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August 12, 2019

Global Market Comments
August 12, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or
(CYB), (FXE), (TLT), (FXY), (COPX), (USO),
(GLD), (VIX), (FXB), (IWM0, (DIS), (CRB), (FB)
(A COW BASED ECONOMICS LESSON)

July 5, 2019

Global Market Comments
July 5, 2019
Fiat Lux

Featured Trade:

(FRIDAY JULY 19 ZERMATT SWITZERLAND STRATEGY SEMINAR)
(WHERE THE ECONOMIST “BIG MAC” INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (FXA), (FXY), (CYB),
(WHY US BONDS LOVE CHINESE TARIFFS),
(TLT), (TBT), (SOYB), (BA), (GM)

Where The Economist “Big Mac” Index Finds Currency Value

My former employer, The Economist, once the ever-tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its “Big Mac” index of international currency valuations.

Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.

The index counts the cost of McDonald’s (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.

What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai baht are cheap.

I couldn’t agree more with many of these conclusions. It’s as if the august weekly publication was tapping The Diary of a Mad Hedge Fund Trader for ideas.

I am no longer the frequent consumer of Big Macs that I once was as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool than a speedy lunch.

 

 

 

 

 

 

 

The Big Mac in Yen is Definitely Not a Buy

May 20, 2019

Global Market Comments
May 20, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR I’LL TAKE SOME OF THAT!)
(FXI), (CYB), (TSLA), (AAPL), (BA), (WMT), (TLT), (INTU), (GOOGL)

The Market Outlook for the Week Ahead, or I’ll Take Some of That!

Whatever the market is drinking right now, I’ll take some of that stuff. If you could bottle it and sell it, you’d be rich. Certainly, the Viagra business would go broke.

To see the Dow average only give up 7% in response to the worst trade war in a century is nothing less than stunning. To see it then make half of that back in the next four days is even more amazing. But then, that is the world we live in now.

When the stock market shrugs off the causes of the last great depression like it’s nothing, you have to reexamine the root causes of the bull market. It’s all about the Fed, the Fed, the Fed.

Our August central bank’s decision to cancel all interest rate rises for a year provided a major tailwind for share prices at the end of 2018. The ending of quantitative tightening six months early injected the steroids, some $50 billion in new cash for the economy per month.

We now have a free Fed put option on share prices. Even if we did enter another 4,500-point swan dive, most now believe that the Fed will counter with more interest rate cuts, thanks to extreme pressure from Washington. A high stock market is seen as crucial to winning the 2020 presidential election.

Furthermore, permabulls are poo-pooing the threat to the US economy the China (FXI) trade war presents. Some $500 billion in Chinese exports barely dent the $21.3 trillion US GDP. It’s not even a lot for China, amounting to 3.7% of their $13.4 trillion GDP, or so the argument goes.

Here’s the problem with that logic. The lack of a $5 part from China can ground the manufacture of $30 million aircraft when there are no domestic alternatives. Similarly, millions of small online businesses, mostly based in the Midwest, couldn’t survive a 25% price increase in the cost of their inventory.

As for the Chinese, while trade with us is only 3.7% of their economy, it most likely accounts for 90% of their profits. That’s why the Chinese yuan (CYB) has recently been in free fall in a desperate attempt to offset punitive tariffs with a substantially cheaper currency.

The market will figure out all of this eventually on a delayed basis and probably in a few months when slowing economic growth becomes undeniable. However, the answer for now is NOT YET!

Markets can be dumb, poor sighted, and mostly deaf animals. It takes them a while to see the obvious. One of the problems with seeing things before the rest of the world does, I can be early on trades, and that can translate into losing money. So, I have to be cautious here.

When that happens, I revert to an approach I call “Trading devoid of the thought process.” When prices are high, I sell. When they are low, I buy. All other information is noise. And I keep my size small and stop out of losers lightning fast. That’s how I managed to eke out a modest 0.63% profit so far this month, despite horrendous trading conditions.

You have to trade the market you have, not what it should be, or what you wish you had. It goes without saying that the Mad Hedge Market Timing Index become an incredibly valuable tool in such conditions.

It was a volatile week, to say the least.

China retaliated, raising tariffs on US goods, ratcheting up the trade war. US markets were crushed with the Dow average down 720 intraday and Chinese plays like Apple (AAPL) and Boeing (BA) especially hard hit.

China tariffs are to cost US households $500 each in rising import costs. Don’t point at me! I buy all American with my Tesla (TSLA).

The China tariffs delivered the largest tax increases in history, some $72 billion according to US Treasury figures. With Walmart (WMT) already issuing warnings on coming price hikes, we should sit up and take notice. It is a highly regressive tax hike, with the poorest hardest hit.

The Atlanta Fed already axed growth prospects for Q2, from 3.2% to 1.1%. This trade war is getting expensive. No wonder stocks have been in a swan dive.

US Retail Sales cratered in March while Industrial Production was off 0.5%. Why is the data suddenly turning recessionary? It isn’t even reflecting the escalated trade war yet.

European auto tariff delay boosted markets in one of the administration’s daily attempts to manipulate the stock market and guarantee support of Michigan, Wisconsin, and Pennsylvania during the next presidential election. All government decisions are now political all the time.

Weekly Jobless Claims plunged by 16,000 to 212,000. Have you noticed how dumb support staff have recently become? I have started asking workers how long they have been at their jobs and the average so far is three months. No one knows anything. This is what a full employment economy gets you.

Four oil tankers were attacked at the Saudi port of Fujairah, sending oil soaring. America’s “two war” strategy may be put to the test, with the US attacking Iran and North Korea simultaneously.

Bitcoin topped 8,000, on a massive “RISK OFF” trade, now double its December low. The cryptocurrency is clearly replacing gold as the fear trade.

The Mad Hedge Fund Trader managed to blast through to a new all-time high last week.

Global Trading Dispatch closed the week up 16.35% year to date and is up 0.63% so far in May. My trailing one-year rose to +20.19%. We jumped in and out of short positions in bonds (TLT) for a small profit, and our tech positions appreciated.

The Mad Hedge Technology Letter did OK, making some good money with a long position in Intuit (INTU) but stopping out for a small loss in Alphabet (GOOGL).

Some 10 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.
 
My nine and a half year profit jumped to +316.49%. The average annualized return popped to +33.21%. With the markets incredibly and dangerously volatile, I am now 80% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter.

I’ll wait until the markets retest the bottom end of the recent range before considering another long position.

The coming week will see only one report of any real importance, the Fed Minutes on Wednesday afternoon. Q1 earnings are almost done.

On Monday, May 20 at 8:30 AM, the April Chicago Fed National Activity Index is out.

On Tuesday, May 21, 10:00 AM EST, the April Existing Home Sales is released. Home Depot (HD) announces earnings.

On Wednesday, May 22 at 2:00 PM, the minutes of the last FOMC Meeting are published. Lowes (LOW) announces earnings.

On Thursday, May 16 at 23 AM, Weekly Jobless Claims are published. Intuit (INTU) announces earnings.

On Friday, May 24 at 8:30 AM, April Durable Goods is announced.

As for me, I’ll be taking a carload of Boy Scouts to volunteer at the Oakland Food Bank to help distribute food to the poor and the homeless. Despite living in the richest and highest paid urban area in the world, some 20% of the population now lives on handouts, including many public employees and members of the military. It truly is a have, or have-not economy.

Good luck and good trading.

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

 

 

 

 

 

 

July 17, 2018

Global Market Comments
July 17, 2018
Fiat Lux

(WHERE THE ECONOMIST “BIG MAC” INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (FXA), (FXY), (CYB),
(CATCHING UP WITH DOWNTON ABBEY),
(TESTIMONIAL)

May 4, 2018

Global Market Comments
May 4, 2018
Fiat Lux

Featured Trade:
(DON’T MISS THE MAY 9 GLOBAL STRATEGY WEBINAR),
(A DAY IN THE LIFE OF THE MAD HEDGE FUND TRADER),
(SPY), (TLT), (TBT), (FXE),(GLD), (GDX), (USO),
(AMLP), (STBX), (NFLX), (DIS), (AAPL), (GM)

May 3, 2018

Global Market Comments
May 3, 2018
Fiat Lux

Featured Trade:
(STORAGE WARS),
(MSFT), (IBM), (CSCO), (SWCH),
(DON’T BE SHORT CHINA HERE),
($SSEC), (FXI), (CYB), (CHL), (BIDU),

The Two Century Dollar Short

Any trader will tell you the trend is your friend and the overwhelming direction for the US dollar for the last 222 years has been down.

Our first Treasury Secretary, Alexander Hamilton, found himself constantly embroiled in sex scandals. Take a ten dollar bill out of your wallet and you?re looking at a world class horn dog, a swordsman of the first order.

When he wasn?t fighting scandalous accusations in the press and the courts, he spent much of his six years in office orchestrating a rescue of our new currency, the US dollar.

Winning the Revolutionary War bankrupted the young United States, draining it of resources and leaving it with huge debts. Hamilton settled many of these by giving creditors notes exchangeable for then worthless Indian land west of the Appalachians.

As soon as the ink was dry on these promissory notes, they traded in the secondary market for as low as 25% of face value, beginning a centuries long government tradition of stiffing its lenders, a practice that continues to this day.

My unfortunate ancestors took him up on his offer, the end result being that I am now writing this letter to you from California?and am part Indian.

It all ended in tears for Hamilton, who, misjudging former Vice President Aaron Burr?s intentions in a New Jersey duel, ended up with a bullet in his back that severed his spinal cord.

Since Bloomberg machines weren?t around in 1790, we have to rely on alternative valuation measures for the dollar then, like purchasing power parity and the value of goods priced in gold.

A chart of this data shows an undeniable permanent downtrend, which greatly accelerates after 1933 when FDR banned private ownership of gold and devalued the dollar.

Today, going short the currency of the world?s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer.

But once it became every hedge fund trader?s free lunch and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic corrections, which began a few years ago, and could continue for months or even years longer.

The euro has its own particular problems, with the cost of a generous social safety net sending EC budget deficits careening. ? Add to that the gargantuan cost of a burgeoning refugee crisis.

Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses and possess small consuming populations.

I?m talking about the Canadian dollar (FXC), the Australian dollar (FXA) and the New Zealand dollar (BNZ), all of which will eventually hit parity with the greenback. Think of these as emerging markets where they speak English, best played through the local currencies.

For a sleeper, buy the Chinese Yuan ETF (CYB) for your back book. A major revaluation by the Middle Kingdom is just a matter of time.

I?m sure that if Alexander Hamilton were alive today he would counsel our modern Treasury Secretary, Jack Lew, to talk the dollar up, but to do everything he could to undermine the buck behind the scenes, thus, over time, depreciating our national debt down to nothing through a stealth devaluation.

Given Jack Lew?s performance so far, I?d say he studied his history well. Hamilton must be smiling from the grave.

ChartA Chart of the US Dollar Priced in Hard Goods

UUP

10 Dollar Bill

Jack LewSee the Resemblance?

China?s Firecracker Surprise

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.

CYB 8-12-15

SSEC 8-12-15

FXI 8-12-15

EWH 8-12-15

China - FirecrackerSurprise!