Global Market Comments
July 8, 2020
Fiat Lux
Featured Trade:
(TRADING THE BLUE WAVE STOCK MARKET),
(FB), (AAPL), (MSFT), (AMZN), (ADBE), (SQ), (PYPL), (CRM), (SGEN), (REGN), (ILMN) (FEYE), (PANW), (AMD), (MU), (NVDA), (TSLA), (LEN), (PHM), (KBH), (XOM), (CVX), (XOM), (RTN), (NOC), (LMT), (KOL), (X), (GE)
At this point, it is possible that the president may lose the November election.
He is 14 points behind Democratic candidate Joe Biden in the polls. The odds at the London betting polls have him losing by a similar amount. My old employer The Economist magazine in London gives him a 10% chance of winning using a mix of economic and polling data.
And this assumes the election is held today. The fact is that the president is digging himself into a deeper hole every day, taking the wrong side of every issue confronting the country today. He seems to be refighting the Civil War….and taking the Confederate side when even the State of Mississippi is taking its symbol off its flag.
So, what will the post-Trump world look like? Will taxes go through the roof? Will the market crash? Is it time to go 100% cash, change our names, and move to a country with no US extradition treaty?
I don’t think so. In fact, with stocks soaring to meteoric new highs every day, the market expects that a Biden administration will be great news for stocks, perhaps the best ever.
Taxes will certainly go up. Favorable tax treatment of the energy, real estate, and private equity funds will get axed. Carried interest will finally become history. Marginal tax rate on net income over $1 billion could get hiked to the Roosevelt levels of 80-90%.
Biden has already announced an increase in the corporate tax rate from 21% to 28%. That will cut earnings for the S&P 500 by $9 a share. But the stock market is not the economy, with S&P earnings only accounting for 10% of US GDP.
And the $9 companies lose in taxes they will make back and more from new government spending, which isn’t slowing down any time soon. Some 14,000 American bridges need to be rebuilt. The Interstate Highway System is a shambles. High-speed broadband needs to go rural. The electrification of the US needs to accelerate to accommodate the millions of electric cars headed our way.
I believe that eventually, 51 million Americans will lose their jobs as a result of the pandemic. Perhaps a third of those are never coming back because the future has been so accelerated. That will leave the broader U-6 Unemployment rate stuck in double digits for years, maybe for decades.
So, we’re going to need some kind of Roosevelt style programs like the Works Progress Administration (WPA) and the Civilian Conservation Corps (CCC) who built much of the monolithic infrastructure that we all enjoy today.
At least 300,000 educated workers could immediately be put to work in contact tracing. Millions more could be employed in national infrastructure programs. One thing is certain. A new administration won’t stop massive government spending, it will simply redirect it.
And let's face it. A Biden win would bring a big expansion of Obamacare. With the best healthcare technology in the world, private industry has done the world’s worst job controlling the pandemic.
Countries with well-run national healthcare systems like Australia, New Zealand, Japan, and Singapore have almost wiped out the disease. This is why I am avoiding the healthcare sector for the foreseeable future.
Who are the big winners of all this? Big tech (FB), (AAPL), (MSFT), (AMZN), medium tech (ADBE), fintech (SQ), (PYPL), the cloud (CRM), and biotech (SGEN), (REGN), and (ILMN).
Cybersecurity will always be in demand (FEYE), (PANW). The global chip shortage will continue to worsen (AMD), (MU), (NVDA).
And Tesla (TSLA)? What can I say? It is already up nearly 100-fold from my initial $16.50 recommendation in 2010, and I’ve bought three Tesla’s (two S’s and an X).
Followers of the Mad Hedge Trade Alert service know that I am already long these names up the wazoo, and is why I am up 26% in 2020. It’s simply a matter of all pre-pandemic trends hyper-accelerating, which we were already tapped into.
If you have to add a purely domestic sector, a gigantic Millennial tailwind will keep homebuilders bubbling for years like (LEN), (PHM), and (KBH).
And while you won’t find me as a player here, retail will recover. The sector has not prospered during the current administration, thanks to a trade war with China and the pandemic.
And the losers? There is a classification of “Trump” stocks you don’t want to be anywhere near. Energy will do terribly (XOM), (CVX), (XOM), with Texas tea possibly revisiting negative numbers. If you take away the tax breaks, energy hasn’t really made money in decades.
Defense stocks (RTN), (NOC), (LMT) will take a big hit from budget cutbacks and fewer wars. Coal (KOL) will finally get shut down for good, probably sold to China in bankruptcy proceedings. Industrials will continue to lag (X), (GE), with no more free handouts from the government and no technology advantage.
So if Biden wins, you don’t need to slit your wrists, hang yourself from the showerhead, or cease investing completely. Just take your stock market winnings and go out and get drunk instead.
Global Market Comments
April 30, 2020
Fiat Lux
SPECIAL HOUSING ISSUE
Featured Trade:
(WHY A US HOUSING BOOM IS IMMINENT)
(LEN), (KBH), (PHM)
Lately, my inbox has been flooded with emails from subscribers asking if the housing market is about to crash as a result of the pandemic and if they should sell their homes.
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%.
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 500%.
Looking at the recent housing statistics, I can understand their concern. The grim tidings are:
*2.9 Million Homes Now in Forbearance, and the number is certainly going to rise from here. Laid off renters are defaulting on payments, depriving owners of meeting debt obligations. It’s just a matter of time before this creates a financial crisis. Avoid the banks for now, no matter how cheap they get.
* Existing Home Sales Collapsed by 15.4%, in March. Realtors expect this figure to drop 40% in the coming months. Open houses are banned, sellers are pulling listings, and buyers low-balling offers. However, price declines in the few deals going through are minimal. When will the zero interest rates come through? Mortgage interest rates are higher now than before the pandemic because 6% of all home loans are now in default.
* Pending Home Sales Down a Staggering 20.8% in March, and off 16.3% YOY. The worst is yet to come. The West, the first into shelter-in-place, was down a monster 26.8%. Prices still aren’t moving because nobody can buy or sell.
*Chinese Buying of West Coast homes has vaporized over trade war fears, and then of the Covid-19 lockdown, which started with a shutdown of all flights from China.
I have a much better indicator of future housing prices than the depressing numbers above. The way homebuilder stocks like Lennar (LEN), KB Homes (KBH), and Pulte Homes (PHM) are trading, I’d say your home will be worth a lot more in a year, and possibly double in another five years. Many of these stocks are up nearly 100% since the March 23 bottom.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth over the last 20 years is that 85 million baby boomers are retiring to be followed by only 65 million “Gen Xer’s”. When you are losing 20 million consumers, economies don’t grow very fast. For more about millennial investing habits, please click here.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, healthcare, and “RISK OFF” assets like bonds.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward to the other side of the pandemic and the reverse happens. The baby boomers will be out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xer’s being chased by 85 million of the “millennial” generation trying to buy their assets!
By then we will not have built new homes in appreciable numbers for 14 years and a severe scarcity of housing hits. Even before the pandemic, new home construction was taking place at half the 2008 peak. Residential real estate prices will naturally soar. Labor shortages will force wage hikes.
The middle-class standard of living will then reverse a 40-year decline. Annual GDP growth will return from the subdued 2% rate of the past three years to near the torrid 4% seen during the 1990s. It all leads to my “Return of the Roaring Twenties” scenario which you can learn about by clicking here.
It gets better.
It is certain that a future administration will restore tax deductions for state and local real estate taxes (SALT) lost in the 2017 tax bill. The cap on home mortgage interest rate deductions will also rise.
These two events will trigger an immediate 10% increase in the value of your home on an after-tax basis and more on the coasts.
So, if someone approaches you with a discount offer for your home, I would turn around and run a mile the other way.
You should also pile into the stocks, options, and LEAPS of housing stocks in any future market dip.
In Your Future?
Global Market Comments
January 6, 2019
Fiat Lux
2020 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE), (AMLP), (USO), (UNG),
(GLD), (GDX), (SLV), (ITB), (LEN), (KBH), (PHM)
Global Market Comments
December 19, 2019
Fiat Lux
Featured Trade:
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)
(PLAY IT SAFE WITH ANTHEM), (ANTM), (CI)
Global Market Comments
September 11, 2019
Fiat Lux
Featured Trade:
(HAS THE VALUE OF YOUR HOME JUST PEAKED?),
(ITB), (PHM), (KBH), (LEN), (DHI), (NVR), (TOL),
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA CONFERENCE, OCTOBER 25-26, 2019)
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:
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!
Global Market Comments
February 27, 2019
Fiat Lux
Featured Trade:
(WHY CHINA’S US TREASURY DUMP WILL CRUSH THE BOND MARKET),
(TLT), (TBT), ($TNX), (FCX), (FXE), (FXY), (FXA),
(USO), (OXY), (ITB), (LEN), (HD), (GLD), (SLV), (CU),
(THE 13 NEW TRADING RULES FOR 2019)
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.
