At yesterday morning?s opening bell, we were greeted with the unmistakable evidence the stock market is technically breaking down.
The Dow Average has broken its three-year upward sloping trend line. Market leading sectors, like Consumer Discretionary and Financials have all put in eminently convincing ?Head and Shoulders? tops (click here). More distressingly, the head and shoulders for lead sector Technology has already broken down. Check out all the charts below.
I quickly ran my expiration P&L this morning. I figured out that if I sold all my longs for small profits (SPY), (IWM), and kept all my short positions (FXY), (T), (AA), I would be up 4.43% year to date by mid February, which in this environment is nothing less than heroic. The exception to the analysis is my sale of Linn Energy (LINE), which will be the subject of my next piece.
For more detail on why this is happening, read today?s letter, ?The Great American Rot is Ending? by clicking here).
https://www.madhedgefundtrader.com/wp-content/uploads/2015/02/Skydiver-e1422906198890.jpg253400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-02-03 01:04:522015-02-03 01:04:52The Market?s Technical Outlook is Terrible
For those of you who heeded my expert advice to buy the ProShares Ultra Short Euro ETF (EUO) last July, well done!
You are up a massive 48%! This is on a move in the underlying European currency of only 18.5%.
My browsing of the Galleria in Milan, the strolls through Spanish shopping malls, and my dickering with an assortment of dubious Greek merchants, all paid off big time. It turns out that everything I predicted for this beleaguered currency came true.
The European economy did collapse. Cantankerous governments made the problem worse by squabbling, delaying and obfuscating, as usual.
The European Central Bank finally threw in the towel and did everything they could to collapse the value of the Euro and reinvigorate their comatose economies. This they did by imitating America?s wildly successful quantitative easing, which they announced with local variations last Thursday.
And now for the good news: The best is yet to come!
Europe is now six days into a strategy of aggressive monetary easing which may take as long as five years until it delivers tangible, sustainable results. That?s how long it took for the Federal Reserve?s QE to restore satisfactory levels of confidence in the US economy.
The net net is that we have almost certainly only seen the first act of a weakening of the Euro which may last for years. A short Euro could be the trade that keeps on giving.
The ECB?s own target now is obviously parity against the greenback, which you will find predicted in my own 2015 Annual Asset Class Review released at the beginning of January (click here).
Once they hit that target, 87 cents to the Euro will become the new goal, and that could be achieved sooner than later.
However, you will not find me short the Euro up the wazoo this minute. I think we have just stumbled into a classic ?Buy the Rumor, Sell the News? situation with the Euro.
The next act will involve the ECB sitting on its hands for a year, realizing that their first pass at QE was inadequate, superficial, and flaccid, and that it is time to pull the bazooka out of their pockets once again.
This is a problem when the entire investment world is short the Euro. That paves the way for countless, rip your face off short covering rallies in the months ahead. Any smidgeon or blip of positive European economic data could spark one of these.
Trading the Euro for the past eight months has been like falling off a log. It is about to get dull, mean and brutish. So for the moment, my currency play has morphed into selling short the Japanese yen, which has its own unique set of problems.
As for the unintended consequences of the Euro crash, the Q4 earnings reports announced so far by corporate America tells the whole story.
Companies with a heavy dependence on foreign (read Euro and yen) denominated earnings are almost universally coming up short. On this list you can include Caterpillar (CAT), Procter and Gamble (PG), and Microsoft (MSFT).
Who are the winners in the strong dollar, weak Euro contest? US companies that see a high proportion of their costs denominated in flagging foreign currencies, but see their incomes arrive totally in the form of robust, virile dollars.
You may not realize it, but you are playing the global currency arbitrage game every time you go shopping. The standout names here are US retailers, which manufacture abroad virtually all of the junk they sell you here, especially in low waged China.
The stars here are Macy?s (M), Family Dollar Stores (FDO), Costco (COST), Target (TGT), and Wal-Mart (WMT).
You can see this divergence crystal clear in examining the behavior of the major stock indexes. The chart for the Guggenheim S&P 500 Equal Weight ETF (RSP), which has the greatest share of currency sensitive multinationals, looks positively dire, and may be about to put in a fatal ?Head and Shoulders? top (see the following story).
The chart for the NASDAQ (QQQ), where constituent companies have less, but still a substantial foreign currency exposure, appears to be putting in a sideways pennant formation before eventually breaking out to new highs once again.
The small cap Russell 2000, which is composed of almost entirely domestic, dollar based, ?Made in America? type companies, is by far the strongest index of the trio, and looks like it is just biding time before it blasts through to new highs.
If you are a follower of my Trade Alert Service, then you already know that I have a long position in the (IWM), which has already chipped in 2.12% to my 2015 performance.
https://www.madhedgefundtrader.com/wp-content/uploads/2015/01/John-Thomas1-e1422462857973.jpg302400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2015-01-28 11:35:022015-01-28 11:35:02The Unintended Consequences of the Euro Crash
The talking heads on TV have been working overtime speculating on where the worst move down in the stock market in three years will take us.
It all may sound like intelligent prognosticating to you.
As for me, I know they are guessing.
So I shall share with you my ten benchmark indicators that you can closely track to decide for yourself whether stocks are headed for perdition, or are soaring skyward once again.
1) Ten year Treasury bond yields start to rise, and break out above 2.30% (they are now at 2.18%).
2) The US dollar begins to appreciate once again, taking the Euro ETF (FXE) below $125.
3) Inflation expectations start to rise in Europe. Watch the monthly CPI numbers out of France and Italy, which have recently been negative.
4) Fed funds futures start to rise from near zero.
5) The price of crude oil stabilizes. Watch Brent, which will have the sharpest move up once recovery begins.
6) The small cap index, the Russell 2000 (IWM), starts to outperform the S&P 500 (SPY) on the upside. Smaller companies led the retreat on the downside, and should lead a new recovery as traders like me cover shorts (I already have).
7) Cyclical stocks, like airlines (DAL) outperform defensive stocks like soap and shampoo makers (PG) we already captured this with a (DAL) Trade Alert.
8) The junk bond market (HYG) starts to appreciate.
9) The macro data stream delivers a series of positive numbers.
10) People quit talking about the market bottom, and start opining about the next market top.
As you have probably figured out buy now with my flurry of recent Trade Alerts, I am leaning towards the probability that the bottom for stocks is already in. It?s all about oil.
I spent my weekend running numbers on the impact that cheap energy will have on the economy, and they are truly staggering. I list a few points below:
1) If oil stays down in this area, it will deliver a savings of $12,000 per family in gasoline, heating bills (being from California, I have only heard about these) and electricity.
2) The increased spending this will generate will add 1% to US GDP growth next year, as the cost of energy is pervasive through all industries, either directly, or indirectly.
3) This amounts to a $1.1 trillion stimulus package for the US economy, larger than the one we got in 2009. Think of it as a QE 4.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/10/Infrared-Picture.jpg296400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-21 01:05:192014-10-21 01:05:1910 Signs of a Market Bottom
Well, so much for the 200 day moving average! It?s like that girlfriend who has been ferociously loyal for the last year, and suddenly she is busy every weekend and never returns phone calls.
Not that this ever happens to me. Ahem.
I knew there would be trouble when the perma bulls on TV told me the market would bounce hard off this inviolable line in the sand, with the (SPX) at 1,905. I cut my bullish equity positions by two thirds on the first market rally and never looked back.
For proof that you still make beginner mistakes after 45 years in the business, take a look at how I handled my Tesla (TSLA) position last week. Elon Musk teased us all with his ?D? tweet two weeks ago, and the stock levitated magically while all other momentum stocks were being mercilessly thrown overboard.
?Women and traders? first comes to mind.
Did I sell into the rumor and capture the 80 basis point profit I had in hand? Nope. I held on until yesterday morning and bailed after a $40 plunge in the stock, taking a 1.62% hit.
This happened while the rest of Texas was coming down with Ebola Virus. I fall victim to the bout of over confidence whenever my Trade Alert success rate exceeds 90%, as it recently has done. I start to believe my own research, always a fatal flaw.
Fortunately, I?m still running double shorts in the S&P 500 (SPY) and the Russell 2000 (IWM) to hedge these losses. The ?Hedge? in ?Mad Hedge Fund Trader? is a well-earned one, I assure you.
You would think I would get hate mail for making such a stupid mistake. Au contraire! Readers thanked me for pulling the plug so quickly and with all humility. It appears that when most other newsletters put out a bad call they develop a sudden case of amnesia, leaving their customers to thrash about in bloody, shark-invested waters on their own.
Not here!
So, should we be burning up the Internet trunk lines with frenzied clicks to unload our long-term stock portfolios?
I think not. Here are ten reasons why I believe the bull market in shares is still alive and well:
1) Stocks are selling at only 14 X 2015 earnings, in the middle of the historic range.
2) The $23 plunge in oil prices we have enjoyed over the last five months amounts to a gigantic tax cut for the world economy, and could add a full 1% to US GDP growth, which has essentially come out of nowhere. Saudi Arabia told us today that this could go on for another year. Remember, it is our oil that is crushing prices.
3) The Christmas selling seasons is setting up to be a strong one, thanks to a friendly calendar and renewed consumer confidence. This is why retailers and credit card companies like American Express (AXP) have been reviving.
4) The November 4 midterm elections are still a big unknown for the market to discount. The next day could signal the beginning of the yearend bull market.
5) I think we are seeing the final blow off top in the bond market. A reversal would be very stock friendly, especially for financials (BAC).
6) Mergers and acquisitions are continuing at a torrid pace. This is happening because companies see each other as cheap, not expensive, and usually happens at market bottoms.
7) Those who aren?t merging are buying their own stock back with both hands, like Apple, at a staggering $400 billion annualized rate.
8) Volatility spikes (VIX) also signal market bottoms (see chart below). We are nearing another top with the closely followed indicator closing at $24.64 today, a high for the past two years.
9) Capital spending is accelerating, not only in technology, but across most other industries as well. This is why the IMF boosted its growth forecast for America next year to 3.8%, and that is probably a low number.
10) Ever heard of ?Sell in May and Go Away?? Well, ?Buy in November and stay put? is also true. That is only weeks away. October is usually the worst month of the year to sell and is not the path to untold riches.
The big question now is how much additional pain we have to suffer before the promised turnaround occurs.
My colleague, Mad Day Trader Jim Parker, went over his screens with a fine tooth comb and came up with $1,846 and $1,810 for the (SPX). Similarly, NASDAQ could trade down to the $3,700-$3,800 range.
My personal favorite is on the calendar, the Midterm elections on November 4. Whatever the outcome, we could see an upside explosion that lasts for six months, once thus unknown disappears. Not only could this make your year in 2014, but 2015 as well.
And I already know who is going to win! It is gridlock, whether the Democrats control one House of congress, or none!
https://www.madhedgefundtrader.com/wp-content/uploads/2014/03/John-Thoms-Black-Swans-e1413901799656.jpg337400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-14 09:48:062014-10-14 09:48:0610 Reasons Why the Bull Market is Still Alive
It looks we are going to have to start watching the appalling Zombie shows on TV and in the movies. That is so we can gain tips on how to survive the coming Apocalypse that will unfold when the Ebola virus escapes Texas and spreads nationally.
I?m not worried. I?m actually pretty good with a bow and arrow.
Thank you United Airlines!
I happy to report that the total return for my followers so far in 2014 has topped 35%, compared to a pitiful 1% gain for the Dow Average during the same period.
In September, my paid Trade Alert followers have posted a blockbuster 5.01% in gains. This is on the heels of a red-hot August, when readers took in a blistering 5.86% profit.
The nearly four year return is now at an amazing 157.8%, compared to a far more modest increase for the Dow Average during the same period of only 37%.
That brings my averaged annualized return up to 39.7%. Not bad in this zero interest rate world. It appears better to reach for capital gains than the paltry yields out there.
This has been the profit since my groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud.
It has been pedal to the metal on the short side for me since the Alibaba IPO debuted on September 19. I have seen this time and again over four decades of trading.
Wall Street gets so greedy, and takes out so much money for itself, there is nothing left for the rest of us poor traders and investors. They literally kill the goose that lays the golden egg. Share prices have nowhere left to go but downward.
Add to that Apple?s iPhone 6 launch on September 8 and the market had nothing left to look for. The end result has been the worst trading conditions in two years. However, my double short positions in the S&P 500 (SPY) and the Russell 2000 (IWM) provided the lifeboat I needed.
The one long stock position I did have, in Tesla (TSLA), is profitable, thanks to a constant drip, drip of leaks about the imminent release of the Model X SUV. The Internet is also burgeoning with rumors concerning details about the $40,000 next generation Tesla 3, which will enable the company to take over the world, at least the automotive part.
Finally, after spending two months touring dreary economic prospects on the Continent, I doubled up my short positions in the Euro (FXE), (EUO).
Those positions came home big time when the European Central Bank adopted my view and implanted an aggressive program of quantitative easing and interest rate cuts. Hint: we are now only one week into five more years of Euro QE!
The only position I have currently bedeviling me is a premature short in the Treasury bond market in the form of the ProShares Ultra Short 20+ Treasury ETF (TBT). Still, I only have a 40 basis point hickey there.
Against seven remaining profitable positions, I?ll take that all day long. And I plan to double up on the (TBT) when the timing is ripe.
Quite a few followers were able to move fast enough to cash in on the move. To read the plaudits yourself, please go to my testimonials page by clicking here. They are all real, and new ones come in almost every day.
Watch this space, because the crack team at Mad Hedge Fund Trader has more new products and services cooking in the oven. You?ll hear about them as soon as they are out of beta testing.
The coming year promises to deliver a harvest of new trading opportunities. The big driver will be a global synchronized recovery that promises to drive markets into the stratosphere by the end of 2014.
Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, and 67.45% in 2013.
Our flagship product,?Mad Hedge Fund Trader PRO, costs $4,500 a year. ?It includes?Global Trading Dispatch?(my trade alert service and daily newsletter). You get a real-time trading portfolio, an enormous research database, and live biweekly strategy webinars. You also get Jim Parker?s?Mad Day Trader?service and?The Opening Bell with Jim Parker.
To subscribe, please go to my website at?www.madhedgefundtrader.com, click on ?Memberships? located on the second tier of tabs.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/John-Thomas4.jpg325331Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-10-03 01:05:282014-10-03 01:05:28Mad Hedge Fund Trader Tops 30% Gain in 2014
I don?t double up short positions very often. I am too old to lose all my money and go back to work as an entry-level analyst at Morgan Stanley. Besides, they probably wouldn?t have me back anyway. It is a different company than it was 30 years ago, a lot different.
However, the dead cat, short covering bounce we got off this morning?s Hong Kong dump does allow me to get back into the short side of the (SPY) one more time.
We managed to gain 20 (SPX) points, or 2 entire (SPY) handles from the Monday morning capitulation, puke on your shoes low. Except this time, we are a weekend closer to expiration, only 14 trading days until October 15.
And waiting all the way until Friday for the September nonfarm payroll buys us a free week.
Does anyone really care what?s going on in Hong Kong, China, or anywhere else in the world, for that matter? Not really. It appears only day traders do, and those of us who have family members there, like me.
The beginning of October is usually the scariest two weeks of the year. So a bet that the (SPY) doesn?t blast up to new all time highs during this period looks like a pretty good idea.
Buying the S&P 500 (SPY) October, 2014 $202-$205 vertical in-the-money bear put spread with the volatility index (VIX) just short of the $17 handle, the highest print in six months, is also getting us the best short term spread prices this year. It?s almost like the good old days.
If the prospect of executing this trade causes the hair on the back of your neck to stand up, take a look at the charts below.
The Russell 2000 (IWM) broke through to a new low this morning, proving that a solid, three-month downtrend in the small caps is still alive and well.
The chart looks even worse for the iShares iBoxx High Yield Corporate Bond ETF (HYG), which has become a very important lead security for traders to keep a laser like focus on.
NASDAQ (QQQ) and the Dow Jones Average ($INDU) are sitting bang on crucial support lines. Alibaba is still sucking all the oxygen out of the technology sector, with major institutions selling everything else to take instant 5% stakes in the new issue. This is great news for the sector for the long term, but not so great for the short term.
Finally, I asked my ace Mad Day Trader, Jim Parker, his thoughtful take here. He believes that short term, markets are oversold and due for a rallyette. He wouldn?t be shorting stocks here with My money! But is the (SPY) going to a new all time high in 14 trading days? Absolutely no way!
There is another factor to consider here. We have recently clocked substantial profits with our short positions in the Euro (FXE) and the Russell 2000 (IWM).
So we can afford the luxury of getting aggressive here when everyone else is running and hiding. We are essentially now playing with the house?s money. The only question is whether we will next post a larger gain, or a smaller one. That is a position of strength, and a great place to trade from.
So I think the net net of all of this is that best case, the risk markets all keep trending downward, worse case, they flat line sideways, at least for the next 14 trading days. Either way, it is a win-win for me. That makes the S&P 500 (SPY) October, 2014 $202-$205 in-the-money bear put spread a winner in my book.
You can buy this spread anywhere in a $2.60-$2.75 range and have a reasonable expectation of making money on this trade.
This is a rare instance where there is no outright stock or ETF equivalent to this trade. If you sell short the stock market here, such as through purchasing the ProShares Ultra Short S&P 500 ETF (SDS), we could rally all the way up to, but just short of the all time high, and you would get your head handed to you.
If this happens with the S&P 500 (SPY) October, 2014 $202-$205 in-the-money bear put spread, you make your maximum profit of 1.30% of your total portfolio. This is why I play in the options market. So non options players are better to stand aside on this trade and just watch it for educational purposes.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/09/Market-Floor-e1411743381455.jpg265400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-30 01:04:502014-09-30 01:04:50Why I?m Doubling Up My Shorts
It now appears that the ?Alibaba? correction (BABA) is at hand.
I warned you, pleaded with you, and begged you about this yesterday, and on May 8 (click here for ?Will Alibaba Blow Up the Market?).
The longer the company postponed the mother of all IPO?s, the higher the prices flew, until we finally got a print at the absolute apex of the market. Now, it?s time to pay the piper.
The development is part of a broader move out of riskier, higher beta stocks into safe, large caps that has been underway for several weeks now. Those traders who are ahead want to protect their years. Those who aren?t are screwed anyway, so don?t bother returning their phone calls.
Look no further than my favorite, Tesla (TSLA), which topped out on September 3, along with the rest of the MoMo high technology, biotechnology and Internet names.
Still love the cars, though.
The (IWM) has really been sucking hind teat all year, falling by 3% year to date compared to an 8% gain in the S&P 500.
Yesterday, the sushi really hit the fan when the 50-day moving average pierced the 200-day moving average for the first time since August, 2011. Known as a much dreaded ?death cross,? this is the technical equivalent of slitting both wrists and thrashing about in shark-invested waters, heralding more declines to come.
Let me list the reasons why this is the sector traders love to hate when markets move from ?RISK ON? to ?RISK OFF?:
*Since small companies borrow more than large companies, they are far more sensitive to rising interest rates. Guess what? Rates have been rocketing this month.
*Since small companies are more leveraged (indebted) than big ones, they are more sensitive to a slowing economy.
*Small companies don?t have the international diversification of their bigger brethren, and therefore have less of a financial cushion to fall back on.
*The (IWM) has roughly 1.5 times the volatility of the S&P 500, making a short position here fantastic downside protection for a broader based portfolio of stocks. So you get a lot of selling here, as managers try to lock in performance for fiscal years that start ending as early as October 31.
*Did I mention that the stock market is at one of its most overbought levels in history, the worst since 1928? Bearish sentiment is at only 13%, the lowest since 1987. These are more reason to sell, as if you needed any.
My readers have made tons of money over the years playing the (IWM) on the short side. It?s time for another visit to the trough. I?m not finishing my year early.
Not yet, anyway.
If you can?t trade options, then buy the Short Russell 2000 Fund ETF (RWM) as a 1X play, or the Direxion Daily Small Cap Bear 3X ETF (TZA) for a 3X trade. However, 3X ETF?s of any kind are for intra day traders only.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/04/Burning-Building-e1430840521423.jpg308400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-09-24 01:05:532014-09-24 01:05:53Time to Bail on the Small Caps
Many commentators are warning of a top, a bubble and Armageddon to come in the stock market. There has not been a 10% correction in the indexes since the debt ceiling crisis three years ago.
But I think that we are just getting started.
Share prices have the rocket fuel for the Dow average to make it to 18,000 by the end of 2014, and possibly 100,000 by 2025. To understand why, you have to focus on major long-term structural changes occurring in the global economy which at this point only a handful for strategists can see, and then, only faintly.
The evidence couldn?t be more undeniable. The major stock indexes have repeatedly broken out to new all time highs in 2014. The more volatile and economically sensitive Russell 2000 small cap index has left it in the big caps dust.
Inflows to equity mutual funds have been the most prolific since 2008. It all paints a picture of a run up (SPX) to and of 2,100 by year-end, which by the way, has been my own forecast all year. Perma bears be damned!
Betting on the Federal Reserve?s fears of a replay of 1937, when premature tightening tipped the US economy into the second leg of the Great Depression, has been a huge winner for me for years now. It means that it is willing to err on the side of over stimulation, by a lot.
With wages growth stagnant for decades, and many commodity prices and precious metals down 30% or more year to date, the Fed certainly has a free pass on the inflation front to do so. Corporate earnings are also helping, consistently surprising to the upside.
However, I think the market is trying to tell us infinitely more than what appeared in yesterday?s headlines, or what flew by in the last tweet or text. There is something deeper going on here beyond the noise of the daily data releases. Asset prices are acting like there is a major structural change underway in the world economy, which so far has remained invisible to all except the market.
Yes, there are a few professionals out there who can see imminent momentous change within their own narrow industries. But no one has yet aggregated all these changes together, so I?ll take a whack at it.
Here are ten theories for you to contemplate.
1) There is more Peace Dividend to Pay - Is it possible that the markets have not yet fully discounted America?s victory in the Cold War? That the payout was interrupted by the dotcom and housing crashes, and that it is now resuming?
Yes, we priced in a chunk with the run up in the Dow average from 2,500 to 11,000 during the 1990?s. But could there be more to go? After all, 22 years since the fall of the Soviet Union and the US still faces no industrial strength enemy, and there are none on the horizon either.
At the very least, this reality should be enough to chop our current defense spending by half, and eliminate most of our budget deficit. Much of the defense establishment agrees with me. They?d rather be spending money on inexpensive, high value, targeted programs, like cyber warfare and drones, rather than the costly, politically inspired, heavy metal weapons systems of old.
2) Obama Care Works ? With the House of Representatives voting to repeal the President?s health care plan for the 50th time, and closing down the government for 16 days in protest, conservative antipathy towards Obamacare couldn?t be more clear. But what if, instead of doubling health care costs as the right has claimed, it drops them by half? What if the plan does add 0.5% to annual GDP and creates 2 million jobs?
This, after all, was the original plan. Health care is expensive in the US because of the lack of competition, and Obamacare delivers that in spades for the first time. Of course there were going to be teething problems. After all, the government is trying to create 50 Amazons overnight at once. It took 20 years for my former Morgan Stanley colleague, Jeff Bezos, to create just one.
The early evidence shows that the competitive health insurance exchanges the plan sets up are delivering price reductions of 30% to 50% in New York and California. I walked into Costco the other day and was offered a plan for $235 a month with an $8,000 deductable, just so I could avoid the penalties for the uninsured. The best offer I previously received from Blue Cross of California was $3,500 a month, typical for an elderly white male like myself.
If this, in turn, solves the health care and Social Security crisis, it will do a lot to wipe out that ?uncertainty? you hear so much about. The predictions of the eventual insolvency of the United States, a perennial Internet conspiracy favorite, also go down the drain.
3) Another Technology Revolution ? Are we on the verge of another great technology breakthrough like the one we saw during the dotcom boom, when PC?s, the Internet, and the World Wide Web simultaneously came together to supercharge corporate earnings for a decade? What if the cost of treating cancer drops from $100,000 to $200, as my friend, Dr. Michio Kaku, believes. What if new Apples and Googles (GOOG) continue to appear out of nowhere?
If you lived in San Francisco and were barraged by venture capital pitches on a daily basis, as I am, you would think this new Golden Age is going to start any minute. There are a thousand innovations percolating out there.
The only question is whether the lead industry will be communications, health care, energy, or all three. Ride your bike south of Market Street someday and see how much research capacity is being built now, the size of a small city. It is awe-inspiring.
4) The Real Cost of Energy Collapses ? We all know about the new 100-year supply of natural gas discovered under our feet that will turn us into Saudi America. But there are 100 additional ways that energy supply is improving and demand is falling.
Conservation will be huge, as will grid and utility modernization. What if Tesla?s (TSLA) Elon Musk is able to deliver a $40,000 electric car with a 300-mile range in three years, as he has promised? This will be a game changer. His track record so far is pretty good.
This is the man so brimming with confidence that he just bought James Bond?s submarine car for $1 million (see the cool modified Lotus in The Spy Who Loved Me). Falling energy costs mean that the profitability of virtually every listed company goes through the roof.
It is likely that if Iran ever does make good on its threat to close the Straights of Hormuz, no one will care. Some 80% of that oil, and soon to be 100%, goes to China, and that will be their problem, not ours.
5) Productivity Accelerates ? By relentlessly introducing new technologies and cutting costs, corporate profitability has soared for the past 30 years. Pessimists now say things can?t get any better. But what if they do?
As I tell guests at my strategy luncheons, this is not a mean reverting data series. Having invested in the machine that took your labor force from 1,000 to 100, what if the next one brings it to 10? Guess which country is about to lose millions of jobs from offshoring and new technology? China. Just talk to any European CEO about their new ?American Strategy.?
6) Interest Rates Stay Low for Another Decade ? If wages stay in check, oil prices fall, and commodity places stay low, then the Fed has absolutely no reason to substantially raise interest rates for another ten years, no matter what the economy does. The next demographic push that creates a worker shortage and higher wages doesn?t start until the early 2020?s.
Sure, the Fed will probably normalize overnight rates back to 2% by next year, as the safety net for the economy is no longer needed. But rates could remain historically very low for quite a long time. This savings immediately drops to the bottom line of any borrower, be they individual, corporate, or government.
In fact, looking at the main causes of the recessions for the last 50 years?a spike in interest rates or a sudden cut off in oil supplies, and absolutely none are visible on the horizon, for now.
7) Shinzo Abe Saves Japan ? The conventional wisdom is that the new government in Japan is resorting to a last desperate act to save their economy that will fail, and that a complete collapse of their over leveraged financial system will result.
But what if Abe gets his necessary reforms through and the country regains its powerhouse status. If Japan?s $6 trillion economy, the world?s third largest, bounces back from a 1% to a 4% GDP growth rate, there will be positive implications for all of us.
8) Europe Gets Its Act Together ? It seems that all we ever hear about from the continent is debt crisis and stagnation and a political system so fragmented that no one can do anything about it. But what if new leadership emerges and takes the initiative to coalesce and solidify Europe?
That would involve creating a single Ministry of Finance, issuing pan Euro bonds, and a European Central Bank with teeth and courage. Their economic problems would disappear and growth would double. As part of my consulting arrangements with governments there, I have been recommending these measures for years, and everyone agrees. All that is missing is the political will to carry them out.
9) The Dollar Stays Strong ? With America?s debt to GDP now over 100% and rising, many analysts believe it is just a matter of time before we see a major crash in the dollar. This is only the continuation of a 220-year-old trend.
What if it goes up instead? Energy independence means we will no longer ship $250 billion a year to the Middle East to pay for oil imports. CEO?s in Europe and Asia are stumbling over each other to find ways to get capital into the US to take advantage of a stronger economy. Higher growth rates mean the feared American deficits start shrinking on their own, with no action from congress whatsoever. This is all long-term dollar positive.
10) Multiples Keep Expanding ? Most strategists believe that the S&P 500 is fairly valued at 1,983 with a price earnings multiple of 15 times, dead in the middle of its historic 9-22 range. But if any of my theories above unfold, then much higher multiples are justified. If they all unfold, then investors wouldn?t hesitate to pay a 25 multiple for American stocks, as their future outlook is so unremittingly positive.
You may say this sounds crazy, and you?d be right. But remember, twice in the last 25 years we have seen market multiples skyrocket to 100. Japanese share valuations reached that nosebleed summit in 1989, and American Dotcom stocks did so in 2000. And they reached those numbers with fundamentals far less substantial than we are facing now. Just take multiples on today?s market up from 15X to 20X, and the Dow should be worth 26,000.
Sure, all of the above represents a pie in the sky best-case scenario. Some, or none, of them may actually play out in the real world. But the ones that do occur will have a super-leveraged effect on each other. The net impact will be US GDP growth easily leaps back from today?s feeble 2% to the virile 4% or more that we grew comfortable with during the fifties, sixties, and eighties.
That growth rate will solve America?s Social Security, Medicare, and deficit problems in fairly short order, without any action by the government.
Needless to say, all of the above is hugely positive for the stock market. It brings forecasts for a Dow 18,000 by the end of 2014, and 100,000 by 2025 out of the realm of fantasy. It kind of makes today?s stock prices look dirt-cheap.
Maybe that?s what the market is trying to tell us, if we only had the patience and the foresight to listen.
This doesn?t mean that you need to rush out and buy more stocks today. Some of these trends will take a decade or more to play out. Better entry points will no doubt present themselves. But the writing is on the wall for higher equity prices, not just in the US, but globally.
I can tell you from the vast expanse of my own 45 years in the prediction business, I have learned one thing. All that is forecast never happens, and all that happens was never forecast.
I?m still waiting for my flying car, although the Tesla S-1 comes close.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/05/JT-with-Tesla-e1427723768460.jpg227400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-08-21 01:03:432014-08-21 01:03:43Why US Stocks Are Dirt Cheap
War threatens in the Ukraine. Iraq is blowing up. Rebels are turning our own, highly advanced weapons against us. Israel invades Gaza. Ebola virus has hit the US. Oh, and two hurricanes are hitting Hawaii for the first time in 22 years.
Should I panic and sell everything I own? Is it time to stockpile canned food, water and ammo? Is the world about to end?
I think not.
In fact the opposite is coming true. The best entry point for risk assets in a year is setting up. If you missed 2014 so far, here is a chance to do it all over again.
It is an old trading nostrum that you should buy when there is blood in the streets. I had a friend who reliably bought every coup d? etat in Thailand during the seventies and eighties, and he made a fortune, retiring to one of the country?s idyllic islands off the coast of Phuket. In fact, I think he bought the whole island.
Now we have blood in multiple streets in multiple places, thankfully, this time, it is not ours.
I had Mad Day Trader, Jim Parker, do some technical work for me. He tracked the S&P 500/30 year Treasury spread for the past 30 years and produced the charts below. This is an indicator of overboughtness of one market compared to another that reliably peaks every decade.
And guess what? It is peaking. This tells you that any mean reversion is about to unleash an onslaught of bond selling and stock buying.
There is a whole raft of other positive things going on. Several good stocks have double bottomed off of ?stupid cheap? levels, like IBM (IBM), Ebay (EBAY), General Motors (GM), Tupperware (TUP), and Yum Brands (YUM). Both the Russian ruble and stock market are bouncing hard today.
There is another fascinating thing happening in the oil markets. This is the first time in history where a new Middle Eastern war caused oil price to collapse instead of skyrocket. This is all a testament to the new American independence in energy.
Hint: this is great news for US stocks.
If you asked me a month ago what would be my dream scenario for the rest of the year, I would have said an 8% correction in August to load the boat for a big yearend rally. Heavens to Betsy and wholly moley, but that appears to be what we are getting.
It puts followers of my Trade Alert service in a particularly strong position. As of today, they are up 24% during 2014 in a market that is down -0.3%. Replay the year again, and that gets followers up 50% or more by the end of December.
Here is my own shopping list of what to buy when we hit the final bottom, which is probably only a few percent away:
Longs
JP Morgan (JPM) Apple (AAPL) Google (GOOG) General Motors (GM) Freeport McMoRan (FCX) Corn (CORN) Russell 2000 (IWM) S&P 500 (SPY)
https://www.madhedgefundtrader.com/wp-content/uploads/2014/08/Gun-Ammunition-War-Room.jpg280438Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-08-11 01:05:382014-08-11 01:05:38Is the Turnaround at Hand, and Ten Stocks to Buy at the Bottom?
Feed the ducks while they are quacking. That is one of the oldest nostrums heard on Wall Street, and feed them they have, to the point of absolute gluttony.
This year we have seen the market for new initial public offerings for newly listed companies explode to life. There have been 46 so far in 2014, some 26 from the biotechnology area alone. Last Friday, there were an astounding seven in one day. When the demand is there, investment bankers are more than happy to run the printing presses overtime to meet it, creating new stock as fast as they can.
This morning saw the debut of King Digital Entertainment (KING), maker of the kid?s digital game ?Candy Crush?. Much to the chagrin of the bankers and the existing shareholders, the stock immediately traded down -10%. You know that when you see huge, dancing lollypops on the floor of the New York Stock Exchange, it is time to get out of the market, post haste.
It all seems frighteningly familiar, like d?j? vu all over again. The last time things were this hot was in April of 2000. Then, an onslaught of IPO?s put in the top for NASDAQ, igniting the great Dotcom crash. Share prices have yet to recover those heady levels a decade and a half later.
Looking at the quality and quantity of the new companies being floated, with minimal earnings, sky high multiples, and market capitalizations in the tens of billions of dollars, a similar outcome is assured. Wall Street never fails to kill the golden goose. There is no limit on greed.
As a result, the IPO market is threatening to take the main market down with it. The number of short-term indicators that I am seeing roll over and die is nothing less than astounding. At the very least, I think we are in for the kind of 5%-7% correction of the sort that we saw in January and February. I?ll give you two big ones.
The scary tell here is the strength of the bond market (TLT), which just broke out to a new seven-month high. Today?s Treasury five-year bond auction went like a house on fire. Stocks and bonds rarely go up in unison, and bonds usually end up being right.
Another is the elevating bottom in the volatility Index (VIX). During November and December, the (VIX) put in rock solid bottoms at the $12 level. After the January dump, the support rose to $14. This means that investors are now more nervous, willing to pay a premium for downside protection, and intend to unload shares at the first sign of trouble. As much fun as rising bottoms can be, you never want to see them in volatility if you own stocks.
The only question is whether they can hold the market up until Friday, March 28, the month end on Monday, March 31, or the new start to the quarter on Tuesday, April 1.
So how best to participate in the coming debacle? Cut back any leveraged long positions that you have. If you want to keep your stocks for tax or other reasons, then write front month call options against them, known as ?buy writes.?
Use the good days to lay on positions in long dated put options for the S&P 500 (SPY), the NASDAQ (QQQ), and the Russell 2000 (IWM). Long dating heads off the time decay problem, reducing the volatility of your position, and helps preserve capital.
Traders can also buy volatility through the iPath S&P 500 VIX Short Term Futures ETN (VXX), an exchange traded note, which rises when stocks fall.
The set up here for the iPath S&P 500 VIX Short Term Futures ETN (VXX) is a no brainer. If we get the modest weakness that we saw in early March, the (VXX) should rise 10% from current levels to the $48 handle. If we get a January replay, that is worth 20% for the (VXX), potentially boosting it to $55. If we finally get the long overdue 10% correction, the (VXX) should rocket by 30% or more.
If the selloff decides to wait a few more days or weeks you can afford to be patient. Since this is an ETN, and not an option play, a flat lining or rising market isn?t going to cost you much money. The February low in the (VXX) at $42.25 looks pretty safe to me in a rising volatility environment. A revisit would only cost us pennies.
Take your pick, but all paths seam to lead skyward for the (VXX), sooner or later.
https://www.madhedgefundtrader.com/wp-content/uploads/2014/03/Girl-on-Pogo-Stick.jpg380330Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2014-03-27 09:21:512014-03-27 09:21:51Will Candy Crush Crush the Market?
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