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The Market Outlook for the Week Ahead, or Unicorns and Candy Cane

I have to tell you that flip-flopping from extreme optimism to extreme pessimism and back is a trader’s dream come true. Volatility is our bread and butter.

Long term followers know that when volatility is low, I struggle to make 1% or 2% a month. When it is high, I make 10% to 20%, as I have for two of the last three months.

That is what the month of October has delivered so far.

To see how well this works, the S&P 500 is dead unchanged so far this month, while the Mad Hedge Fund Trader alert service is up a gangbuster 10% and we are now 70% in cash.

While the market is unchanged in two years, risk has been continuously rising. That's because year on year earnings growth has fallen from 26% to zero. That means with an unchanged index, stocks are 26% more expensive.

Entire chunks of the market have been in a bear market since 2017, including industrials, autos, energy, and retailers. US Steel (X), which the president’s tariffs were supposed to rescue, has crashed 80% since the beginning of 2018.

The great irony here is that while the Dow Average is just short of an all-time high, all of the good short positions have already been exhausted. In short, there is nothing to do.

So, the wise thing to do here is to use the 1,200-point rally since Thursday to raise cash you can put to work during the next round of disappointment, which always comes. If we do forge to new highs, they will be incremental ones at best. That’s when you let your passive indexing friends pick up the next bar tab, who unintentionally caught the move.

In the meantime, we will be bracing ourselves for the big bank earnings due out this week which are supposed to be dismal at best. JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) are out on Tuesday and Bank of America (BAC) publishes on Wednesday.

That’s when we find out how much of this move has been about unicorns and candy canes, and how much is real.

Trump demoed his Own trade talks, creating a technology blacklist and banning US pension investment into the Middle Kingdom. He also hints he’ll take a small deal rather than a big one. Great for American farmers but leaves intellectual property and forced joint ventures on the table, throwing the California economy under the bus. I knew it would end this way. It’s very market negative. Without a trade deal, there is no way to avoid a US recession in 2020.

The Inverted Yield Curve is flashing “recession.” The three-month Treasury yield has been above the 10-year bond yield since May, and that always says a downturn is coming. The time to batten down the hatches is now.

US Producer Prices plunged in September, down 0.3%, the worst since January. It’s another recession indicator but also pushes the Fed to lower rates further.

Inflation was Zero in September, with the Consumer Price Index up 1.8% YOY. Slowing economy due to the trade war gets the blame, but I think that accelerating technology gets the bigger blame.

New Job Openings hit an 18-month low, down 123,000 to 7.05 million in August, as employers pull back in anticipation of the coming recession. Trade war gets the blame. The smart people don’t hire ahead of a recession.

FedEx (FDX) is dead money, says a Bernstein analyst, citing failing domestic and international sales. No pulling any punches, he said “The bull thesis has been shredded.” Not what you want to hear from this classic recession leading indicator. Nobody ships anything during a slowdown.

Loss of SALT Deductions cost you $1 trillion, or about 4% per home, according to an analysis by Standard & Poor’s. Quite simply, losing the ability to deduct state and local tax deductions creates a higher after-tax cost of carry that reduces your asset value. If you bought a home in 2017 you lost half of your equity almost immediately. The east and west coast were especially hard hit.

Fed to expand balance sheet to deal with the short-term repo funding crisis, which periodically has been driving overnight interest rates up to an incredible 5%. Massive government borrowing is starting to break the existing financial system. What they’re really doing is trying to head off to the next recession.

The Fed September minutes came out, and traders seem to be expecting more rate cuts than the Fed is. Trade is still the overriding concern. The next meeting is October 29-30. It could all end in tears.

Apple (AAPL) raised iPhone 11 Production by 10%, to 8 million more units, according Asian parts suppliers. Great news for its $1,089 top priced product ahead of the Christmas rush. It turns out that an Apple app is helping Hong Kong protesters manage demonstrations. I’m keeping my long, letting the shares run to a new all-time high. Buy (AAPL) on the dips.

The Mad Hedge Trader Alert Service has blasted through to yet another new all-time high. My Global Trading Dispatch reached new apex of +347.48% and my year-to-date accelerated to +47.24%. The tricky and volatile month of October started out with a roar +9.82%. My ten-year average annualized profit bobbed up to +35.64%.

Some 26 out of the last 27 trade alerts have made money, a success rate of 94%! Underpromise and overdeliver, that's the business I have been in all my life. It works. This is rapidly turning into the best year of the decade for me. It is all the result of me writing three newsletters a day.

I used the recession fear-induced selloff after October 1 to pile on a large aggressive short-dated portfolio which I will run into expiration. I am 60% long with the (SPY), (IWM), (USO), (WMT), (AAPL), and (GOOGL). I am 10% short with one position in the (IWM) giving me a net risk position of 50% long. All of them are working.

The coming week is pretty non-eventful of the data front. Maybe the stock market will be non-eventful as well.

On Monday, October 14, nothing of note is published.

On Tuesday, October 15 at 8:30 AM, the New York Empire State Manufacturing Index is released. JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) kick off the Q3 earnings season with reports.

On Wednesday, October 16, at 8:30 AM, we learn the September Retail Sales. Bank of America (BAC) and CSX Corp. (CSX) report.

On Thursday, October 17 at 8:30 AM, the Housing Starts for September are out. Morgan Stanley (MS) reports.

On Friday, October 18 at 8:30 AM, the Baker Hughes Rig Count is released at 2:00 PM. Schlumberger (SLB), American Express (AXP), and Coca-Cola (KO) report.

As for me, I’ll be going to Costco to restock the fridge after last week’s two-day voluntary power outage by PG&E. Expecting Armageddon, I finished off all the Jack Daniels and chocolate in the house. We managed to eat all of our frozen burritos, pork chops, steaks, and ice cream in a mere 48 hours. But that’s what happens when you have two teenagers.

Hopefully, it will rain soon for the first time in six months bringing these outages to an end.

Good luck and good trading.

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

October 7, 2019

Diary, Newsletter, Summary

Global Market Comments
October 7, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or WILL HE OR WON’T HE?)
(INDU), (USO), (TM), (SCHW), (AMTD), (ETFC), (SPY), (IWM), (USO), (WMT), (AAPL), (GOOGL), (SPY), (C)

The Market Outlook for the Week Ahead, or Will He, or Won’t He?

Diary, Newsletter

Once again, the markets are playing out like a cheap Saturday afternoon matinee. We are sitting on the edge of our seats wondering if our hero will triumph or perish.

The same can be said about financial markets this week. Will a trade deal finally get inked and prompt the Dow Average to soar 2,000 points? Or will they fail once again, delivering a 2,000-point swan dive?

I vote for the latter, then the former.

Still, I saw this rally coming a mile off as the Trump put option kicked in big time. That's why I piled on an aggressive 60% long position right at last week’s low. Carpe Diem. Seize the Day. Only the bold are rewarded.

Or as Britain’s SAS would say, “Who dares, wins.”

It takes a lot of cajones to trade a market that hasn’t moved in two years, let alone take in a 55% profit during that time. But you didn’t hire me to sit on my hands, play scared, and catch up on my Shakespeare.

I think markets will eventually hit new all-time highs sometime this year. The game is to see how low you can get in before that happens without getting your head handed to you first.

Last week saw seriously dueling narratives. The economic data couldn’t be worse, pointing firmly towards a recession. But the administration went into full blown “jawbone” mode, talking up the rosy prospects of an imminent China trade deal at every turn.

This was all against a Ukraine scandal that reeled wildly out of control by the day. Is there a country that Trump DIDN’T ask for assistance in his reelection campaign? Now we know why the president was at the United Nations last week.

The September Nonfarm Payroll Report came in at a weakish 136,000, with the Headline Unemployment rate at 3.5%, a new 50-year low.

Average hourly earnings fell. Apparently, it is easy to get a job but impossible to get a pay raise. July and August were revised up by 45,000 jobs.

Healthcare was up by 39,000 and Professional and Business Services 34,000. Manufacturing fell by 2,000 and retail by 11,0000. The U-6 “discouraged worker” long term unemployment rate is at 6.9%.

The US Manufacturing Purchasing Managers Index collapsed in August from 49.7 to 47.9, triggering a 400-point dive in the Dow average. This is the worst report since 2009. Manufacturing, some 11% of the US economy, is clearly in recession, thanks to the trade war-induced loss of foreign markets. A strong dollar that overprices our goods doesn’t help either.

The Services PMI Hit a three-year low, from 53.1 to 50.4, with almost all economic data points now shouting “recession.” The only question is whether it will be shallow or deep. I vote for the former.

Consumer Spending was flat in August. That’s a big problem since the average Joe is now the sole factor driving the economy. Everything else is pulling back. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1% last month as an increase in outlays on recreational goods and motor vehicles was offset by a decrease in spending at restaurants and hotels.

The Transports, a classic leading sector for the market, have been delivering horrific price action this year giving up all of its gains relative to the S&P 500 since the 2009 crash.

Oil (USO) got crushed on recession fears, down a stunning 19.68% in three weeks. The global supply glut continues. Over production and fading demand is not a great formula for prices.

Toyota Auto Sales (TM) cratered by 16.5% in September, to 169,356 vehicles in another pre-recession indicator. It’s the worst month since January during a normally strong time of the year. The deals out there now are incredible.

Online Brokerage stocks were demolished on the Charles Schwab (SCHW) move to cut brokerage fees to zero. TD Ameritrade (AMTD) followed the next day and was spanked for 23%, and E*TRADE (ETFC) punched for 17. These are cataclysmic one0-day stock moves and signal the end of traditional stock brokerage.

The Mad Hedge Trader Alert Service has blasted through to yet another new all-time high. My Global Trading Dispatch reached new apex of 341.86% and my year-to-date accelerated to +41.72%. The tricky and volatile month of October started out with a roar +5.40%. My ten-year average annualized profit bobbed up to +35.06%.

Some 26 out of the last 27 trade alerts have made money, a success rate of 96.29%! Under promise and over deliver, that's the business I have been in all my life. It works.

I used the recession-induced selloff since October 1 to pile on a large aggressive short dated portfolio. I am 60% long with the (SPY), (IWM), (USO), (WMT), (AAPL), and (GOOGL). I am 20% short with positions in the (SPY) and (C), giving me a net risk position of 40% long.

The coming week is all about the September jobs reports. It seems like we just went through those.

On Monday, October 7 at 9:00 AM, the US Consumer Credit figures for August are out.

On Tuesday, October 8 at 6:00 AM, the NFIB Business Optimism Index is released.

On Wednesday, October 9, at 2:00 PM, we learn the Fed FOMC Minutes from the September meeting.

On Thursday, October 10 at 8:30 AM, the US Inflation Rate is published. US-China trade talks may, or may not resume.

On Friday, October 11 at 8:30 AM, the University of Michigan Consumer Sentiment for October is announced.

The Baker Hughes Rig Count is released at 2:00 PM.

As for me, I’m still recovering from running a swimming merit badge class for 60 kids last weekend. Some who showed up couldn’t swim, while others arrived with no swim suits, prompting a quick foray into the lost and found.

One kid jumped in and went straight to the bottom, prompting an urgent rescue. Another was floundering after 15 yards. When I pulled him out and sent him to the dressing room, he started crying, saying his dad would be mad. I replied, “Your dad will be madder if you drown.”

I never felt so needed in my life.

Good luck and good trading.

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

October 4, 2019

Diary, Newsletter, Summary

Global Market Comments
October 4, 2019
Fiat Lux

Featured Trade:

(LAST CHANCE TO BUY THE NEW MAD HEDGE BIOTECH AND HEALTH CARE LETTER AT THE FOUNDERS PRICE)
(SEPTEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (VIX), (USO), (ROKU), (TLT), (BA), (INDU),
(GM), (FXI), (FB), (SCHW), (IWM), (AMTD)

October 2 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 2 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Would you do the S&P 500 (SPY) bull call spread if you didn’t have time to enter the short leg yesterday?

A: I would, because once again, once the Volatility Index (VIX) gets over $20, picking these call spreads is like shooting fish in a barrel. I think the long position I put on the (SPY) this morning is so far in the money that you will be sufficiently safe on a 12-day and really a 2-week view. There is just too much cash on the sidelines and interest rates are too low to see a major December 2018 type crash from here.

Q: I could not come out of the United States Oil Fund (USO) short position—should I keep it to expiration?

A: Yes, at this point we’re so close to expiration and so far in the money that you’d need a 30% move in oil to lose money on this. So, run it into expiration and avoid the execution costs.

Q: How do you see TD Ameritrade (AMTD) short term?

A: Well, it was down approximately 25% yesterday, so I would buy some cheap calls and go way out of the money so as not to risk much capital—on the assumption that maybe next week into the China trade talks, we get some kind of rally in the market and see a dramatic rise. 25% does seem extreme for a one-day move just because one broker was cutting his commissions to zero. By the way, I have been predicting that rates would go to zero for something like 30 years; that’s one of the reasons I got out of the business in 1989.

Q: Would you consider buying Roku (ROKU) at the present level?

A: Down 1/3 from the top is very tempting; however, I’m not in a rush to buy anything here that doesn’t have a large hedge on it. What you might consider doing on Roku is something like a $60-$70 or $70-$80 long-dated call spread. That is hedged, and it’s also lower risk. Sure, it won’t make as much money as an outright call option but at least you won’t be catching a falling knife.

Q: Will we see a yearend rally in the stocks?

A: Probably, yes. I think this quarter will clear out all the nervous money for the short term, and once we find a true bottom, we might find a 5-10% rally by yearend—and I’m going to try to be positioned to catch just that.

Q: At which price level do you go 100% long position?

A: If we somehow get to last December lows, that’s where you add the 100% long position. And there is a chance, while unlikely, that we get down to about 22,000 in the Dow Average (INDU), and that’s where you bet the ranch. Coming down from 29,000 to 22,000, you’re essentially discounting an entire recession with that kind of pullback. But we’re going to try to trade this thing shorter term; the market has so far been rewarding us to do so.

Q: The United States Treasury Bond Fund (TLT) looks like it’s about to break out. How do you see buying for the November $145 calls targeting $148?

A: We are actually somewhat in the middle of the range for the (TLT), so it’s a bit late to chase. We did play from the long side from the high $130s and took a quick profit on that, but now is a little bit late to play on the long side. We go for the low-risk, high-return trades, and $145 is a bit of a high-risk trade at this point. I would look to sell the next spike in the (TLT) rather than buy the middle where we are now.

Q: Will Boeing (BA) get recertified this year?

A: Probably, yes—now that we have an actual pilot as the head of the FAA—and that will be a great play. But if the entire economy is falling into a recession, nothing is a good play and you want to go into cash if you can’t do shorts. That would give us a chance to buy Boeing back closer to the $320 level, which was the great entry point in August.

Q: Do you expect General Motors (GM) shares to bounce if they settle with the union on their strike?

A: Maybe for a day or two, but that’s it. The whole car industry is in recession already. The union picked the worst time to strike because GM has a very high 45-day inventory of unsold cars which they would love to get rid of.

Q: What are the chances of a deal with China (FXI)?

A: Zero. How hard do the Chinese really want to work to get Trump reelected? My guess is not at all. We may get the announcement of a fake deal that resumes Chinese agricultural purchases, but no actual substance on intellectual property theft or changing any Chinese laws.

Q: Will they impeach Trump?

A: Impeach yes, convict no; and it’s going to take about 6 months, which will be a cloud hanging over the market. The market’s dropped about 1,000 points since the impeachment inquiry has started.

Q: What about the dollar?

A: I'm staying out of the dollar due to too many conflicting indicators and too much contra-historical action going on. The dollar seems high to me, but I’ve been wrong all year.

Q: E*Trade (ETFC) just announced free stock trading—what are your thoughts?

A: All online brokers now pretty much have to announce free trading in order to stay in business, otherwise you end up with the dumbest customers. It’s bad for the industry, but it’s good for you. The fact that all of these companies are moving to zero shows how meaningless your commissions became to them because so much more money was being made on selling your order flow to high frequency traders or selling your data to people like Facebook (FB).

Q: What’s your take on the Canadian dollar (FXC)?

A: It will go nowhere to weak, as long as the US is on a very slow interest rate-cutting program. The second Canada starts raising rates or we start cutting more aggressively is when you want to buy the Loonie.

Q: Fast fashion retailer Forever 21 went bankrupt—is it too late to short the mall stocks?

A: No but be very disciplined; only short the rallies. Last week would have been a good chance to get shorts off in malls and retailers. You really need to sell into rallies because the further these things go down, the more volatility increases as the prices go low. Obviously, a $1 move on a $30 stock is only 3% but a $1 move on a $10 stock is 10%. If you’re the wrong way on that, it can cost you a lot of money, even though the thing’s going to zero.

Q: Comments on defense stocks such as Raytheon (RTN)?

A: This is a highly political sector. If Trump gets reelected, expect an expansion of defense spending and overseas sales to Saudi Arabia, which would be good for defense. If he doesn’t get reelected, that would be bad for defense because it would get cut, and sales to places like Saudi Arabia would get cut off. I stay out of them myself because it’s essentially a political play and we’re very late in the cycle.

Q: Mark Zuckerberg says presidential candidate Elizabeth Warren’s proposal is an existential threat. Do you agree with him and her policies? Will they crash the economy?

A: They would be bad for the economy; however, I think it’s highly unlikely Warren gets elected. The country’s looking for a moderate president, not a radical one, and she does not fit that description. If you did break up the Tech companies, they’d be worth more individually than they are in these great monolithic companies.

Q: Does the Russell 2000 (IWM) call spread look in danger to you?

A: It’s a higher risk trade, however we are hedged with that short S&P 500, so we can hang onto the long (IWM) position hedging it with your short S&P 500 (SPY) trade reducing your risk.

Q: What do you have to say about shrinking buybacks?

A: It’s another recession indicator, for one thing. Corporate buybacks have been driving the stock market for the last 2 years at around a trillion dollars a year. They have suddenly started to decline. Why is that happening? Because companies think they can buy their stocks back at lower levels. If companies don't want to buy their stocks, you shouldn’t either.

Q: When is the time for Long Term Equity Anticipation Securities (LEAPS)?

A: We are not in LEAPS territory yet. Those are long term, more than one-year option plays. You really want to get those at the once-a-year horrendous selloffs like the ones in December and February. We’re not at that point yet, but when we get there, we’ll start pumping out trade alerts for LEAPS for tech stocks like crazy. Start doing your research and picking your names, start playing around with strikes, and then one day, the prices will be so out of whack it will be the perfect opportunity to go in and buy your LEAPS.

Q: Was it a Black Monday for brokerages when Charles Schwab (SCHW) cut their commission to zero?

A: Yes, but it’s been one of the most predicted Black Mondays in history.

Q: Will the Fed save the market?

A: I would think they have no ability to save the market because they really can’t cut interest rates any more than they already have. There really are no companies that need to borrow money right now, and any that does you don’t want to touch with a ten-foot pole. The economy is not starved for cash right now—we have a cash glut all over the world—therefore, lowering interest rates will have zero impact on the economy, but it does eliminate the most important tool in dealing with future recessions. You go into a recession with interest rates at zero, then you’re really looking at a great depression because there’s no way to get out of it. It’s the situation Europe and Japan have been in for years.

Good Luck and Good Trading
John Thomas
CEO $ Publisher
The Diary of a Mad Hedge Fund Trader

September 6, 2019

Diary, Newsletter, Summary

Global Market Comments
September 6, 2019
Fiat Lux

Featured Trade:

(SEPTEMBER 4 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (FXY), (FXB), (USO), (XLE), (TLT), (TBT),
(FB), (AMZN), (MSFT), (DIS), (WMT), (IWM), (TSLA), (ROKU), (UBER), (LYFT), (SLV), (SIL)

September 4 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 4 Global Strategy Webinar broadcast from Silicon Valley with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: If Trump figures out the trade war will lose him the election; will he stop it?

A: Yes, and that is a risk that hovers over all short positions in the market at all times these days because stocks will soar (INDU) when the trade war ends. We now have 18 months of share appreciation that has been frustrated or deferred by the dispute with China. The problem is that the US economy is already sliding into recession and it may already be too late to turn it around.

Q: Do you see the British pound (FXB) dropping more on the Brexit turmoil? Do you think the UK will stay in the EU?

A: If the UK ends Brexit through an election, then the pound should recover from $1.19 all the way back up to $1.65 where it was before Brexit happened four years ago. If that does happen, it will be one of the biggest trades of the year anywhere in the world, going long the British pound. This is how I always anticipated it would end. I was in England for the Brexit vote and I was convinced that if they held the election the next day, it would have lost. The only reason it won was because nobody thought it would— a lot like our own 2016 election. That brings Britain back into the EEC, saves Europe, and has a positive impact on markets globally. So, this is a big deal. Not to do so would be economic suicide for Britain, and I think wiser heads will prevail.

Q: Do you think it’s a good idea for Saudi ARAMCO to go public in Japan as reports suggest?

A: When the Arabs want to get out of the oil business (USO), (XLE), you want to also. That’s what the sale of ARAMCO is all about. They’re going to get a $1 trillion or more valuation, raising $100 billion in cash. And guess who the biggest investors in alternative energy in California are? It’s Saudi Arabia. They see no future in oil, nor should you. This is why we’ve been negative on the sector all year. By the way, bankruptcies by frackers in the U.S. are at an all-time high, another indicator that low oil prices can’t be tolerated by the US industry for long.

Q: Is it time to buy the ProShares Ultra Short 20 year Plus Treasury Bond Fund (TBT)?

A: No, not yet; I think we’re going to break 1.33% — the all-time low yield for the (TLT) will probably be somewhere just below 1.00%. We probably won’t go to absolute zero because we still have a growing economy. The countries that already have negative interest rates have shrinking economies or are already in recession, like Germany or Great Britain can justify zero rates.

Q: Are you going to run all your existing positions into expiration?

A: I’m going to try to—it’s only 12 days to expiration, and we get to keep the full profit if we do. As long as the market is dead in the middle here, there are no other positions to put on, no extreme low to buy into or extreme high to sell into. It’s a question of letting this sort of nowhere-trend play out, but also there's nothing else to buy, so there is no need to raise cash. So, we’re 60% invested now and we’re going to try running as many of those into expiration as we can. Looks like all the long technology positions are safe (FB), (AMZN), (MSFT), (DIS). The only thing we’re pressing here are the shorts in Walmart (WMT) and Russell 2000 (IWM).

Q: Do you think it’s a good idea for Tesla (TSLA) to build another Gigafactory in Shanghai, China during a trade war? Will this blow up in Elon’s face?

A: I don’t think so because the Chinese are desperate for the Tesla technology and they just gave Tesla an exemption on import duties on all parts that need to go there to build the cars. So, that’s a very positive development for Tesla and I believe the stock is up about $10 since that news came out.

Q: Will Roku (ROKU) ever pull back? Would you buy it up here?

A: No, we recommended this thing last year at $40; it’s now up to $165, and up here it’s just wildly overbought, in chase territory. Of course, the reason that’s happening is that the big concern last year was Amazon wiping out Roku, yet they ultimately ended up partnering with Roku, and that’s worth about a 400% gain in the stock. You know the second you get into this, it’s over. There are just too many better fish to fry in the technology area.

Q: What happens if our existing Russell 2000 (IWM) September 2019 $153-$156 in-the-money vertical BEAR PUT spread Russell 2000 position closes between $156 and $153?

A: You lose money. You will get the Russell 2000 shares put to you, or sold to you at $153.00, which means you now own them, and you’ll get a big margin call from your broker for owning the extra shares. If ever it looks like we’re getting close to the strike price going into expiration, I come out precisely because of that risk. You don’t want random chance dictating whether you’re going to make money in your position or not going into expiration. If you’re worried about that, I would get out now and you can still come out with a nice profit. Or, you can always wait for another down day tomorrow.

Q: Is it time to get super aggressive shorting Lyft (LYFT) or Uber (UBER) when they openly admit that they won’t make a profit anytime in the near future?

A: The time to short Uber (UBER) and Lyft was at the IPO when the shares became available to sell. Down here I don’t really want to do very much. It’s late in the game and Uber’s down about one third from its IPO price. We begged people to stay away from this. It’s another example where they waited for the company to go ex-growth before it went public, but it didn’t leave anything for the public. It was a very badly mishandled IPO—it’s now at $31 against a $45 IPO price and was at a new all-time low just 2 days ago. You knew when they offered the drivers shares, the thing was in trouble. Sometime this will be a buy, but not yet. Go take a long nap first.

Q: Is the fact that rich people are hoarding cash a good indicator that a recession is approaching?

A: Yes, absolutely. Bonds yielding 1.45% is also an indication that the wealthy are hoarding cash from other investment and parking it in US treasury bonds. I went to the Pebble Beach Concourse d’ Elegance vintage car show a few weeks ago and all of the $10 million plus cars didn’t sell, only those priced below $100,000. That is always a good indicator that the wealthy are bailing ahead of a recession. If you can’t get a premium price for your vintage Ferrari, trouble is coming.

Q: Argentina just implemented currency controls; is this the start of a rolling currency crisis among emerging nations?

A: No, I believe the problems are unique to Argentina. They’ve adopted what is known as Modern Momentary Theory—i.e. borrowing and printing money like crazy. Unfortunately, this is unsustainable and results in a devalued currency, general instability, and the eventual hanging of their leaders from the nearest lamppost. This is exactly the same monetary policy that the Trump administration has been pursuing since he came into office. Eventually, it will lead to tears, ours, not his.

Q: Is the new all-electric Porsche Taycan a threat to Tesla?

A: No, it’s not. Their cheapest car is $150,000 and it gets one third less range than Tesla does. It’s really aimed at Porsche fanatics, and I doubt they will get outside their core market. In the meantime, Tesla has taken over the middle part of the electric market with the Model 3 at $37,000 a car. That’s where the money is, and Porsche will never get there.

Q: How will the US pull out of recession if the interest rates are at or below zero?

A: It won’t—that’s what a lot of economists are concerned about these days. With interest rates below zero, the Fed has lost its primary means to stimulate the economy. The only thing left to do is use creative means like feeding the economy with currency, which Europe has been doing for 10 years, and Japan for 30, with no results. That’s another reason to not allow rates to get back to zero—so we have tools to use when we go into a recession 12-24 months from now.

Q: What’s the best way to buy silver?

A: The ETF iShares Silver Trust (SLV) and, if you want to be aggressive, the silver miners with the Global X Silver Miners ETF (SIL).

Q: Have global central banks ruined the western economic system as we know it for future generations?

A: They may have—mostly by printing too much money in the last 10 years in order to get us out of recession. This hasn’t really worked for Europe or Japan, mind you, though who knows how much worse off they would be if they hadn’t. What it did do here is head off a Great Depression. If we go back to money printing in a big way, however, and it doesn’t work, we will not have prevented a Great Depression so much as pushed it back 10 or 15 years. That’s the great debate ongoing among economists, and it will eventually be settled by the marketplace.

Five Stocks to Buy at the Market Bottom

Diary, Newsletter

With the Dow Average down 2,000 points in four weeks, you are being given a second bite of the apple before the yearend tech-led rally begins.

So, it is with great satisfaction that I am rewriting Arthur Henry’s Mad Hedge Technology Letter’s list of recommendations.

By the way, if you want subscribe to Arthur’s groundbreaking, cutting edge service, please click here at https://hi290.infusionsoft.com/app/orderForms/tl-sub

It’s the best read on technology investing in the entire market.

You don’t want to catch a falling knife, but at the same time, diligently prepare yourself to buy the best discounts of the year.

The China trade war has triggered a tsunami wave of selling, tearing apart the tech sector with a vicious profit-taking few trading days.

No doubt that asset managers are frantically locking in profits for the rest of the year and protecting ebullient performance from a first quarter to remember.

This week shouldn’t deter investors from picking up bargains that were non-existent since December because the bulk of the highest quality tech names churned higher with lurching momentum.

Here are the names of five of the best stocks to slip into your portfolio in no particular order once the madness subsides.

Apple

Steve Job’s creation is weathering the gale-fore storm quite well. Apple has been on a tear reconfirming its smooth pivot to a software services-tilted tech company. The timing is perfect as China has enhanced their smartphone technology by leaps and bounds.

Even though China cannot produce the top-notch quality phones that Apple can, they have caught up to the point where local Chinese are reasonably content with its functionality.

That hasn’t stopped Apple from vigorously growing revenue in greater China 20% YOY during a feverishly testy political climate that has their supply chain in Beijing’s crosshairs.

The pivot is picking up steam and Apple’s revenue will morph into a software company with software and services eventually contributing 25% to total revenue.

They aren’t just an iPhone company anymore. Apple has led the charge with stock buybacks and will gobble up a total of $150 billion in shares by the end of 2019. Get into this stock while you can as entry points are few and far between.

Amazon (AMZN)

This is the best company in America hands down and commands 5% of total American retail sales or 49% of American e-commerce sales.

It became the second company to eclipse a market capitalization of over $1 trillion. Its Amazon Web Services (AWS) cloud business pioneered the cloud industry and had an almost 10-year head start to craft it into its cash cow. Amazon has branched off into many other businesses since then oozing innovation and is a one-stop wrecking ball.

The newest direction is the smart home where they seek to place every single smart product around the Amazon Echo, the smart speaker sitting nicely inside your house. A smart doorbell was the first step along with recently investing in a prefab house start-up aimed at building smart homes.

Microsoft (MSFT)

The optics in today look utterly different from when Bill Gates was roaming around the corridors in the Redmond, Washington headquarter, and that is a good thing in 2019.

Current CEO Satya Nadella has turned this former legacy company into the 2^nd largest cloud competitor to Amazon, and then some.

Microsoft Azure is rapidly catching up to Amazon in the cloud space because of the Amazon-effect working in reverse. Companies don’t want to store proprietary data to Amazon’s server farm when they could possible destroy them down the road. Microsoft is mainly a software company and gained the trust of many big companies especially retailers.

Microsoft is also on the vanguard of the gaming industry taking advantage of the young generation’s fear of outside activity. Xbox-related revenue is up 36% YOY, and its gaming division is a $10.3 billion per year business.

Microsoft Azure grew 87% YOY last quarter. The previous quarter saw Azure rocket by 98%. Shares are cheaper than Amazon and almost as potent.

Square (SQ)

CEO Jack Dorsey is doing everything right at this fin-tech company blazing a trail right to the doorsteps of the traditional banks.

The various businesses they have on offer makes me think of Amazon’s portfolio because of the supreme diversity. The Cash App is a peer-to-peer money transfer program that cohabits with a bitcoin-investing function on the same smartphone app.

Square has targeted the smaller businesses first and is a godsend for these entrepreneurs who lack immense capital to create a financial and payment infrastructure. Not only do they provide the physical payment systems for restaurant chains, they also offer payroll services and other small loans.

The pipeline of innovation is strong with upper management mentioning they are considering stock trading products and other bank-like products. Wall Street bigwigs must be shaking in their boots.

The recently departed CFO Sarah Friar triggered a 10% collapse in share price on top of the market meltdown. The weakness will certainly be temporary, especially if they keep doubling their revenue every two years like they have been doing.

Roku (ROKU)

Benefitting from the broad-based migration from cable TV to online streaming and cord-cutting, Roku is perfectly placed to delectably harvest the spoils.

This uber-growth company offers an over-the-top (OTT) streaming platform along with the necessary hardware and picks up revenue by selling digital ads.

Founder and CEO Anthony Woods owns 21 million shares of his brainchild and insistently notes that he has no interest in selling his company to a Netflix or Apple.

Roku’s active accounts mushroomed 46% to 22 million in the second quarter. Viewers are reaffirming the obsession with on-demand online streaming content with hours streamed on the platform increasing 58% to 5.5 billion.

The Roku platform can be bought for just $30 and is easy to set up. Roku enjoys the lead in the over-the-top (OTT) streaming device industry controlling 37% of the market share leading Amazon’s Fire Stick at 28%.

The runway is long as (OTT) boxes nestle cozily in only 40% of American homes with broadband, up from a paltry 6% in 2010.

They are consistently absent from the backbiting and jawboning the FANGs consistently find themselves in partly because they do not create original content and they are not an offshoot from a larger parent tech firm.

This growth stock experiences the same type of volatility as Square.

Be patient and wait for 5-7% drops to pick up some shares.

You Have to Know Which Flowers to Pick

August 26, 2019

Diary, Newsletter, Summary

Global Market Comments
August 26, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TWEET THAT SANK A THOUSAND SHIPS),

(SPY), (TLT), (GOOGL), (FB), (DIS), MSFT), (WMT), (IWM)

The Market Outlook for the Week Ahead, or The Tweet that Sank a Thousand Ships

Diary, Newsletter

I always wondered who the enemy was. Now, I know.

Not only is Fed governor Jerome Powell responsible for the upcoming recession, I also heard he fixed the 1918 World Series where the Chicago White Sox deliberately lost.

And come to think of it, Jack the Ripper and D.B Cooper were never caught either. If Tweets are to be believed, the Fed now needs to seek guidance from the president before any subsequent policy decision.

It all reminds me of the last days of the Third Reich when Adolph Hitler was ordering into action divisions that no longer existed.

And I love all of it.

An 850 point top to bottom swan dive in the Dow Average vaporized all my short positions, which I had put on days ago for just this eventuality. It also allowed me to get back into Microsoft (MSFT) down $5, which I have been struggling to get back into for months.

My only miss of the month has been in Gold (GLD), whose move continues to be so parabolic that I haven’t been able to get you, or me, into it.

No doubt the administration will respond with another charm offensive, as this did this week, and ignite another ferocious short-covering rally.

The harsh truth is that confidence is eroding by the day. And the escalating talk of a recession can, in itself, cause a recession. So much depends on belief when share price earnings multiples are trading at a lofty 17X. But it is all looking increasingly like a little boy trying to head off a flood by holding his finger in a hole in a dike.

There’s no more waiting to see if the trade war escalates again on September 1. We already have the answer. It now appears we have instant escalation all the time with every Tweet. It’s not exactly what I want to bet my retirement fund on.

I have been getting questions as to why I have been adding long positions with the outlook so grim. For a start, these positions are all triply hedged.

I’m long a call against a short call with an identical maturity. I have low beta long positions hedged against high beta short positions. And finally, I don’t think we can break down below the 200-day moving average in the major indexes until the September 20 Fed meeting when they FAIL to cut interest rates again because the data isn’t there yet.

The net, net, net of all of this is that my portfolio can take a 1,000-point hit in the Dow Average and its no big deal.

And don’t forget. Ultra-low interest rates will put a higher floor under the market than we have seen in past selloffs.

I pray the insanity keeps up (did I hear a reference to the Messiah the other day?) because it is allowing me to ship out Trade Alerts as fast as I can write them.

Stocks rose briefly on German stimulus prospects. It's an idea imported from America, heavy borrowing and massive deficit spending to float the economy. It’s just what the world needs, more freshly printed money, like the last $17 trillion worked so well. It’s all confirmation that Europe is already in recession.

The US now has the world’s highest interest rates, at 3.60% for 30-year fixed-rate loans. Only the US offers loans of this duration, thanks to heavy government subsidies through Fannie Mae and Freddie Mac.

Floating rate loans in France are 1.39%, in Germany are 1.0%, Japan at 0.65%. In Denmark, banks will lend at a negative -0.50%. Yes, they will pay you to live in your house. But when you’re borrowing at -0.90% you can do that. Only China has higher interest rates, with an overnight at 4.60%. The irony runs deep.

Unsurprisingly, the Congressional Budget Office cut 0.3% off of its 2020 growth forecast and the US budget deficit will rise to a ruinous $1 trillion two years sooner than expected. Fading business investment and weakening consumer spending will be the problems. The trade war is also a drag. It’s funny how no one wants to spend in front of a recession.

“Mid Cycle Adjustment” is how the Fed described the last interest rates cut in minutes released on Wednesday. It makes further cuts less likely. So does a stock market trading 5% below all-time highs. They also mention the cut as an “insurance policy” not actually justified by the current economic data. Three weeks ago, the fed cut rates for the first time in a decade.

The Mad Hedge Trader Alert Service is posting its best month in two years. Some 22 of the last 23 round trips have been profitable, generating one of the biggest performance jumps in our 12-year history.

My Global Trading Dispatch has hit a new all-time high of 334.61% and my year-to-date shot up to +34.47%. My ten-year average annualized profit bobbed up to +34.62%.

I have coined a blockbuster 16.14% so far in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.

As long as the Volatility Index (VIX) stays above $20, deep-in-the-money options spreads are offering free money. I am now 80% invested, 60% long big tech and 20% short, with 20% in cash. It rarely gets this easy.

The coming week will be a snore on the data front. Believe it or not, it could be quiet, as we grind through the last week of the summer.

On Monday, August 26 at 8:30 AM, US Durable Goods for July are out.

On Tuesday, August 27 at 9:00 AM, we get a new S&P Case Shiller National Home Price Index for June

On Wednesday, August 28, at 10:30, we learn the EIA Crude Oil Stocks for the previous week.

On Thursday, August 29 at 8:30 AM, the Weekly Jobless Claims are printed. July Pending Home Sales are published at 10:00 AM.

On Friday, August 30 at 10:00 AM, the University of Michigan Consumer Sentiment is printed.

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

As for me, it will be a busy weekend with volunteer work at the Alameda Food Bank due and CPR training at the local fire department. I feel like I am getting my Eagle Scout rank all over again.

Good luck and good trading.

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

Tag Archive for: (IWM)

You Have to Know Which Flowers to Pick

Time to Bring in the Heavy Guns