September 11, 2019

Global Market Comments
September 11, 2019
Fiat Lux

Featured Trade:

(ITB), (PHM), (KBH), (LEN), (DHI), (NVR), (TOL),

Has the Value of Your Home Just Peaked?

Lately, my inbox has been flooded with emails from subscribers asking how to hedge the value of their homes. This can only mean one thing: the residential real estate market has peaked.

They have a lot to protect. Since prices hit rock bottom in 2011 and foreclosures crested, the national real estate market has risen by 50%.

I could almost tell you the day the market bounced. That’s when a couple of homes in my neighborhood that had been for sale for years suddenly went into escrow.

The hottest markets, like those in Seattle, San Francisco, and Reno, are up by more than 125%, and certain neighborhoods of Oakland, CA have shot up by 400%.

The concerns are confirmed by data that started to roll over in the spring and have been dismal ever since. It is not just one data series that has rolled over, they have all gone bad. One bad data point can be a blip. An onslaught is a new trend. Let me give you a dismal sampling.

*Home Affordability hit a decade low, thanks to rising prices and interest rates and trade war-induced soaring construction costs

*July Housing Starts have been in a tailspin as tariff-induced rocketing costs wipe out the profitability of new homes

*New Home Sales collapsed YOY.

*14% of all June Real Estate Listings saw price cuts, a two-year high

 *Chinese Buying of West Coast homes has vaporized over trade war fears

Fortunately, investors have a lot of options for either hedging the value of their own homes or making a bet that the market will fall.

In 2006, the Chicago Mercantile Exchange (CME) started trading futures contracts for the Corelogic  S&P/Case-Schiller Home Price Index, which covered both U.S. residential and commercial properties.

The Case-Shiller index, originated in the 1980s by Karl Case and Robert Shiller, is widely considered to be the most reliable gauge to measure housing price movements. The data comes out monthly with a three-month lag.

This index is a widely-used and respected barometer of the U.S. housing market and the broader economy and is regularly covered in the Mad Hedge Fund Trader biweekly global strategy webinars.

The composite weight of the CSI index is as follows:

  • Boston 7.4%
  • Chicago 8.9%
  • Denver 3.6%
  • Las Vegas 1.5%
  • Los Angeles 21.2%
  • Miami 5%
  • New York 27.2%
  • San Diego 5.5%
  • San Francisco 11.8%
  • Washington DC 7.9%

However, these contracts suffer from the limitations suffered by all futures contracts. They can be illiquid, expensive to deal in, and you probably couldn’t get permission from your brokers to trade them anyway.

If you want to be more conservative, you could take out bearish positions on the iShares US Home Construction Index (ITB), a basket of the largest homebuilders (click here for their prospectus). Baskets usually present half the volatility and therefore half the risk of any individual stock.

If real estate is headed for the ashcan of history, there are far bigger problems for your investment portfolio than the value of your home. Real estate represents a major part of the US economy and if it is going into the toilet, you could too.

It is joined by the sickly auto industry. Thanks to the trade wars, farm incomes are now at a decade low. As we lose each major segment of the economy, the risk is looming that the whole thing could go kaput. That, ladies and gentlemen, is called a recession and a bear market.

On the other hand, you could take no action at all in protecting the value of your home.

Those who bought homes a decade ago, took a ten-year cruise and looked at the value of their residence today will wonder what all the fuss is about. By the way, I met just such a person on the Queen Mary 2 last summer. Yes, ten years at sea!

And the next recession is likely to be nowhere near as bad as the last one, which was a twice-a-century event. So it’s probably not worth selling your home and buying it back later, as I did during the Great Recession.

See you onboard!



In Your Future?


February 27, 2019

Global Market Comments
February 27, 2019
Fiat Lux

Featured Trade:

(TLT), (TBT), ($TNX), (FCX), (FXE), (FXY), (FXA),
 (USO), (OXY), (ITB), (LEN), (HD), (GLD), (SLV), (CU),

Why China’s US Treasury Dump Will Crush the Bond Market

Years ago, if you asked traders what one event would destroy financial markets, the answer was always the same: China dumping its $1 trillion US treasury bond hoard.

It looks like Armageddon is finally here.

Once again, the Chinese boycotted this week’s US Treasury bond auction.

With a no-show like this, you could be printing a 2.90% yield in a couple of weeks. It also helps a lot that the charts are outing in a major long term double top.

You may read the president’s punitive duties on Chinese solar panels as yet another attempt to crush California’s burgeoning solar installation industry. I took it for what it really was: a signal to double up my short in the US Treasury bond market.

For it looks like the Chinese finally got the memo. Exploding American deficits have become the number one driver of all asset classes, perhaps for the next decade.

Not only are American bonds about to fall dramatically in value, so is the US dollar (UUP) in which they are denominated. This creates a double negative hockey stick effect on their value for any foreign investor.

In fact, you can draw up an all assets class portfolio based on the assumption that the US government is now the new debt hog:

Stocks – buy inflation plays like Freeport McMoRan (FCX) and US Steel (X)
Emerging Markets – Buy asset producers like Chile (ECH)
Bonds – run a double short position in the (TLT)
Foreign Exchange – buy the Euro (FXE), Yen (FXY), and Aussie (FXA)
Commodities – Buy copper (CU) as an inflation hedge
Energy – another inflation beneficiary (USO), (OXY)
Precious Metals – entering a new bull market for gold (GLD) and silver (SLV)

Yes, all of sudden everything has become so simple, as if the fog has suddenly been lifted.

Focus on the US budget deficit which has soared from $450 billion a year ago to over $1 trillion today on its way to $2 trillion later this year, and every investment decision becomes a piece of cake.

This exponential growth of US government borrowing should take the US National Debt from $22 to $30 trillion over the next decade.

I have been dealing with the Chinese government for 45 years and have come to know them well. They never forget anything. They are still trying to get the West to atone for three Opium Wars that started 180 years ago.

Imagine how long it will take them to forget about washing machine duties?

By the way, if I look uncommonly thin in the photo below it’s because there was a famine raging in China during the Cultural Revolution in which 50 million died. You couldn’t find food to buy in the countryside for all the money in the world. This is when you find out that food has no substitutes. The Chinese government never owned up to it.





February 20, 2019

Global Market Comments
February 20, 2019
Fiat Lux

Featured Trade:

(COPX), (GLD), (FCX), (BHP), (RIO), (SIL),
 (PPLT), (PALL), (GOLD), (ECH), (EWZ), (IDX),
(DHI), (LEN), (PHM), (ITB)

January 9, 2019

Global Market Comments
January 9, 2019
Fiat Lux

2019 Annual Asset Class Review
A Global Vision


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)

August 17, 2018

Global Market Comments
August 17, 2018
Fiat Lux

Featured Trade:
(ITB), (PHM), (KBH), (LEN), (DHI), (NVR), (TOL),

April 18, 2018

Global Market Comments
April 18, 2018
Fiat Lux

Special Residential Real Estate Issue

Featured Trade:
(DHI), (TOL), (LEN), (ITB), (KBH)

Why the Real Estate Boom Has a Decade to Run

Real estate brokers are still reeling from the news that December existing home sales rocketed by a blockbuster 14.7%, to an annualized 5.46 million units.

And now I hear that Apple (AAPL) is planning on building a second new research and development campus that will need 20,000 new high tech workers. The housing crisis here in the San Francisco Bay area just went from bad to worse.

It is all fresh fuel for a continuation in the bull market for US residential real estate, not just for this year, but for another decade.

Friends in the industry tell me the eye popping numbers were due to the implementation of the TILA-RESPA Integrated Disclosure (TRID) in October.

Dubbed the ?Know before you owe? requirement, TRID is the inevitable outcome of the 2008 subprime housing crash.

If you weren?t born yet in 2008, or were living in a cave on a remote Pacific island back then, go watch the movie ?The Big Short? for a further explanation of those dark days.

As a result, real estate closings now take at least a week longer, and sometimes more, thanks to a new requirement for several three day ?cooling off periods.?

When the new law kicked in, TRID nearly brought he industry to a halt, and firms were sent scurrying to their attorneys to draw up the new disclosure forms to stay within the law.

TRID undoubtedly was responsible for the slowdown in the market in the run up to December.

Although prices seem high now, I am convinced that we are only at the beginning of a long term secular bull market in housing. Anything you purchase now is going to make you look like a genius ten years down the road.

The best is yet to come.

The big driver will be demographics, of course.

From 2022 onward, 65 million Gen Xer?s will be joined by 85 million late blooming Millennials in bidding wars for the same houses. That will create a market of 150 million buyers, unprecedented in the history of the American real estate market.

In the meantime, 80 million baby boomers, net sellers and downsizers of homes for the past decade, will slowly die off and disappear from the scene as a negative influence. Only one third are still working.

The first boomer, Kathleen Casey-Kirschling, born seconds after midnight on January 1, 1946, will become 76 years old by then. A former school teacher, she took early retirement at 62.

The real fat on the fire here is that 5 million homes went missing in action this decade, thanks to the financial crisis. They were never built.

This is the result of the bankruptcy of several homebuilders, and the new found ultra conservatism of the survivors, like DR Horton (DHI), Lennar Homes (LEN), and Pulte Group (PHM).

Did I mention that all of this makes this sector a screaming ?BUY?, once the market moves into ?RISK ON? mode later in the year?

Talk to any real estate agent and they will complain about the shortage of inventory (except in Chicago, the slowest growing market in the country).

Prices are so high already that flippers have been squeezed out of the market for good. Bottom feeders, like hedge funds buying at the bankruptcy auctions, are a distant memory. Some now own more than 20,000 homes.

Income taxes are certain to rise in coming years, and the generous deductions allowed homeowners are looking more attractive by the day.

And let?s face it, ultra low interest rates aren?t going to be here forever. Borrow at 3% today against a long term 3% inflation rate, and you are essentially getting you house for free.

The rising rents that are turning Millennials from renters to buyers may be the first sign of real inflation beyond the increasingly dear health care and higher education that we’re are already seeing.

And Millennials are having kids that demand a bigger living space! Who knew?

I may become a grandfather yet!

DHI 1-27-16

PHM 1-27-16

LEN 1-27-16

Home-HouseLooks Like a ?BUY? to Me

Stress Testing the Mad Hedge Fund Trader Strategy

It is always a great idea to know how bomb proof your portfolio is.

Big hedge funds have teams of MIT educated mathematicians that constantly build models that stress test their holdings for every conceivable outcome.

WWIII? A Global pandemic? A 1,000 point flash crash? No problem. Analysts will tell you to the decimal point exactly how trading books will perform in every possible scenario.

The problem is that these are just predictions, which is code for ?educated guesses.?

The most notorious example of this was the Long Term Capital Management melt down where the best minds in the world constructed a portfolio that essentially vaporized in two weeks with a total loss.

S&P 500 volatility (VIX) exceeding $40? Never happen!

Oops. Better get those resumes out!

That?s why events like the Monday, August 24 1,000 flash crash are particularly valuable. While numbers and probabilities are great, they are not certainties. Nothing beats real world experience.

As markets are populated by humans, they will do things that no one can anticipate. Every machine has its programming shortcoming.

Given that standard, I think the Mad Hedge Fund Trader?s strategy did pretty well in the downdraft. I went into Monday with an aggressive ?RISK ON? portfolio that included the following:

MHFT Trading Book

The basic assumptions of this book were that the long term bull market has more to run, the housing sector would lead, interest rates would rise going into the September 17 Federal Reserve meeting, the dollar would remain strong, and that stock market volatility would stay within a 12%-20% range.

What we got was the sharpest one-day stock decline in history, a 28 basis point spike up in interest rates, a complete collapse in the dollar, and stock market volatility at an eye popping 53.85%.

Yikes! I couldn?t have been more wrong.

Now here?s the good news.

When we finally got believable options prices 30 minutes after the opening I priced my portfolio, bracing myself. My August performance plunged from +5.12% on Friday to -10%.

Hey, I never promised you a rose garden.

But that only took my performance for the year back to my June 17 figure, when I was up 23% on the year. In other words, I had only given up two months worth of profits, and that was at the low of the day.

I then sat back and watched the Dow rally an incredible 800 points. Now it was time to de risk. So I dumped my entire portfolio. The assumptions for the portfolio were no longer valid, so I unloaded the entire thing.

This was no time to be stubborn, proud, and full of hubris.

By the end of the day, I was down only -0.48% for August, and up +32.65% for the year.

Ask any manager, and they would have given their right arm to be down only -0.28% on August 24.

Of course, it helped that I had spent all month aggressively shorting the market into the crash, building up a nice 5.12% bank of profits to trade against. That is one of the reasons you subscribe to the Diary of a Mad Hedge Fund Trader.

The biggest hit came from my short position in the Japanese yen (FXY), which was just backing off of a decade low and therefore coiled for a sharp reversal. It cost me -4.85%.

My smallest loss was found in the short Treasury bond position (TLT), where I only shed 1.52%. But the (TLT) had already rallied 9 points going into the crash, so I was only able to eke out another 4 points to the upside on a flight to safety bid.

Lennar Homes gave me a 2.59% hickey, while the S&P 500 long I added only on Friday (after all, the market was then already extremely oversold) subtracted another 1.61%.

The big lesson here is that my short option hedges were worth their weight in gold. Without them, the losses on the Monday opening would have been intolerable, some two to three times higher.

You can come back from a 10% loss. I have done so many times in my life. A 30% loss is a completely different kettle of fish, and is life threatening.

For years, readers complained that my strategy was too conservative and cautious, really suited for the old man that I have become.

Readers were able to make a lot more money following my Trade Alerts through just buying the call options and skipping the hedge, or better yet, buying the futures.

I didn?t receive a single one of those complaints on Monday.

I?ll tell you who you didn?t hear from on Monday, and that was friends who pursued the moronic trading strategies you often find touted on the Internet.

That includes approaches like leveraged naked shorting of puts that are always advertising fantastic track records…when they work.

You didn?t hear from them because they were on the phone pleading with their brokers while they were forcibly liquidating portfolio showing 100% losses.

Any idiot can look like a genius shorting puts until it blows up in their face on a day like Monday and they lose everything they have. I know this because many of these people end up buying my service after getting wiped out by others.

I work on the theory that I am too old to go broke and start over. Besides, Morgan Stanley probably wouldn?t have me back anyway. It?s a different firm now.

Would I have made more money just sitting tight and doing nothing?


But the risks involved would have been unacceptable. I would have failed my own test of not being able to sleep at night. That is not what this service is all about.

In any case, I know I can go back to the market and make money anytime I want. That makes the hits easier to swallow.

You can?t do this without any capital.

With the stress test of stress tests behind us, the rest of the years should be a piece of cake.

Good luck, and good trading.

FXY 8-27-15

TLT 8-27-15

LEN 8-27-15

SPY 8-27-15

John ThomasSometimes It Pays to Be Old