Global Market Comments
May 18, 2020
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE MARKET IS BRACKETED)
(SPY), (TLT), (VIX), (DIS)
Global Market Comments
May 18, 2020
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE MARKET IS BRACKETED)
(SPY), (TLT), (VIX), (DIS)
We are all living the Bill Murray movie “Groundhog Day” over and over again. Every day seems to blend seamlessly into the next, ad infinitum.
I think it’s Monday, but I’m not sure. The stock market is open so that must mean it’s Monday to Friday. The trash goes out tomorrow, so it might be Tuesday. No, wait! CBS 60 Minutes was on last night, so it has to be Monday. Maybe.
When a Marine Corp 60mm mortar team zeros in on a target, it is said to be “bracketed.” No matter which way the enemy goes, he gets blown up.
The S&P 500 is now “bracketed”.
If it falls, the support of the free Fed put option kicks in to limit the damage via QE infinity. If the market tries to rally, it is capped by the worst economic data in history, last week joined by a new trade war with China.
Who is the enemy that gets destroyed in this military metaphor? Anyone betting on an imminent upside or downside breakout, especially those who are long the Volatility Index (VIX).
That means the thousands who follow the Mad Hedge Fund Trader have just been given a money-printing machine, a new rich uncle.
For every time the market rallies, you simply buy a vertical bear put option spread in the front month with strikes prices well outside the bracketed area as I did last week with (DIS). When it dives, you strap on vertical bull call spreads, as I did last week with the (DIS) and the (SPY). Then you laugh all the way to the bank.
We could be bracketed a long time. The early data from opening-up states is that consumers returning to stores only amounts to a ruinous 7% of pre-pandemic levels. That suggests the Unemployment Rate will soar to 30% or more before it peaks, exceeding the Great Depression apex. There are easily another 10 million that haven’t been counted yet because the state benefit processors are so slow.
However, as long as we are bracketed, I reckon I can make 10% a month, as I already have done from the Middle of April and in May.
It is not a riskless strategy.
The day an actual vaccine is announced, the market Dow Average could soar by 3,000 points in a day, wiping out the shorts. The White House has been declaring this on a daily basis. But until we get a vaccine the market believes, we will remain bracketed. That could take years, if ever.
Dr. Fauci triggered a 1,000-point market dive with his sobering analysis of the course of the pandemic in the coming months. Don’t count on going back to school in the fall.
No “V” for the economy, said the Fed. The job losses are a complete economic disaster that will take years to recover from. That’s the opinion of Minneapolis Federal Reserve Bank President Neel Kashkari. The president just said Corona deaths will reach 100,000. Buzzkill. Do you think the stock market will notice?
Fed funds futures are discounting negative interest rates in a year. They say they don’t want negative rates but may not have a choice. The markets may go there without them. The disruptions to the financial service will be enormous. Do you really want to pay the bank to deposit your hard-earned money?
Fed Governor Powell warns the worst is yet to come, and the need for more stimulus is paramount. However, negative interest rates which failed in Europe and Japan won’t work here either. The problem is rampant fear, not the overnight cost of funds.
Weekly Jobless Claims are still soaring, up 3 million on the week to 36.5 million. It’s going to get worse before it gets better. The Fed is targeting a peak of 36.5 million. Connecticut is the worst-performing state, California the best.
Stan Druckenmiller says stocks are the most overvalued in his career, says my former client, one of the best traders in the market. My friend David Tepper says they’re the most expensive since 1999. It may be splitting hairs, but how much do you want to own here? Keep those shorts!
Another death knell for US Treasury bonds (TLT) as the April budget deficit soars to $738 billion. That is an $8.85 trillion annual rate. Overissuance is about to destroy deflation big time.
Retail Sales collapse by 16.4%, the worst on record in another Great Depressionary data release. The stock market is starting to lean towards a view that the economy will take years to recover, not months. I’m somewhere in the middle.
A new trade war with China heats up, with the president banning more export items, especially chips for telecom giant Huawei. I guess our economy isn’t bad enough. Knock another few thousand off the Dow.
When we come out on 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 at zero, oil at $0 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance had another fabulous week, up an awesome +11.26%, and blasting us up to a new eleven-year all-time high of 20%. It has been one of the most heroic performance comebacks of all time.
My aggressive short bond positions gave back some money on the ‘RISK OFF” posture for the week. However, we offset those losses and a lot more on longs in bonds and shorts in the (SPY) and Walt Disney (DIS).
That takes my 2020 YTD return up to +7.29%. That compares to a loss for the Dow Average of -16.89%. My trailing one-year return exploded to 48.47%. My eleven-year average annualized profit returned to +34.59%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, May 18 at 10:00 AM, the NAHB Housing Market Index for May is released.
On Tuesday, May 19 at 8:30 AM, US Housing Starts for April are printed. Home Depot (HD) and Walmart (WMT) report.
On Wednesday, May 20, at 10:30 AM, weekly EIA Crude Oil Stocks are published. Target (TGT) and Lowes (LOW) report.
On Thursday, May 21 at 8:30 AM, Weekly Jobless Claims are announced. NVIDIA (NVDA) reports.
On Friday, May 22, the Baker Hughes Rig Count follows at 2:00 PM. Alibaba (BABA) reports.
As for me, I am headed back up to Incline Village, NV, a town completely free of Covid-19. The village is thinking of barring entry to all non-residents. Maybe it’s the fresh air.
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 9, 2020
(TEN LONG TERM LEAPS TO BUY AT THE BOTTOM)
(MSFT), (AAPL), (GOOGL), (QCOM), (AMZN),
(V), (AXP), (NVDA), (DIS), (TGT)
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now, and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPS, allows plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 131.8% profit from an average stock price increase of only 17.6%.
That is a staggering return 7.7 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way, your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright. I expect the list below to rise by 50% or more over the next two years.
Microsoft (MSFT) – March 18 2022 $180-$190 bull call spread at $2.67 delivers a 274% gain with the stock at $190, up 16% from the current level. As the global move online vastly accelerates the world is clamoring for more computers and laptops, 90% of which run Microsoft’s Windows operating system. The company’s new cloud present with Azure will also be a big beneficiary.
Apple (AAPL) – June 17 2022 $210-$220 bull call spread at $6.47 delivers a 55% gain with the stock at $226, up 14% from the current level. With most of the world’s Apple stores now closed, sales are cratering. That will translate into an explosion of new sales in the second half when they reopen. The company’s online services business is also exploding.
Alphabet (GOOGL) – January 21 2022 $1,500-$1,520 bull call spread at $7.80 delivers a 28% gain with the stock at $226, up 14% from the current level. Global online searches are up 30% to 300%, depending on the country. While advertising revenues are flagging now, they will come roaring back
QUALCOMM (QCOM) – January 21 2022 $90-$95 bull call spread at $1.55 delivers a 222% gain with the stock at $95, up 23% from the current level. We are on the cusp of a global 5G rollout and almost every cell phone in the world is going to have to use one of QUALCOMM’s proprietary chips.
Amazon (AMZN) – January 21 2022 $2,100-$2,150 bull call spread at $17.92 delivers a 179% gain with the stock at $2,150, up 15% from the current level. If you thought Amazon was taking over the world before, they have just been given a turbocharger. Much of the new online business is never going back to brick and mortar.
Visa (V) – June 17 2022 $205-$215 bull call spread at $3.75 delivers a 166% gain with the stock at $215, up 16% from the current level. Sales are down for the short term but will benefit enormously from the mass online migration of new business only. They are one of a monopoly of three.
American Express (AXP) – June 17 2022 $130-$135 bull call spread at $1.87 delivers a 167% gain with the stock at $135, up 28% from the current level. This is another one of the three credit card processors in the monopoly, except they get to charge much higher fees.
NVIDIA (NVDA) – September 16 2022 $290-$310 bull call spread at $6.90 delivers a 189% gain with the stock at $310, up 19% from the current level. They are the world’s leader in graphics card design and manufacturing used on high-end PCs, artificial intelligence, and gaining. They befit from the soaring demand for new computers and the coming shortage of chips everywhere.
Walt Disney (DIS) – January 21 2022 $140-$150 bull call spread at $2.55 delivers a 55% gain with the stock at $116, up 31% from the current level. How would you like to be in the theme park, hotel, and cruise line business right now? It’s in the price. Its growing Disney Plus streaming service will make (DIS) the next Netflix.
Target (TGT) – June 17 2022 $125-$130 bull call spread at $1.40 delivers a 257% gain with the stock at $130, up 16% from the current level. Some store sales are up 50% month on month and lines are running around the block. Their recent online growth is also saving their bacon.
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 26 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: There’s been a moderation of new coronavirus cases in China. Is this what the market needs to find a bottom?
A: Absolutely it is; of course, the next risk is that cases keep increasing overseas. The final bottom will come when overseas cases start to disappear, and that could be a month or two off.
Q: How low will interest rates go after the coronavirus?
A: Well, interest rates already hit new all-time lows before the virus became a stock market problem. The virus is just giving it a turbocharger. Our initial target of 1.32% for the ten-year US Treasury bond was surpassed yesterday, and we think it could eventually hit 1.00% this year.
Q: What is the best way to know when to buy the dip?
A: When the Volatility Index (VIX) starts to drop. If you can get the volatility index down to the mid-teens and stay there, then the market will stabilize and start to rise fairly sharply. A lot of the really high-quality stocks in the market, like United Airlines (UAL), Walt Disney (DIS), Apple (AAPL) and Amazon (AMZN), have really been crushed by this selloff. So those are the names people are going to look at for quality at a discount. That’s going to be your new investment theme, buying quality at a discount.
Q: Do recent events mean that Boeing (BA) is headed down to 200?
A: I wouldn’t say $200, but $280 is certainly doable. And if you get to $280, then the $240/$250 call spread all of a sudden looks incredibly attractive.
Q: What does a Bernie Sanders presidency mean for the market?
A: Well, if he became president, we could be looking at like a 50-80% selloff—at least a repeat of the ‘09 crash. However, I doubt he will get elected, or if elected, he won’t have control of congress, so nothing substantial will get done.
Q: Is this the beginning of Chinese (FXI) bank failures that will cause an economic crisis in mainland China?
A: It could be, but the actual fact is that the Chinese government is doing everything they can to rescue troubled banks and companies of all types with short term emergency loans. It’s part of their QE emergency rescue package.
Q: Can you explain what lower energy prices mean for the global economy?
A: Well, if you’re an oil consumer (USO), it’s fantastic news because the price of gas is going down. If you’re an oil producer (XLE), like for people in the Middle East, Texas, Louisiana, Oklahoma, and North Dakota, it’s terrible news. And if you’re involved anywhere in the oil industry, or own energy stocks or MLPs, you’re looking at something like another great recession. I have been hugely negative on energy for years. I’ve seen telling people to sell short coal (KOL). It’s having a “going out of business” sale.
Q: Should I aggressively short Tesla (TSLA) here? Surely, they couldn’t go up anymore.
A: Actually, they could go up a lot more. I would just stay away from Tesla and watch in amazement—there’s no play here, long or short. It suffices to say that Tesla stock has generated the biggest short-selling losses in market history. I think we’re up to about $15 billion now in short losses. Much smarter people than us have lost fortunes trying in that game.
Q: Was that an Amazon trade or a Google trade?
A: I sent out both Amazon and an Apple trade alert this morning. You should have separate trade alerts for each one.
Q: Are chips a long term buy at today’s level?
A: Yes, but companies like NVIDIA (NVDA), Micron Technology (MU), and Advanced Micro Devices (AMD) may be better long-term buys if you wait a couple of weeks and we test the new lows that we’ve been talking about. Chips are the canary in the coal mine for the global economy, and we have not gotten an all-clear on the sector yet. If you’re really anxious to get into the sector, buy a half of a position here and another half 10% down, which might be later this week.
Q: When will Foxconn reopen, the big iPhone factory in China?
A: Probably in the next week or so. Workers are steadily moving back; some factories are saying they have anywhere from 60-80% of workers returning, so that’s positive news.
Q: Are bank stocks a sell because of lower interest rates?
A: Yes, absolutely. If you think the 10-year treasury is running to a 1.00% yield as I do, the banks will get absolutely slaughtered, and we hate the sector anyway on a long-term basis.
Q: What about future Fed rate cuts?
A: Futures markets are now pricing in possibly three more rate cuts this year after discounting no more rate cuts only a few weeks ago. So yes, we could get more interest rates. I think the government is going to pull all the stops out here to head off a corona-induced recession.
Q: Once your options expire, is it still affected by after-hours trading?
A: If you read the fine print on an options contract, they don’t actually expire until midnight on a Saturday night after options expiration day, even though the stock market stops trading on a Friday. I’ve never heard of a Saturday exercise, but you may have to get a batch of lawyers involved if you ever try that.
Q: What’s the worst-case scenario for this correction?
A: Everything goes down to their 200-day moving averages, including Indexes and individual stocks. You’re talking about Apple dropping to $243 and Microsoft (MSFT) to $144, and NASDAQ (QQQ) to 8,387. That could tale the Dow Average (INDU) to maybe 24,000, giving up all the 2019 gains.
Good Luck and Good Trading
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
November 18, 2019
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE MELT UP IS ON)
(SPY), (AAPL), (UBER), (SCHW), (BA), (TSLA), (DIS), (NFLX), (TLT)
All of a sudden, and without warning, a buying panic has ensued in the stock market, breaking it out of a tedious two-year range.
The many concerns that kept investors out of stocks, like the trade war, interest rates, and a global economic slowdown, were shaken off like water off the back of a wet dog.
I could see all this coming. Even with my Mad Hedge Market Timing Index at 86, and trading as high as 91, screaming “SELL” I have been ignoring it. It usually has to spend 2-4 weeks at these elevated levels to make a real top anyway. Hedge fund compatriots who were sucked into selling too early by their own inferior in-house algorithms have been stopping out in great pain.
I’ll tell you the people who are really screwed by this move. Those who watched the economic data deteriorate all year, cut their equity allocations to the bone, and only started chasing the market upward once it broke new ground. It is a strategy that can only end in tears.
We here at Mad Hedge Fund Trader did a lot better. Followers of Global Trading Dispatch missed the breakout but bought every major dive of 2019. With double a good year’s performance in hand, we have no need to chase.
The newer Mad Hedge Technology Letter and Mad Hedge Biotech and Healthcare Letter have continued to go long pedal to the metal bringing in double-digit gains for all. Above all, we took profit on no less than four positions on Friday.
Can the market grind higher? Absolutely, yes. The world is awash in cash looking for any kind of return, and US stocks, with a (SPY) 1.81% dividend, are among the world’s highest yielding. In fact, the move could continue until the end of the year.
When will I come back in? After we get a substantial dip. Disciplines are useless unless you stick to them. In the meantime, while stocks are going crazy, there is fertile ground to harvest in other asset classes. I bought bonds (TLT) at the bottom last week and they are already performing nicely.
If you remember, I sold short, and then bought oil (USO) in September, taking advantage of a spate of volatility there. Such is the advantage of an all-asset class strategy I have been preaching and teaching for the past 12 years.
There will be no interest rate cuts in 2020, says Fed chairman Jay Powell, reading in between the lines. To do so would undermine our ability to get out of the next recession. We are still way below the 2.0% inflation target in this deflationary world.
The de-inversion of the yield curve is clearly driving stocks, with long term interest rates at last higher than short term ones. The markets are backing the recession out of the forecast. “Fear of missing out” is replacing just fear.
Consumer Prices rose faster than expected as tariffs feed into prices, up 0.4% in October. It’s going to take a lot more than that to move the needle on inflation. The YOY rate climbed to 1.8%. Also, US Producer Prices jumped, up 0.4% in October, a six-month high. It’s going to take a lot more than this to start ringing the inflation bell.
Weekly Jobless Claims soared by 14,000 to 225,000. It’s the first big jump in many months. Is the employment top in? Is this the end of the beginning or the beginning of the end?
Charles Schwab (SCHW) trading accounts soared 31%, in the wake of the commission cut to zero. What happens when you lower the price? You sell more of them. It’s a classic law of supply and demand.
Uber founder dumped stocks, as Travis Kalanick unloads $700 million worth of shares. He’s not selling because he can’t think of new ways to spend the money. It’s not exactly a “BUY” recommendation, is it? Avoid (UBER) like the plague.
Apple hit a new all-time high at $264, on three broker upgrades, with the high end reaching $290. The market capitalization tops $1.2 trillion, making it the world’s largest publicly-traded company. It looks like I’m going to have to increase my own target from a conservative $200. I made this prediction when the newsletter started a decade ago and the share traded under $20. People said I was nuts, except Steve Jobs.
The Tesla Model 3 returns to “reliable” list, from Consumer Reports. They had been taken off due to pieces falling off new cars and failing transmissions exactly at the 44,000-mile mark. It was all covered by warranty, of course. Looks like Elon is figuring out how to put these things together and stay that way. It follows an onslaught of good news about the company that has wiped out the shorts. Who is last on the quality list now? Cadillac. Buy (TSLA) on dips.
US short interest falls 1.6%, to 16.8 billion shares, as hedge funds scramble to limit losses. It’s got to be at least half the current net buying.
Disney launched its streaming service, Disney Plus, at $6.99 a month. The site crashed from overwhelming demand. It’s a problem I wish I had. Netflix (NFLX) won’t go under but their growth will be clearly impaired. Let the streaming wars begin! Buy (DIS) on dips.
US Productivity plunged sharply, down 0.3% in Q3. It’s completely a result of the trade war-induced freeze on capital spending by US businesses this year. It means we’re eating out seed corn to grow.
This was a week for the Mad Hedge Trader Alert Service to stay level. With only one position left, a bargain long in (TLT), not much else was going to happen. My long position in Boeing (BA) expired on Friday at its maximum profit point.
By the way, running out of positions at a market top is a good thing.
My Global Trading Dispatch performance held steady at +349.38% for the past ten years, pennies short of an all-time high. My 2019 year-to-date leveled out at +48.68%. So far in November, we are down a miniscule -0.31%. My ten-year average annualized profit held steady at +35.17%.
With my Mad Hedge Market Timing Index sitting around the sky-high 86 level, it is firmly in “SELL” territory and at a three-year high. The markets have been up in a straight line for 2 ½ months.
The coming week is pretty non-eventful of the data front after last week’s fireworks. Maybe the stock market will be non-eventful as well.
On Monday, November 18 at 11:00 AM, the US NAHB Housing Market Index for November is out.
On Tuesday, November 19 at 9:30 AM, US Housing Starts for October are released.
On Wednesday, November 20 at 2:00 PM, the Fed’s FOMC Minutes for their October meeting are published.
On Thursday, November 7, at 8:30 AM, Weekly Jobless Claims come out. At 11:00 AM the October Existing Home Sales are announced.
On Friday, November 8 at 11:00 AM, the University of Michigan Consumer Sentiment is out.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I am going to see the latest Harry Potter play on Saturday, Harry Potter and the Cursed Child. It’s a reward for two kids who got straight A’s on their report cards. They seem to be strangely good at math. Maybe the apple doesn’t fall far from the tree.
Good luck and good trading.
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Don’t blame the weatherman for the weather forecast.
The writing is on the wall.
Television is dead as the latest iteration of the Emmy’s bombed, reaching just 10.2 million viewers who tuned in to watch Amazon’s “The Marvelous Mrs. Maisel” win best comedy and “SNL’s” Michael Che and Colin Jost charm the audience.
The paltry numbers were a follow-up to last month’s MTV Video Music Awards which reached a record low of 5.23 million viewers, scoring lower ratings than that night’s network evening news broadcasts.
Why are viewers dropping like a dead fly on the wall?
It’s difficult to deduce but live TV events including the Super Bowl have lost viewership across the board.
I would attribute part of the blame to the death of the shared center in the American experience.
There are just too many content alternatives.
Viewers have a bevy of channels to choose from and if they aren’t watching television, they have already cut the cord.
This development has removed many millennials out of the traditional TV viewership pool.
To economize time, many consumers review the highlights through a truncated version on YouTube too.
As for the Emmys, the high quantity of content available online means that many people do not even know what shows are up for awards anymore.
We are at “peak tv.”
And the development of content could simply mean that award shows aren’t interesting anymore.
Nobody has time to sit around for hours of commercials when Netflix is one click away.
We have never had so much content before.
Does that mean investors should all buy Netflix and the world is all well and good?
It did before but we need to revisit their narrative.
Netflix doesn’t exist in a vacuum and the internet content space is a fluid situation.
They scooped up the lion shares of the spoils when on-demand streaming content was a monopoly which in fact was an industry created by them.
But the launch of services that could threaten its top position has crashed Netflix’s (NFLX) shares and they are now negative for 2019.
Shares were trading around a comfortable $380 just three months ago and have parachuted down to $250 today.
The alarming underperformance in shares goes hand in hand with an avalanche of negative news engulfing the company.
One of its most popular legacy show “The Office” was sent packing back to its originators NBC, then Netflix followed off that nasty bit with an earnings report that showed negative domestic new subscriber growth for the first time since 2011.
The growth in the international part of the business was underwhelming too, to say the least.
Without much time to recover, Apple (AAPL), Disney (DIS), NBC, and AT&T (T) announced plans to debut new streaming services that would peel off a substantial amount of Netflix demand.
This news, in effect, puts a cap on Netflix raising the price for their streaming service while confronted with the dreadful future of needing to pay higher prices to generate premium content.
The premise behind Netflix was always the super growth engine that superseded any negative aspects.
To add a little more color, most of these new streaming services are priced to undercut Netflix and investors must wonder how Netflix will be able to overcome these various headwinds at a time when growth companies are getting punished by an outsized rotation to value.
I believe that a dead cat bounce should be met with selling short Netflix.
Global Market Comments
September 20, 2019
(SEPTEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (FDX), (FB), (HYG), (JNK), (EEM), (BABA), (JD), (TBT), (FXE), (UUP), (AMZN), (FB), (DIS), (MSFT), (USO), (INDU),
(THE GREAT TRADING GURU SPEAKS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 18 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: What would happen to the United States Treasury Bond Fund (TLT) if the Fed does not lower rates?
A: My bet is that it would immediately have a selloff—probably several points—but after that, recession worries will take bond prices up again and yields down. I don’t think we have seen the final lows in interest rates by a long shot. That’s why I bought the (TLT) last week.
Q: Is it good to buy FedEx (FDX) considering the 13% fall today?
A: I use the 3-day rule on these situations. That’s how long it takes for the dust to settle from an earnings shock like this and find the real price. The problem with FedEx is that it’s a great early recession predictor. When the number of delivered packages decreases, it’s always an indicator that the economy as a whole is slowing down, which we know has been happening. It’s one of the most cyclical stocks out there, therefore one of the most dangerous. I wouldn’t bother with FedEx right now. Go take a long nap instead.
Q: Would you be a buyer of Facebook (FB) here, given they seem to have weathered all the recent attacks from Washington?
A: Not here in particular, but I would buy it 20% down when it gets to the bottom edge of its upward channel—it still looks like it’s going crazy. They’re literally renting or buying buildings to hire an additional 50,000 people in San Francisco anticipating huge growth of their business, so that’s a better indicator of the future of Facebook than anything.
Q: Will junk bonds be more in demand now that rates are cratering?
A: Junk bonds (HYG), (JNK) are driven more by the stock market than the bond market, as you can see in the huge rally we just had. Junk bonds are great because their default ratios are usually far below that which the interest rate implies, but you really have to trade them like stocks. Think of them as preferred stocks with really high dividends. When the stock market tops, so will junk bonds. Remember in 2008, junk yields got all the way up to 15% compared to today’s 5.6%.
Q: What will happen to emerging markets (EEM) as rates lower?
A: If lower interest rates bring a weaker US dollar, that would be very positive for emerging markets over the long term and they would be a great buy. However, emerging markets will take the hardest hit if we actually do go into a recession. So, I would pass for now.
Q: What are your thoughts on Alibaba (BABA) and JD.com (JD)?
A: They are great for the long term. However, expect a lot of volatility in the short term. As long as the trade war is going on, these are going to be hard to trade until we get a settlement. (JD) is already up 50% this year but is still down 40% from pre trade war levels. These things will all be up 20-30% when that happens. If you can take the heat until then, they would probably be okay for a long-term portfolio globally diversified.
Q: What do you have to say about the ProShares Ultra Short 20+ Year Treasury ETF (TBT)—the short bond ETF?
A: If you have a position, I’d be selling now. We just had a massive 20%, 4-point rally from $22 to $27 and now would be a good time to take a profit, or at least get out closer to your cost. The zero interest rates story is not over yet.
Q: Would you short the US dollar?
A: I would most likely short it against the euro (FXE), which now has a massive economic stimulus and quantitative easing program coming into play which should be positive for it and negative for the US dollar (UUP). That’s most likely why the euro has stabilized over the last couple of weeks. That said, the dollar has been unexpected high all year despite falling interest rates so I have been avoiding the entire foreign exchange space. I try to stay away from things I don’t understand.
Q: If all our big tech September vertical bull call spreads are in the money, what should we do?
A: You do nothing. They all expire at the Friday close in two trading days. Your broker should automatically use your long call position to cover your short call position and credit your account with the total profit on the following Monday, as well as release the margin for holding that position. After that, we’ll probably wait for another good entry point on all the same names, (AMZN), (FB), (DIS), (MSFT).
Q: If the US fires a cruise missile at Iran, how would the market react?
A: It would selloff pretty big—markets hate wars. And the US wouldn’t send one missile at Iran; it would be more like 100, probably aimed at what little nuclear facilities they have. I doubt that is going to happen. The world has figured out that Trump is a wimp. He talks big but there is never any action or follow through. Inviting the Taliban to Camp David while they were still blowing up our people? Really?
Q: Will the housing market turn on the turbochargers after this dip in rates?
A: It wouldn’t turn on the turbochargers, but it might stabilize the market because money is available now at unprecedentedly low interest rates. However, we still have the loss of the SALT deductions—the state and local taxes and real estate taxes that came in with the Trump tax bill. Since then, real estate has been either unchanged or has fallen on both the East and West coast where the highest priced houses are. It’s the most expensive houses that take the loss of the SALT deduction the hardest. Don’t expect any movement in these markets until the SALT deduction comes back, probably in 16 months.
Q: What catalyst do you think would cause a 10% correction in the next 2-3 months?
A: Trump basically saying “screw you” to the Chinese—a tweet saying he’s going to bring another round of tariff increases. That’s worth a minimum of 2,000 points in the Dow Average (INDU), or about 7% percent. Either that or no move in Fed interest rates—that would also create a big selloff. My guess is that and adverse development in the trade war will be what does it. That’s why my positions are so small now.
Q: We have a big short position in the United States Oil Fund (USO) now. Are you going to run this into expiration until October $18?
A: Even though oil has already collapsed by 10% since we put this position on last Friday, premiums in oil options are still close to record levels. So, it pays us to hang on for the time decay. The world is still massively oversupplied in oil and the Saudis were able to bring half of the lost production back on in a day. Oil will keep falling unless there is another attack and it is unlikely we will see one again on this scale. And, we only have 20 more days to go to capture the full 14.8% profit.
Good luck and good trading.
CEO & Publisher
Diary of a Mad Hedge Fund Trader