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 18 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 18 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: What would happen to the United States Treasury Bond Fund (TLT) if the Fed does not lower rates?

A: My bet is that it would immediately have a selloff—probably several points—but after that, recession worries will take bond prices up again and yields down. I don’t think we have seen the final lows in interest rates by a long shot. That’s why I bought the (TLT) last week.

Q: Is it good to buy FedEx (FDX) considering the 13% fall today?

A: I use the 3-day rule on these situations. That’s how long it takes for the dust to settle from an earnings shock like this and find the real price. The problem with FedEx is that it’s a great early recession predictor. When the number of delivered packages decreases, it’s always an indicator that the economy as a whole is slowing down, which we know has been happening. It’s one of the most cyclical stocks out there, therefore one of the most dangerous. I wouldn’t bother with FedEx right now. Go take a long nap instead.

Q: Would you be a buyer of Facebook (FB) here, given they seem to have weathered all the recent attacks from Washington?

A: Not here in particular, but I would buy it 20% down when it gets to the bottom edge of its upward channel—it still looks like it’s going crazy. They’re literally renting or buying buildings to hire an additional 50,000 people in San Francisco anticipating huge growth of their business, so that’s a better indicator of the future of Facebook than anything.

Q: Will junk bonds be more in demand now that rates are cratering?

A: Junk bonds (HYG), (JNK) are driven more by the stock market than the bond market, as you can see in the huge rally we just had. Junk bonds are great because their default ratios are usually far below that which the interest rate implies, but you really have to trade them like stocks. Think of them as preferred stocks with really high dividends. When the stock market tops, so will junk bonds. Remember in 2008, junk yields got all the way up to 15% compared to today’s 5.6%.

Q: What will happen to emerging markets (EEM) as rates lower?

A: If lower interest rates bring a weaker US dollar, that would be very positive for emerging markets over the long term and they would be a great buy. However, emerging markets will take the hardest hit if we actually do go into a recession. So, I would pass for now.

Q: What are your thoughts on Alibaba (BABA) and (JD)?

A: They are great for the long term. However, expect a lot of volatility in the short term. As long as the trade war is going on, these are going to be hard to trade until we get a settlement. (JD) is already up 50% this year but is still down 40% from pre trade war levels. These things will all be up 20-30% when that happens. If you can take the heat until then, they would probably be okay for a long-term portfolio globally diversified.

Q: What do you have to say about the ProShares Ultra Short 20+ Year Treasury ETF (TBT)—the short bond ETF?

A: If you have a position, I’d be selling now. We just had a massive 20%, 4-point rally from $22 to $27 and now would be a good time to take a profit, or at least get out closer to your cost. The zero interest rates story is not over yet.

Q: Would you short the US dollar?

A: I would most likely short it against the euro (FXE), which now has a massive economic stimulus and quantitative easing program coming into play which should be positive for it and negative for the US dollar (UUP). That’s most likely why the euro has stabilized over the last couple of weeks. That said, the dollar has been unexpected high all year despite falling interest rates so I have been avoiding the entire foreign exchange space. I try to stay away from things I don’t understand.

Q: If all our big tech September vertical bull call spreads are in the money, what should we do?

A: You do nothing. They all expire at the Friday close in two trading days. Your broker should automatically use your long call position to cover your short call position and credit your account with the total profit on the following Monday, as well as release the margin for holding that position. After that, we’ll probably wait for another good entry point on all the same names, (AMZN), (FB), (DIS), (MSFT).

Q: If the US fires a cruise missile at Iran, how would the market react?

A: It would selloff pretty big—markets hate wars. And the US wouldn’t send one missile at Iran; it would be more like 100, probably aimed at what little nuclear facilities they have. I doubt that is going to happen. The world has figured out that Trump is a wimp. He talks big but there is never any action or follow through. Inviting the Taliban to Camp David while they were still blowing up our people? Really?

Q: Will the housing market turn on the turbochargers after this dip in rates?

A: It wouldn’t turn on the turbochargers, but it might stabilize the market because money is available now at unprecedentedly low interest rates. However, we still have the loss of the SALT deductions—the state and local taxes and real estate taxes that came in with the Trump tax bill. Since then, real estate has been either unchanged or has fallen on both the East and West coast where the highest priced houses are. It’s the most expensive houses that take the loss of the SALT deduction the hardest. Don’t expect any movement in these markets until the SALT deduction comes back, probably in 16 months.

Q: What catalyst do you think would cause a 10% correction in the next 2-3 months?

A: Trump basically saying “screw you” to the Chinese—a tweet saying he’s going to bring another round of tariff increases. That’s worth a minimum of 2,000 points in the Dow Average (INDU), or about 7% percent. Either that or no move in Fed interest rates—that would also create a big selloff. My guess is that and adverse development in the trade war will be what does it. That’s why my positions are so small now.

Q: We have a big short position in the United States Oil Fund (USO) now. Are you going to run this into expiration until October $18?

A: Even though oil has already collapsed by 10% since we put this position on last Friday, premiums in oil options are still close to record levels. So, it pays us to hang on for the time decay. The world is still massively oversupplied in oil and the Saudis were able to bring half of the lost production back on in a day. Oil will keep falling unless there is another attack and it is unlikely we will see one again on this scale. And, we only have 20 more days to go to capture the full 14.8% profit.

Good luck and good trading.
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader





You Can’t Do Enough Research

May 14, 2019

Mad Hedge Technology Letter
May 14, 2019
Fiat Lux

Featured Trade:

(AAPL), (MSFT), (ADBE), (PYPL), (QCOM), (MU), (JD), (BABA), (BIDU)

China’s Counterattack

Ratcheting up the trade tensions, China is pulling the trigger on retaliatory tariffs on $60 billion worth of U.S. goods, just days after the American administration said it would levy higher tariffs on $200 billion in Chinese goods.

American President Donald Trump accused China of reneging on a “great deal.”

The mushrooming friction between the two superpowers gives even more credence to my premise that hardware stocks should be avoided like the plague.

I have stood out on my perch in 2019 and proclaimed to buy software stocks and if you need one name to hide out in then I would confidently choose Microsoft (MSFT).

Microsoft has little exposure to China and will be rewarded the most on a relative basis.

The last place you want to get caught out is buying hardware stocks exposed to China and Apple is quickly turning into the largest piece of collateral damage along with airplane manufacturer Boeing.

Remember that 20% of Apple’s revenue comes from China and Apple bet big to solidify a complex supply chain through Foxconn Technology Group in China.

When history is recorded, CEO of Apple Tim Cook not hedging his bets exposing Apple’s revenue machine could go down as one of the worst ever managerial decisions by tech management.

The forced intellectual property transfers in China from western corporations was the worst kept secret in corporate America.

Being an operational guru as he is, and the hordes of data that Apple have access to, this was a no brainer and Cook should have mitigated his risks by investing in a supply chain that was partially outside of China, and not incrementally spreading out the supply chain through other parts of Asia is coming back to bite him.

China’s most recent tariffs will come into effect on June 1, adding up to 25% to the cost of U.S. goods that are covered by the new policy from China’s State Council Customs Tariff Commission.

The result of these newly minted tariffs is that importers will probably elect to avoid absorbing the costs themselves and pass the price hikes to the consumer sapping demand.

The American consumer still retains its place as the holy grail of the American economic bull case, but this will test the thesis.

For the short term, it would be foolish to hang out to Chinese companies listed in New York through American depository receipts (ADR) such as (JD), Alibaba (BABA).

Baidu (BIDU) is a company that I am flat out bearish on because of a weakening strategic position versus Alibaba and Tencent in China.

Even with no trade war, I would tell investors to short Baidu, and the chart is nothing short of disgusting.

Wei Jianguo, a former vice-minister at the Chinese Ministry of Commerce who handled foreign trade, said to the South China Morning Post that “China will not only act as a kung fu master in response to U.S. tricks but also as an experienced boxer and can deliver a deadly punch at the end.”

It is clear that any goodwill between the two heavyweight powers has evaporated and the hardliners inside the communist party pulled all the levers possible to back out at the last second.

Many of us do not understand, but there is a complicated political game perpetuating inside the Chinese communist party pitting reformists against staunch traditionalists.

This is not only Chairman Xi’s decision and appearing weak on the global stage is the last concession the communist government will subscribe to.

Along with the iPhone company, semiconductor stocks will be ones to avoid.

The list starts out with the chip companies leveraged the most to Chinese revenue as a proportion of total sales including Qualcomm (QCOM) with 65% of revenue in China, Micron (MU) who has 57% of sales in China, Qorvo who has half of sales from China, Broadcom who has 48% of sales from China, and Texas Instruments rounding out the list with 43% of total revenue from China.

The first 5 months of the year saw constant chatter that the two sides would kiss and makeup and chip stocks benefitted from that tsunami of positive momentum.

The picture isn’t as pretty when you flip the script, and chip stocks could suffer a gut-wrenching summer if the two sides drift further apart.

After Microsoft, other software names I would take comfort in with the added bonus of strong balance sheets are Veeva Systems (VEEV), PayPal (PYPL), and Adobe (ADBE).

The new tariffs will burden American households to up to $2 billion per month going forward, and new purchases for discretionary items like extra electronics will be put on the back burner extending the refresh cycle and saddling chip companies and Apple with a glut of iPhone and chip inventory.

Buy software companies on the dip.



January 15, 2019

Mad Hedge Technology Letter
January 15, 2019
Fiat Lux

Featured Trade:

(AAPL), (FB), (CTRP), (PDD), (BABA), (JD), (TME)

The Balkanization of the Internet

The Mad Hedge Technology Letter has a front-line seat to the carnage wrought by the balkanization of technology that is swiftly descending across all corners of the tech universe.

In technology terms, this is frequently referred to as “splinternet.”

A quick explanation for the novices can be summed up by saying splinternet is the fragmenting of the Internet causing it to divide due to powerful forces such as technology, commerce, politics, nationalism, religion, and interests.

The rapid rise of global splinternet news stories will have an immediate ramification on your tech portfolio and it’s my job to untangle the knots.

What investors are seeing is the bifurcation of the global tech game into a binary world of Chinese and American tech.

Most recently, Central European country Poland, who was thought to be siding with the Chinese because of the growing presence by large-cap Chinese tech in Warsaw, announced government security had arrested a Huawei employee, Chinese national Wang Weijing, for allegedly spying on behalf of the Chinese state.

For all the naysayers that believe the administration’s hope of curtailing the theft of western technology was a bogus endeavor, this recent event buttresses the notion that Chinese state-funded tech companies are truly running nefariously throughout the world.

In fact, Poland has little to gain from this maneuver if you take the current status quo as your guidebook, and I would argue it is a net negative for Poland because Chinese tech is deeply embedded inside of the Poland tech structure bestowing profits and internet capabilities on multiple parties.

Making the case stronger against China, Poland has no flagship tech communications company that would serve as competition to the Chinese or could directly gain from this breach of trust.

The fringe of the Eurozone Central European nations and Eastern European countries bordering Russia running developing economies rely on Huawei and other low-cost Chinese tech suppliers like ZTE to offer value for money for a populace who cannot afford $1000 Apple (AAPL) iPhones and exorbitant western European telecommunications infrastructure equipment.

The Chinese beelining to this burgeoning area in Europe has given these less developed countries high-speed broadband internet for $10-$15 per month and 4G mobile service for $7 per month, a smidgeon of what westerners fork out for the same monthly service.

Poland rebuffing Huawei is an ominous sign for Chinese tech doing business in the Czech Republic and Hungary as European countries are moving towards denying Huawei in unison.

The last few years saw China create the same recipe of success for fueling economic expansion mimicking the American economy.

The tech sector led the way with outsized gains boosting productivity while analog companies transformed into digital companies to take advantage of the efficiencies high-tech provides.

At the same time, Beijing has initiated a muscular response to the accelerated growth of local tech companies.

The foul play of American tech in Europe has given impetus to Beijing to launch a power grab on local tech structures such as Baidu, Alibaba, and Tencent.

This couldn’t be more evident at Tencent who has failed to secure any new gaming licenses for their best gaming titles.

PlayerUnknown’s Battlegrounds (PUBG), a battle royale multiplayer, has been deprived of massive revenue because of Tencent’s inability to win a proper gaming license from the Chinese authorities to sell in-game add-ons.

In total, lost revenue has already cost Chinese video game companies over $2 billion in revenue since May 2017.

Beijing wants to temper the growing clout of private tech companies who were the recipient of the Chinese consumer’s gorge on technology in the last 20 years.

These companies have never been more infiltrated by the communist party and this can be mainly attributed to the acknowledgment by Beijing that Chinese tech companies are too powerful for their own good now and are a legitimate threat to the powers above.

That is what the sudden retirement of Founder of Alibaba Jack Ma told us who infuriated Chairman Xi because Ma was the first Chinese of note to meet American President Donald Trump at Trump Towers pledging to create a million jobs in America.

Ma later rescinded that statement and was put out to pasture by Beijing.

What does this all mean?

As the broad-based balkanization spreads like wildfire, Chinese and American tech companies’ addressable markets will shrink hamstringing the drive to accelerate revenue.

The potential loss of Europe for the Chinese could give way to Nokia, Siemens, and other western telecommunication companies to move in hijacking a bright spot for Huawei.

If Apple isn’t punching above their weight in China, well that almost certainly means that local tech companies aren’t having a cake walk in the park as well.

The winter sell-off turned the screws on tech first and then the rest of equities obediently, Chinese tech could have a similar domino effect to the Chinese economy boding badly for Chinese ADRs listed on the New York Stock Exchange (NYSE).

Last year, the Shanghai index was one of the worst performing stock markets in the world.

And if the trade wars are really ravaging a few key limbs from local Chinese tech firms, then companies exposed to the Chinese consumer such as Alibaba (BABA), (JD), Pinduoduo (PDD), International (CTRP) and Tencent Music Entertainment (TME) could fall off a cliff.

This has already been in the works.

These companies are a good barometer of the health of the Chinese consumer and have had an abysmal last six months of price action.

The vicious cycle will repeat itself with worsening Chinese data drying up the demand for Chinese tech services and the Chinese consumer tightening their purse strings as they try to save money from a cratering economy.

It could become a self-fulfilling prophecy and that is what other indicators such as negative automobile sales and a rapidly failing real estate market are telling us.

The 65 million ghost apartments dotted around China don’t help.

This could be the perfect opportunity to instigate wide-ranging reforms to open up the financial, insurance, a tech market to the west, something many analysts thought China would do after joining the World Trade Organization (WTO).

However, Beijing’s retrenchment preferring to pedal mercantilism and cold-blooded power grabs could offer Chairman Xi the prospect of further consolidating his authority by sticking his fingers deeper into the local tech structures giving the state even more control.

I would guess this is a false dawn.

American tech will confront balkanization headwinds of its own evidence in Vietnam as the government blamed Zuckerberg’s Facebook (FB) for failing to root out anti-government rhetoric which is illegal in the communist-based country.

If you haven’t figured it out yet – there is an underlying suitability issue with western tech services that tie up with authoritarian governments.

It many times leads the western tech companies to be a pawn in a political game that later turns into a bloody mess.

The weak rule of law has spawned a convenient practice of blaming western tech to distract from internal disputes strengthening the nationalist case of a purported western tech firm gone rogue.

This could lead Facebook to be removed in Vietnam, and the $238 million in ad revenue that will vanish.

Headaches are sprouting up across Europe with Facebook clashing with more stringent data privacy rules through General Data Protection Regulation (GDPR).

German’s largest national Sunday newspaper Bild am Sonntag claimed from sources that the Federal Cartel Office will summon Facebook to halt collecting some user data.

This could take a machete to ad revenue in a critical lucrative market for Facebook, and this experience is being echoed by other American tech companies who are running full speed into complicated regulatory quagmires outside of America.

Adding benzine to the flames, Deputy Attorney General Rod Rosenstein speaking at a cybercrime symposium at Georgetown University’s Law Center in Washington added to the tech misery explaining that to “secure devices requires additional testing and validation—which slows production times — and costs more money.”

This is not bullish to the overall tech picture at all.

Hamstringing tech is not ideal to promoting economic growth, but the decades of unchecked growth is finally reverting back to the mean with regulation rearing its unpretty head and the balkanization of tech forcing countries to pick between China or America.

The silver lining is that the American economy remains resilient taking the body blows of a government shutdown, interest rate drama, and trade war uncertainty in full stride.

The net-net is that American and Chinese tech firms could experience decelerating revenue growth far dire than any worst-case scenario forecasted by industry analysts.

Therefore, I forecast that American tech shares have limited upside for the next 6-10 weeks and Chinese tech is dead money in that same time span.

Any rally is ripe for another sell-off if there are no meaningful breakthroughs in the trade war and if China’s economic data continues to falter.

The global growth scare could actually come home to roost.

The supposed narrowing of trade differences has been nothing more than tactical, and procuring any fundamental victories is a hard ask in the short term.

In an ideal world, China would open the floodgates and allow the world to join them in an economic détente, however, based on Chairman Xi’s record of purging his mainland enemies and the military, slamming the gates shut and padlocking them seems more likely at this point.

Seizing the rights to an untimed Chairmanship term has its perks – this is one of them and he is using the entire assortment of options available to him.

Traders should look at deep in-the-money vertical bear put spreads on any sharp rally to specific out-of-fashion tech names saddled with regulatory and data balkanization headwinds, or tech firms with a large footprint in mainland China.






China?s View of China

I ran into Minxin Pei, a scholar at the Carnegie Endowment for International Peace, who imparted to me some iconoclastic, out-of-consensus views on China?s position in the world today.

He thinks that power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP at $5,800, compared to $48,000 in the US.

We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars.

China can?t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs, want to secede.

China?s military is entirely devoted to controlling its own people which make US concerns about their recent build up laughable.

All of Asia?s progress, to date, has been built on selling to the US market. Take us out, and they?re nowhere.

With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon.

There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more, because there is no social safety net.

Try filing a Chinese individual tax return, where a maximum rate of 40% kicks in at an income of $35,000 a year, with no deductions, and there is no social security or Medicare in return.

Ever heard of a Chinese unemployment office or jobs program?

Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries.

The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia has just one world-class school, the University of Tokyo.

As much as we Americans despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world.

After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for four decades, and you feel this vibrating from everything around you.

I?ll consider what Minxin Pei said next time I contemplate going back into the China (FXI) and emerging markets (EEM).

fxi baba bidu jd

China - ParadeChina: Not All It?s Cracked Up to Be

Woe the Australian Dollar!

If I warned them once, I warned them 1,000 times!

The Australian dollar (FXA) is going to fall.

That?s why I cautioned my Aussie friends to sell their homes, get the money the hell out of the country, and pay for their overseas vacations in advance.

As long as it is a de facto colony of China, the fortunes of the Land Down Under are completely tied to economic prospects there.

It is almost a waste of time looking at the Reserve Bank of Australia?s data releases. They have become a deep lagging, and really irrelevant indicators. You are better off going to the source, and that is in Beijing.

And therein lies the problem.

It is highly unlikely that the government in China has any idea what their economy is actually doing. Sure, they pump out the usual figures on a reliable basis like clockwork. These are educated guesses, at best.

Even in a perfect world, collecting numbers from 1.3 billion participants is a hopeless task. The US is unable to do these with any real accuracy, and we have one quarter of their population and vastly superior technology.

For what it is worth, Chinese President Xi Jinping has promised that his country?s GDP growth will not fall below a 6.5% annual rate for the next five years. At this pace, China is still creating more economic activity that any other country in the world.

Which leaves us nothing else to rely on but commodity prices to look at, far an away Australia?s largest earner. These are suggesting that the worst has yet to come.

Virtually the entire asset class hit new six year lows yesterday. I had to go to the weekly charts to see how ugly things really are.

Australia?s largest exports are iron ore (26%, or $68.2 billion worth), coal (KOL) (16%), gold (GLD) (8.1%), and petroleum (USO) (5.7%). When the world?s largest consumer of these slows down, so does demand for these commodities.

BHP Billiton Ltd. (BHP), the largest producer of iron ore, has seen its shares plunge 57% from last year?s high.

But wait! It gets worse.

I have written at length about the transition of China from an industrial to a services based economy. You would expect this, as the Middle Kingdom has virtually no commodity resources of its own, but lots of smart people.

In a nutshell, they wish they had America?s economy. Where services now account for a staggering 68% of all economic activity.

This is why China?s future lies with Alibaba (BABA), Baidu (BIDU), and (JD). It does NOT lie with its steel factories and coalmines, which by the way, recently announced layoffs of 100,000, the largest in history.

To learn more about the structural remaking of China, please click here for ?End of the Commodities Super Cycle?.

There is one bright spot to mention. Australia is making a transition to a services based economy of its own. Tourism is rocketing, as is the influx of flight capital from the Middle Kingdom.

Walk the streets of Brisbane these days, and you are overwhelmed by the abundance of Asians coming here to learn English, attain a high education, or start a new business. When I came here 40 years ago, they were virtually absent.

How low is low?

It doesn?t help that the governor of the Reserve Bank of Australia, Australia?s central bank, Glenn Stevens, despises his nation?s currency.

He has used every rally this year to talk down the Aussie, threatening interest rate cuts and quantitative easing.

The hope is that a deep discount currency will allow the exporters to maintain some pricing edge on the commodities front.

The market chatter is that the Aussie will take a run as low as $0.55, the 2008-09 Great Recession low.

Whether we actually get that far or not is a coin toss.

And will even $0.55 below enough for Glenn Stevens?

FXA 11-12-15

BHP 11-12-15

COPPER 11-11-15

GOLD 11-11-15

Australian Energie Ressources

Glenn StevensNoted Aussie Dollar Hater