus cases and deaths, which you can find here.

On Monday, September 14 at 11:00 AM US Inflation Expectations are released.

On Tuesday, September 15 at 8:30 AM EST, the New York Empire State Manufacturing Index for September is published. A two-day meeting at the Federal Reserve begins.

On Wednesday, September 16, at 8:30 AM EST, September Retails Sales are printed. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out. At 2:00 the Fed announces its interest rate decision, which will probably bring no change.

On Thursday, September 17 at 8:30 AM EST, the Weekly Jobless Claims are announced. Housing Starts for August are also out.

On Friday, September 18, at 8:30 AM EST, the University of Michigan Consumer Sentiment is announced. At 2:00 PM The Bakers Hughes Rig Count is released.

As for me, the Boy Scout camporee I was expected to judge and supervise this weekend was cancelled, not because of Covid-19, but smoke. This will certainly go down in history as the year from hell.

Stay healthy.

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

September 8, 2020

Diary, Newsletter, Summary

Global Market Comments
September 8, 2020
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHY CASH IS STILL TRASH),
(JPM), (AAPL), (AMZN), (V), (TLT), (SPY), (GOOGL),
(BAC), (C), (FCX), (VIX), (VXX), (TSLA), (FB)

The Market Outlook for the Week Ahead, or Why Cash is Still Trash

Diary, Newsletter, Summary

This isn’t the “Big One.”

This isn’t even a Middle One.”

This is no more than a 10%-15% correction typical for long term bull markets.

Sure, we saw every technical indicator known to man scream “SELL” in the run-up to the recent market top. There were other factors at play as well.

The bulk of the buying focused on only the top six stocks, more concentrated than seen during the Dotcom Bubble Top in 2000.

There really was only one buyer. That would be my friend Masayoshi Son’s Softbank (SFTBY). He bought $4 billion worth of big tech call options in the run-up to the top with an exercise value of $30 billion. When he started to sell last Monday, the market for these options vaporized and stocks plunged.

The fact that both Apple (AAPL) and Tesla (TSLA) shares split the same day also defined a market top that I have been warning readers about for weeks.

This is all in the face of the incredible reality that 50% of all S&P 500 (SPY) stocks are down over the past two years. It really has been a stock picker’s market with a turbocharger.

And this isn’t just any old bull market. We are in fact 11 ½ years into a bull market that started in March 2009 that has another decade to run. We have completed the first 400% gain. What lies ahead of us is another stock market increase of 400%, taking us up to 120,000 in the Dow Average by 2030.

And this is a bull market that has suffered plenty of 10%-15% corrections since its inception. The one that began in Thursday is no different. The sole exception to this analysis was the COVID-19-induced 37% meltdown that began in February. That little event only lasted six weeks.

For you see, the fundamentals have not changed one iota. No, I’m not talking about earnings, valuations, or sales growth. That is so 20^th century.

No, I’m referring to the only fundamental that counts in the 21^st century: Liquidity.

And liquidity isn’t shrinking, it is in fact increasing. That includes the unprecedented expansion of quantitative easing by the Federal Reserve, massive deficit spending by the US government, and zero interest rates, which Fed governor Jay Powell has promised us will continue for another five years.

During the last Dotcom Bubble top, the FAANGs and Tesla (TSLA) did not even exist. Apple was just coming out of its flirtation with bankruptcy and Amazon (AMZN) had just barely gone public. Google (GOOGL) and Facebook (FB) were still but glimmers in their founders’ eyes.

Except now we have a new bullish fundamental to discount: a Biden win in November. Since Biden decisively pulled ahead in the polls in May, the stock market has risen almost every day. He is 4%-10% ahead in every battleground state poll.

Even if Trump were to win every red and red-leaning state accounting for 163 electoral college votes, plus all 63 votes from toss-up states (AZ, NC, IA, FL, GA, OH), he would still lose the election, where 270 votes are needed to win. Just THAT is a 1:100 event, on the scale of Harry Truman’s historic 1948 compact, and Trump is no Harry Truman.

So what of Biden wins?

You can count on the $3 trillion stimulus bill passed by the House in March to go through, which primarily allocates money to keep states and local municipalities from firing policemen, firemen, and teachers.

Next to come are another $3 trillion in infrastructure spending. And I absolutely know from past experience that markets love this kind of stuff. It enhanced liquidity even more.

As I say, cash is still trash, and it may remain so for years.

The Top is in, with a horrific two-day 1,500-point selloff in the Dow Average ($INDU) coming out of the blue on no news and signaling the end of the current rally. Whatever went up the most is now going down the most as the Robinhood traders flee in panic. This was long overdue. Margin calls are running rampant.

Volatility (VIX) soared to $38, up 70% in two days, meaning that we may be close to the end of this correction. The (SPX) is down 24 points, 6.7% from the Wednesday high. The last (VIX) peak was at $44 in June and $80 in March. Time to start buying stocks for a yearend rally? Look at the banks.

Was Apple (AAPL) really up 400%? Did Tesla gain 500%? You might be fooled if you didn’t know that these stocks just split, Apple at 4:1 and Tesla for 5:1. In fact, both stocks posted robust gains in real terms, Apple up 5% and Tesla up 10%. Tesla just hit my five-year split-adjusted target of $2,500. Every other analyst had a much lower target or were bearish. Time to run a mile as splits often herald intermediate market tops.

Apple hit a $2.3 trillion in market cap at the peak, up a staggering $300 billion in days. We are truly in La La Land here. The price-earnings multiple has soared from 9X to 40X. That 5G iPhone better deliver. Didn’t you hear that 5G was causing Coronavirus, a popular internet conspiracy theory?

The Dow Average just lost its Apple turbocharger. Some 1,000 of the 2,000 points the Dow Average gained in August were due to Apple alone. With the Dow rebalancing today, with (XOM), (PFE), and (RTX) out and (CRM), (AMGN), and (HON) in, Apple’s influence has been greatly diluted. With the (VIX) back up above $26, the worst is yet to come. The stock market is screaming for a correction.

Copper (FCX) hit a new 3-year high, with demand soaring in China. They were the first to cap Covid-19 and restore their economy. The red metal is a great call on the recovery of the global economy. Those who bought the Freeport McMoRan (FCX) LEAPS I recommended in March are sitting pretty. The shares are up 228% since then.

Tesla to sell $5 billion in stock to finance the construction of new factories in Nevada, TX, and Germany. (TSLA) fell 5% on the news. I had been advising clients to sell all week. It won’t be a conventional secondary stock offering but an effort to sell into every stock spike. More proof that Elon hates Wall Street as if we needed more. With a market cap of $450 billion, investors are finally viewing Tesla as a data company rather than a car company.

US car sales recover to 15.2 million in August on an annualized basis. That brings us almost back to pre-pandemic levels. This is the best indicator yet that the US is returning to a semi-normal economy. Of course, zero interest rates and other unprecedented incentives are a big help.

Consumer Spending popped, up 1.9% in July, which accounts for two-thirds of the US economy. Those who have money are spending like there’s no tomorrow, and with a global pandemic, maybe there won’t be. New car purchases were a big winner as buyers take advantage of 0% financing everywhere.

Weekly Jobless Claims dropped to 880,000, still terrible, but less terrible than last week. California claims have topped 8 million since the pandemic began. Continuing claims drop to 13.3 million, down from the 25 million peak in May.

US Unemployment Rate plunged to 8.4% in August, from 10.2%. The August Nonfarm Payroll report jumps by 1.37 million. It’s a much faster improvement than expected. Retail gained 248,000, Education & Health Services were up 147,000, and Leisure & Hospitality were up 174,000, Government was up 344,000. It’s all thanks to the miracle of government spending. The Dow Average is down 500 points anyway.

China to dump US Treasury bonds in response to Trump's escalating trade war, putting $200 billion in paper up for sale. They hold $1.07 trillion in total and is our largest single creditor. The (TLT) is down two points on the news, where I am running a double short position. Who is going to fund America’s massive borrowing?

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.

My Global Trading Dispatch bounced back hard with some super aggressive buying of stocks right at the Thursday and Friday market bottoms and selling short of bonds at the top.

By going full speed ahead, damn the torpedoes, I brought in the best two-day return in the 13-year history of the Mad Hedge Fund Trader, up a heroic 8.27%.

It started out as a terrible week, getting flushed out of one of my short positions in the (SPY) for a big loss as the market hit a new all-time high.

Then I got long banks (JPM), Apple (AAPL), Amazon (AMZN), Visa (V), and went triple short bonds (TLT). I still retain one short in the (SPY), which is now profitable. I would have bought Bank of America (BAC) and Citigroup (C), but the market ran away before I could write the trade alerts.

The instant crash was yet another gift. Right after I shorted bonds, the Chinese hinted that they would unload $200 million worth of their US Treasury bond holdings. The harder I work, the luckier I get.

If these positions expire at max profit in eight trading days, I will be back at new all-time highs. Notice that I am shifting my longs away from tech and toward domestic recovery plays.

You only need 50 years of practice to know when to bet the ranch.

That takes our 2020 year to date back up to 30.99%, versus -0.70% for the Dow Average. September stands at 4.44%. That takes my eleven-year average annualized performance back to 36.27%. My 11-year total return returned to 386.90%. My trailing one-year return popped back up to 51.60%.

It is a quiet week as always following the fireworks of the jobs data.

The only numbers that really count for the market are the number of US Coronavirus cases and deaths, which you can find here.

On Monday, September 7, it is Labor Day in the US, and markets are closed.

On Tuesday, September 8 at 10:00 AM EST, the Economic Optimism Index for September is released.

On Wednesday, September 9, at 8:13 AM EST, the EIA Cushing Crude Oil Stocks are out.

On Thursday, September 10 at 8:30 AM EST, the Weekly Jobless Claims are announced. US Core Producer’s Price Index for August is also out.

On Friday, September 4, at 8:30 AM EST, the US Inflation Rate for August is printed. At 2:00 PM The Bakers Hughes Rig Count is released.

As for me, I am headed back to Lake Tahoe to flee the horrific smoke in the San Francisco Bay Area drifting our way from the rampant California wildfires. If people don’t believe in global warming, they should come here where we have it in spades. We’ll even give you some.

At least we’ve been getting spectacular sunsets.

Stay healthy.

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

September 4, 2020

Diary, Newsletter, Summary

Global Market Comments
September 4, 2020
Fiat Lux

Featured Trade:

(SEPTEMBER 2 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (SPY), (GLD), (GDX), (JPM), (BAC), (C), (WFC), (VIX), (VXX), (TLT), (TBT), (USO), (INDU), (SDS),

September 2 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the September 2 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Tesla (TSLA) is down 25% today from the Monday high. What are your thoughts?

A: Yes, I've been recommending to people all last week that they dump their big leverage positions, like their one- and two-year LEAPS in Tesla and quite a few people got out at the absolute highs near $2,500 just before the new stock issue was announced. People who bought the Tesla convertible bonds ten years ago got an incredible tenfold return, plus interest!

Q: Are we at-the-money at the bear put spread in (SPY)?

A: Yes, and if we go any higher, you are going to get a stop loss in your inbox because I have good performance this year to protect. I do this automatically without thinking about it. In this kind of crazy market, you cannot run shorts indefinitely. Hope is not a strategy. And it’s easy to stop out of a loser when 90% of the time you know the next one is going to be a winner.

Q: Doesn’t gold (GLD) normally go up in falling stock markets?

A: Yes, in a normal market that’s what it does. The problem is that all asset classes have produced identical charts in the last 2.5 years, and when they all go up in unison, they all go down in unison. This time around, gold will sell off with the stock market and gold miners (GDX) will go down three times as fast. Remember gold miners are stocks first and gold plays second, so when a big stock dive hits, will see big dives in gold miners as well, as we saw in February and March.

Q: Why is JP Morgan (JPM) a good buy?

A: JP Morgan is the quality play in the banks. And once inflation starts to kick in and interest rates rise, and you get a positive yield curve and a strengthening economy—that is fantastic news for banks. They are also one of the few underperforming sectors left in the market, so in any stock market selloff banks will rise. And that’s JP Morgan (JPM), Bank of America (BAC), Citigroup (C) that will lead the charge. Avoid Wells Fargo (WFC). It’s still broken.

Q: I see iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) starting to move up. Should we buy it?

A: Only on dips and only if you expect a dramatic selloff in the stock market very soon, which I do. The (VXX) trade is very high risk. The contango is huge. I tried making money on it a couple of times this year and failed both times; this really is for professional intraday traders in Chicago with an inside look at customer order flows. Retail traders rarely make money on the (VXX) trade—usually, they get killed.

Q: Will gold hold up as interest rates rise?

A: No, it won’t. Rising interest rates are death for gold and other precious metals. Your gold theory is that interest rates stay lower for longer, which the Fed has essentially already promised us.

Q: What do you think of the United States Treasury Bond Fund (TLT)?

A: I’m looking to sell shorts in big size as I did in the spring and I’m looking for five-point rallies to sell into. I missed the last one last week because it just rolled over so fast on an opening gap down that you couldn’t get any trade alerts out, and that’s happening more and more. So, if we get going up to $166-$167, that will be a decent short and then you want to be doing something like the $175-$178 vertical bear put spread in October. I don’t think bonds are going to go to 0% interest rates, I think the real range is 50-95 basis points in a 10-year treasury yield. That is your trading range.

Q: Do you think big oil (USO) will transform into a low carbon energy industry if Biden wins?

A: I’ve been telling big oil that that’s what they’re going to have to do for 20 years. They all read Mad Hedge Fund Trader. And, they always laugh, saying oil will be dominant at least until 2050. Since then, they have become the worst-performing sector of the S&P 500 on a 20-year view, and my thought is that eventually, big oil takes over and buys the entire alternative energy industry, and slowly pulls out of oil. They have the engineering talent to pull it off and they have the cash to make the acquisitions. They will have to reinvent themselves or go out of business, just like everybody else.

Q: What could trigger the stock market pullback you mention in your slides? Because the bullish Fed quantitative easing trade is hard to stop.

A: It’s like the 2000 top, there was no one thing or even a couple things, that could trigger the top. It’s just the sheer weight of prices and exhaustion of new buyers, and that is impossible to see in advance, so all you can do is watch your charts. One down out of the blue the Dow Average ($INDU) will suddenly drop 1,000 points for no reason.

Q: When you say Europe is recovering, which data indicates this?

A: Well, when you look at Q2 GDP growth in Europe, they were only down 10% while the US was down 26%. That is purely a result of Europe having a much more aggressive COVID-19 response than the United States. There is no mask debate in Europe, it’s like 100% compliance. Here you have blue states wearing masks and red states not. The result of that, of course, is that the death rate in the red states is about five times higher than it is in blue states, on a per capita basis. That is why the US has the highest infection rate in the world, the highest death rate, and is why we lost an extra 16% of GDP growth in Q2.

Q: Will you trade a short Tesla again?

A: No, I’ve been hit twice on Tesla shorts in the last six months and we are now in La La land—it’s essentially untradable. I got a lot of people out of Tesla earlier this week, and then they announced their share new $5 billion issue, which they should have done a while ago

Q: Is there any way to play the home mortgage refi boom in the stock market with the 30-year mortgages at a record low 2.88%?

A: You buy the banks. If you call your bank and ask for a refi quote, it might be a week before they get back to you, they are so busy. Banks are also getting enormous subsidies from all these various lending and stimulus type programs, so money is raining down on them right now. Banks are now the cheapest sector in the market, selling at 6x earnings. It is probably the single greatest sector in the stock market right now to buy.

Q: I’ve been holding the ProShares UltraShort 20 year Plus Treasury fund (TBT) and it is moving up and down in the short-range. Should I sell?

A: No, I think we have more room to go on the (TBT), I think we could get to $18, which is about a 0.90% yield in the US Treasury bond market.

Q: Do you have a target on Tesla?

A: Well, my downside target would be its old breakout level. So, divide by five and you get $300. That equates to $1450 in the pre-split price. So, we could have a real monster selloff, like 40%, once this market loses momentum. It’s safe to say don’t buy Tesla up here.

Q: Is the ProShares UltraShort S&P 500 ETF (SDS) offering a good entry point here?

A: It is as soon as we rollover. In these momentum-driven markets, it’s best to wait for proof of a top before you start getting fancy with short plays. You can see how I got hammered several times in the last month by being too early on my shorts; and fortunately, I was able to hedge out most of those losses. You might not be able to do so.

Q: Are you planning on keeping your Fortinet spread?

A: Yes, to expiration, which is only 11 days off, unless we get an out-of-the-blue meltdown.

Q: Do you like Ali Baba (BABA)?

A: Yes; that is essentially a play on a Biden win in the election. If he wins, our war with China will cease and all of the China plays will go ballistic as we return to international trade, which has been powering our economy for the last 70 years.

Q: What about cruise lines like Carnival (CCL)?

A: I know they’re cheap. They’re selling out their 2021 summer cruises with customers betting that there will be a corona vaccine by then, or simply not caring whether there is a pandemic or not. The dedicated cruisers are desperate to cruise. That’s one reason why these stocks are holding up, but I don’t want to touch them. I think the recovery will take much longer than people realize.

Q: When do you buy gold?

A: Wait for a bigger dip.

Q: Should I be holding gold for the long term?

A: Yes; if you don’t want to trade it, just sitting on your position is fine. I think gold eventually goes to 3,000 after hitting an initial target of 2,200.

Good Luck and Stay Healthy

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

October 18, 2019

Diary, Newsletter, Summary

Global Market Comments
October 18, 2019
Fiat Lux

Featured Trade:

(OCTOBER 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (C), (GM), (IWM), ($RUT), (FB),
(INTC), (AA), (BBY), (M), (RTN), (FCX), GLD)

October 16 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 16 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: How do you think the S&P 500 (SPX) will behave with the China trade negotiations going on?

A: Nobody really knows; no one has any advantage here and logic or rationality doesn’t seem to apply anymore. It suffices to say it will continue to be up and down, depending on the trade headline of the day. It’s what I call a “close your eyes and trade” market. If it’s down, buy it; if it’s, upsell it.

Q: How long can Trump keep kicking the can down the road?

A: Indefinitely, unless he wants to fold completely. It looks like he was bested in the latest round of negotiations because the Chinese agreed to buy $50 billion worth of food they were going to buy anyway in exchange for a tariff freeze. Of course, you really don’t get a trade deal unless you get a tariff roll back to where they were two years ago.

Q: Did I miss the update on the Citigroup (C) trade?

A: Yes, we came out of Citigroup a week ago for a small profit or a break-even. You should always check our website where we post our trading position sheet every day as a backstop to any trade alerts you’re getting by email. Occasionally emails just go completely missing, swallowed up by the ether. To find it go to www.madhedgefundtrader.com , log in, go to My Account, Global Trading Dispatch, then Current Positions. You can also find my newly updated long-term portfolio here.

Q: How much pain will General Motors (GM) incur from this standoff, and will they ever reach a compromise?

A: Yes, the union somewhat blew it in striking GM when they had incredibly high inventories which the company is desperate to get rid of ahead of a recession. If you wonder where all those great car deals are coming from, that's the reason. All of the car companies want to go into a recession with as little inventory as possible. It's not just GM, it’s everybody with the same problem.

Q: When does the New Daily Position Sheet get posted?

A: About every hour after the close each day. We need time to process our trades, update all the position sheets before getting it posted.

Q: What do you think about Bitcoin?

A: We hate it and don’t want to touch it. It’s unanalyzable, and only the insiders are making money.

Q: Are you predicting a repeat of Fall 2018 going into the end of this year to close at the lows?

A: No, I’m not. A year ago, we were looking at four interest rate increases to come. This year we’re looking at 1 or 2 more interest rate cuts. It’s nowhere near the situation we saw a year ago. The most we’re going to get is a 7% selloff rather than a 20% selloff and if anything, stocks will rise into the yearend then fall.

Q: Why are we trading the Russell 200 (IWM) instead of the ($RUT) Small Cap Index? We pay less commissions to brokers.

A: There's more liquidity in the (IWM). You have to remember that the combined buying power of the trade alert service is about $1 billion. And that’s harder to do with smaller illiquid ETFs like the ($RUT), especially the options.

Q: If this is a “Don’t fight the Fed” rally for investors, where else is there to go but stocks?

A: Nowhere. But it’s happening in the face of an oncoming recession, so it’s not exactly a great investment opportunity, just a trading one. 2009 was a great time not to fight the Fed.

Q: Do you want to buy Facebook (FB) even though there are so many threats of government scrutiny and antitrust breakups?

A: The anti-trust breakups are never going to happen; the government can't even define what Facebook does. There may be more requirements on disclosures, which means nothing because nobody really cares about disclosures—they just click the box and agree to anything. I was actually looking at this as a buy when we had the big selloff at the end of September and instead, I bought four other Tech stocks and (FB) had moved too far when we got around to it. I think there’s upside potential for Facebook, especially if we can move out of this current range.

Q: Would you sell short European banks? It seems like they’re cutting jobs right and left.

A: I always get this question after big market meltdowns. European banks have been underpricing risks for decades and now the chickens are coming home to roost. Some of these things are down 80-90% so it’s too late to sell short. The next financial crisis is going to be in Europe, not here.

Q: Is it time to short Best Buy (BBY) due to the China deal?

A: No, like Macys (M), Best Buy is heavily dependent on imports from China, and the stock has gotten so low it’s hard to short. And the problem for the whole market in general is all the best sectors to short are already destroyed, down 80-90%. There really is nothing left to short, now that all the bad sectors have been going down for nearly two years. There has been a massive bear market in large chunks of the market which no one has really noticed. So, that might be another reason the market is going up—that we’ve run out of things to short.

Q: Do you like Intel (INTC)?

A: Yes, for the long term. Short term it still could face some headwinds from the China negotiations, where they have a huge business.

Q: Would you buy American Airlines (AA) on the return of Boeing 737 MAX to the fleet?

A: Absolutely, yes. The big American buyers of those planes are really suffering from a shortage of planes. A return of the 737 MAX to the assembly line is great news for the entire industry.

Q: Do you like Raytheon (RTN)?

A: No, Trump has been the defense industry’s best friend. If he exits in the picture, defense will get slaughtered—it will be the first on the chopping block under a future democratic administration. And, if you’re doing nothing but retreating from your allies, you don't need weapons anyway.

Q: Will Freeport McMoRan (FCX) benefit from a trade war resolution?

A: Yes, the fact that it isn't moving now is an indication that a trade war resolution has not been reached. (FCX) has huge exposure to traditional metal bashing industries like they still have in China.

Q: Would you go long or short gold (GLD) here?

A: No, I'm waiting for a bigger dip. If you can get in close to the 200-day moving average at $129.50, that would be the sweet spot. Longer term I still like gold and it is a great recession hedge.

Good Luck and Good Trading!

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

Yes, I Still Like Gold

October 14, 2019

Diary, Newsletter, Summary

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

Diary, Newsletter

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