September 20, 2019

Global Market Comments
September 20, 2019
Fiat Lux

Featured Trade:

(TLT), (FDX), (FB), (HYG), (JNK), (EEM), (BABA), (JD), (TBT), (FXE), (UUP), (AMZN), (FB), (DIS), (MSFT), (USO), (INDU),

September 6, 2019

Global Market Comments
September 6, 2019
Fiat Lux

Featured Trade:

(INDU), (FXY), (FXB), (USO), (XLE), (TLT), (TBT),
(FB), (AMZN), (MSFT), (DIS), (WMT), (IWM), (TSLA), (ROKU), (UBER), (LYFT), (SLV), (SIL)

August 29, 2019

Global Market Comments
August 29, 2019
Fiat Lux

Featured Trade:

(SPY), ($INDU), (USO), (TLT), (UUP), (COPX), (GLD),

August 5, 2019

Global Market Comments
August 5, 2019
Fiat Lux

Featured Trade:

($INDU), (SPY), (TLT), (IWM), (WMT), (FXB)

The Market Outlook for the Week Ahead, or Taking the Elevator Down

It is often said the markets take the escalator up and the elevator down. A thousand Dow points in three days? That’s like taking the elevator down from the 101st floor of the Empire State Building down to the basement in one shot.

Welcome to your new $30 billion tax, or about $90 per American per year. That will be the effect of the new 10% tariff increase on $300 billion worth of goods imported from China. Unfortunately, this comes on top of an existing $210 per American, bring the total bill due from the China trade war to $300 per person.

Clearly, the Chinese think they can get a better deal from the next president and are inclined to wait it out. This has been my base case since the trade war started 18 months ago.

It was one of the most frenetic, emotion-charged, and violent weeks of the year, with almost daily wild swings on a daily basis. This is the environment where hedge funds and newsletters like this one earn their pay.

The July Nonfarm Payroll Report came in at 164,000, keeping the headline unemployment report to 3.7%. Average hourly earnings grew by a hot 3.2% YOY. The previous two months were revised down by 41,000. Overall, it was a disappointing report.

Manufacturing has been especially weak all year, adding only 16,000 jobs in July and averaging 8,000 jobs a month all year. The headline charge into the services economy continues. Retail lost 3,600, the sixth consecutive monthly decline. The strength was in Professional Services, up 31,000, Health Care at 30,000, and Social Assistance at 20,000.

The broader U-6 “discouraged worker” structural unemployment rate dropped from 7.2% to 7.0%, a new cycle low.

The British Pound (FXB) crashed by 1%, as the harsh reality of a hard Brexit looms. That’s because Boris Johnson, the pro Brexit activist, was named UK prime minister and filled his cabinet with anti-EC doormats. It virtually guarantees a recession there and will act as an additional drag on the US economy.

The end result may be a “Disunited Kingdom”, with Scotland declaring independence in order to stay in the EC, and Northern Ireland splitting off to create a united Emerald Island. The stock market there will crater and the pound will go to parity against the greenback.

Home Price Gains are Still Shrinking, from a 3.5% to a 3.4% annual gain in May, according to the S&P Corelogic Case Shiller National Home Price Index. The Median Home Price hit a new high of $285,700. That can’t buy you a parking space in San Francisco. This is removing a major leg from the economy.

Las Vegas saw the biggest increase at 6.4%, followed by Phoenix at 5.7% and Tampa at 5.1%. Shrinking price gains in the face of falling interest rates is a classic pre-recessionary indicator.

Apple hurdled a low bar, with an upward forward guidance delivering a 5% pop in the stock. Revenues rose 1% to $53.8 billion, while profits dropped 7%. The future looks bright on the eve of 5G iPhones. Hardware drops to less than half of sales for the first time. Services revenues jump to 21% of the total.

China is still a drag. Amazingly, Apple only bought $17 billion worth of its own stock last quarter against a commitment of $100 billion. So why are analyst “BUY” ratings at a decade low? Maybe it’s because threats of retaliation in the China trade war are hanging over Apple like a sword of Damocles.

It took only three words to kill Wall Street. Confusion reigns. “Mid Cycle Adjustment” was how Fed governor Jay Powell described Wednesday’s 25 basis point interest rate cut, the first in 12 years, absolutely what the market didn’t want to hear. That implies that the Fed is “one and done,” and that there will be no more interest rate cuts in this economic cycle.

The president added insult to injury piling abuse on his own appointee, further eroding confidence in the independence of the Fed. A truly data dependent Fed wouldn’t have budged last week.

Bonds soared on “one and done.” Higher rates for longer give a new lease on life for the fixed income markets everywhere. Since 2008, major central bank balance sheets have exploded from $3 trillion to $16 trillion, and there is nowhere better for this mountain of money to go but the ten-year US Treasury bond.

Yields have smashed the four-year low at 1.82% and are headed to 1.40% by yearend. The market is wildly overbought for now on the back of an instant three-point rally, so keep buying those dips. Next up is the century low in rates.

Oil crashed 8% on increased global recession fears, in the worst plunge in four years and one of the biggest swan dives in history. The strong dollar doesn’t help either. I have recommended that investors avoid energy like the plague all year and it has worked like a charm. Long term, it’s going out of business anyway, so I don’t even want to trade it here.

Retailers got destroyed on the China news, with stocks down 6%-12% across the board. Best Buy (BBY) did a 12% swan dive. This will be the stick that broke the camel’s back for a lot of retailers already hanging on by their fingernails. Some 42% of US apparel, 69% of footwear, and 84% of accessories come from China.

Squeezed by Amazon on one side and administration China policies on the other, this will spell the death of retail. It looks like we’re going to have to go barefoot this winter. Thank goodness there’s global warming. The death spiral was further confirmed by the weak jobs figures in retail this morning.

I went into the week 100% in cash, giving me the dry powder to pursue the short side aggressively. I always tell followers that cash is a position, that it has option value, and this was a classic example of how well that can work.

The second I heard about the China tariff increase, I went pedal to the metal and increased my shorts from 0% to 40%, against 60% cash. My current shorts include the S&P 500 (SPY), US Treasury bonds (TLT), the Russel 2000 (IWM), and the giant retailer (WMT).

I see August as the best short selling opportunity of the year. I put out my first shorts the day after the Fed rate cut. My Global Trading Dispatch has hit a new all-time high of 320.30% and my year-to-date shot up at +20.16%. A robust earned a robust 1.83% so far in August, and 4.78% since I went back into the market from Zermatt, Switzerland three weeks ago.  

My ten-year average annualized profit bobbed up to +33.13%.  My Mad Hedge Market Timing Index saw one of the sharpest declines in its history, plunging from 65 to 23 on only two days. We could even be back to “BUY” territory by the end of next week.

The coming week will be a feeble one on the data front. Believe it or not, it could be a quiet week.

On Monday, August 5 at 2:00 PM, the July ISM Non-Manufacturing PMI is out.

On Tuesday, August 6 at 2:00 PM, the June JOLTS Jobs Openings report is published.

On Wednesday, August 7, at 8:30 AM, June Consumer Credit is released.

On Thursday, August 8 at 8:30 AM, the Weekly Jobless Claims are printed.

On Friday, August 9 at 8:30 AM, July Core Purchasing Price Index is printed, an inflation indicator.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, believe it or not, I have not been to the beach this year. As a native Californian, that is near high treason. So I am loading up the old Tesla with an ice chest, boogie boards, and kids and headed to nearby Stinson Beach in Marin County. I’m going early to beat the traffic and will take my usual short cuts I learned while living there eons ago.

Surf’s up!

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader









July 31, 2019

Global Market Comments
July 31, 2019
Fiat Lux


Featured Trade:
(TLT), ($TNX), (TBT), (SPY), ($INDU), (FXE), (UUP), (USO),
(TLT), (TBT),

Italy’s Big Wake Up Call

Those planning a European vacation this summer just received a big gift from Mario Draghi, the outgoing president of the European Central Bank. His promise to re-accelerate quantitative easing in Europe has sent the Euro crashing and the US dollar soaring.

Over the last two weeks, the Euro (FXE) has fallen by 2.5%. That $1,000 Florence hotel suite now costs only $975. Mille Gracie!

You can blame the political instability in the Home of Caesar, which has not had a functioning government since WWII. The big fear is that the extreme left would form a collation government with the extreme right that could lead to its departure from the European Community and the Euro. Think of it as Bernie Sanders joining Donald Trump!

In fact, Italy has had 62 different governments since WWII. They change administrations like I change luxury cars, about once a year. Welcome to European debt crisis part 27.

I can’t remember the last time markets cared about what happened in Europe. It was probably the first Greek debt crisis in 2011. As a result, German ten-year bunds have cratered from 0.60% to -0.40%. But they care today, big time.

Given the reaction of the global financial markets, you could have been forgiven for thinking that the world had just ended.

US Treasury Bond yields (TLT) saw their biggest plunge in years, off 120 basis points to 2.05%.

Even oil prices collapsed for an entirely separate set of reasons, the price of Texas Tea pared 20% since April on spreading global recession fears.

Saudi Arabia looks like it’s about to abandon the wildly successful OPEC production quotas that have been boosting oil prices for the past year. Iran has withdrawn from the nuclear non-proliferation treaty, responding with an undeclared tanker war in the Persian Gulf, which I flew over myself only a few weeks ago. The geopolitical premium is back with a vengeance.

So if the Italian developments are a canard, why are we REALLY going down?

You’re not going to like the answer.

It turns out that rising inflation, interest rates, oil and commodity prices, the US dollar, US national debt, budget deficits, and stagnant wage growth are a TERRIBLE backdrop for risk in general and stocks specifically. And this is all happening with the major indexes at the top end of recent ranges.

In other words, it was an accident waiting to happen.

Traders are extremely nervous, global uncertainty is high, the seasonals are awful, and Washington is a ticking time bomb. If you were wondering why I was issuing so few Trade Alerts in July, these are the reasons.

This all confirms my expectation that markets could remain stuck in increasingly narrow trading ranges for the next six months until the presidential election begins in earnest.

Which is creating opportunities.

The global race towards zero interest  has the US as the principal laggard. So you should keep buying every serious dip in the bond market.

Stocks are still wildly overvalued for the short term, so I’ll keep my low profile there. As for gold (GLD) and the currencies, I keep buying dips there as well.

So watch for those coming Trade Alerts. I’m not dead yet, just resting. The contest here is to make as much money as you can, not to see how many trades you can clock. That is a brokers’ game, not yours.





Waiting for My Shot

July 15, 2019

Global Market Comments
July 15, 2019
Fiat Lux

Featured Trade:

(INDU), (SPY), (TLT), (GLD), (FXA), (USO)


July 8, 2019

Global Market Comments
July 8, 2019
Fiat Lux

Featured Trade:

(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),

Standby for the Coming Golden Age of Investment

I believe that the global economy is setting up for a new Golden Age reminiscent of the one the United States enjoyed during the 1950s, and which I still remember fondly.

This is not some pie in the sky prediction.

It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.

What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million “Gen Xers”.

When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, health care, and “RISK OFF” assets like bonds.

The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.

Fast forward six years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.

That is when you have 65 million Gen Xers being chased by 85 million of the “millennial” generation trying to buy their assets.

By then, we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes.

The middle-class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.

The stock market rockets in this scenario.

Share prices may rise very gradually for the rest of the teens as long as tepid 2-3% growth persists.

After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 100,000 by 2030.

If I’m wrong, it will hit 200,000 instead.

Emerging stock markets (EEM) with much higher growth rates do far better.

This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well.

The 100-year supply of natural gas (UNG) we have recently discovered through the new “fracking” technology will finally make it to end users, replacing coal (KOL) and oil (USO).

Fracking applied to oilfields is also unlocking vast new supplies.

Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC’s share of global reserves is collapsing.

This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars. 

Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five-year low.

Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation by 2020.

I now have an all-electric garage with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow.

The net result of all of this is lower energy prices for everyone.

It will also flip the US from a net importer to an exporter of energy with hugely positive implications for America’s balance of payments.

Eliminating our largest import and adding an important export is very dollar-bullish for the long term.

That sets up a multiyear short for the world’s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.

Accelerating technology will bring another continuing positive. Of course, it’s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos.

But at the enterprise level, this is enabling speedy improvements in productivity that is filtering down to every business in the US, lower costs everywhere.

This is why corporate earnings have been outperforming the economy as a whole by a large margin.

Profit margins are at an all-time high.

Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development.

When the winners emerge, they will have a big cross-leveraged effect on economy.

New health care breakthroughs will make serious disease a thing of the past which are also being spearheaded in the San Francisco Bay area.

This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented.

It raised $3 billion through a bond issue to fund its own research even though it couldn’t afford it.

I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years, they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday.

What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver’s seat on these innovations? The USA.

There is a political element to the new Golden Age as well. Gridlock in Washington can’t last forever. Eventually, one side or another will prevail with a clear majority.

This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for.

That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don’t need the maximum $30,156 annual supplement. Nor do I.

The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cut defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.

I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up.

A Pax Americana would ensue.

That means China will have to defend its own oil supply, instead of relying on us to do it for them for free. That’s why they have recently bought a second used aircraft carrier. The Middle East is now their headache.

The national debt then comes under control, and we don’t end up like Greece.

The long-awaited Treasury bond (TLT) crash never happens.

The reality is that the global economy is already spinning off profits faster than it can find places to invest them, so the money ends up in bonds instead.

Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won’t kick in for another decade.

But some individual industries and companies will start to discount this rosy scenario now.

Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.


Dow Average 1900-2015


Another American Golden Age is Coming