Posts

January 17, 2019

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)

What Happened to the Dow?

When I joined Morgan Stanley some 35 years ago, one of the grizzled old veterans took me aside and gave me a piece of sage advice.

“Never buy a Dow stock”, he said. “They are a guarantee of failure.”

That was quite a bold statement, given that at the time the closely watched index of 30 stocks included such high-flying darlings as Eastman Kodak (EK), Sears Roebuck & Company (S), and Bethlehem Steel (BS). It turned out to be excellent advice.

Only ten of the Dow stocks of 1983 are still in the index (see tables below), and almost all of the survivors changed names. Standard Oil of California became Chevron (CVX), E.I du Pont de Nemours & Company became DowDuPont, Inc. (DD), and Minnesota Mining & Manufacturing became 3M (MMM).

Almost all of the rest went out of business, like Union Carbide Corporation (the Bhopal disaster) and Johns-Manville (asbestos products) or were taken over. A small fragment of the old E.W. Woolworth is known as Foot Locker (FL) today.

Charles Dow created his namesake average on May 26, 1896, consisting of 12 names. Almost all were gigantic trusts and monopolies that were broken up only a few years later by the Sherman Antitrust Act.

In many ways, the index has evolved to reflect the maturing of the US economy from an 18th century British agricultural colony, to the manufacturing powerhouse of the 20th century, to the technology and services-driven economy of today.

Of the original Dow stocks, only one, US Leather, vanished without a trace. It was the victim of the leap from horses to automobile transportation and the internal combustion engine. United States Rubber is now part of France’s Michelin Group (MGDDY).

American Tobacco reinvented itself as Fortune Brands (FBHS) to ditch the unpopular “tobacco” word. National Lead moved into paints with the Dutch Boy brand. It sold off that division when the prospects for leaded paints dimmed in 1970 (they cause mental illness in children).

What was the longest lived of the original 1896 Dow stocks? General Electric (GE), originally founded by light bulb inventor Thomas Edison. It went down in flames thanks to poor management and was delisted in 2018. It was a 122-year run. Today, it is one of the great turnaround challenges facing American Industry.

Which company is the American Leather of today? My bet is that it’s General Motors (GM) which is greatly lagging behind Tesla (TSLA) in the development of electric cars (90% market share versus 5%). With a product development cycle of five years, it simply lacks the DNA to compete in the technology age.

What will be the largest Dow stock in a decade? Regular readers already know the answer.

 

 

 

 

The Market Outlook for the Week Ahead, or The Year EVERYTHING Went Down

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 

 

 

 

 

 

 

 

 

 

October 17, 2018

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?)

October 10, 2018

Global Market Comments
October 10, 2018
Fiat Lux


SPECIAL TESLA ISSUE

Featured Trade:
(OCTOBER 14 SAVANNAH GEORGIA STRATEGY BREAKFAST),
(THE BULL CASE FOR TESLA),
 (TSLA), (GM), (F)

October 8, 2018

Global Market Comments
October 8, 2018
Fiat Lux

Featured Trade:

(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or GET ME OFF THIS ROLLER COASTER),
(THE INCREDIBLE FUTURE OF THE AUTOMOBILE),
(TSLA), (GM), (F), (TM)

September 27, 2018

Global Market Comments
September 27, 2018
Fiat Lux

Featured Trade:
(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F),
(TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (RSX), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL),
(TUESDAY, OCTOBER 16, 2018, MIAMI, FL,
GLOBAL STRATEGY LUNCHEON)

How to Gain an Advantage with Parallel Trading

One of the most fascinating things I learned when I first joined the equity trading desk at Morgan Stanley during the early 1980s was how to parallel trade.

A customer order would come in to buy a million shares of General Motors (GM) and what did the in-house proprietary trading book do immediately?

It loaded the boat with the shares of Ford Motors (F).

When I asked about this tactic, I was taken away to a quiet corner of the office and read the riot act.

“This is how you legally front run a customer,” I was told.

Buy (GM) in front of a customer order, and you will find yourself in Sing Sing shortly.

Ford (F), Toyota (TM), Nissan (NSANY), Daimler Benz (DDAIF), BMW (BMWYY), or Volkswagen (VWAPY), are no problem.

The logic here was very simple.

Perhaps the client completed an exhaustive piece of research concluding that (GM) earnings were about to rise.

Or maybe a client old boy network picked up some valuable insider information.

(GM) doesn’t do business in isolation. It has tens of thousands of parts suppliers for a start. While whatever is good for (GM) is good for America, it is GREAT for the auto industry.

So through buying (F) on the back of a (GM) might not only match the (GM) share performance, it might even exceed it.

This is known as a Primary Parallel Trade.

This understanding led me on a lifelong quest to understand Cross Asset Class Correlations, which continues to this day.

Whenever you buy one thing, you buy another related thing as well, which might do considerably better.

I eventually made friends with a senior trader at Salomon Brothers while they were attempting to recruit me to run their Japanese desk.

I asked if this kind of legal front running happened on their desk.

“Absolutely,” he responded. But he then took Cross Asset Class Correlations to a whole new level for me.

Not only did Salomon’s buy (F) in that situation, they also bought palladium (PALL).

I was puzzled. Why palladium?

Because palladium is the principal metal used in catalytic converters, which remove toxic emissions from car exhaust, and have been required for every U.S. manufactured car since 1975.

Lots of car sales, which the (GM) buying implied, ALSO meant lots of palladium buying.

And here’s the sweetener.

Palladium trading is relatively illiquid.

So, if you catch a surge in the price of this white metal, you would earn a multiple of what you would make on your parallel (F) trade.

This is known in the trade as a Secondary Parallel Trade.

A few months later, Morgan Stanley sent me to an investment conference to represent the firm.

I was having lunch with a trader at Goldman Sachs (GS) who would later become a famous hedge fund manager and asked him about the (GM)-(F)-(PALL) trade.

He said I would be an IDIOT not to take advantage of such correlations. Then he one-upped me.

You can do a Tertiary Parallel Trade here through buying mining equipment companies such as Caterpillar (CAT), Cummins (CMI), and Komatsu (KMTUY).

Since this guy was one of the smartest traders I ever ran into, I asked him if there was such a thing as a Quaternary Parallel Trade.

He answered “Abso******lutely,” as was his way.

But the first thing he always did when searching for Quaternary Parallel Trades would be to buy the country ETF for the world’s largest supplier of the commodity in question.

In the case of palladium, that would be Russia (RSX) followed by South Africa (EZA), which together account for 74% of the world’s total production.

Since then, I have discovered hundreds of what I can Parallel Trading Chains, and have been actively making money off of them. So have you, you just haven’t realized it yet.

I could go on and on.

Do this for decades as I have and you learn that some parallel trades break down and die. The cross relationships no longer function.

The best example I can think of is the photography/silver connection. When the photography business was booming, silver prices rose smartly.

Digital photography wiped out this trade, and silver-based film development is still only used by a handful of professionals and hobbyists.

Oh, and Eastman Kodak (KODK) went bankrupt in 2012.

However, it seems that whenever one Parallel Trading Chain disappears, many more replace it.

You could build chains a mile long simply based on how well Apple (AAPL) is doing.

Suffice it to say that parallel trading is an incredibly useful trading strategy.

Ignore it at your peril.

 

 

 

 

 

It’s a Long and Winding Road to Get Here

September 26, 2018

Global Market Comments
September 26, 2018
Fiat Lux

SPECIAL CAR ISSUE

Featured Trade:
(SAY GOODBYE TO THAT GAS GUZZLER),
(GM), (F), (TSLA), (GOOGL), (AAPL)

September 4, 2018

Global Market Comments
September 4, 2018
Fiat Lux

Featured Trade:
(WEDNESDAY, OCTOBER 17, 2018, HOUSTON GLOBAL STRATEGY LUNCHEON),
(DON’T MISS THE SEPTEMBER 5 GLOBAL STRATEGY WEBINAR),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
THE WAR WITH CANADA STARTS ON TUESDAY),
(MSFT), (VXX), (TLT), (AAPL), (KO), (GM), (F)