February 27, 2019

Global Market Comments
February 27, 2019
Fiat Lux

Featured Trade:

(TLT), (TBT), ($TNX), (FCX), (FXE), (FXY), (FXA),
 (USO), (OXY), (ITB), (LEN), (HD), (GLD), (SLV), (CU),

Why China’s US Treasury Dump Will Crush the Bond Market

Years ago, if you asked traders what one event would destroy financial markets, the answer was always the same: China dumping its $1 trillion US treasury bond hoard.

It looks like Armageddon is finally here.

Once again, the Chinese boycotted this week’s US Treasury bond auction.

With a no-show like this, you could be printing a 2.90% yield in a couple of weeks. It also helps a lot that the charts are outing in a major long term double top.

You may read the president’s punitive duties on Chinese solar panels as yet another attempt to crush California’s burgeoning solar installation industry. I took it for what it really was: a signal to double up my short in the US Treasury bond market.

For it looks like the Chinese finally got the memo. Exploding American deficits have become the number one driver of all asset classes, perhaps for the next decade.

Not only are American bonds about to fall dramatically in value, so is the US dollar (UUP) in which they are denominated. This creates a double negative hockey stick effect on their value for any foreign investor.

In fact, you can draw up an all assets class portfolio based on the assumption that the US government is now the new debt hog:

Stocks – buy inflation plays like Freeport McMoRan (FCX) and US Steel (X)
Emerging Markets – Buy asset producers like Chile (ECH)
Bonds – run a double short position in the (TLT)
Foreign Exchange – buy the Euro (FXE), Yen (FXY), and Aussie (FXA)
Commodities – Buy copper (CU) as an inflation hedge
Energy – another inflation beneficiary (USO), (OXY)
Precious Metals – entering a new bull market for gold (GLD) and silver (SLV)

Yes, all of sudden everything has become so simple, as if the fog has suddenly been lifted.

Focus on the US budget deficit which has soared from $450 billion a year ago to over $1 trillion today on its way to $2 trillion later this year, and every investment decision becomes a piece of cake.

This exponential growth of US government borrowing should take the US National Debt from $22 to $30 trillion over the next decade.

I have been dealing with the Chinese government for 45 years and have come to know them well. They never forget anything. They are still trying to get the West to atone for three Opium Wars that started 180 years ago.

Imagine how long it will take them to forget about washing machine duties?

By the way, if I look uncommonly thin in the photo below it’s because there was a famine raging in China during the Cultural Revolution in which 50 million died. You couldn’t find food to buy in the countryside for all the money in the world. This is when you find out that food has no substitutes. The Chinese government never owned up to it.





September 24, 2018

Global Market Comments
September 24, 2018
Fiat Lux

Featured Trade:
(SPY), (XLI), (XLV), (XLP), (XLY), (HD), (LOW), (GS), (MS), (TLT),
(UUP), (FXE), (FCX), (EEM), (VIX), (VXX), (UPS), (TGT)

August 28, 2018

Global Market Comments
August 28, 2018
Fiat Lux

Featured Trade:
(HD), ($INDU),

August 24, 2018

Global Market Comments
August 24, 2018
Fiat Lux

Featured Trade:
(BIDU), (BABA), (VIX), (EEM), (SPY), (GLD), (GDX), (BITCOIN),
(SQM), (HD), (TBT), (JWN), (AMZN), (USO), (NFLX), (PIN),

Switching From Growth to Value

All good things must come to an end.

For most of 2015, growth stocks far and away have been the outstanding performers in the US stock market.

Almost daily, I delighted in sending you trade alerts to buy winners, like Palo Alto Networks (PANW), Tesla (TSLA), and the Russell 2000 (IWM).

And so they delivered.

The reasons for their impressive gains were crystal clear.

The expectation all year was that the Federal Reserve would raise interest rates imminently. This gave us a perennially strong dollar (UUP).

Thus, one could only direct focus towards companies that were immune from plunging foreign currencies and falling international earnings.

It really was a year to ?Buy American?.

But a funny thing happened on the way to the bear market for bonds. It never showed up.

The final nail in the coffin was Fed governor Janet Yellen?s failure to move on September 17. She looked everywhere for inflation, but only found the chronically unemployed (the 10% U-6 discouraged worker jobless rate).

Not only did we NOT get the rate hike, the prospects are that WE MAY NOT SEE A SUBSTANTIAL INCREASE IN THE COST OF MONEY FOR YEARS!

At this point, the worst-case scenario is for the Fed to deliver only two 25-basis point rises over the next six months, AND THAT?S IT!

This reinforces my belief that the top of the coming interest rate cycle may only reach the bottom of past cycles, since deflation is so pernicious, and so structural.

All of a sudden, the bull case for the dollar, which has been driving our US stock selection all year, went wobbly at the knees.

Europe, Japan, and China are all now in between new quantitative easing and stimulus cycles, giving a decided bud to the Euro (FXE), the Yen (FXY), (YCS), the Yuan (CYB), the Aussie (FXA), and the Loonie (FXC).

New round of QE will come, but those could be months off.

Therefore, I am sensing a sea change in the market leadership. Rushing to the fore are the shares of companies that benefit from flat interest rates and a flagging greenback.

Those would be value stocks.

Value stocks are easy to find. Do any quantitative screen based on low price earnings multiples, low price to book value, and low price to cash flow, and you will find thousands of them. This is what the big boys do.

There is another reason to refocus on value stocks, but it is more psychological than analytical.

We are now into our sixth year in this bull market, one of the strongest in history. Portfolio managers are very wary of paying high multiples at market tops, as many did at the summit of the Dotcom bubble in 2000.

At least if they buy cheap share at market highs they have adequate job preserving explanations for their actions. There is also some inherent built in safety in increasing weightings in companies that haven?t appreciated very much.

I probably don?t know you personally (although I call about 1,000 of you a year), but I bet you don?t have 100 in-house analysts at hand to help you sift through the wheat and the chaff.

So let me do the heavy lifting for you. I?ll distill down the value play to a handful of high quality, high probability sectors.

1) Industrials ? Remember those, the decidedly unsexy, heavy metal bashing companies that you have been ignoring for years? With global businesses and hefty borrowing for capital spending, they do very well in a flat interest rate environment. What?s my favorite industrial? The former hedge fund that made light bulbs, General Electric (GE). They make really cool jet engines and diesel electric locomotives too.

2) Consumer Discretionary ? Finally, people are spending their gas savings, now that they realize it is more than a temporary windfall. A housing market that is on fire is creating enormous demand for all the things owners stuff in their homes, both in new purchases and upgrades. Low rates will keep the 30-year mortgage under 4% for longer. You already know my best names here, Home Depot (HD), and Disney (DIS).

3) Old Technology ? Tired of paying 100 plus multiples for the latest non yielding cloud highflyer? Mature old technology stocks offer some of the cheapest valuations in the market. As, yes, they pay dividends now! I?ll go with Microsoft here (MSFT) as the action in the options market has suddenly seen a big spike.

And what about the biggest old tech stock of all, Apple (AAPL)? I think this will be a 2016 story, and investors reposition themselves to take advantage of the run up to the iPhone 7 launch in a year. But as the recent price action shows, some portfolio managers may not want to wait.

4) Financials ? Are not the first sector to leap to mind when looking for a low interest rate play. Overnight interest rates will remain depressed as far as the eye can see. However, rates at the long end, maturities of five years or more, are rising.

This steepening yield curve is where it really matters for banks, as it allows them to expand their profit margins. On top of that, bank valuations are at the bargain basement end of the market, with many still trading at below book value. Go for Citibank (C), Bank of America (BAC), and Goldman Sachs (GS).

New leadership from low-priced sectors could give us the rocket fuel for a melt up in the indexes into the end of 2015. It could take us right to the low end of my forecast yearend range for the S&P 500 I made on January 6 of 2,200-2,300 (click here for ?My 2015 Annual Asset Class Review?).

After five months of derisking, both institutions and hedge funds are underweight stocks and shy of exposure. As a result this underperforming year has ?chase? written all over it.

Keep your fingers crossed, but stranger things have happened.

GE 10-21-15

HD 10-21-15

DIS 10-21-15

John ThomasIt?s My Turn to Do the Heavy Lifting

Where?s This Market Bottom?

After yesterday?s 217 point swoon, the S&P 500 (SPX) has fallen 4.3% from its late May peak. It looks like the ?Sell in May? crowd is having the last laugh after all, of which I was one.

Is this a modest 5% correction in a continuing bull market? Or is it the beginning of a Harry Dent style crash to (SPX) 300 (click here for the interview on Hedge Fund Radio)? Let?s go to the videotape.

This was one of the most overbought stock markets in my career. I have to think back to the top of the dotcom boom in 2000 and the pinnacle of the Tokyo bubble in 1989 to recall similar levels of ebullience. In fact, two weeks ago we were at a real risk of a major melt up if we didn?t encounter some sort of pullback. So the modest selling we have seen so far has been welcome, even by the bulls.

There is still a reasonable chance the final decline will be nothing more than a pit stop on the way to new highs. Institutional weightings in equities are at a lowly 31%, compared to 50% 20 years ago. It seems that everyone in the world is overweight bonds (see yesterday?s piece on ?Welcome to the Sack of Rome?).

In recent weeks, the S&P 500 yield ratio has fallen behind that of the 10 year Treasury bond, at 2.10%, but only just. With a price/earnings multiple of 16, we are bang in the middle of a long time historic range of 10-22. Zero overnight interest rates argue that we should be at the top end of that range. The argument that the ?Buy the Dip? crowd is still lurking under the market is real, just a little further than the recent dips allowed.

So how much lower do we have to go? After the close, I enjoyed an in depth discussion with my old friend, Jim Parker, of Mad Day Trader fame about the possible permutations. The following is an itinerary of what your summer trading might look like, expressed in (SPX) terms:

6.2% – 1,605 was the Wednesday low, the 50 day moving average, and the downside of the most recent upward sloping channel on the chart below. This trifecta of support is many traders? first stop for a bounce.

5.4% – 1,590 is the first major downside Fibonacci level. We could see this as soon as the May nonfarm report payroll is announced on Friday.

6.0% – 1,580 is the old 13-year high. Markets always love to retrace to old breakout levels.

6.5% – 1,570 represents a give back of one third of the November-May 330 point rally.

8.3% – 1,540 is the double bottom off the April low.

11.1% – 1,493 is the 200-day moving average. This is the worst-case scenario. I doubt we?ll get there, unless the fundamentals change, which they always do.

Jim gave me a couple more cogent insights. The average big swing move is 100-110 points. The last 100-point move sprung off of the March nonfarm payroll report, which came out on April 5. Big swings also often start and finish around an options expiration, the next one of those is coming on June 21. So for the short term, 1580-1590 is looking good.

To confuse you even further, contemplate the concept that I refer to as the ?Lead Contract.? There is always a lead contract around, one on which all traders maintain a laser like focus, which leads every other financial product out there. It says ?Jump,? and we ask ?How High?? It is also always changing.

Right now, the Nikkei average (DXJ) is the lead contract. The Japanese yen ETF (FXY) is the close inverse. Every flight from risk during the past two weeks has been preceded by a falling Nikkei and a rising yen.
If you want to get a preview of each day?s US trading, stay up the night before and watch the action in Tokyo, as I often do.

You might even learn a word or two of Japanese, which will come in handy when ordering in the better New York sushi shops.

SPY 6-5-13

QQQ 6-5-13

BAC 6-5-13

GOOG 6-5-13

HD 6-5-13

Girl with Chopsticks

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