Jay Powell really showed his hand today with the press conference following his 25-basis point interest rate cut.
The Fed’s medium-term target rate is now zero. Take a 1.75% inflation rate, subtract a 1.75% overnight rate and you end up with a real interest rate of zero. The fact that we have real economic growth also at zero (1.75% GDP – 1.75% inflation) makes this easier to understand.
That means there will be no more interest rate cuts by the Fed for at least six more months. All interest rate risks are to the downside. There is no chance whatsoever of the Fed raising rates in the foreseeable future with a growth rate of 1.75%. It will also take a substantial fall in the inflation rate to get rates any lower than here.
That may happen if the economy keeps sliding slowly into recession. Net net, this is a positive for all risk assets, but not by much.
I regard every Fed day as a free economics lesson from a renown professor. Over the decades, I have learned to read through the code words, hints, and winks of the eye. It appears that the thickness of the briefcase no longer matters as it did during Greenspan. No one carries around paper anymore during the digital age.
I then have to weed through the hours of commentary that follows by former Fed governors, analysts, and talking heads and figure out who is right or wrong.
In the meantime, the “Curse of the Fed” is not dead yet. The ferocious selloffs that followed the last two Fed rate cuts didn’t start until the day or two after. That’s what the bond market certainly thinks, which rallied hard, a full two points, after the announcement.
All of this provides a road map for traders for the coming months.
The Santa Claus rally will start after the next dip sometime in November. Buy the dip and ride it until yearend. The Mad Hedge Market Timing Index at 75, the bond market (TLT), the Volatility Index (VIX) and the prices of gold (GLD), silver (SLV), and the Japanese yen (FXY) are all shouting this should happen sometime soon.
I hope this helps.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/10/jay-powell.png352672Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-10-31 08:04:572019-12-09 13:11:58Welcome to the Land of Zeros
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 4Global Strategy Webinar broadcast from Silicon Valley with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: If Trump figures out the trade war will lose him the election; will he stop it?
A: Yes, and that is a risk that hovers over all short positions in the market at all times these days because stocks will soar (INDU) when the trade war ends. We now have 18 months of share appreciation that has been frustrated or deferred by the dispute with China. The problem is that the US economy is already sliding into recession and it may already be too late to turn it around.
Q: Do you see the British pound (FXB) dropping more on the Brexit turmoil? Do you think the UK will stay in the EU?
A: If the UK ends Brexit through an election, then the pound should recover from $1.19 all the way back up to $1.65 where it was before Brexit happened four years ago. If that does happen, it will be one of the biggest trades of the year anywhere in the world, going long the British pound. This is how I always anticipated it would end. I was in England for the Brexit vote and I was convinced that if they held the election the next day, it would have lost. The only reason it won was because nobody thought it would— a lot like our own 2016 election. That brings Britain back into the EEC, saves Europe, and has a positive impact on markets globally. So, this is a big deal. Not to do so would be economic suicide for Britain, and I think wiser heads will prevail.
Q: Do you think it’s a good idea for Saudi ARAMCO to go public in Japan as reports suggest?
A: When the Arabs want to get out of the oil business (USO), (XLE), you want to also. That’s what the sale of ARAMCO is all about. They’re going to get a $1 trillion or more valuation, raising $100 billion in cash. And guess who the biggest investors in alternative energy in California are? It’s Saudi Arabia. They see no future in oil, nor should you. This is why we’ve been negative on the sector all year. By the way, bankruptcies by frackers in the U.S. are at an all-time high, another indicator that low oil prices can’t be tolerated by the US industry for long.
Q: Is it time to buy the ProShares Ultra Short 20 year Plus Treasury Bond Fund (TBT)?
A: No, not yet; I think we’re going to break 1.33% — the all-time low yield for the (TLT) will probably be somewhere just below 1.00%. We probably won’t go to absolute zero because we still have a growing economy. The countries that already have negative interest rates have shrinking economies or are already in recession, like Germany or Great Britain can justify zero rates.
Q: Are you going to run all your existing positions into expiration?
A: I’m going to try to—it’s only 12 days to expiration, and we get to keep the full profit if we do. As long as the market is dead in the middle here, there are no other positions to put on, no extreme low to buy into or extreme high to sell into. It’s a question of letting this sort of nowhere-trend play out, but also there’s nothing else to buy, so there is no need to raise cash. So, we’re 60% invested now and we’re going to try running as many of those into expiration as we can. Looks like all the long technology positions are safe (FB), (AMZN), (MSFT), (DIS). The only thing we’re pressing here are the shorts in Walmart (WMT) and Russell 2000 (IWM).
Q: Do you think it’s a good idea for Tesla (TSLA) to build another Gigafactory in Shanghai, China during a trade war? Will this blow up in Elon’s face?
A: I don’t think so because the Chinese are desperate for the Tesla technology and they just gave Tesla an exemption on import duties on all parts that need to go there to build the cars. So, that’s a very positive development for Tesla and I believe the stock is up about $10 since that news came out.
Q: Will Roku (ROKU) ever pull back? Would you buy it up here?
A: No, we recommended this thing last year at $40; it’s now up to $165, and up here it’s just wildly overbought, in chase territory. Of course, the reason that’s happening is that the big concern last year was Amazon wiping out Roku, yet they ultimately ended up partnering with Roku, and that’s worth about a 400% gain in the stock. You know the second you get into this, it’s over. There are just too many better fish to fry in the technology area.
Q: What happens if our existing Russell 2000 (IWM) September 2019 $153-$156 in-the-money vertical BEAR PUT spread Russell 2000 position closes between $156 and $153?
A: You lose money. You will get the Russell 2000 shares put to you, or sold to you at $153.00, which means you now own them, and you’ll get a big margin call from your broker for owning the extra shares. If ever it looks like we’re getting close to the strike price going into expiration, I come out precisely because of that risk. You don’t want random chance dictating whether you’re going to make money in your position or not going into expiration. If you’re worried about that, I would get out now and you can still come out with a nice profit. Or, you can always wait for another down day tomorrow.
Q: Is it time to get super aggressive shorting Lyft (LYFT) or Uber (UBER) when they openly admit that they won’t make a profit anytime in the near future?
A: The time to short Uber (UBER) and Lyft was at the IPO when the shares became available to sell. Down here I don’t really want to do very much. It’s late in the game and Uber’s down about one third from its IPO price. We begged people to stay away from this. It’s another example where they waited for the company to go ex-growth before it went public, but it didn’t leave anything for the public. It was a very badly mishandled IPO—it’s now at $31 against a $45 IPO price and was at a new all-time low just 2 days ago. You knew when they offered the drivers shares, the thing was in trouble. Sometime this will be a buy, but not yet. Go take a long nap first.
Q: Is the fact that rich people are hoarding cash a good indicator that a recession is approaching?
A: Yes, absolutely. Bonds yielding 1.45% is also an indication that the wealthy are hoarding cash from other investment and parking it in US treasury bonds. I went to the Pebble Beach Concourse d’ Elegance vintage car show a few weeks ago and all of the $10 million plus cars didn’t sell, only those priced below $100,000. That is always a good indicator that the wealthy are bailing ahead of a recession. If you can’t get a premium price for your vintage Ferrari, trouble is coming.
Q: Argentina just implemented currency controls; is this the start of a rolling currency crisis among emerging nations?
A: No, I believe the problems are unique to Argentina. They’ve adopted what is known as Modern Momentary Theory—i.e. borrowing and printing money like crazy. Unfortunately, this is unsustainable and results in a devalued currency, general instability, and the eventual hanging of their leaders from the nearest lamppost. This is exactly the same monetary policy that the Trump administration has been pursuing since he came into office. Eventually, it will lead to tears, ours, not his.
Q: Is the new all-electric Porsche Taycan a threat to Tesla?
A: No, it’s not. Their cheapest car is $150,000 and it gets one third less range than Tesla does. It’s really aimed at Porsche fanatics, and I doubt they will get outside their core market. In the meantime, Tesla has taken over the middle part of the electric market with the Model 3 at $37,000 a car. That’s where the money is, and Porsche will never get there.
Q: How will the US pull out of recession if the interest rates are at or below zero?
A: It won’t—that’s what a lot of economists are concerned about these days. With interest rates below zero, the Fed has lost its primary means to stimulate the economy. The only thing left to do is use creative means like feeding the economy with currency, which Europe has been doing for 10 years, and Japan for 30, with no results. That’s another reason to not allow rates to get back to zero—so we have tools to use when we go into a recession 12-24 months from now.
Q: What’s the best way to buy silver?
A: The ETF iShares Silver Trust (SLV) and, if you want to be aggressive, the silver miners with the Global X Silver Miners ETF (SIL).
Q: Have global central banks ruined the western economic system as we know it for future generations?
A: They may have—mostly by printing too much money in the last 10 years in order to get us out of recession. This hasn’t really worked for Europe or Japan, mind you, though who knows how much worse off they would be if they hadn’t. What it did do here is head off a Great Depression. If we go back to money printing in a big way, however, and it doesn’t work, we will not have prevented a Great Depression so much as pushed it back 10 or 15 years. That’s the great debate ongoing among economists, and it will eventually be settled by the marketplace.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/08/JT-with-snorkel-story-1-image-6-e1535059927176.jpg267350Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-09-06 04:02:202019-10-14 09:46:34September 4 Biweekly Strategy Webinar Q&A
So, this is what the best trading week looks like.
Investors panicked. The hot money fled in droves. Predictions of escalating trade wars, recessions, and depressions abounded.
The bottom line for followers of the Mad Hedge Fund Trader? We picked up 4.4% on the week, as may make as much next week.
A number of trading nostrums were re-proven once again. That which can’t continue, won’t. When too many people gather on one side of the canoe, it will capsize. If you execute a trade and then throw up on your shoes, you know it will be a good one. I could go on and on.
The week also highlighted another trend. That is the market has become a one-trick pony. The focus of the market is overwhelmingly on technology, the only sector that can promise double digit growth for years to come. And it’s not just technology, but a handful of large cap companies. Investing has become a matter of technology on, or technology off.
This is always how bull markets end, be it the Nifty 50 of the early 1970s, Japanese stocks of the late 1980s, or the Dotcom Bubble of the 1990s.
It was a week that ran off fast forward every day.
China retaliated against the US in the trade war and stocks dove 900 points intraday. The Middle Kingdom imposed a total ban on all US agricultural imports and took the Yuan (CYB) down to a decade low to offset tariffs.
All financial markets and asset classes are now flashing recession and bear market warnings. The Mad Hedge Market Timing Index fell from 70 to 22, the steepest drop in recent memory. The US dollar dropped sharply against the Euro (FXE) and the Japanese yen (FXY). Oil (USO) went into free fall. Copper (COPX) collapsed to a new low for the year.
The New York Fed lowered its Q3 GDP growth to a lowly 1.56%, with the Atlanta Fed pegging 1.9%. Payrolls, orders, import/export prices, and trade are shrinking across the board, all accelerated by the ramp up in the trade war. Manufacturing and retailing are going down the toilet. Sow the wind, reap the whirlwind.
The German economy (EWG) is in free fall, as most analysts expect a negative -0.1% GDP figure for Q2. The fatherland is on the brink of a recession which will certainly spill into the US. That Mercedes Benz AMG S class you’ve been eyeing is about to go on sale. Great Britain (FXB) is already there, with a Brexit-induced negative -0.2% for the quarter.
Some 50% of S&P 500 dividends now yield more than US Treasury bonds. At some point, that makes equities a screaming “BUY” in this yield-starved world, but not quite yet. Is TINA (there is no alternative to stocks) dead, or is she just on vacation?
Ten-year US Treasury bonds (TLT) hit 1.61%, down an incredible 50 basis point in three weeks. Zero rates are within range by next year. The problem is that if the US goes into the next recession at zero interest rates, there is no way to get out. A decades-long Japanese style Great Depression could ensue.
Bond giant PIMCO too says zero interest rates are coming to the US. Too bad they are six months late from my call. It’s all a matter of the US coming into line with the rest of the world. The global cash and profit glut has nowhere else to go but the US. Much of the buying is coming from abroad.
Gold (GLD) hit a six-year high, as a rolling stock market panics drive investors into “RISK OFF” trades and downside hedges. While high interest rates are the enemy of the barbarous relic, low rates are its best friend and negative rates are even better. We are rapidly approaching century lows on a global basis.
Do your Christmas shopping early this year, except do it at the jewelry store and for your portfolio. Above $1,500 an ounce gold is beating stocks this year and the old all-time high of $1,927 is in the cards.
As I expected, August is proving to be the best short selling opportunity of the year. Not only can we make money in falling markets, elevated volatility means we can get into long side plays at spectacularly low levels as well.
With the Volatility Index (VIX) over $20, it is almost impossible to lose money on option spreads. The trick was to get positions off while markets were falling so fast.
The week started out with a rude awakening, my short in the US Treasury Bond Fund rising 1 ½ points at the opening. I covered that for a tear-jerking 3.26% loss, my biggest of the year. But I also knew that making money had suddenly become like falling off a log.
I fortuitously covered all of my short positions in the S&P 500 (SPY) and the Russell 2000 (IWM) right when the Dow average was plumbing depths 2,000-2,200 points lower than the highs of only two weeks ago. Then I went aggressively long technology with very short dated August plays in Walt Disney (DIS), Salesforce (CRM), and Facebook (FB).
My Global Trading Dispatch has hit a new all-time high of 324.78% and my year-to-date shot up to +24.68%. My ten-year average annualized profit bobbed up to +33.60%.
I coined a blockbuster 6.31% so far in August. In a mere three weeks I shot out 12 Trade Alerts, 11 of which made money, bringing in a 10% profit net of the one-bond loss. All of you people who just subscribed in June and July are looking like geniuses.
The coming week will be a snore on the data front. Believe it or not, it could be quiet.
On Monday, August 12 at 11:00 AM EST, the Consumer Inflation Expectations for July are released.
On Tuesday, August 13 at 8:30 AM US Core Inflation for July is published.
On Wednesday, August 14, at 10:30 the IEA Crude Oil Stocks are announced for the previous week.
On Thursday, August 15 at 8:30 AM EST, the Weekly Jobless Claims are printed. At 9:15 we learn July Industrial Production.
On Friday, August 16 at 8:30 AM, the July Housing Starts are out.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be headed to the Land’s End Music Festival in San Francisco this weekend and listen to many of the local rock groups. Hopefully, I will be able to unwind from the stress and volatility of the week.
Good luck and good trading.
John Thomas CEO & Publisher The Diary of a Mad Hedge Fund Trader
You Need Special Glasses to Understand This Market
https://www.madhedgefundtrader.com/wp-content/uploads/2019/08/john-thomas-3d-glass.png470345Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-08-12 08:04:322019-09-16 10:25:34The Market Outlook for the Week Ahead
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader August 7Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Are we headed for a worldwide depression with today’s crash and interest rates?
A: No, I think the interest rates are more of an anomaly unique to the bond market. There is a global cash glut all around the world and all that money is pouring into bonds—not for any kind of return, but as a parking place to avoid the next recession. The economic data is actually stronger than usual for pre-recession indicators. US interest rates going to zero is just a matter of coming in line with the rest of the world. Three to six months from now we may get our final bear market and recession indicators.
Q: Do you think the market has more downside?
A: Yes; if the 200-day moving average for the (SPY) doesn’t hold, then you’re really looking at a potential 20% correction, not the 8% correction we have seen so far.
Q: Which sector would you focus on for any dips?
A: Technology (XLK). If they lead the downturn, they’re going to lead the upturn too. It’s the only place where you have consistent earnings growth going out many years. You’re really all looking for an opportunity to go back into Tech, but the answer is a firm not yet.
Q: Would you buy gold (GLD), even up here?
A: Only if you can take some pain. We’re way overdue for a correction on essentially everything—stocks, bonds, gold, commodities—and when we get it, you can get a real snapback on all these prices. The time to enter gold trade was really a month ago before we took off, and I’ve been bullish on gold all year. So, I think you kind of missed the entry point for gold just like you missed the entry point for shorts on the stock market last week. You only want to be selling decent rallies now. You don’t want to be selling into a hole that makes the risk/reward no good.
Q: What can you say about the (FXA) (the Australian dollar)?
A: It’s holding up surprisingly well given the carnage seen in the rest of the financial markets. I want to stand aside until we get some stability, at which point I think (FXA) will pop up back to the $71 level. New Zealand cutting their rates by 50 basis points really came out of the blue and could eventually feed into a weaker Aussie.
Q: Do you think China (FXI) has no reason to make a trade deal until the US elections?
A: Absolutely not; and this puts a spotlight on the administration’s total inexperience in dealing with China. I could have told you on day one: there’s no way they’re going to settle. Pride is a major factor in China. They have long memories of the opium wars and all the abuses they received at the hands of the western powers and are highly sensitive to any kind of foreign abuse. If you want to get the opposite of a settlement, do exactly what Trump is doing. The administration’s policy has no chance of accomplishing anything. He’s willing to take a lot more pain in the stock market until he gets a deal and that’s bad for all of us.
Q: How does the extra 10% tariff affect the market?
A: Think of everything you’re buying for Christmas; the price goes up 10%. That’s the effect, and it completely wipes out any earnings the retail industry might have had. It’s only bad. We are suffering less harm than China in the trade war, but we are suffering, nonetheless.
Q: Do you think volatility will spike soon?
A: It may very well have already spiked. I don’t think we’ll get a spike as high as in past selloffs because there’s a big short volatility industry that has come back. Any moves more than $30, you have short sellers come in there very quickly to hammer things back down. Also (VIX) isn’t necessarily something you want to be buying after the stock market has already dropped 8%. That train has left the station.
Q: Would a weaker dollar benefit the US economy?
A: Yes; it makes our exports cheaper on the global market. However, if the rest of the world is weakening their currencies as well, it will have no effect. Also, the last time this kind of currency war was attempted was in the early 1930s, and the outcome was the Great Depression.
Q: Defensive stocks—the China story is getting uglier?
A: In this kind of market, I’ve never been a big fan of defensive stocks like utilities or healthcare because defensive stocks go down in bear markets, just at a slower rate than growth stocks because they never went up in the first place. The best defensive stock is cash.
Q: If US interest rates are going to zero, how about buying leaps on (TLT)?
A: Multi-year highs is just not leap buying territory. Multiyear lows are where you buy LEAPS, which are Long Term Equity Participation Certificates. They are basically long-dated 1-2-year call options on stocks that are rising over the long term. The better trade—when we get to zero interest rates and it becomes impossible for rates to go any lower—would be to do a reverse leap. If (TLT) goes up to $200, I would do something like a $150-$160 on the put side betting that sometime over the next 2 years, interest rates go back up again and bonds go down. Too late for LEAPS on bonds, too early for LEAPS on equities.
Q: Do you buy out of the money LEAPS?
A: Yes; that is where you get the triple-digit returns. For example, you can buy the Walt Disney (DIS) June 2021 $150-$160 vertical bull call spread today for $3.30. If we close over $160 by then the spread will be worth $10, up 203% from your cost. And you only need a rise of 25% from here to get that return. This is why I love LEAPS, but only at medium term market bottoms.
Q: Is crude oil (USO) going to $25 on a barrel global slowdown fears?
A: I think you need an actual recession to go down to $25; in the current environment, $42 is a nice target. The basic problem is global structural oversupply and falling demand, which is a classically unfortunate combination for prices.
Q: When will interest rates go to zero?
A: Sooner than later, I would say. My original guess was sometime next year but at the rate we’re going, we could be there by the end of the year.
Q: Would you get involved in natural gas (UNG)?
A: Absolutely not; this is the high season for natural gas right now when summer air conditioner use creates peak demand. It certainly has been hot this summer, especially on a global basis, and if you can’t rally natural gas in this environment you never will. There is also a huge contango in (UNG) which most people can’t beat.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/08/john-snake.png433391Mad Hedge Fund Traderhttps://www.madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2019-08-09 01:02:502019-09-06 16:52:24August 7 Biweekly Strategy Webinar Q&A