Global Market Comments
July 5, 2019
Fiat Lux
Featured Trade:
(FRIDAY JULY 19 ZERMATT SWITZERLAND STRATEGY SEMINAR)
(WHERE THE ECONOMIST “BIG MAC” INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (FXA), (FXY), (CYB),
(WHY US BONDS LOVE CHINESE TARIFFS),
(TLT), (TBT), (SOYB), (BA), (GM)
For many, one of the most surprising impacts of the administration’s tariffs on Chinese imports announced today has been a rocketing bond market.
Since the December $116 low, the iShares 20+ Year Treasury Bond ETF (TLT) has jumped by a staggering $16 points, the largest move up so far in years.
The tariffs are a highly regressive tax that will hit consumers hard in the pocketbook, thus reducing their purchasing power.
It will dramatically slow US economic growth. If the trade war escalates, and it almost certainly will, it could shrink US GDP by as much as 1% a year. A weaker economy means less demand for money, lower interest rates, and higher bond prices.
There is no political view here. This is just basic economics.
And while there has been a lot of hand-wringing over the prospect of China dumping its $1.1 trillion in American bond holdings, it is unlikely to take action here.
The Beijing government isn’t going to do anything to damage the value of its own investments. The only time it actually does sell US bonds is to support its own currency, the renminbi, in the foreign exchange markets.
What it CAN do is to boycott new Treasury bond purchases, which it already has been doing for the past year.
The tariffs also raise a lot of uncertainty about the future of business in the United States. Companies are definitely not going to increase capital spending if they believe a depression is coming, which the last serious trade war during the 1930s greatly exacerbated.
While stocks despise uncertainty, bonds absolutely love it.
Those of you who are short the bond market through the ProShares Ultra Short 20+ Year Treasury ETF (TBT) have a particular problem that is often ignored.
The cost of carry of this fund is now more than 5% (two times the 2.10% coupon plus management fees and expenses). Thus, long-term holders have to see interest rates rise by more than 5% a year just to break even. The (TBT) can be a great trade, but a money-losing investment.
The Chinese, which have been studying the American economic and political systems very carefully for decades, will be particularly clever in its retaliation. And you thought all those Chinese tourists were over here just to buy our Levi’s?
It will target Republican districts with a laser focus, and those in particular who supported Donald Trump. It wants to make its measures especially hurt for those who started this trade war in the first place.
First on the chopping block: soybeans, which are almost entirely produced in red states. In 2016, the last full year for which data is available, the US sold $15 billion worth of soybeans to China. Which are the largest soybean producing states? Iowa followed by Minnesota.
A major American export is aircraft, some $131 billion in 2017, and China is overwhelmingly the largest buyer. The Middle Kingdom needs to purchase 1,000 aircraft over the next 10 years to accommodate its burgeoning middle class. It will be easy to shift some of these orders to Europe’s Airbus Industries.
This is why the shares of Boeing (BA) have been slaughtered recently, down some 13.5% from the top. While Boeing planes are assembled in Washington state, they draw on parts suppliers in all 50 states.
Guess what the biggest selling foreign car in China is? The General Motors (GM) Buick which saw more than 400,000 in sales last year. I have to tell you that it is hilarious to see my mom’s car driven up to the Great Wall of China. Where are these cars assembled? Michigan and China.
The global trading system is an intricate, finally balanced system that has taken hundreds of years to evolve. Take out one small piece, and the entire structure falls down upon your head.
This is something the administration is about to find out.
Global Market Comments
May 16, 2019
Fiat Lux
Featured Trade:
(WHY US BONDS LOVE CHINESE TARIFFS),
(TLT), (TBT), (SOYB), (BA), (GM)
(THE BEST TESTIMONIAL EVER)
Global Market Comments
April 23, 2019
Fiat Lux
Featured Trade:
(LAS VEGAS MAY 9 GLOBAL STRAGEGY LUNCHEON)
(APRIL 17 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXI), (RWM), (IWM), (VXXB), (VIX), (QCOM), (AAPL), (GM), (TSLA), (FCX), (COPX), (GLD), (NFLX), (AMZN), (DIS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 17 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What will the market do after the Muller report is out?
A: Absolutely nothing—this has been a total nonmarket event from the very beginning. Even if Trump gets impeached, Pence will continue with the same kinds of policies.
Q: If we are so close to the peak, when do we go short?
A: It’s simple: markets can remain irrational longer than you can remain liquid. Those shorts are expensive. As long as global excess liquidity continues pouring into the U.S., you’ll not want to short anything. I think what we’ll see is a market that slowly grinds upward until it’s extremely overbought.
Q: China (FXI) is showing some economic strength. Will this last?
A: Probably, yes. China was first to stimulate their economy and to stimulate it the most. The delayed effect is kicking in now. If we do get a resolution of the trade war, you want to buy China, not the U.S.
Q: Are commodities expected to be strong?
A: Yes, China stimulating their economy and they are the world’s largest consumer commodities.
Q: When is the ProShares Short Russell 2000 ETF (RWM) actionable?
A: Probably very soon. You really do see the double top forming in the Russell 2000 (IWM), and if we don’t get any movement in the next day or two, it will also start to roll over. The Russell 2000 is the canary in the coal mine for the main market. Even if the main market continues to grind up on small volume the (IWM) will go nowhere.
Q: Why do you recommend buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXXB) instead of the Volatility Index (VIX)?
A: The VIX doesn’t have an actual ETF behind it, so you have to buy either options on the futures or a derivative ETF. The (VXXB), which has recently been renamed, is an actual ETF which does have a huge amount of time decay built into it, so it’s easier for people to trade. You don’t need an option for futures qualification on your brokerage account to buy the (VXXB) which most people don’t have—it’s just a straight ETF.
Q: So much of the market cap is based on revenues outside the U.S., or GDP making things look more expensive than they actually are. What are your thoughts on this?
A: That is true; the U.S. GDP is somewhat out of date and we as stock traders don’t buy the GDP, we buy individual stocks. Mad Hedge Fund Trader in particular only focuses on the 5% or so—stocks that are absolutely leading the market—and the rest of the 95% is absolutely irrelevant. That 95% is what makes up most of the GDP. A lot of people have actually been caught in the GDP trap this year, expecting a terrible GDP number in Q1 and staying out of the market because of that when, in fact, their individual stocks have been going up 50%. So, that’s something to be careful of.
Q: Is it time to jump into Qualcomm (QCOM)?
A: Probably, yes, on the dip. It’s already had a nice 46% pop so it’s a little late now. The battle with Apple (AAPL) was overhanging that stock for years.
Q: Will Trump next slap tariffs on German autos and what will that do to American shares? Should I buy General Motors (GM)?
A: Absolutely not; if we do slap tariffs on German autos, Europe will retaliate against every U.S. carmaker and that would be disastrous for us. We already know that trade wars are bad news for stocks. Industry-specific trade wars are pure poison. So, you don't want to buy the U.S. car industry on a European trade war. In fact, you don’t want to buy anything. The European trade war might be the cause of the summer correction. Destroying the economies of your largest customers is always bad for business.
Q: How much debt can the global economy keep taking on before a crash?
A: Apparently, it’s a lot more with interest rates at these ridiculously low levels. We’re in uncharted territory now. We really don't know how much more it can take, but we know it’s more because interest rates are so low. With every new borrowing, the global economy is making itself increasingly sensitive to any interest rate increases. This is a policy you should enact only at bear market bottoms, not bull market tops. It is borrowing economic growth from futures year which we may not have.
Q: Is the worst over for Tesla (TSLA) or do you think car sales will get worse?
A: I think car sales will get better, but it may take several months to see the actual production numbers. In the meantime, the burden of proof is on Tesla. Any other surprises on that stock could see us break to a new 2 year low—that's why I don’t want to touch it. They’ve lately been adopting policies that one normally associates with imminent recessions, like closing most of their store and getting rid of customer support staff.
Q: Is 2019 a “sell in May and go away” type year?
A: It’s really looking like a great “Sell in May” is setting up. What’s helping is that we’ve gone up in a straight line practically every day this year. Also, in the first 4 months of the year, your allocations for equities are done. We have about 6 months of dead territory to cover from May onward— narrow trading ranges or severe drops. That, by the way, is also the perfect environment for deep-in-the-money put spreads, which we plan to be setting up soon.
Q: Is it time to buy Freeport McMoRan (FCX) in to play both oil and copper?
A: Yes. They’re both being driven by the same thing: China demand. China is the world’s largest new buyer of both of these resources. But you’re late in the cycle, so use dips and choose your entry points cautiously. (FCX) is not an oil play. It is only a copper (COPX) and gold (GLD) play.
Q: Are you still against Bitcoin?
A: There are simply too many better trading and investment options to focus on than Bitcoin. Bitcoin is like buying a lottery ticket—you’re 10 times more likely to get struck by lightning than you are to win.
Q: Are there any LEAPS put to buy right now?
A: You never buy a Long-Term Equity Appreciation Securities (LEAPS) at market tops. You only buy these long-term bull option plays at really severe market selloffs like we had in November/December. Otherwise, you’ll get your head handed to you.
Q: What is your outlook on U.S. dollar and gold?
A: U.S. dollar should be decreasing on its lower interest rates but everyone else is lowering their rates faster than us, so that's why it’s staying high. Eventually, I expect it to go down but not yet. Gold will be weak as long as we’re on a global “RISK ON” environment, which could last another month.
Q: Is Netflix (NFLX) a buy here, after the earnings report?
A: Yes, but don't buy on the pop, buy on the dip. They have a huge head start over rivals Amazon (AMZN) and Walt Disney (DIS) and the overall market is growing fast enough to accommodate everyone.
Q: Will wages keep going up in 2019?
A: Yes, but technology is destroying jobs faster than inflation can raise wages so they won’t increase much—pennies rather than dollars.
Q: How about buying a big pullback?
A: If we get one, it would be in the spring or summer. I would buy a big pullback as long as the U.S. is hyper-stimulating its economy and flooding the world with excess liquidity. You wouldn't want to bet against that. We may not see the beginning of the true bear market for another year. Any pullbacks before that will just be corrections in a broader bull market.
Good Luck and Good Trading
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
February 27, 2019
Fiat Lux
Featured Trade:
(HOW AUTONOMOUS DRIVING WILL CHANGE THE WORLD),
(TSLA), (GM), (GOOGL)
The car insurance industry will grapple with a massive existential crisis of epic proportions unless they evolve.
The looming threat is caused by technology and autonomous driving.
This is why parents usher their children into industries that won’t be blown up by technological disruption.
Removing the driver from the automobile industry could be the single most societal shift in our lifetimes.
This technology is getting ramped up as we speak and Waymo is the clear leader that is already collecting money for commercial rides in the state of Arizona.
Car insurers must wonder if they will be able to charge the same amount if there are no drivers?
The answer is that the liability will head from the driver to the manufacturer with companies like General Motors (GM) Tesla (TSLA) likely footing the bill while the passenger is likely to pay minimally.
We are headed towards another data war with insurers incentivized to dismiss the relevance of data in self-driving cars and devaluing it will cause the car companies’ bills to go higher.
Car insurance companies are also heavily investing in data analytics teams to see which part of the pie and how big of it they can get from self-driving technology.
This is uncharted territory.
Consensus has it that by 2035, 23 million autonomous vehicles or around 10 percent of today’s total will grace our roads and highways.
But I believe this number is understating the underlying series of generational factors at play.
It’s no secret that the majority of Millennials and Generation Z want to live in coastal urban cores participating in the heart of downtown activities mainly because of the chance to find a high-paying job.
This has exacerbated the migration from rural to metro areas around the country and sapping the need to drive or buy a car when Uber can become an almost perfect substitute.
And don’t forget that according to the latest data, cars are stationary 92% of the time signaling consumers’ intentions to stop purchasing and instead rent cars by the minute, hour, and day.
That is the beauty of the sharing economy and how self-driving cars will fit in.
This avant-garde model will emerge between 2035 and 2050 effectively reducing the value of owning a car, the self-driving car that will be bought, probably by the self-driving tech company itself, could constitute 50% of all vehicles sold globally.
The sum of the parts could mushroom into a $3 trillion addressable market, not only made up of the physical cars but the assortment of ancillary technology needed to fuel these cutting-edge machines.
Alphabet’s (GOOGL) self-driving unit named Waymo run an onboard computer that processes images in real time using its machine learnings algorithm built by the industries’ best machine learning engineers.
However, not only do these firms need an army of artificial intelligence engineers to build the algorithms that are at the fulcrum of what they do, they also need other parts that fit into the puzzle such as lidar radar technology.
Lidar is an acronym for light detection and ranging, and the physical manifestation of this technology has so far been a cone-shaped object on top of the car's roof emitting laser pulses that bounce off objects allowing the car to recreate a 3D image of its surroundings.
The advancement of this technology and the potential production of scale will cut the cost of manufacturing this technology to less than $10 per sensor.
A full-blown lidar unit costs $75,000 at current market prices, but luckily the phenomenon of deflationary technology always drives the prices down to bare bones.
Cameras, sensors, cooling systems, and GPU chips are other products that must be heavily developed to accommodate self-driving technology.
GM is another prominent player in this field, and they have already outfitted close to 200 cars for testing.
The firm transformed its Orion Assembly plant in Michigan to accommodate cameras, lidar, and other sensors to its Chevrolet Bolt.
Whoever masters the lidar technology the quickest will have an inside edge to grab market share once this industry explodes and a lower insurance bill.
Waymo won’t be the only player usurping market share even though they are the brightest name out there, and there is room for others to crash the party.
GM invested $500 million into Lyft which could act as a gateway path into outfitting Lyft cars with GM’s proprietary technology.
Whoever specializes in the art of licensing self-driving technology to companies will ring in the register as well and the opportunities abroad are endless because emerging economies aren’t players in this industry.
GM’s Cruise AV has opened eyes with GM removing pedals or a steering wheel for this electric car.
It’s under testing in select cities and GM plans to integrate it into its ride-sharing program.
Investors are still waiting for companies to telegraph meaningful revenue to the top line, and this teething phase could cause the impatient to bolt for greener pastures.
Waymo has claimed it will be able to deliver up to 1 million trips per day by 2022 signaling that real top line revenue appears a few years off at the earliest.
This trade isn’t for the smash-and-grab type, but this is the future and it will be a slow crawl to broad-based adoption and material revenue.
The death of the car insurance industry is still years away and insurers still have time to save their bacon.
Data at the Association for Safe International Road Travel (ASIRT) shows that nearly 1.25 million people die in road crashes each year, on average 3,287 deaths a day and another 20-50 million are injured or disabled.
Technology is on the move and will try to correct this awful trend in road safety and human fatalities.
These years could be the high-water mark for car insurance and as self-driving technology continues to seep deeper into the public consciousness, it could snatch revenue from the coffers of the insurance companies.
But if these legacy companies become nimble and embrace the changes, they could potentially be at the vanguard of a highly lucrative industry charging the likes of GM and Tesla to ferry around humans.
Global Market Comments
January 17, 2019
Fiat Lux
Featured Trade:
(WHAT HAPPENED TO THE DOW?)
($INDU), (EK), (S), (BS), (CVX), (DD), (MMM),
(FBHS), (MGDDY), (FL), (GE), (TSLA), (GM)
(WHY YOUR OTHER INVESTMENT NEWSLETTER IS SO DANGEROUS)
Last week saw the sharpest move up in stock prices in seven years. Why doesn’t it feel like it? Maybe it’s because we are all recovering losses instead of posting new profits. The mind has a funny way of working like that.
In fact, 2018 may go down as the year that EVERYTHING went down. Stocks (SPY), bonds (TLT), commodities (COPX), precious metals (GLD), foreign currencies (FXE), emerging markets (EEM), oil (USO), real estate (IYR), vintage cars, fine art, and even my neighbor’s beanie baby collection were all posting negative numbers as of a week ago.
In fact, Deutsche Bank tracks 100 global indexes and 88 of them were posting losses on the year. The normal average in any one year is 27. This is why hedge fund are having their worst year in history (except for this one). When your longs AND your shorts plunge in unison, there is nary a dime to be had. Even gold, the ultimate flight to safety asset has failed to perform.
Theoretically, this is supposed to be impossible. When stocks go down, bonds are supposed to go up and visa versa. So are emerging markets and all other hard assets.
This only happens in one set of circumstances and that is when global liquidity is shrinking. There is just not enough free cash around to support everything. So, the price of everything goes down.
The reason most of you don’t recognize this is that last time this happened was in 1980 when most of you were still a gleam in your father’s eye.
If you don’t believe me check, out the chart below from the Federal Reserve Bank of St. Louis. It shows that after peaking in July 2014, the Adjusted Monetary Base has been going nowhere and recently started to decline precipitously.
This was exactly three months before the Federal Reserve ended the aggressive, expansionary monetary policy known as quantitative easing.
The rot started in commodities and spread to precious metals, agricultural prices, bonds, and real estate. In October, it spread to global equities as well. Beanie babies were the last to go.
Want some bad news? Shrinking global liquidity, which is now accelerating, is a major reason why I have been calling for a recession and bear market in 2019 all year.
They say imitation is the sincerest form of flattery. Perhaps that is why 2019 recession calls are lately multiplying like rabbits. Nothing like closing the barn door after the horses have bolted. I wish you told me this in September.
Disturbing economic data is everywhere if only people looked. The S&P Case-Shiller Home Price Index rate of price rise hit an 18-month low at 5.5%. With housing in free fall nationally further serious price declines are to come. With mortgage rates up a full point in a year and affordability at a decade low, who’s surprised?
General Motors (GM) closed 3 plants and laid off 15,000 workers, as trade wars wreak havoc on old-line industries. It looks like Millennials would rather ride their scooters than buy new cars.
Weekly Jobless Claims soared 10,000, to 234,000, a new five-month high. Not what stock owners want to hear. THE JOBS MIRACLE IS FADING!
October New Home Sales were a complete disaster, down a stunning 8.9% and off 12% YOY. These are the worst numbers since the 2009 housing crash. I told you not to buy homebuilders! They can’t give them away now!
Oil plunged again, off 20% in November alone. Is this punishment for Saudi Arabia chopping up a journalist or is the world headed into recession?
It seems we don’t have quiet weeks anymore. Normally, sedentary Jay Powell ripped it up with a few choice words at the New York Economic Club.
By saying that we are close to a neutral rate, the Fed Governor implied that there will be one more rate rise in December and then NO MORE. Happy president. But the historical neutral range is 3.5%-4.5%, meaning there is room for 2-6 X 25 basis point rate hikes to keep the bond vigilantes at pay. Such a card! Thread that needle!
Cyber Monday sales hit a new all-time high, up to $7.3 billion, with Amazon (AMZN) taking far and away the largest share. The stock is now up $300 from its November $1,400 low.
Salesforce, a Mad Hedge favorite, announced blockbuster earnings and was rewarded with a ballistic move upwards in the shorts. Fortunately, the Mad Hedge Technology Letter was long.
The Mad Hedge Alert Service managed to pull victory from the jaws of defeat in November with a last-minute comeback. Add October and November together and we limited out losses to 0.59% for the entire crash.
This was a period when NASDAQ fell a heart-stopping 17% and lead stocks fell as much as 60%. Most investors will take that all day long. I bet you will too. Down markets is when you define the quality of a trader, not up ones, when anyone can make a buck.
My year to date return recovered to +27.80%, boosting my trailing one-year return back up to 31.56%. November finished at a near-miraculous -1.83%. That second leg down in the NASDAQ really hurt and was a once in 18-year event. And this is against a Dow Average that is up a pitiful +2.9% so far in 2018.
My nine-year return recovered to +304.27. The average annualized return revived to +33.80.
The upcoming week is all about jobs reports, and on Friday with the big one.
Monday, December 3 at 10:00 EST, the November ISM Manufacturing Index is published. All hell will break loose at the opening as the market discounts the outcome of the Buenos Aires G-20 Summit.
On Tuesday, December 4, November Auto Vehicle Sales are released.
On Wednesday, December 5 at 8:15 AM EST, the November ADP Private Employment Report is out.
At 10:30 AM EST the Energy Information Administration announces oil inventory figures with its Petroleum Status Report.
Thursday, December 6 at 8:30 AM EST, we get the usual Weekly Jobless Claims. At 10:00 AM we learned the November ISM Nonmanufacturing Index.
On Friday, December 7, at 8:30 AM EST, the November Nonfarm Payroll Report is printed.
The Baker-Hughes Rig Count follows at 1:00 PM. At some point, we will get an announcement from the G-20 Summit of advanced industrial nations.
As for me, I’ll be driving my brand new Tesla Model X P100D which I picked up from the factory yesterday. I’ll be zooming up and down the hills and dales of the mountains around San Francisco this weekend.
I’ll also be putting to test the “ludicrous mode” to see if it really can go from zero to 60 in 2.9 seconds and give passengers motion sickness. I will go well equipped with air sickness bags which I lifted off of my latest Virgin Atlantic flight.
Talley Ho!
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 17, 2018
Fiat Lux
Featured Trade:
(WHO WAS THE GREATEST WEALTH CREATOR IN HISTORY?)
(FB), (AAPL), (GOOG), (AMZN),
(XOM), (BRKY), (T), (GM), (VZ), (CCA),
(WHY DOCTORS MAKE TERRIBLE TRADERS?)
