Global Market Comments
January 9, 2019
Fiat Lux
2019 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLI), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE),
(DIG), (RIG), (USO), (UNG), (USO), (OXY),
(GLD), (GDX), (SLV),
(ITB), (LEN), (KBH), (PHM)
I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.
By day, I have two comfortable seats facing each other next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini could get to navigate it.
I am not Houdini, so I go downstairs to use the larger public hot showers. They are divine.
We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.
I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.
I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure and to keep me up to date with the onboard gossip.
The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.
As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way to Google search obscure data points and download the latest charts.
You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.
Who knew that 95% of America is off the grid? That explains so much about our country today.
I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 10x.
After making the rounds with strategists, portfolio managers, and hedge fund traders in the run-up to this trip, I can confirm that 2018 was one of the most brutal to trade for careers lasting 30, 40, or 50 years. This was the year that EVERYTHING went down, the first time that has happened since 1972. Comparisons with 1929, 1987, and 2008 were frequently made.
While my own 23.56% return for last year is the most modest in a decade, it beats the pants off of the Dow Average plunge of 8% and 99.9% of the other managers out there. That is a mere shadow of the spectacular 57.91% profit I took in during 2017. This keeps my ten-year average annualized return at 34.20%.
Our entire fourth-quarter loss came from a single trade, a far too early bet that the Volatility Index would fall from the high of the year at $30.
For a decade, all you had to do was throw a dart at the stock page of the Wall Street Journal and you made money, as long as it didn’t end on retail. No more.
For the first time in years, the passive index funds lost out to the better active managers. The Golden Age of the active manager is over. Most hedge funds did horribly, leveraged long technology stocks and oil and short bonds. None of it worked.
If you think I spend too much time absorbing conspiracy theories from the Internet, let me give you a list of the challenges I see financial markets facing in the coming year:
The Nine Key Variables for 2019
1) Will the Fed raise rates one, two, or three times, or not at all?
2) Will there be a recession this year or will we have to wait for 2020?
3) Is the tax bill fully priced into the economy or is there more stimulus to come?
4) Will the Middle East drag us into a new war?
5) Will technology stocks regain market leadership or will it be replaced by other sectors?
6) Will gold and other commodities finally make a long-awaited comeback?
7) Will rising interest rates (positive) or deficits (negative) drive the US dollar this year?
8) Will oil prices recover in 2019?
9) Will bitcoin ever recover?
Here are your answers to the above: 1) Two, 2) 2020, 3) Yes, 4) No, 5) Both, 6) Yes, 7) Yes, 8) Yes, 9) No.
There you go! That’s all the research you have to do for the coming year. Everything else is a piece of cake. You can go back to your vacation.
The Twelve Highlights of 2018
1) Stocks will finish lower in 2019. However, we aren’t going to collapse from here. We will take one more rush at the all-time highs that will take us up 10% to 15% from current levels, and then fail. That will set up the perfect “head and shoulders” top on the long-term charts that will finally bring to an end this ten-year bull market. This is when you want to sell everything. The May 10, 2019 end to the bull market forecast I made a year ago is looking pretty good.
I think there is a lot to learn from the 1987 example when stocks crashed 20% in a single day, and 42% from their 1987 high, and then rallied for 28 more months until the next S&L crisis-induced recession in 1991.
Investors have just been put through a meat grinder. From here on, its all about trying to get out at a better price, except for the longest-term investors.
2) Stocks will rally from here because they are STILL receiving the greatest amount of stimulus in history. Energy prices have dropped by half, taxes are low, inflation is non-existent, and interest rates are still well below long term averages.
Corporate earnings will grow at a 6% rate, not the 26% we saw in 2018. But growing they are. At current prices, the stock market is assuming that companies will generate big losses in 2019, which they won’t. Just try to find a parking space at a shopping mall anywhere and you’ll see what I mean.
3) Technology stocks will lead any recovery. Love them or hate them, big tech accounts for 25% of stock market capitalization but 50% of US profits. That is where the money is. However, in 2019 they will be joined by biotech and health care companies as market leaders.
4) The next big rally in the market will be triggered by the end of the trade war with China. Don’t expect the US to get much out of the deal. It turns out that the Chinese can handle a 20% plunge in the stock market much better than we can.
5) The Treasury bond market will finally get the next leg down in its new 10-year bear market, but don’t expect Armageddon. The ten-year Treasury yield should hit at least 3.50%, and possibly 4.0%.
6) With slowing, US interest rate rises, the US dollar will have the wind knocked out of it. It’s already begun. The Euro and the Japanese yen will both gain about 10% against the greenback.
7) Political instability is a new unknown factor in making market predictions which most of us have not had to deal with since the Watergate crisis in 1974. It’s hard to imagine the upcoming Mueller Report not generating a large market impact, and presidential tweets are already giving us Dow 1,000-point range days. These are all out of the blue and totally unpredictable.
8) Oil at $42.50 a barrel has also fully discounted a full-on recession. So, if the economic slowdown doesn’t show, we can make it back up to $64 quickly, a 50% gain.
9) Gold continues its slow-motion bull market, gaining another 10% since the August low. It barely delivered in 2018 as a bear market hedge. But once inflation starts to pick up a head of steam, so should the price of the barbarous relic.
10) Commodities had a horrific year, pulled under by the trade war, rising rates, and strong dollar. Reverse all that and they should do better.
11) Residential real estate has been in a bear market since March. You’ll find out for sure if you try to sell your home. Rising interest rates and a slowing economy are not what housing bull markets are made of. However, prices will drop only slightly, like 10%, as there is still a structural shortage of housing in the US.
12) The new tax bill came and went with barely an impact on the economy. At best we got two-quarters of above-average growth and slightly higher capital spending before it returned to a 2%-2.5% mean. Unfortunately, it will cost us $4 trillion in new government debt to achieve this. It was probably the worst value for money spent in American history.
Dow Average 1987-90
The Thumbnail Portfolio
Equities - Go Long. The tenth year of the bull market takes the S&P 500 up 13% from $2,500 to $2,800 during the first half, and then down by more than that in the second half. This sets up the perfect “head and shoulders” top to the entire decade-long move that I have been talking about since the summer.
Technology, Pharmaceuticals, Healthcare, and Biotech will lead on the up moves and now is a great entry point for all of these. Buy low, sell high. Everyone talks about it but few ever actually execute like this.
Bonds - Sell Short. Down for the entire year big time. Sell short every five-point rally in the ten-year Treasury bond. Did I mention that bonds have just had a ten-point rally? That’s why I am doubled up on the short side.
Foreign Currencies - Buy. The US dollar has just ended its five-year bull trend. Any pause in the Fed’s rate rising schedule will send the buck on a swan dive, and it’s looking like we may be about to get a six-month break.
Commodities - Go Long. Global synchronized recovery continues the new bull market.
Precious Metals - Buy. Emerging market central bank demand, accelerating inflation, and a pause in interest rate rises will keep the yellow slowly rising.
Real Estate – Stand Aside. Prices are falling but not enough to make it worth selling your home and buying one back later. A multi-decade demographic tailwind is just starting, and it is just a matter of time before prices come roaring back.
1) The Economy-Slowing
A major $1.5 trillion fiscal stimulus was a terrible idea in the ninth year of an economic recovery with employment at a decade high. Nevertheless, that’s what we got.
The certainty going forward is that the gains provided by lower taxes will be entirely offset by higher interest rates, higher labor costs, and rising commodity and oil prices.
Since most of the benefits accrued to the top 1% of income earners, the proceeds of these breaks entirely ended up share buybacks and the bond market. This is why interest rates are still so incredibly low, even though the Fed has been tightening for 4 ½ years (remember the 2014 taper tantrum?) and raising rates for three years.
And every corporate management views these cuts as temporary so don’t expect any major capital investment or hiring binges based on them.
The trade wars have shifted the global economy from a synchronized recovery to a US only recovery, to a globally-showing one. It turns out that damaging the economies of your biggest economies is bad for your own business. They are also a major weight on US growth. CEOs would rather wait to see how things play out before making ANY long-term decisions.
As a result, I expect real US economic growth will retreat from the 3.0% level of 2018 to a much more modest 1.5%-2.0% range in 2019.
The government shutdown, now in its third week (and second year), will also start to impact 2019 growth estimates. For every two weeks of closure, you can subtract 0.1% in annual growth.
Twenty weeks would cut a full 1%. And if you only have 2% growth to start with that means you don’t have much to throw away until you end up in a full-on recession.
Hyper-accelerating and cross-fertilizing technology will remain a long term and underestimated positive. But you have to live here next to Silicon Valley to realize that.
S&P 500 earnings will grow from the current $170 to $180 at a price earnings multiple at the current 14X, a gain of 6%. Unfortunately, these will start to fade in the second half from the weight of rising interest rates, inflation, and political certainty. Loss of confidence will be a big influence in valuing shares in 2019.
Whatever happened to the $2.5 trillion in offshore funds held by American companies expected to be repatriated back to the US? That was supposed to be a huge market stimulus last year. It’s still sitting out there. It turns out companies still won’t bring the money home even with a lowly 10% tax rate. They’d rather keep it abroad to finance growth there or borrow against it in the US.
Here is the one big impact of the tax bill that everyone is still missing. The 57% of the home-owning population are about to find out how much their loss of local tax deductions and mortgage deductions is going to cost them when they file their 2018 returns in April. They happen to be the country’s biggest spenders. That’s another immeasurable negative for the economy.
Take money out of the pockets of the spenders and give it to the savers and you can’t have anything but a weakening on the economy.
All in all, it will be one of the worst years of the decade for the economy. Maybe that’s what the nightmarish fourth quarter crash was trying to tell us.
2) Equities (SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC)
The final move of a decade long bull market is upon us.
Corporate earnings are at record levels and are climbing at 6% a year. Cash on the balance sheet is at an all-time high as are profit margins. Interest rates are still near historic lows.
Yet, there is not a whiff of inflation anywhere except in now fading home costs and paper asset prices. Almost all other asset classes offer pitiful alternatives.
The golden age of passive index investing is over. This year, portfolio managers are going to have to earn their crust of bread through perfect market timing, sector selection, and individual name-picking. Good luck with that. But then, that’s why you read this newsletter.
I expect an inverse “V”, or Greek lambda type of year. Stocks will rally first, driven by delayed rate rises, a China war settlement, and the end of the government shut down. That will give the Fed the confidence to start raising rates again by mid-year because inflation is finally starting to show. This will deliver another gut-punching market selloff in the second half giving us a negative stock market return for the second year in a row. That hasn’t happened since the Dotcom Bust of 2001-2002.
How much money will I make this year? A lot more than last year’s middling 23.56% because now we have some reliable short selling opportunities for the first time in a decade. Short positions performed dreadfully when global liquidity is expanding. They do much better when it is shrinking, as it is now.
Frozen Headwaters of the Colorado River3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)
Amtrak needs to fill every seat in the dining car to get everyone fed, so you never know who you will share a table with for breakfast, lunch, and dinner.
There was the Vietnam vet Phantom jet pilot who now refused to fly because he was treated so badly at airports. A young couple desperate fleeing Omaha could only afford seats as far as Salt Lake City, sitting up all night. I paid for their breakfast.
A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites returning home by train because their religion forbade automobiles or airplanes.
This year is simply a numbers game for the bond market. The budget deficit should come in at a record $1.2 trillion. The Fed will take out another $600 billion through quantitative tightening. Some $1.8 trillion will be far too much for the bond market to soak up, meaning prices can only fall.
Except that this year is different for the following reasons.
1) The US government is now at war with the world’s largest bond buyer, the Chinese government.
2) A declining US dollar will frighten off foreign buyers to a large degree.
3) The tax cuts have come and gone with no real net benefit to the average American. Probably half of the country saw an actual tax increase from this tax cut, especially me.
All are HUGELY bond negative.
It all adds up to a massive crowding out of individual and corporate borrowers by the federal government, which will be forced to bid up for funds. You are already seeing this in exploding credit spreads. This will be a global problem. There are going to be a heck of a lot of government bonds out there for sale.
That 2.54% yield for the ten-year Treasury bond you saw on your screen in early January? You will laugh at that figure in a year as it hits 3.50% to 4.0%.
Bond investors today get an unbelievably bad deal. If they hang on to the longer maturities, they will get back only 90 cents worth of purchasing power at maturity for every dollar they invest a decade down the road at best.
The only short-term positive for bonds was Fed governor Jay Powell’s statement last week that our central bank will be sensitive to the level of the stock market when considering rate rises. That translates into the reality that rates won’t go up AT ALL as long as markets are in crash mode.
It all means that we are now only two and a half years into a bear market that could last for ten or twenty years.
The IShares 20+ Year Treasury Bond ETF (TLT) trading today at $123 could drop below $100. The 2X ProShares 20+ Short Treasury Bond Fund (TBT) now at $31 is headed for $50 or more.
Junk Bonds (HYG) are already reading the writing on the wall taking a shellacking during the Q4 stock market meltdown. This lackluster return ALWAYS presages an inverted yield curve by a year where short term interest rates are higher than long term ones. This in turn reliably predicts a full-scale recession by 2020 at the latest.
4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
I have pounded away at you for years that interest rate differentials are far and away the biggest decider of the direction in currencies.
This year will prove that concept once again.
With overnight rates now at 2.50% and ten-year Treasury bonds at 2.54%, the US now has the highest interest rates of any major industrialized economy.
However, pause interest rate rises for six months or a year and the dollar loses its mojo very quickly.
Compounding the problem is that a weak dollar begets selling from foreign investors. They are in a mood to do so anyway, as they see rising political instability in the US a burgeoning threat to the value of the greenback.
So the dollar will turn weak against all major currencies, especially the Japanese yen (FXY), and the Australian (FXA) and Canadian (FXC) dollars.
You can take that to the bank.
5) Commodities (FCX), (VALE), (MOO), (DBA), (MOS), (MON), (AGU), (POT), (PHO), (FIW), (CORN), (WEAT), (SOYB), (JJG)
A global synchronized economic slowdown can mean only one thing and that is sustainably lower commodity prices.
Industrial commodities, like copper, iron ore, performed abysmally in 2018, dope slapped by the twin evils of a strong dollar and the China trade war.
We aren’t returning to the heady days of the last commodity bubble top anytime soon. Investors are already front running that move now.
However, once this sector gets the whiff of a weak dollar or higher inflation, it will take off like a scalded chimp.
Now that their infrastructure is largely built out, the Middle Kingdom will change drivers of its economy. This is world-changing.
The shift will be from foreign exports to domestic consumption. This will be a multi-decade process, and they have $3.1 trillion in foreign exchange reserves to finance it.
It will still demand prodigious amounts of imported commodities but not as much as in the past.
This trend ran head-on into a decade-long expansion of capacity by the commodities industry, delivering the five-year bear market that we are only just crawling out of.
The derivative equity plays here, Freeport McMoRan (FCX) and Companhia Vale do Rio Doce (VALE) have all been some of the best-performing assets of 2017.
6) Energy (DIG), (RIG), (USO), (DUG), (DIG), (UNG), (USO), (OXY), (XLE), (X)
If you expect a trade war-induced global economic slowdown, the last thing in the world you want to own is an energy investment.
And so it was in Q4 when the price of oil got hammered doing a swan dive from $68 to $42 a barrel, an incredible 38% hickey.
All eyes will be focused on OPEC production looking for new evidence of quota cheating which is slated to expire at the end of 2018. Their latest production cut looked great on paper but proved awful in practice. Welcome to the Middle East.
The only saving grace is that with crude at these subterranean levels, new investment in fracking production has virtually ceased. No matter, US pipelines are operating at full capacity anyway.
OPEC production versus American frackers will create the constant tension in the marketplace for all of 2019.
My argument in favor of commodities and emerging markets applies to Texas tea as well. A weaker US dollar, trade war end, interest rate halt are all big positives for any oil investment. The cure for low oil prices is low prices.
That makes energy Master Limited Partnerships, now yielding 6-10%, especially interesting in this low yield world. Since no one in the industry knows which issuers are going bankrupt, you have to take a basket approach and buy all of them.
The Alerian MLP ETF (AMLP) does this for you in an ETF format.
Our train has moved over to a siding to permit a freight train to pass, as it has priority on the Amtrak system.
Three Burlington Northern engines are heaving to pull over 100 black, spanking brand new tank cars, each carrying 30,000 gallons of oil from the fracking fields in North Dakota.
There is another tank car train right behind it. No wonder Warren Buffett tap dances to work every day as he owns the railroad.
We are also seeing relentless improvements on the energy conservation front with more electric vehicles, high mileage conventional cars, and newly efficient building.
Anyone of these inputs is miniscule on its own. But add them all together and you have a game changer.
As is always the case, the cure for low prices is low prices. But we may never see $100/barrel crude again. In fact, the coming peak in oil prices may be the last one we ever see. The word is that leasing companies will stop offering five-year leases in five years because cars with internal combustion engines will become worthless in ten.
Add to your long-term portfolio (DIG), ExxonMobile (XOM), Cheniere Energy (LNG), the energy sector ETF (XLE), Conoco Phillips (COP), and Occidental Petroleum (OXY). But date these stocks, don’t marry them.
Skip natural gas (UNG) price plays and only go after volume plays because the discovery of a new 100-year supply from “fracking” and horizontal drilling in shale formations is going to overhang this subsector for a very long time, like the rest of our lives.
It is a basic law of economics that cheaper prices bring greater demand and growing volumes which have to be transported. Any increase in fracking creates more supply of natural gas.
7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)
The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.
On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.
The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a train over on to its side.
In the snow-filled canyons, we sight a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.
We also see countless abandoned 19th century gold mines and the broken-down wooden trestles leading to them, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.
Gold (GLD) lost money in 2018, off 2.4%. More volatile silver (SLV) shed 12%.
This was expected, as non-yielding assets like precious metals do terribly during times of rising interest rates.
In 2019, gold will finally be coming out of a long dark age. As long as the world was clamoring for paper assets like stocks, gold was just another shiny rock. After all, who needs an insurance policy if you are going to live forever?
But the long-term bull case is still there. Gold is not dead; it is just resting.
If you forgot to buy gold at $35, $300, or $800, another entry point here up for those who, so far, have missed the gravy train.
To a certain extent, the belief that high-interest rates are bad for gold is a myth. Wealth creation is a far bigger driver. To see what I mean, take a look at a gold chart for the 1970s when interest rates were rising sharply.
Remember, this is the asset class that takes the escalator up and the elevator down, and sometimes the window.
If the institutional world devotes just 5% of their assets to a weighting in gold, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation-adjusted all-time high, or more.
This is why emerging market central banks step in as large buyers every time we probe lower prices. China and India emerged as major buyers of gold in the final quarters of 2018.
They were joined by Russia which was looking for non-dollar investments to dodge US economic and banking sanctions.
That means it’s just a matter of time before gold breaks out to a new multiyear high above $1,300 an ounce. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP).
I would also be using the next bout of weakness to pick up the high beta, more volatile precious metal, silver (SLV) which I think could rise from the present $14 and hit $50 once more, and eventually $100.
The turbocharger for gold will hit sometime in 2019 with the return of inflation. Hello stagflation, it’s been a long time.
8) Real Estate (ITB), (LEN),
The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write.
My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.
It is a route long traversed by roving bands of Indians, itinerant fur traders, the Pony Express, my own immigrant forebears in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80.
Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.
There is no doubt a long-term bull market in real estate is taking a major break. If you didn’t sell your house by March last year you’re screwed and stuck for the duration.
And you’re doubly screwed if you’re trying to sell your home now during the government shutdown. With the IRS closed, tax return transcripts are unobtainable making any loan approval impossible. And no one at Fannie Mae or Freddie Mac, the ultimate buyers of 70% of US home loans, has answered their phone this year.
The good news is that we will not see a 2008 repeat when home values cratered by 50%-70%. There is just not enough leverage in the system to do any real damage. That has gone elsewhere, like in exchange-traded funds. You can thank Dodd/Frank for that which imposed capital rules so strict that it is almost impossible for banks to commit suicide.
And no matter how dire conditions may appear now, you are not going to see serious damage in a market where there is a generational structural shortage of supply.
We are probably seven years into a 17-year run at the next peak in 2028. What we are suffering now is a brief two-year pause to catch our breath. Those bidding wars were getting tiresome anyway.
There are only three numbers you need to know in the housing market for the next 20 years: there are 80 million baby boomers, 65 million Generation Xers who follow them, and 86 million in the generation after that, the Millennials.
The boomers have been unloading dwellings to the Gen Xers since prices peaked in 2007. But there is not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis.
If they have prospered, banks won’t lend to them. Brokers used to say that their market was all about “location, location, location.” Now it is “financing, financing, financing.” Imminent deregulation is about to deep-six that problem.
There is a happy ending to this story.
Millennials now aged 23-38 are already starting to kick in as the dominant buyers in the market. They are just starting to transition from 30% to 70% of all new buyers in this market.
The Great Millennial Migration to the suburbs has just begun.
As a result, the price of single-family homes should rocket tenfold during the 2020s as they did during the 1970s and the 1990s when similar demographic forces were at play.
This will happen in the context of a coming labor shortfall, soaring wages, and rising standards of living.
Rising rents are accelerating this trend. Renters now pay 35% of the gross income, compared to only 18% for owners, and less when multiple deductions and tax subsidies are taken into account.
Remember too that, by then, the US will not have built any new houses in large numbers in 12 years.
We are still operating at only a half of the peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.
That makes a home purchase now particularly attractive for the long term, to live in, and not to speculate with. And now that it is temporarily a buyer’s market, it is a good time to step in for investment purposes.
You will boast to your grandchildren how little you paid for your house as my grandparents once did to me ($3,000 for a four-bedroom brownstone in Brooklyn in 1922), or I do to my kids ($180,000 for an Upper East Side high rise in 1983).
That means the major homebuilders like Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH) may finally be a buy on the dip.
Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now.
If you borrow at a 4% 5/1 ARM rate, and the long-term inflation rate is 3%, then over time you will get your house nearly for free.
How hard is that to figure out?
Crossing the Bridge to Home Sweet Home9) Postscript
We have pulled into the station at Truckee in the midst of a howling blizzard.
My loyal staff has made the ten-mile treck from my beachfront estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.
After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.
Well, that’s all for now. We’ve just passed the Pacific mothball fleet moored near the Benicia Bridge. The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my water bottle.
The Golden Gate Bridge and the soaring spire of Salesforce Tower are just around the next bend across San Francisco Bay.
A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my MacBook Pro and iPhone X, pick up my various adapters, and pack up.
We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak and still get home in time to watch the ball drop in New York’s Times Square.
I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.
I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above.
Good trading in 2019!
John Thomas
The Mad Hedge Fund Trader
Global Market Comments
December 14, 2018
Fiat Lux
Featured Trade:
(DECEMBER 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (MU), (PYPL), (SPOT), (FXE), (FXY), (XLF), (MSFT), (AMZN), (TSLA), (XOM),
(SIGN UP NOW FOR TEXT MESSAGING OF TRADE ALERTS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader December 12 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader
Q: Is the bottom in on the S&P 500 (SPX) or are we going to go on another retest?
A: It’s stuck right in the 2600-2800 range, and I think that’s probably where we bounce off of 2600 again. The question is whether or not we can clear the top of the range at 2800. If we can’t, I would fully expect a retest of this bottom in which case I could see it going down to 2500.
Q: You say you’ll go 100% cash by Dec 21st but also stated that the S&P 500 will go up 5% by the year's end. Should we stay in until we get the up 5% move?
A: Yes, all of our options positions expire by the 21st but if you’re just long in stocks, I would stay long, probably through the end of the year.
Q: Will the Chinese-U.S. dispute ruin the Tech industry?
A: No, I think the Trump Administration will have to do some kind of deal and call it a victory, otherwise the trade war will pull the U.S. into recession. If we go into the next presidential election with another recession—well, no one has ever survived that. Even with the China-U.S. dispute, the U.S. is still dominant in the Tech industry and will continue to do so for decades to come.
Q: China has managed to duplicate Micron Technology’s (MU) biggest selling chip, undercutting prices—thoughts?
A: True, Micron is the lowest value added of the major chip producers, therefore their stock has gotten hit the worst of any of the chip stocks down by about 46%, but I know Micron very well and they have a whole range of chips they’re currently upgrading, moving themselves up the value change to compete with this. So, that makes it a great company to own for the long term.
Q: I’m up 90% on my PayPal (PYPL) position—should I take a profit?
A: Yes! Absolutely! How many 90% profits have you had lately? You are hereby excused from this webinar to go execute this trade. And well-done Dr. Denis! And thank you for the offer of a free colonoscopy.
Q: What can you say about Spotify (SPOT)?
A: No, thank you—there’s lots of competition in the music streaming business. We are avoiding the entire space. The added value is not great, and many of these companies will have a short life. And with China’s Tencent growing like crazy, life for Spotify is about to become dull, mean, and brutish.
Q: What’s your view on currencies?
A: So you’re looking to make another fortune? Yes, I think the Euro (FXE) and the Yen (FXY) really are looking hard to rally, and the trigger could be dovish language in the next Fed meeting. Once the Fed slows its rate of interest rates rises, the currencies should take off like a scalded chimp.
Q: Will the banks (XLF) rally in the next 6 months for a better sell?
A: Many people are waiting for a rally in the banks so they can unload them and haven’t gotten it—they’re back to pre-election price levels. The issue here is structural, and you don’t get recoveries from major structural changes in an industry. It’s significant that this is the first bull market that had no net new employment in the banks whatsoever; the business is fading away. They are the new buggy whip makers. These gigantic national branch networks will all be gone in ten years because the banks can’t afford them.
Q: Would you enter the Microsoft (MSFT) trade today?
A: I actually think I would; Microsoft only pulled back 10% when everything else was dropping 30%, 40%, or 50%. That shows you how many people are trying to get into this name so if you could take a little short-term pain (like 5%), the stock outright is probably a screaming buy here. I think it’ll go to $200 one day, so here at $110-$111 it looks like a pretty good deal. The story here is that Microsoft is rapidly taking market share from Amazon (AMZN) in the cloud business and that’s going to continue.
Q: When will you be updating your long-term model portfolio?
A: I usually do it at the end of the year, and rarely make any big changes. I’ll still be selling short bonds and still like Tesla (TSLA) and Exxon (XOM).
Q: I just joined your service. What is the best way to get started?
A: I’ll give you the same advice that I gave every starting trader at Morgan Stanley (MS). Start trading on paper only. When you are making money reliably on paper, move up to using real money, but only with one contract per position. When that is successful, slowly increase your size to 2, 3, 5, 10, and 20 contracts. Pretty soon, you will be swinging around 1,000 contracts a lot like I do. The further you move down the learning curve the greater you can increase your size and your risk. If you never get past the paper stage at least it’s not costing you any money.
I hope this helps.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
December 12, 2018
Fiat Lux
Featured Trade:
(STANDBY FOR THE COMING GOLDEN AGE OF INVESTMENT),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)
Mad Hedge Fund Trader John Thomas was interviewed on a major news network a few days ago talking out the state of the global financial markets. I thought you would be interested in the Q&A that followed.
Q: Bonds (TLT) have come down a lot on sudden flight to safety bid, with the 30-year yield under 2.9%. Do you see yields going back up in the short term?
A: Absolutely, yes. This is a one-time only panic triggered by the failure of the G-20 Summit in Buenos Aires. And we got the second leg down from the arrest of the CFO of Huawei, one of China's biggest companies, so that has triggered a short-term panic. It's temporary and we're going to bounce back strong. In fact, we already have. Now is a great time to be shorting bonds and buying stocks.
Q: How bad are things at Facebook (FB)? Is the bad news priced into the stock?
A: No, all the bad things are not priced into the stock. That’s why we are telling people that Facebook is a “No touch.” Bad news seems to come out every day, it’s a black swan a day stock, you don’t want to be anywhere near it. They will get some regulation, but nobody knows what it is, or how much it will affect profitability. But when a big company has to change their business model in a hurry, you don’t want to be anywhere near it. Far easier to buy it on the way up than on the way down.
Q: Will a cut in the oil supply by OPEC stem the spiraling down price of Oil (USO)? Is there a trade here?
A: “Yes” to both questions. OPEC will probably announce some sort of price cut/production cut in the next meeting which will get prices off the floor. Everyone ramped up their production to try to beat price falls which then makes the price fall worse, which is always what happens. So, yes, I would be buying oil here. I'd be buying oil stocks here too. There is your trade.
Q: Will the markets hold the February Lows?
A: Yes.
Q: If it does not hold, how far can it fall?
A: Worst case, you may get a fall straight down sucking all the sellers. But if you flip the algorithms to the buy side then it’s off the races. Markets have a habit of doing that quite a lot this year, so I think the lows have been made and you want to be buying stocks here. The fundamentals behind the market are just too strong to get beyond what algorithms are doing, what damage algorithms can do on a day trading basis. So yeah, I don't think that we're going to new lows, these are the new lows right here.
Q: Do you see an American Recession by the end of 2019?
A: Yes, I see the bull market ending in the next 3 to 6 months and recessions starting after that. That said, there is plenty to be made on the upside in coming months and then there's a ton of money to be made on the downside after that. That’s when you want to be attending my short selling school which you also get with a subscription to my service.
Q: Will the Chinese (FXI) allow the Yuan to collapse to fuel imports AND stimulate their GDP growth rate?
A: Yes. They have largely offset all of the import duties imposed by the US by depreciating their currency by 10%. If we raise duties more, they'll just cut their currency value by the same amount, so the actual dollar landed price is unchanged. There's nothing the US can do about that. We're already playing our best cards so it’s not like we can do to retaliate if they devalue their currency more. That’s the problem you have shooting all of your arrows on the first attack.
Q: Would you rotate some growth to value-based stocks on the expectation of interest rising next year in crush and grow stocks.
A: You got it half right. I would sell the high growth stocks into the next big rally, take my profits, and then go into cash! You don't want to own defensive stocks in bear markets, you want to own cash. Defensive stocks go down in a bear market, only at a slower rate, but go down they do nonetheless. Cash is king. You can earn 3 or 4% on your cash these days. That is much better than a stock that is going down.
Q: I bought General Electric (GE) about a year ago at $17, and I thought it was a great deal at the time. Unfortunately, it was not, so can (GE) go any lower than it is now? I thought it would hold $10 dollars but then they cut their dividend to one cent and the shares have cratered to seven dollars. What should I do?
A: You're kind of asking me what to do after you close the barn door and the horses have already bolted. If you have (GE), I would keep it at seven dollars. The worst thing, it goes sideways from here. The best case is you get a strong rally and the stock doubles in coming months. This is not a chapter 11 situation as they have too many assets. It’s just a matter of how quickly they can turn around the company. By the way, we told people to stay away from (GE) from $31 all the way down to when it got to single digits. So, we missed that buy every dip mentality in (GE). Thank goodness for that.
Q: Why won’t banks benefit in a rising interest rate environment?
A: The answer is very simple. These are the new buggy whip makers. You don't want to own big banks as they're hobbled by these gigantic branch networks which cost a fortune, and which are all going to disappear in ten years. Fintech companies like Square (SQ) and PayPal (PYPL), these little tiny apps that you've never heard of, they're eating the banks’ businesses one by one. And by the way, even though interest rates are rising, loan volume is falling at a faster rate, so they're making a lot less money than they used to. They're not really allowed to trade markets anymore because the risk is too high. So, even if they knew how to trade markets, they can’t rely on those earnings like they used to. So, avoid the banks like the plague.
Q: Is there any scenario you see stocks rising 10% next year?
A: No. Absolutely not. We're trying to call the top of a 10-year bull market here. The total return on the market in 2019 will probably be negative and could be negative by quite a lot. Maybe by 10%, 15%, or more. So yeah, if you're hanging on for new highs, I would give up that theory and find another one. It could be a very long wait, like a five-year wait before we go back to the old highs we saw in September and before that in January.
Q: Will Geopolitics drive the market more than it did in 2018?
A: Absolutely, it will. In the geopolitics category, you can include the China trade war, the Europe trade war, the possibility that Congress does not approve the new NAFTA. There's a ton of new things that could go wrong next year. And by the way, the burden of proof is now on stocks to prove how good they are. Risk is rising in the market and volatility is rising, but there still is good money to be made for a year-end rally.
Q: Why has gold (GLD) not performed so far?
A: We don't have inflation and gold really needs to get a good ramp up in inflation to get some serious price performance. That said, I expect a return in inflation. The economic data you get lags reality by anywhere from 3 to 6 months, so you will get a rise in inflation well above 3%. That’s when you really start to move on gold, that’s why I'm saying buy the dip.
Q: Would you buy the dollar (UUP)?
A: No, I would not. It’s looking like we have a couple of interest rates rising next year. The dollar will remain strong into that but in some point next year in the whole strong dollar story disappears as the rise in interest rates stops. If the interest rates level, all of the weak dollar plays will take off like a rocket. Those would include the Euro (FXE), Yen (FXY), and emerging markets (EEM). So, watch those spaces very carefully. There are gigantic moves coming in all of those once we stop raising interest rates and once the dollar peaks out.
Q: Will we close at the lows of the year?
A: No, we will not. The lows of the year probably happened right before this interview. I expect a strong rally from here driven by algorithms. Yes, they work on the upside just as well as they do on the downside side. In fact, algorithms really don’t care which way they go just as long as they go.
Q: What securities do you cover?
A: We cover stocks, bonds, commodities, precious metals, real estate, and every trade alert has a recommendation for a stock, an ETF, and an options trade so that way you can tailor the trade alert to meet your own experience level and risk tolerance.
Q: When does the letter come out?
A: It comes out roughly at midnight EST every day before the next trading day. That way early risers can read the letter and then enter their trade alerts at the market opening. It also helps the Europeans read it as their day starts. We have a big following in Europe and an even bigger following in Australia so that is the answer to that question.
Q: Can beginners with no previous experience use your service?
A: Absolutely. Training beginners how to enter the markets for the first time is one of the primary goals of this newsletter. We have customers that range in size from $20 billion dollar hedge funds all the way down to students trading off their dorm room beds with minimal one-contract trades. So yes, it’s for everybody and every trade alert that we send out has a link to a video showing you exactly how to execute this trade on your own trading platform
Q: Are you an algorithm?
A: Well, if I made a machine noise that would help. All I can say is come to one of my global strategy luncheons. You can pinch me and if I bleed, I am real.
Q: You obviously have enough money, why do you do this?
A: Leveling the playing field for the average guy is why I do this. When I worked on Wall Street, I saw so many people get ripped off it used to make me sick. So, this is my chance to get even. Helping you learn how to make money is my way of getting even. That's why I do this.
At the beginning of the interview, I promised you a seasonal trade alert, here is one of the most popular ones, Buy Home Depot (HD) in the Summer before the hurricane season. That’s good every year for a 15% rally and that’s exactly what we got this year. A 15% rally, 2 big hurricanes, big profits, goodbye, and then see you again next year.
Q: Thank you for coming today, John. It was a real pleasure.
Global Market Comments
November 23, 2018
Fiat Lux
Featured Trade:
(SURVIVING THANKSGIVING)
(SPY), (TLT), (TBT), (GLD), (FXE), (FXY), (USO), (VIX), (VXX), (NVDA), (NFLX), (AMZN)
The Mad Hedge Fund Trader took a much-needed break this week to enjoy turkey with his vast extended family on the pristine shores of Incline Village, Nevada.
The weather was crystal clear, the temperature in the sixties throughout the day, and down into the teens at night. The kids took turns freezing bottles of water outside. To a fire-weary Californian, that’s cool.
During my nighttime snowshoeing on the Tahoe Rim Trail, I am overawed by a pale waning moon setting into the lake. I walked through a heard of elk in the darkness, the snow crunching under my boots. On the way back, I noticed that a mountain lion had been tracking me.
The Trade Alerts went out so fast and furious this year, bringing in my biggest outperformance of my competitors since my service started 11 years ago. As of today, we are up 26% on the year versus a Dow Average (INDU) that has gained exactly zero.
Great managers are not measured by how much they make in rising markets but by how little they lose in falling ones.
I made money during the two market meltdowns this year, at least until this week. That last 1,000-point dive really hurt and breaks all precedent with Thanksgiving weeks past.
I played tech hard from the long side during the first half, then avoided it like the plague in the third quarter.
Short positions in bonds (TLT) continued to be my “rich uncle” trade every month this year. I am currently running a double position there.
I avoided banks, energy, gold, and commodities which performed horribly despite many entreaties to get in.
I avoided the foreign exchange markets such as the Japanese yen (FXY) and the Euro (FXE) because they were largely moribund and there were better fish to dry elsewhere.
The Volatility Index (VIX), (VXX) was a push on the year with both longs and shorts.
My big miss of the year was in biotechnology and health care. I am well familiar with the great long-term bull case for these sectors. But I was afraid that the president would announce mandatory drug price controls the day after I took a position.
I still believe in the year-end rally, although we will be starting from much lower levels than I thought possible. The recent technology crash was really something to behold, with some of the best quality companies like NVIDIA (NVDA), Amazon (AMZN), and Netflix (NFLX) down 30%-60% in weeks. It all looked like a Dotcom Bust Part II.
These are all screaming buys for the long term here. Tech companies are now trading cheaper than toilet paper making ones.
As Wilber Wright, whose biography I am now reading, once said, “Eagles can’t soar to greatness in calm skies.” His picture now adorns every American commercial pilot’s license, including mine.
This is a week when my mother’s seven children, 22 grandchildren, and 11 great-grandchildren suddenly remember that they have a wealthy uncle, cousin, or brother with a mansion at Lake Tahoe.
So, the house is packed, all the sofa beds put to use. We even had to put a toddler to sleep in a bathtub on pillows.
A 28-pound bird made the ultimate sacrifice and was accompanied with mashed potatoes, gravy, stuffing, potato salad, and mince pie. Cooking a turkey here at 6,125 feet can be tricky where water boils only at 198 degrees Fahrenheit. You have to add 15% to the cooking time or you end up with medium-rare meat, not such a great idea with a turkey.
Topping it all was a fine Duckhorn Chardonnay which the White House served at state dinners during a former administration. I’m told the current president doesn’t drink.
I ate an entire pumpkin pie topped with whipped cream last night just to give my digestive system an early warning that some heavy lifting was on its way.
I am the oldest of seven of the most fractious and divided siblings on the planet, so attending these affairs is always a bit of an emotional and physical challenge.
I bet many of my readers are faced with the same dilemma, with mixed red state/blue state families, and they all have my sympathy. Hint: Don’t mention Bitcoin. Your Millennial guests will suddenly develop food poisoning, down 80% in a year.
My family ranges throughout the entire political spectrum, from far-right big oil to far-left pot legalization and transgender rights. For this first time in family history, we all voted for the same candidate in the last election in every one of three generations.
Hillary Clinton. Go figure!
Suffice it to say that we'll be talking a lot about the only two safe subjects there are, sports and the weather. Go Niners! Hurray Giants! Will it snow?
We are all giving thanks that we weren’t roasted alive in a wildfire and prayed for the 1,000 missing who won’t be sitting down for Thanksgiving dinners this year. Most will never be found.
I learned from my brother who runs a trading desk at Goldman Sachs that the industry expects a recession in 2019. (GS) stock has been hammered because the had to refund $600 million in fees that were stolen from the Malaysian government.
Dodd-Frank and Glass Steagall are history, and interest rates are steadily rising like clockwork. Trading volumes are shrinking as the algorithms take over everything. Some 80% of all trading is now thought to be machine-driven.
He finally traded in his Bentley Turbo R for a new black high-performance Tesla Model X with the “ludicrous” mode. I take delivery of mine at the Fremont, CA factory next week. After six decades, sibling rivalry still lives. I cautioned him to keep an ample supply of airline airsick bags in the car. Good thing he got it before the subsidies expired at yearend!
It looks like it’s OK to be rich again.
My born-again Christian sister was appalled at the way the government separated children from parents at the border earlier this year. There are still several hundred lost.
My gay rights activist sister has been marching to protest current government policy on the issue. She was quick to point out that Colorado elected its first gay governor, although I doubt anyone there will notice since they are all stoned in the aftermath of marijuana legalization.
A third sister married to a very pleasant fellow in Big Oil (USO) will be making the long trip from Borneo where he is involved in offshore exploration. This is the guy who escaped from Libya a few years ago by the skin of his teeth.
In the meantime, his industry has been beset by waves of cost-cutting and forced early retirements triggered by the recent oil price crash. He says the US will have to build energy infrastructure for a decade before it can export what it is producing now in oil and natural gas.
So far, the local headhunters haven’t taken a trophy yet. And I mean real headhunters, not the recruiting kind.
Sister no. 4, who made a killing in commodities in Australia and then got out at the top seven years, thanks to a certain newsletter she reads, graced us with a rare visit.
Fortunately, she took my advice and converted all her winnings to greenbacks, thus avoiding the 30% hit the Aussie (FXA) has taken in recent years.
She’s now investing in cash flow positive Reno condos, again, thanks to the same newsletter.
My poor youngest sister, no. 5, took it on the nose in the subprime derivatives market during the 2008 crash. Fortunately, she followed my counsel to hang on to the securities instead of dumping everything at the bottom for pennies.
She is the only member of the family I was not able to convince to sell her house in 2005 to duck the coming real estate collapse because she thought the nirvana would last forever. At least that is what her broker told her.
Thanks to the seven-year-old real estate boom, she is now well above her cost, while serial refi’s have taken her cost of carry down by more than half.
My Arabic speaking nephew in Army Intelligence cashed out of the service and is now attending college on the newly revamped GI Bill.
He is majoring in math and computer science on my recommendation. My dad immensely benefited from the program after WWII, a poor, battle-scarred kid from Brooklyn attending USC. For the first time in 45 years, not a single family member is fighting in a foreign war. No gold stars here, only blue ones. If it can only last!
My oldest son is now in his 10th year as an English language professor at a government university in China. He spends his free time polishing up his Japanese, Russian, Korean, and Kazak, whatever that is.
At night, he trades the markets for his own account. Where do these kids get their interest in foreign languages anyway? Beats me. I was happy with seven.
He is planning on coming home soon. Things have recently gotten very uncomfortable for American residents of the Middle Kingdom.
It’s true that the apple doesn’t fall far from the tree.
My second son is now the head of SEO (search engine optimization) at a major Bay Area online company. Hint: you use their services every day. His tales of excess remind me of the most feverish days of the Dotcom boom. He says that technology is moving forward so fast that he can barely keep up.
His big score this year was winning a lottery to get a rent-controlled apartment in a prime San Francisco neighborhood. It’s all of 400 square feet but has a great view and allows dogs, a rarity indeed.
My oldest daughter took time out from her PhD program at the University of California to bear me my first grandchild, a boy. It seems all my kids are late bloomers. We are all looking forward to the first Dr. Thomas someday (we have an oversupply of Captains).
I am looking forward to my annual Scrabble tournament with all, paging my way through old family photo albums between turns. And yes, “Jo” is a word (a 19th century term for a young girl). So is “Qi.” The pinball machine is still broken from last Thanksgiving, or maybe it just has too many quarters stuffed in it.
Before dinner, we engaged in an old family tradition of chopping down some Christmas trees in the nearby Toiyabe National Forest on the Eastern shore of Lake Tahoe.
To keep it all legal I obtained the proper permits from the US Forest Service at $10 a pop.
There are only three more trading weeks left this year before we shut down for the Christmas holidays.
That is if I survive my relatives.
Good luck and good trading!
Captain John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
August 10, 2018
Fiat Lux
Featured Trade:
(AUGUST 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TBT), (PIN), (ISRG), (EDIT), (MU), (LRCX), (NVDA),
(FXE), (FXA), (FXY), (BOTZ), (VALE), (TSLA), (AMZN),
(THE DEATH OF THE CAR),
(GM), (F), (TSLA), (GOOG), (AAPL)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader August 8 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: What should I do about my (SPY) $290-295 put spread?
A: That is fairly close to the money, so it is a high-risk trade. If you feel like carrying a lot of risk, keep it. If you want to sleep better at night, I would get out on the next dip. The market has 100 reasons to go down and two to go up, the possible end of trade wars and continuing excess global liquidity, and the market is focusing on the two for now.
Q: What are your thoughts on the ProShares Ultra Short Treasury Bond Fund (TBT)?
A: Short term, it's a sell. Long term it's a buy. It's possible we could get a breakout in the bond market here, at the 3% yield level. If that happens, you could get another five points quickly in the TBT. J.P. Morgan's Jamie Diamond thinks we could hit a 5% yield in a year. I think that's high but we are definitely headed in that direction.
Q: What are your thoughts on the India ETF (PIN)?
A: It goes higher. It's been the best-performing emerging market, and a major hedge fund long for the last five years. The basic story is that India is the next China. Indicia is the next big infrastructure build-out. Once India gets regulatory issues out of the way, look for more continued performance.
Q: What are your thoughts on Intuitive Surgical (ISRG)?
A: Intuitive is a kind of microcosm in the market right now. It's trading well above a significant support level, which happens to be $508. I don't typically like Intuitive Surgical stock because the options are very inefficient, and therefore very pricey. I think, at this point, there is a bigger possibility of it breaking down than continuing to head higher. In other words, it's overbought. Buy long term, the sector has a giant tailwind behind it with 80 million retiring baby boomers.
Q: What are your thoughts on the entire chip sector, including Micron (MU), Lam Research (LRCX) and NVIDIA (NVDA)?
A: NVIDIA is the top of the value chain in the entire sector, and it looks like it wants to break to a new high. My target is $300 by the end of the year, from the current $240s. I think the same will happen with Lam Research (LRCX), which just had a massive rally. All three of these have major China businesses; China buys 80% of its chips from the U.S. You can do these in order in the value chain; the lowest value-added company is Micron, followed by Lam Research, followed by NVIDIA, and the performance reflects all of that. So, I think until we get out of the trade wars, Micron will be mired down here. Once it ends, look for it to get a very sharp upside move. Lam is already starting to make its move and so is NVIDIA. Long term, Lam and NVIDIA have doubles in them, so it's not a bad place to buy right here.
Q: You once recommended the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ) which is now down 10%, one of your few misses. Keep or sell?
A: Keep. It's had the same correction as the rest of Technology. All corrections in Technology are short term in nature--the long-term bull story is still there. (BOTZ) is a huge play on artificial intelligence and automation, so that is going to be with us for a long time, it's just enduring a temporary short-term correction right now, and I would keep it.
Q: What do you have to say about the CRISPR stocks like Editas Medicine Inc. (EDIT)?
A: The whole sector got slammed by a single report that said CRISPR causes cancer, which is complete nonsense. So, I would use this sell-off to increase your current positions. I certainly wouldn't be selling down here.
Q: What could soften the strong dollar?
A: Only one thing: a recession in the U.S. and an end to the interest-raising cycle, which is at least a year off, maybe two. Keep buying the U.S. dollar and selling the currencies (FXE), (FXY), (FXA) until then.
Q: What are your thoughts on Baidu and Alibaba?
A: I thought China tech would get dragged down by the trade wars, but they behaved just as well as our tech companies, so I'd be buying them on dips here. Again, if we do win the trade wars, these Chinese tech companies could rocket. The fundamental stories for all of them is fantastic anyway, so it's a good long-term hold.
Q: Have you looked at Companhia Vale do Rio Doce (VALE)? (A major iron ore producer)
A: No, I've kind of ignored commodities all this year, because it's such a terrible place to be. If we had a red-hot economy, globally you would want to own commodities, but as long as the recovery now is limited to only the U.S., it's not enough to keep the commodity space going. So, I would take your profits up here.
Q: With Tesla (TSLA) up $100 in two weeks should I sell?
A: Absolute. If the $420 buyout goes through you have $40 of upside. If it doesn't, you have $140 of downside. It's a risk/reward that drives like a Ford Pinto.
Q: How long will it take global QE (quantitative easing) to unwind?
A: At least 10 years. While we ended our QE four years ago, Europe and Japan are still continuing theirs. That's why stocks keep going up and bonds won't go down. There is too much cash in the world to sell anything.
Q: Apple (AAPL)won the race to be the first $1 trillion company. Who will win the race to be the first $2 trillion company?
A: No doubt it is will be Amazon (AMZN). It has a half dozen major sectors that are growing gangbusters, like Amazon Web Services. Food and health care are big targets going forward. They could also buy one of the big ticket selling companies to get into that business, like Ticketmaster.
Good Luck and Good trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
