Global Market Comments
November 13, 2019
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, NOVEMBER 15 OPTIONS EXPIRATION),
(TAKE A RIDE IN THE NEW SHORT JUNK ETF),
(SJB), (JNK), (HYG),
(THE COOLEST TOMBSTONE CONTEST)
Global Market Comments
November 13, 2019
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, NOVEMBER 15 OPTIONS EXPIRATION),
(TAKE A RIDE IN THE NEW SHORT JUNK ETF),
(SJB), (JNK), (HYG),
(THE COOLEST TOMBSTONE CONTEST)
Stocks will drop sharply in the coming year. It will most likely happen when the Democratic candidate takes a substantial lead over the president, which recent by-elections have shown is likely.
What could be better than an ETF that benefits from both falling bonds AND stocks?
It just so happens that there is such an animal.
When you look at the profusion of new ETFs being launched today, you find that they almost always correspond with market tops.
The higher the market, the greater the demand for the underlying, and the more leverage traders bay for it. The resulting returns for investors are usually disastrous.
But occasionally, a blind squirrel finds an acorn, and if you fire buckshot long enough, you hit a barn.
That’s why I am getting interested in the new ProShares Short High Yield ETF (SJB). After riding the bull move in junk all the way up with (JNK), (HYG), I have recently turned negative on the sector.
Junk bonds have moved too far too fast. Current spreads for junk paper are now only 200 basis points over equivalent term Treasury bonds, and investors at these levels are in no way being compensated for their risk.
If the stock market starts to roll over in 2018, then the junk bond market will follow it in the elevator going down to the ladies' underwear department in the basement.
Keep in mind that when shorting the junk market, you run into the same problem you have with the (TBT), a leveraged short ETF for the Treasury bond market.
Buy the (JNK) and you are short a 5.75% coupon which, with the management fees, works out to a monthly cost of more than 50 basis points. That is a big nut to cover.
So timing for entry into this fund will be crucial
Global Market Comments
September 20, 2019
Fiat Lux
Featured Trade:
(SEPTEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (FDX), (FB), (HYG), (JNK), (EEM), (BABA), (JD), (TBT), (FXE), (UUP), (AMZN), (FB), (DIS), (MSFT), (USO), (INDU),
(THE GREAT TRADING GURU SPEAKS)
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.com (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
Global Market Comments
January 9, 2019
Fiat Lux
2019 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLI), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE),
(DIG), (RIG), (USO), (UNG), (USO), (OXY),
(GLD), (GDX), (SLV),
(ITB), (LEN), (KBH), (PHM)
Global Market Comments
September 7, 2018
Fiat Lux
Featured Trade:
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA,
GLOBAL STRATEGY LUNCHEON),
(SEPTEMBER 5 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (MU), (MSFT), (LRCX), (GOOGL), (TSLA),
(TBT), (EEM), (PIN), (VXX), (VIX), (JNK), (HYG), (AAPL)
There is no happier corner of the fixed income universe than junk bonds (JNK), (HYG), which have been soaring like a bat out of hell recently.
Average yields for the bond class most sensitive to the economy have collapsed from 18% to near an all-time low of 6.68%, a scant 483 basis points over ten year Treasury bonds (TLT).
If you look at the chart for (JNK) it virtually tracks the S&P 500 one for one, with less volatility, and therein lies the problem. When bonds act like stocks, what happens to bonds when stocks go down?
That is a particularly pertinent question these days as stocks have more than doubled from the bottom, and are approaching grotesquely overbought levels. After a move in the S&P 500 Index?s average multiple from 9 to 19, with 20 a possible top, are junk bonds peaking out here as well?
?A 483 basis point premium does not sound like much compared to the historical range. It is pricing in the near absence of risk in this paper, as if they will live forever? When did I last see this movie? 2006? 2007? Alas, how short memories have become.
It might be worth taking some money off the table here, and taking the hit in the cash flow in your portfolio.
Lowering your beta is prudent, especially if we are about to move from a 'RISK ON' to a 'RISK OFF' world for more than a day.
Do you really want to wait for the music to stop playing before you grab a chair?
When you look at the profusion of new ETF?s being launched today, you find that they almost always correspond with market tops.
The higher the market, the greater the demand for the underlying, and the more leverage traders pay for it. The resulting returns for investors are disastrous.
But occasionally a blind squirrel finds an acorn, and if you fire buckshot long enough, you hit a barn.
That?s why I am getting interested in the ProShares Short High Yield ETF (SJB). After riding the bull move in junk all the way up with (JNK), (HYG), I have recently turned negative on the sector.
Junk bonds have moved too far too fast. Current spreads for junk paper are now only 200 basis points over equivalent term Treasury bonds, and investors at these levels are in no way being compensated for their risk.
If the stock market starts to roll over this summer, then the junk bond market will follow it in the elevator going down to the ladies underwear department in the basement.
Keep in mind that when shorting the junk market, you run into the same problem you have with the (TBT), a leveraged short ETF for the Treasury bond market.
Buy the (SJB) and you are short a 6.74% coupon, which works out to a monthly costs of more than 50 basis points. That is a big nut to cover. So timing for entry into this fund will be crucial.
Suddenly, the consolidation turned into a correction and maybe even a bear market.
A crucial part of trading a crash is knowing what to do at the bottom. Don?t worry. You?ll receive a flurry of text alerts from me right when that happens.
Many individual investors simply run to the bathroom and lock the door, hoping nobody knocks on the door for a couple of days.
Worse, they dump every stock they have. That?s what makes market bottoms.
Trades that once seemed impossible can now get done, provided you use limit orders.
Let me get this right. Stocks are crashing because:
1) The Federal Reserve isn?t going to raise interest rates anymore.
2) The price of oil has dropped 84% in five years.
3) Commodities have reached multi-decade lows.
4) The US dollar has suddenly stabilized.
5) Investors are yanking money from abroad and pouring it into the US on a flight to safety trade because it is the only place they can obtain a positive return, especially in stocks.
May I point out the screamingly obvious right here?
These are all reasons for 90% of US companies that borrow money and consume energy and commodities to increase earnings and to boost their share prices.
Only the 10% that derive revenues from ripping oil and commodities out of the ground should get hurt here.
Of course the market doesn?t know that. It is anything but rational when we hit big triple digit declines. There was only one direction on, and that was OUT.
And that is where you make your money
Margin clerks rule supreme, squeezing every bit of leverage out of their clients they can find.
The Dow and (SPY) are already posting large negative numbers for 2016.
Of course, I saw all of this coming a mile off.
I have been banging drums, pulling fire alarms, shooting off flare guns, and otherwise warning readers that the technical situation for the market was terrible ever since I went 100% into cash in December.
When the breakdown appeared imminent, I shot out Trade Alerts to sell short the S&P 500 (SPY) in size as fast as I could write them. And I started buying outright (SPY) puts for the first time in ages.
As a result of these sudden tactical moves, my model-trading portfolio has been keeping its head above water all month, up 2%. The Dow Average is off by a nausea inducing -10.7% at today?s low.
Yes, yes! All the hard work and research is paying off!
Ignore my musings at your peril!
What is even more stunning is that these declines are occurring in the face of US macro economic numbers that are going from strength to strength. The blockbuster December nonfarm payroll report of 292,000 is the real writing on the wall.
Housing, which accounts for about one third of the US economy, has been on fire. I?m sorry, but if you can?t find a parking space at Target, there is no recession.
Another crucial leg of the US economy, auto manufacturing, has been in overdrive. Auto sales are at a record 18 million annual rate, and some summer production shut downs have been cancelled.
That is, everywhere except Volkswagen.
With two of the most important legs firing on all cylinders, it?s clearly not about the economy, stupid!
There certainly hasn?t been a geopolitical event to justify moves of this magnitude.
As far as I can tell, Hitler has not invaded Poland, nor have the Japanese attacked Pearl Harbor.
Sure, there is whining about China, which has the Shanghai Index approaching the 2,900 level once again, down 40% from the top.?
Which leads me to believe that all of this is nothing more than a temporary hiccup. A BIG Hofbrauhouse kind of hiccup, but a hiccup nonetheless.
In a zero interest rate world, stocks only have to fall back from a price earnings multiple of 18 to 15 to flush out a ton of buying, and they will have done just that when the (SPY) hits $174.
THAT IS MY LINE IN THE SAND.
If nothing else, corporate buybacks should reaccelerate here, which could reach $1 trillion in 2016. Some 75% companies exit their quiet period by February 5 and can resume buying.
That could signal an interim market bottom.
The great thing about this selloff is that the best quality companies have fallen the most. This has been a function of the heavy sovereign wealth fund selling the bridge oil deficits.
After all, when share prices are in free fall, you have to sell what you can, not what you want to. It is only human to realize profits rather than incur losses, so quality has been trashed.
I am therefore going to give you a list of ten of my favorite stocks to buy at the bottom, highlighting the sectors that will lead us into a yearend rally.
The themes here are home builders, consumer discretionary, autos, solar, old technology, and international. I?m sorry, but the entire interest sensitive sector is on hold for the rest of the year, thanks to likely Fed inaction.
Watch out, because when I sense that the market has burned itself out on the downside, the Trade Alerts are going to be coming hot and heavy.
You have been forewarned!
Read ?em and weep with joy!
10 Stocks to Buy at the Bottom
Lennar Homes (LEN)
Home Depot (HD)
Microsoft (MSFT)
General Electric (GE)
Tesla (TSLA)
Apple (AAPL)
First Solar (FSLR)
Palo Alto Networks (PANW)
Wisdom Tree Japan Hedged Equity (DXJ)
Wisdom Tree Europe Hedged Equity (HEDJ)
With the bond market confounding forecasters and prognosticators once again, I thought I?d delve into one of the more mysterious reasons why the bond market keeps going from strength to strength.
To a man, hedge fund traders expected bond prices to take a dive in 2014 and 2015 and for yields to soar. Isn?t that what?s supposed to happen in recovering economies?
Instead, we got the opposite, and yields have plunged, from 3.05% for the ten-year Treasury to as low as 2.80% this week.
There are many important lessons to be learned here. This is not your father?s bond market.
The internal dynamics of the fixed income markets have changed so much in the last three decades that it has become unrecognizable to long term practitioners, like myself.
A big factor has been the takeover of the bond market by the 1%, the richest segment of the US population and, indeed, the global economy. As wealth concentrates at the top, its character changes.
Let me stop here and tell you that the ultra rich are different from you and me, and not just because they have more money.
I have learned this after nearly half-century-long relationships with the planet?s wealthiest families, including the Rockefellers, Rothschilds, DuPonts, Morgans, and Pritzkers, first as important contacts of mine at The Economist, then as clients of mine at Morgan Stanley, then as investors in my hedge fund, and now as subscribers to The Diary of a Mad Hedge Fund Trader.
The wealthier families become the more conservative they get in their investment choices. Their goal shifts from capital appreciation to asset protection.
They lose interest in return on capital and become obsessed with return of capital. This is how the rich stay rich, sometimes for centuries. I have even noticed this among my newly minted billionaire hedge fund buddies.
What this means for the bond market is that they never sell. When they buy a 30-year Treasury bond, it is with the expectation of keeping it for the full 30 years until maturity.
That way they can avoid capital gains taxes and only have to pay taxes on the coupon interest. When they die, spouses get the step up in the cost basis, and then the wealth passes from one generation to the next. Taxes are never paid.
Back in the 1980s, when wealth was more evenly distributed, the top 1% only accounted for 1% of Treasury bond ownership. Today, that figure is closer to 25%.
Add this to the 50% of our national debt that is owned by foreign investors, primarily central banks, who also tend to hold paper for its full life. Central banks don?t pay taxes either.
China and Japan are the biggest holders with around $1 trillion each. This means that 75% or more of bonds are owned by investors who won?t sell. What does that mean for the rest of us? Bond prices that never go down.
With bonds very close to 30-year highs, keeping your bonds has been the right thing to do. I can?t tell you how many investment advisors I know who have distilled their practices down to managing fixed income instruments only.
This involves the entire coupon clipping space, including municipal bonds (MUB), corporates (LQD), junk (JNK), and even emerging market debt (ELD).
This is driven by customer demand, the 1%ers, not from any great insights or epiphanies they achieved on their own.
Of course, there is a certain amount of "driving with your eyes firmly fixed on the rear view mirror" going on here. Maybe the rich will finally sell their bonds once prices fall hard, stay down and then go down some more.
Inflation rearing its ugly head might also do the trick since it is always bad for bond prices as it reduces the purchasing power of money. Selling is certainly what they were doing in the early eighties, when the ten-year yield hit 12%.
Again, the rear view mirror effect, when bond were called ?certificates of wealth confiscation.?
There are other matters to consider with the 1% owning so much of the bond market and keeping it there.
This money is not getting invested in new start ups and creating jobs. It is money that is not being used to engender new economic growth. One of the fantasies of the last election was the claim that the 1% were creating so many jobs. They weren?t, not as long as their money was parked in a risk free bond market.
Instead, it is just stagnating. This is one reason why economic growth is so flaccid this decade and will remain so. This is fine for the 1%, but not so good for the rest of us.
The bottom line here is that while bonds are overbought and due for a pullback, they are not by any means going to crash. We could be living in the 2.60%-3.50% range for the 30-year for quite some time, maybe for years.
That is if the new Federal Reserve governor and my friend, ultra dove Janet Yellen, has anything to say about it. She has only just started and could be with us for another eight years.
Personally, I don?t foresee any appreciable rise in interest rates until we get well into the 2020s, when real inflation finally returns from the dead.
That is when bonds will become the asset class you don?t want to know, whether you?re in the 1% or not.
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