Years ago, if you asked traders what one event would destroy financial markets, the answer was always the same: China dumping its $1 trillion US treasury bond hoard.
It looks like Armageddon is finally here.
Once again, the Chinese boycotted this week’s US Treasury bond auction.
With a no-show like this, you could be printing a 2.90% yield in a couple of weeks. It also helps a lot that the charts are outing in a major long term double top.
You may read the president’s punitive duties on Chinese solar panels as yet another attempt to crush California’s burgeoning solar installation industry. I took it for what it really was: a signal to double up my short in the US Treasury bond market.
For it looks like the Chinese finally got the memo. Exploding American deficits have become the number one driver of all asset classes, perhaps for the next decade.
Not only are American bonds about to fall dramatically in value, so is the US dollar (UUP) in which they are denominated. This creates a double negative hockey stick effect on their value for any foreign investor.
In fact, you can draw up an all assets class portfolio based on the assumption that the US government is now the new debt hog:
Stocks – buy inflation plays like Freeport McMoRan (FCX) and US Steel (X) Emerging Markets – Buy asset producers like Chile (ECH) Bonds – run a double short position in the (TLT) Foreign Exchange – buy the Euro (FXE), Yen (FXY), and Aussie (FXA) Commodities – Buy copper (CU) as an inflation hedge Energy – another inflation beneficiary (USO), (OXY) Precious Metals – entering a new bull market for gold (GLD) and silver (SLV)
Yes, all of sudden everything has become so simple, as if the fog has suddenly been lifted.
Focus on the US budget deficit which has soared from $450 billion a year ago to over $1 trillion today on its way to $2 trillion later this year, and every investment decision becomes a piece of cake.
This exponential growth of US government borrowing should take the US National Debt from $22 to $30 trillion over the next decade.
I have been dealing with the Chinese government for 45 years and have come to know them well. They never forget anything. They are still trying to get the West to atone for three Opium Wars that started 180 years ago.
Imagine how long it will take them to forget about washing machine duties?
By the way, if I look uncommonly thin in the photo below it’s because there was a famine raging in China during the Cultural Revolution in which 50 million died. You couldn’t find food to buy in the countryside for all the money in the world. This is when you find out that food has no substitutes. The Chinese government never owned up to it.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/05/Man-in-China-story-2-image-6.jpg225336Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-02-27 01:07:462019-07-09 04:06:37Why China’s US Treasury Dump Will Crush the Bond Market
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: If there is a China trade deal, should I buy China stocks, specifically Alibaba?
A: To a large extent, both Chinese and US stocks have already fully discounted a China trade deal, so buying up here could be very risky. The administration has been letting out a leak a day to support the stock market, so I don’t think there will be much juice left when the announcement is actually made. The current high levels of US stocks make everything risky.
Q: Is it time to buy NVIDIA (NVDA)?
A: The word I’m hearing from the industry is that you don’t want to buy the semiconductor stocks until the summer when they start discounting the recovery after the next recession (which is probably a year off from this coming summer). The same is true for Micron Technology (MU), Advanced Micro Devices (AMD), and Lam Research (LRCX).
However, if you’re willing to take some heat in order to own a stock that’s going to triple over the next three years, then you should buy it now. If you’re a long-term investor, these are the entry points you die for. Looking at the charts it looks like it is ready to take off.
Q: Should I be shorting the euro (FXE), with the German economy going into recession?
A: No. We’re at a low for the euro so it’s a bad time to start a short. It’s interest rates that drive the euro more than economies. With the U.S. not raising interest rates for six months, maybe a year, and maybe forever, you probably want to be buying the currencies more than selling them down here.
Q: Would you buy the British pound (FXB) on Brexit fears?
A: I would; my theory all along has been that Brexit will fail and the pound will return to pre-Brexit levels—30% higher than where we are at now. I have always thought that the current government doesn’t believe in Brexit one iota and are therefore executing it as incompetently as possible.
They have done a wonderful job, missing one deadline after the next. In the end, Britain will hold another election and vote to stay in Europe. This will be hugely positive for Europe and would end the recession there.
Q: What do we need to do for the market to retest the highs?
A: China trade deal would do it in a heartbeat. If this happens, we will get the 5% move to the upside initially. Then we’re looking at a double top risk for the entire 10-year bull market. That’s when the short players will start to come in big time. You’d be insane to new positions in stocks here. There is an easy 4,500 Dow points to the downside, and maybe more.
Q: Do you think earnings growth will come in at 5%, or are they looking to be zero or negative?
A: Zero is looking pretty good. We know companies like to guide conservative then surprise to the upside; however, with Europe and China slowing down dramatically, that could very well drag the U.S. into recession and our earnings growth into negative numbers. The capital investment figures have been falling for three months now. US Durable Goods fell by 1.2% in January.
This explains why companies have no faith in the American economy for the rest of this year. This was a big reason why Amazon (AMZN) abandoned their New York headquarters plans. They see the economic data before we do and don’t want to expand going into a recession.
Q: When will rising government debt start to hurt the economy?
A: It already is. Foreign investors have been pulling their bids for fear of a falling US dollar. They have also become big buyers of gold (GLD) in order to avoid anything American, so we have a new bull market there. In the end, the biggest hit is with business confidence.
Nothing good ever comes from exploding US deficits and companies are not inclined to invest going into that. That is a major factor behind the sudden deterioration in virtually all data points over the past month.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2019/02/John-micron.png358293Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-02-22 01:06:072019-07-09 04:07:13February 20 Biweekly Strategy Webinar Q&A
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 6 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Why are you so convinced bonds (TLT) are going to drop in 2019?
A: I think the Fed will regain the confidence to start raising rates again in the second half. Wage inflation is starting to appear, especially at the minimum wage level in several states. That will crater the bond market as well as the stock market, just as we saw in the second half of 2018. We’re in unknown territory in the bond market; we’re issuing astronomical WWII levels of debt and it’s only a matter of time before the Federal government crowds out private sector borrowers. Even if the bond market sidelines during this time, we will still make the maximum profit in the kind of option bear put spreads I have been putting on.
Q: Why did the Aussie (FXA) go down when they suddenly flipped from rising to cutting interest rates?
A: Interest rate differentials are the principal driver of all foreign exchange rates. They always have been and always will be. Rising rates almost always lead to a stronger currency. And with the US Fed on pause for the foreseeable future, we think the Aussie will be stronger going into 2019.
Q: Do you see the 10-year US Treasury yield going back up to 3.25% this year?
A: Yes, it’ll probably happen in the second half of the year—once the Fed gets its mojo back and decides that high employment and inflation are the bigger threats to the economy.
Q: Has NVIDIA (NVDA) bottomed here?
A: Probably, but you don’t want to touch the semiconductor chip companies until the summer. That’s when all the industry insiders expect the industry to turn and start discounting rocketing earnings after the next recession.
Q: Are stocks expensive here (SPY)?
A: On a trailing basis no, on a forward basis definitely yes. The current price/earnings multiple for the market is 17 now against a 14-20 range in 2018. So, we are dead in the middle of that range now. That’s OK when earnings are rapidly rising as they did last year. But they are falling now and at an increasingly increasing pace.
Q: Do you think the administration used the shutdown to bring forth a recession? To kickstart the pro-economic platform for reelection in 2020?
A: The administration’s view is that the economy is the strongest it’s ever been with no chance of future recession and that they will win the election as a slam dunk. If you believe that, buy stocks; if you don’t, sell them.
Q: How bad do you think Europe (IEUR) will get and does that mean the dollar (UUP) could see parity with the Euro (FXE) soon?
A: Europe is bad but they’re not going to raise interest rates anymore. However, they’re not going to cut them either because they’re already at zero. You need rising rates to see a stronger currency and the fact that the U.S. stopped raising rates is an argument for the Euro to go higher.
Q: Are we about to settle into a fading Volatility Index (VIX) environment for the rest of the year?
A: No, we are not; the (VIX) has been fading for 6 weeks. We’re approaching a bottom with the (VIX) here at $15, and the next big move in will probably be to the upside. The market has gotten WAY too complacent.
Q: Which are the most worrisome signals you see in the U.S. economy right now?
A: Weak earnings and sales guidance from all U.S. companies going forward and the immense jump in jobless claims last week as well as the ever-exploding amounts of government debt. Did I mention the trade war with China and the next government shutdown? Traders have a lot on their plate right now.
Q: How far will Lam Research (LRCX) go?
A: We’ve just had a massive 46% move up, so I wouldn’t chase it up here. However, long term there is still an easy double in this stock. They’re tied in with the semiconductor companies; NVIDIA, Advanced Micron Devices (AMD) and Micron Technology (MU) all trade in a group and may take one more run at the lows. Short term it’s overbought, long term it’s a screaming buy.
Q: Will the ag crisis feed into the main economy?
A: It could. All ag storage in the country is full, so farmers are putting the new harvest under tarps where it is rotting away and then claiming on their insurance. If you add another harvest on top of that it will be a disaster of epic proportions. China is America’s largest ag customer. It took decades of investment to develop them a client, and they are never coming back in their previous size. The trust is gone. Bankruptcies are at a ten-year high and that could eventually take down some regional banks which in turn hurt the big banks. However, ag is only 2% of the US economy, so it won’t cause the next recession. It’s really more of a story of local suffering.
Q: If you give out stop and not filled at stop price, when and how do you adjust to exit?
A: I would quickly enter it and if you’re not done quickly move it down five cents. If you don’t get done, do it again. There is no way to know where the real market is in until you put in a real order. There are 11 different option exchanges online and they are changing prices every millisecond. Furthermore, spread trades can get one leg done on one exchange and the second leg done on another, so prices can be all over the place.
Q: What data goes into the Mad Hedge Market Timing Index and how do you use it to time the markets?
A: It uses a basket of 30 different indicators which constantly changes according to what generates the highest return in a 30 year backtest. It includes a lot of conventional data points, like moving averages and RSIs, along with some of our own internal proprietary ones. When we are getting a reading below 20, we are looking to buy. Any reading over 65 and we are looking to sell, and over 80 we will only go short. It works like a charm. It paid for my new Tesla! I hope this helps.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/02/plane.png441829Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-02-08 01:06:592019-07-09 04:08:21February 6 Biweekly Strategy Webinar Q&A
Featured Trade:
(MARKET GETS A FREE PASS FROM THE FED),
(SPY), ($INDU), (TLT), (GLD), (FXE), (UUP),
(APPLE SEIZES VICTORY FROM THE JAWS OF DEFEAT),
(AAPL)
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-31 02:08:572019-01-31 02:16:54January 31, 2019
When the Oxford English Dictionary considers the Word of the Year for 2019, I bet “PATIENCE” will be on the short list.
That was the noun that Federal Reserve governor Jerome Powell had in mind when describing the central bank's current stance on interest rates.
Not only did Powell say he was patient, he posited that the Fed was currently at a neutral interest rate. The last time he opened on this matter four months ago, the neutral rate was still 50 basis point higher, suggesting that more rate hikes were to come.
What a difference four months makes! The last time Powell spoke, the stock market crashed. Today, he might as well fire a flare gun signaling the beginning of a stampede by investors.
The Dow ($INDU) average at one point gained 500 points. Lower rates for longer term meant that bonds took it on the kisser. And gold (GLD) absolutely loved it as they now have less competition from interest-bearing instruments.
The US dollar (UUP) was taken out to the woodshed and beaten senseless paving the way for a nice pop in the euro (FXE). Even oil (USO) took the cue as cheaper interest rates mean a stronger global economy that will drink more Texas tea.
I believe that the Fed move today will definitely take a retest of the December 24 lows off the table for the time being. Now, if we can only get rid of that damn trade war with China, it will be off to the races for risk in general and stocks specifically.
What Did You REALLY Mean Jay?
https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/Jay-Powell.png289229Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-31 02:07:512019-07-09 04:40:40Market Gets a Free Pass from the Fed
Last week, I was too busy to cook dinner for my brood, so I ordered a pizza delivery. When an older man showed up with our dinner, I told the kids to tip him double. After all, he might be an unpaid federal air traffic controller.
It is a good thing I work late on Friday afternoon because that's when the government shutdown ended after 35 days. The bad news? The government stops getting paid again in only 18 more days. If you have to travel, you better do it quick as the open window may be short.
The most valuable thing we learned from all of this is that the weak point in America is the airline transportation system which relies on 4,000 flights to get the country’s business done.
Having once owned a European air charter company, I could have told you as much was coming. Every nut, bolt, and screw that goes into a US registered aircraft has to be inspected by the federal government. They are painted yellow when viewed which is called “yellow tagging”. No inspection, no screw. No screw, no airplane. No airplane, no flight. No flight, no economy. I can’t tell you how many times I have seen a $30 million aircraft grounded by a failed 50-cent part.
And here’s what most investors don’t get. We lost 75 basis points in GDP growth from the shutdown. We may lose another 75 basis points restarting. And if you lose 1.50% from a post-Christmas period that is normally weak anyway, Q1 GDP may well come in negative. Hello recession!
We won’t know for sure until the first advanced estimate of Q1 GDP from the US Department of Commerce’s Bureau of Economic Analysis is published on April 26. That’s when the sushi will hit the fan. That, by the way, is perilously close for the May 10 prediction of the end of the entire ten-year bull market.
How did investors fare during the shutdown? We clocked the best January in 32 years with the Dow Average up 7.55%. Maybe the government should stay closed all the time!
It is not like the government shutdown, the fading Chinese trade talks, and the arrest of the president’s pal were the only things happening last week.
A slowing China is freaking out investors everywhere. Even if a trade deal is cut tomorrow, it may not be enough to pull the economy out of a downward death spiral. Look out below! A 6.6% growth rate for 2018 is the slowest in 30 years.
Existing Home Sales were down a disastrous 6.4%, in December and 10% YOY, the worst read since 2012. The government shutdown is made closings nearly impossible.
The EC’s Mario Draghi said there would be no euro rate rises until 2020 and the US bond market took off like a rocket. Another point or two and we’ll be in short selling territory again. Don’t count on Europe to pull us out of the next recession. Whoever came up with the idea of putting an Italian in charge of Europe’s finances anyway? Like that was such a great idea.
Procter & Gamble (PG) beat with an upside earnings surprise. It must be all those people buying soap to wash their hands of our political system. But Ford (F) disappointed, dragged down by weak foreign earnings. The weakest big car company to get into electric cars is really starting to suffer. The last of the buggy whip makers is taking a swan dive
The semis have bottomed in the wake of spectacular earnings reports from (LRCX), (AMD), and (XLNX). The great artificial intelligence play is back in action after a severe spanking. I never had any doubt they would come back. Now for an entry point.
Farmers are leaving crops to rot in the field as the trade war with China destroys prices and the Mexicans needed to harvest them are trapped at the border. There’s got to be an easier way to earn a living. Avoid the ags and all ag plays. Short tofu stocks!
Investors are now sitting on pins and needles wondering if we get a repeat of the horrific February of 2018, or whether so far great earnings reports will drive us to higher highs. Earnings tail off right when the next government shutdown is supposed to start so our lives will be interesting, to say the least.
My January and 2019 year to date return soared to +7.24%, boosting my trailing one-year return back up to +30.23%.
My nine-year return climbed up to +308.14%, a mere 1.72% short of a new all time high.The average annualized return revived to +33.61%.
I have been dancing in between the raindrops using rallies to take profits on longs and big dips to cover shorts.
I started out the week using the 4 1/2 point plunge in the bond market (TLT) to cover the last of my shorts there, bring in a whopper of a $1,680 profit in only 13 trading days. To quote the Terminator (whose girlfriend I once dated, the Terminatrix), I’ll be back.”
I used the big 500-point swoon in the Dow on Monday to come out of my (SPY) short at cost. An unfortunate comment on interest rates by the European Central Bank forced me to stop out of my long in the Euro (FXE), also at cost.
That has whittled my portfolio down to only two positions, a long in Microsoft (MSFT) and a short in Apple (AAPL). As a pairs trade you could probably run this position for years. I am now 80% in cash.
The goal is to go 100% into cash into the February option expiration in 14 trading days, wait for a big breakout, and then fade it. Essentially, I am waiting for the market to tell me what to do. That will enable me to bank double-digit profits for the start of 2019, the best in a decade.
The upcoming week is very iffy on the data front because of the government shutdown. Some government data may be delayed and other completely missing. Private sources will continue reporting on schedule. All of the data will be completely skewed for at least the next three months. You can count on the shutdown to dominate all media until it is over.
Jobs data will be the big events over the coming five days along with some important housing numbers. We also have several heavies reporting earnings.
On Monday, January 28 at 8:30 AM EST, we get the Chicago Fed National Activity Index.
On Tuesday, January 29, 9:00 AM EST, the Case Shiller National Home Price Index for November is released. The ever important Apple (AAPL) earnings are out after the close, along with Juniper Networks (JNPR).
On Wednesday, January 30 at 8:15 AM EST, the ADP Private Employment Report is announced. Pending Home Sales for December follows. Boeing Aircraft (BA) and Facebook (FB), and PayPal (PYPL) announce.
Thursday, January 31 at 8:30 AM EST, we get Weekly Jobless Claims. We also get the all-important Consumer Spending Index for December. Amazon (AMZN) and General Electric (GE) announce.
On Friday, February 1 at 8:30 AM EST, the January NonFarm Payroll Report hits the tape.
The Baker-Hughes Rig Count follows at 1:00 PM. Schlumberger (SLB) announces earnings. Home Sales is released. AbbVie Inc (ABBV) and DR Horton (DHI) report.
As for me, I will be celebrating my birthday. Believe me, lighting 67 candles creates a real bonfire. I received the best birthday card ever from my daughter which I have copied below
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2019/01/John-Thomas-birthday.png447325Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-01-28 01:06:592019-07-09 04:41:34The Market Outlook for the Week Ahead, or It’s Finally Over
(THE MARKET FOR THE WEEK AHEAD, or WHY I LOVE THE STOCK MARKET),
(SPY), (TLT), (MSFT), (CRM), (AMZN), (FXE)
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD),
(AAPL)
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