Global Market Comments
March 23, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE GREAT DEPRESSION),
(INDU), (SPY), (GS), (MS), (FXI), (USO), (TSLA)
Tag Archive for: (MS)
The neighborhood is alive with power tools.
These are the implements that were given as Christmas presents to dads years ago. But to afford life in the San Francisco Bay Area said dads have to work 12 hours a day and weekends. Now, suddenly they have all the free time in the world and those ancient gifts are coming out of decade-old original packaging.
I’ve noticed something else about my neighborhood. People have suddenly started to turn gray. Beauty salon appointments have been banned for weeks, not designated essential businesses.
The GDP forecasts released by Goldman Sachs (MS) last week have been turning a lot of other people gray as well. Q1 is thought to show a -6% annualized shrinkage and Q2 is expected to come in at -24%. The unemployment rate will peak at 9%. Not to be outdone, Morgan Stanley (MS) cut their Q2 forecast to -30%.
That means America’s GDP will shrink to the 2016 level of $18.62 trillion, down enormously from today’s $21.5 trillion. Yes, three years of economic growth will be gone in a puff of smoke. These are far worse than the last Great Recession when the worst two quarters came in at -2% and -8%. That’s double the worst figures of the Great Recession.
In the meantime, vast swaths of the American economy are moving online, never to return.
The good news is that growth will return at a historic 12% rate in Q3. That sets up an exaggerated “V” for the stock market. How soon should you start buying stocks if this economic scenario plays out? Probably a month, if not weeks, but only if you have the courage to do so.
The numbers from China (FXI) this week are very encouraging, showing no increase in new cases. In February, they enacted the kind of severe lockdown which California enacted a week ago.
Hopefully, that means we will get the Chinese results in a month or two. But the problem is that these are Chinese numbers that may be intended more to please the government than shed light on the truth.
The first real look we get at the effectiveness of lockdown may be in Italy in a few weeks, which has been quarantined since February.
In the US, the states have abandoned all hope of help from Washington and are leading the charge with the most aggressive measures. In California, it is now illegal for 40 million people to go outside unless it is a trip to the grocery store, the pharmacy, or the doctor.
The Golden State is now on a WWII footing. Tesla (TSLA) is switching production to ventilators. The state national guard is setting up field hospitals in parks. I am growing my own victory garden in the back yard.
The state is seeking to double the number of hospital beds to 20,000 within weeks. It just bought an entire hospital in Oakland, Seton Hospital. It went bankrupt last year and the administrators couldn’t give it away. The state i taking control of abandoned college dormitories and leasing empty hotels and cruise ships.
I expect food rationing to hit in a month. The distribution system is strained but working now. It may start to fail in April or May when large numbers of workers get sick.
The good news is that shelter in place should work, possibly by May. Kids are out of school until August.
With Trump refusing to put the entire country on lockdown that raises the specter of those in red states dying, while those in blue ones live. The big blue states of New York, California, New Jersey, Connecticut, and Illinois were the first to order shelter-in-place and will certainly see lower and sooner peaks in disease and fatalities.
And guess who has a one-month supply of Chloroquine, along with antibiotics widely believed to be a cure for the Coronavirus? That would be me, who bought them to fight off malaria for my trip to Guadalcanal six weeks ago. I was planning on going back in June to collect more dog tags for the Marine Corps, so I have an extra supply. As long as you can read, I’ll still be writing.
There is one more unexpected aspect of the pandemic and the shelter-in-place orders. I expect a baby boom to ensue in about nine months, thanks to all this enforced togetherness. The US birth rate has been falling for decades and is now well below the replacement rate. It’s about time we found a way to turn it around. Just don’t count me in on this one. I already have five kids.
So, you’re still asking for a market bottom.
The futures in Asia are limit down as I write this, just above the Dow Average 17,000 handle (INDU), thanks to the Senate failure to pass a virus rescue bill. Near 15,000 seems within range, down 49% from the February high. Modern history is no longer relevant here. We have to go back to 1929 to see numbers this extreme. I’ll be doing the research on that in the coming days.
The 1987 crash was already revisited a week ago, with a 3,000-point plunge in the Dow Average, or 12%. Some 33 years ago, we saw a 20% single day haircut, which I remember too well. This is with the Federal Reserve throwing everything at the stock market but the kitchen sink. I never thought I’d live long enough to see another one of these.
The Fed took interest rates to zero to stave off a depression, but the stock market crashes in overnight trading anyway. That brings the total to 150 basis points in cuts in five days. The Treasury is to buy an eye-popping $700 billion in mortgage securities to clear out the refi market for the first time in a decade. The Fed has just fired its last bullets to save stocks.
Goldman Sachs is targeting 2,000 in the (SPX), down 10% from here and 41% from the top. That is a 14X multiple on a 2020 S&P 500 earnings decline from $165 to $143. Yes, it’s just a guess. Investors could care less now about fundamentals or technicals. Cash is king.
Oil (USO) is headed for the teens. Saudi Arabia is ramping up production to a record 13 million barrels a day. The recession is collapsing US demand from 20 to 15 million b/d, half of which is consumed by transportation.
Russian national income has just collapsed by 75%. Will there by a second Russian Revolution? The 3% of the US market capitalization accounted for by energy stocks will drop below 1%. Fill her up! Avoid energy, even though some are going for pennies on the dollar.
The only data point that counts now is the daily real-time Corona tally of cases and deaths from Johns Hopkins, (click here). All other economic data is now irrelevant. Right now we are at 335,997 cases worldwide and 14,641 deaths. The US is at a frightening 33,276 cases as of writing.
Insider buying is exploding, with CEOs picking up their own stocks at 50%-70% discounts. Charles Scarf, president of Wells Fargo, just bought $5 million worth of (WFC) down 52% from the recent top. This is a legendary indicator that we may be within weeks of a market bottom.
The New York Stock Exchange closes its floor trading operations last week after several members tested positive for the Corona virus. Online trading will continue, where 95% of the business migrated years ago. It’s really just a TV stage now.
It’s all about hedge funds, triggering the massive volatility of the past month. They have been unwinding massive positions with up to 13X leverage in illiquid markets that can’t handle the massive volume.
When the last hedge fund is liquidated, the market will go up and the (VIX) will collapse. They may have started and the (VIX) plunged an incredible 25 points in hours.
Trump asked states to keep unemployment data secret to minimize market impact. Just what we need, less information, not more. The Weekly Jobless Claims were a bombshell, adding 70,000 to 271,000, the sharpest increase in a decade. Look for far worse to come in coming weeks as whole industries are shut down, and state unemployment computers explode from the weight of applications. Jobless Claims over 2 million are imminent!
Existing Home Sales soared by a stunning 6.5% in February, a 13-year high. The West saw an amazing 17% increase. The median home price jumped by 8% YOY. While the data is great, it’s all pre-Corona. It is illegal for people to go out to look at homes in many states, and no one wants to sell to keep strangers out of the house.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $20 a barrel, and many stocks down by three quarters, there will be no reason not to.
My Global Trading Dispatch performance has had a great week, thanks to the collapse in market volatility, pulling back by -8.22% in March, taking my 2020 YTD return down to -11.14%. That compares to an incredible loss for the Dow Average of -37% at the Friday low. My trailing one-year return was pared back to 31.68%. My ten-year average annualized profit shrank to +33.56%.
I have been fighting a battle for the ages on a daily basis to limit my losses. My goal here is to make it back big time when the market comes roaring back in the second half.
My short volatility positions have largely recovered. I shorted the (VXX) when the Volatility Index (VIX) was at $35. It then went to an unbelievable $80 before falling back to $55. I was saved by only trading in very long maturity, very deep out-of-the-money (VXX) put options where time value will maintain a lot of their value. Now, we have time decay working in our favor. These will all come good well before their one-year expiration.
At the slightest sign of a break in the pandemic, the economy and shares should come roaring back. Right now, I have a 70% cash position.
On Monday, March 23 at 7:30 AM, the Chicago Fed National Activity Index is out.
On Tuesday, March 24 at 9:00 AM, the New Home Sales for February are released.
On Wednesday, March 25, at 7:30 AM, US Durable Goods for February are published.
On Thursday, March 26 at 7:30 AM, Weekly Jobless Claims are announced. The number could top 1,000,000. The final read on Q4 GDP is announced, although it is ancient history.
On Friday, March 27 at 9:00 AM, the US Personal Income for February is printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I will be in training doing daily ten-mile hikes with a 50-pound backpack. I will be leading the Boy Scouts on a 50-mile hike at Philmont in New Mexico. I expect the epidemic to peak well before then and normalcy to return.
Shelter in place will work. Please stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Going Shopping
Global Market Comments
September 9, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SAVED BY A HURRICANE)
(FXB), (M), (XOM), (BAC), (FB), (AAPL),
(AMZN), (ROKU), (VIX), (GS), (MS),
This was the week when the stock market was saved by Hurricane Dorian.
Why a hurricane?
Because it gave President Trump something else to Tweet about beside China and Jay Powell. The White House went totally silent, at least on matters concerning the stock market. There, the focus instead turned on whether Trump predicted Dorian was going to hit Alabama (it didn’t).
Thank goodness for small favors.
Instead, investors got to hear about progress was purported to be made on the China trade talks with a possible October meeting.
It all reminds me of the 1968 Paris peace talks, which I visited, where I remember Ambassador Avril Harriman storming out of the Majestic Hotel with a very stern expression on his face. They had just spent a year arguing with the North Vietnamese over the shape of the table (they finally settled on an oval).
Brexit finally started lurching towards its inevitable demise. Hard Brexit failed in Parliament, a disaster for Prime Minister Boris Johnson, whose own party and even his own brother voted against him.
Elections will follow which will finally plunge a dagger through the heart of Britain’s attempt to leave the European Community. If this happens, it will be a huge positive for risk markets globally. This is the beginning of the end. Get ready to buy the pound (FXB).
The bad news? Don’t count on this happening again this week, unless we get another hurricane. When a stock market rally is led by sectors with the worst fundamentals, like retail (M), energy (XOM), and banks (BAC), you want to run a mile. It means the rally was driven by short-covering, we are now at a market high, and the short players have a ton of cash.
I have been pounded with questions all week if the bottom is in and if it’s time to load the boat with tech stocks yet again. I have to answer with a firm “Not yet!” We still have three weeks to go in September with plenty of time for more volatility.
If the Fed cuts interest rates by 25 basis points, the Dow average could crater by 1,000 points. If they don’t cut, which I give a 50/50 chance, it will be down by 2,000 points.
They will be encouraged to cut by an August Nonfarm Payroll Report that came in at a tepid 130,000. The headline Unemployment Rate remained unchanged at 3.7%, a 50-year low. Average Hourly Earnings were an inflationary 0.4%, or 3.2% YOY. June and July were revised down.
The 2020 census was a big factor in August, where the US government hired 25,000 workers to prepare for next year. Without this, August would have come in at a weak 105,000 jobs.
Manufacturing hiring amounted to only 3,000, while Retail lost 11,000 jobs for the seventh consecutive monthly decline. The broader U-6 “discouraged worker” unemployment rate rose from 7.0% to 7.2%.
To demonstrate how much value you are gaining with this service, I generated the chart below. Since January 26, 2018 when the S&P 500 peaked, the total return has been zero, with a lot of heart-stopping volatility, including one 20% drawdown.
That has been the cost to the stock market of the trade war, which started only a few days later. The profit created by the Mad Hedge Fund Trader during the same period has been 58.97%.
You couldn’t even beat the Mad Hedge Fund Trader by pouring all your money into big technology stocks. Over the same time, Facebook (FB) fell 4.1%, Apple (AAPL) rose 21.7%, and Amazon (AMZN) by 22.2%.
The only way you could have topped my performance was to pour your life savings into Roku (ROKU), right when Amazon was about to put it out of business. Jeff Bezos partnered with Roku instead of delivering a 225% pop in the shares.
You might think such a performance is blown out of proportion, exaggerated, and fake. However, it is perfectly consistent with the numbers generated for the in-house trading books by senior traders at Goldman Sachs (GS) and Morgan Stanley (MS) where I come from.
In fact, during my day, if a trader earned less than 30% a year on his capital, he got fired or transferred over to covering retail accounts because the firm had so many better places to invest. They are also consistent with the performance of the top-end hedge managers, of which I used to be one.
Chinese Manufacturing Activity fell for four consecutive months taking the Purchasing Managers Index below a recessionary 50. If you wreck the economy of the world’s largest customer, the rest of the world goes into recession.
US Manufacturing hit a three-year low, the ISM Manufacturing PMI diving from an average 56.5 to 49.1 in August. Anything below 50 is a recession indicator. Hoping that China will bleed worse than us in a trade war is not a winning strategy. Stocks dove 300 points and the Volatility Index (VIX) shot up to $21 on the news. Avoid risk, as this is going to be a terrible month.
The prospect of a China meeting popped stocks 400 points, with an agreement to meet in October, citing progress on a phone call. Boy, I’m getting tired of this. When can we go back to looking at earnings, dividends, and book value?
The European Central Bank will almost certainly ease this week. It hasn’t worked for ten years so let’s try it again. They’re obviously not printing enough Euros. Overnight rates will fall from -0.4% to -0.6%. Some 30 billion euros a month will hit the economy in a new QE.
The Atlanta Fed downgraded the economy, cutting its Q3 GDP growth forecast from 2.0% to 1.5%. Expect a string of poor data points in the coming months as the delayed effect of an escalated trade war. However, the non-manufacturing service economy remains strong. That’s me, and probably you too.
The Mad Hedge Trader Alert Service has posted its best month in two years. Some 22 or the last 23 round trips, or 95.6%, have been profitable, generating one of the biggest performance jumps in our 12-year history.
My Global Trading Dispatch has hit a new all-time high of 334.48% and my year-to-date shot up to +34.35%. My ten-year average annualized profit bobbed up to +34.30%.
Better yet, since July 31, we generated a 20% profit for the trade alert service while the gain in the Dow Average was absolutely zero!
I raked in an envious 16.01% in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.
As long as the Volatility Index (VIX) stays above $20, deep in-the-money options spreads are offering free money. I am now 40% long big tech. It rarely gets this easy.
The coming week will be a snore, as it always is after the jobs data.
On Monday, September 9 at 11:00 AM, August Consumer Inflation Expectations are out.
On Tuesday, September 10 at 12:00 PM, the NFIB Business Optimism Index for August is released.
On Wednesday, September 11, at 8:30 AM, the US Producer Price Index is announced.
On Thursday, September 12 at 8:30 AM, the Weekly Jobless Claims are printed. At the same time, the US Inflation Rate is published.
On Friday, September 13 at 8:30 AM, the US Retails Sales are printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be driving up to Lake Tahoe to make final preparations for the October 25-26 Mad Hedge Lake Tahoe Conference. A record number of black bears have been breaking into homes this summer and I just want to make sure my lakefront estate is OK.
It seems that Airbnb tenants have been leaving trails of cookies to their front doors and painting their refrigerators with peanut butter so they can get better selfies with their ursine neighbors.
Not a good idea.
I’ll be avoiding Interstate 80. A truck carrying 1,000 live chickens crashed there yesterday and the California Highway Patrol was last seen chasing them down the freeway.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
August 22, 2019
Fiat Lux
Featured Trade:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
Global Market Comments
December 14, 2018
Fiat Lux
Featured Trade:
(DECEMBER 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (MU), (PYPL), (SPOT), (FXE), (FXY), (XLF), (MSFT), (AMZN), (TSLA), (XOM),
(SIGN UP NOW FOR TEXT MESSAGING OF TRADE ALERTS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader December 12 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader
Q: Is the bottom in on the S&P 500 (SPX) or are we going to go on another retest?
A: It’s stuck right in the 2600-2800 range, and I think that’s probably where we bounce off of 2600 again. The question is whether or not we can clear the top of the range at 2800. If we can’t, I would fully expect a retest of this bottom in which case I could see it going down to 2500.
Q: You say you’ll go 100% cash by Dec 21st but also stated that the S&P 500 will go up 5% by the year's end. Should we stay in until we get the up 5% move?
A: Yes, all of our options positions expire by the 21st but if you’re just long in stocks, I would stay long, probably through the end of the year.
Q: Will the Chinese-U.S. dispute ruin the Tech industry?
A: No, I think the Trump Administration will have to do some kind of deal and call it a victory, otherwise the trade war will pull the U.S. into recession. If we go into the next presidential election with another recession—well, no one has ever survived that. Even with the China-U.S. dispute, the U.S. is still dominant in the Tech industry and will continue to do so for decades to come.
Q: China has managed to duplicate Micron Technology’s (MU) biggest selling chip, undercutting prices—thoughts?
A: True, Micron is the lowest value added of the major chip producers, therefore their stock has gotten hit the worst of any of the chip stocks down by about 46%, but I know Micron very well and they have a whole range of chips they’re currently upgrading, moving themselves up the value change to compete with this. So, that makes it a great company to own for the long term.
Q: I’m up 90% on my PayPal (PYPL) position—should I take a profit?
A: Yes! Absolutely! How many 90% profits have you had lately? You are hereby excused from this webinar to go execute this trade. And well-done Dr. Denis! And thank you for the offer of a free colonoscopy.
Q: What can you say about Spotify (SPOT)?
A: No, thank you—there’s lots of competition in the music streaming business. We are avoiding the entire space. The added value is not great, and many of these companies will have a short life. And with China’s Tencent growing like crazy, life for Spotify is about to become dull, mean, and brutish.
Q: What’s your view on currencies?
A: So you’re looking to make another fortune? Yes, I think the Euro (FXE) and the Yen (FXY) really are looking hard to rally, and the trigger could be dovish language in the next Fed meeting. Once the Fed slows its rate of interest rates rises, the currencies should take off like a scalded chimp.
Q: Will the banks (XLF) rally in the next 6 months for a better sell?
A: Many people are waiting for a rally in the banks so they can unload them and haven’t gotten it—they’re back to pre-election price levels. The issue here is structural, and you don’t get recoveries from major structural changes in an industry. It’s significant that this is the first bull market that had no net new employment in the banks whatsoever; the business is fading away. They are the new buggy whip makers. These gigantic national branch networks will all be gone in ten years because the banks can’t afford them.
Q: Would you enter the Microsoft (MSFT) trade today?
A: I actually think I would; Microsoft only pulled back 10% when everything else was dropping 30%, 40%, or 50%. That shows you how many people are trying to get into this name so if you could take a little short-term pain (like 5%), the stock outright is probably a screaming buy here. I think it’ll go to $200 one day, so here at $110-$111 it looks like a pretty good deal. The story here is that Microsoft is rapidly taking market share from Amazon (AMZN) in the cloud business and that’s going to continue.
Q: When will you be updating your long-term model portfolio?
A: I usually do it at the end of the year, and rarely make any big changes. I’ll still be selling short bonds and still like Tesla (TSLA) and Exxon (XOM).
Q: I just joined your service. What is the best way to get started?
A: I’ll give you the same advice that I gave every starting trader at Morgan Stanley (MS). Start trading on paper only. When you are making money reliably on paper, move up to using real money, but only with one contract per position. When that is successful, slowly increase your size to 2, 3, 5, 10, and 20 contracts. Pretty soon, you will be swinging around 1,000 contracts a lot like I do. The further you move down the learning curve the greater you can increase your size and your risk. If you never get past the paper stage at least it’s not costing you any money.
I hope this helps.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
September 24, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or IT’S FED WEEK),
(SPY), (XLI), (XLV), (XLP), (XLY), (HD), (LOW), (GS), (MS), (TLT),
(UUP), (FXE), (FCX), (EEM), (VIX), (VXX), (UPS), (TGT)
(TEN TIPS FOR SURVIVING A DAY OFF WITH ME)
20/20 hindsight is a wonderful thing, especially when all of your predictions come true.
In February, I announced that markets would trade in broad ranges until the run-up to the midterm elections. That is what has happened to a tee, with the decisive upside breakout taking place last week. From here on. You’re trying to buy dips for a year-end run-up to higher highs.
For many months I was the sole voice in the darkness crying out that the bull market was still alive, it was just resting. Now quality laggards are taking the lead, such as in Industrials (XLI), Health Care (XLV), Consumer Staples (XLP), and Consumer Discretionary (XLY).
Home Depot (HD), which I recommended a month ago has taken off for the races, as has competitor Lowes (LOW), thanks to a twin hurricane boost. Even the long dead banks have recently showed a pulse (MS), (GS).
Technology stocks are taking a long-needed rest after a torrid two-and-a-half-year run. But they’ll be back. They always come back.
It’s not only stocks that have broken out of ranges, so has the bond market (TLT), the U.S. dollar (UUP), and foreign currencies (FXE). Will commodity companies like Freeport-McMoRan (FCX) and emerging markets (EEM) be the last to pick themselves off the mat, or do they really need to see the end of the trade wars first?
Markets are essentially acting like the trade war is over and we won. Why would traders believe this? That’s what a Volatility Index touching $11 tells you and is why I have been telling them to avoid buying it all week. Because the president told them so.
Another not insignificant positive is that multinationals have been slow to repatriate foreign funds, so there is a lot more still abroad to buy back their own stocks.
Weekly jobless claims hit another half century low at 201,000. Major U.S. companies such as UPS (UPS) and Target (TGT) are planning record levels of Christmas hiring. By the way, this is what economic peaks look like.
The Senate passes a mini spending bill that keeps the government from shutting down until December 7. The budget deficit keeps on soaring, but apparently, I am the only one who cares. Live through a debt crisis like we had during the early 1980s and you’d feel the same way.
The data for housing continues to be terrible, and we saw our first increase in inventories in three years.
Finally, with people camping out overnight and lines around the block, Apple’s CEO Tim Cook opens the doors to the Palo Alto, CA, store at 9:00 AM sharp on Friday to three new phones. But did the stock peak at $230, as it has in past release cycles?
Last week, the performance of the Mad Hedge Fund Trader Alert Service forged a new all-time high and then gave it up on one bad trade. September is now unchanged at -0.32%. My 2018 year-to-date performance has retreated to 26.69%, and my trailing one-year return stands at 38.23%.
My nine-year return appreciated to 303.16%. The average annualized Return stands at 34.32%. I hope you all feel like you’re getting your money’s worth.
This coming week is all about the Fed, plus a plethora of housing data.
On Monday, September 24, at 10:30 AM, we learn the August Dallas Fed Manufacturing Survey.
On Tuesday, September 25, at 9:00 AM, the new S&P Corelogic Case-Shiller National Home Price Index for July, a three-month lagging indicator.
On Wednesday September 26, at 10:00 AM, the August New Home Sales is published. At 2:00 the Fed Open Market Committee announced its decision to raise interest rates by 25 basis points.
Thursday, September 27 leads with the Weekly Jobless Claims at 8:30 AM EST, which dropped 3,000 last week to 201,000, a new 43-year low. At the same time an update on Q2 GDP is published.
On Friday, September 28, at 9:45 AM, we learn the August Chicago Purchasing Managers Index. The Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me,
Good luck and good trading.
Mad Hedge Technology Letter
May 10, 2018
Fiat Lux
Featured Trade:
(WHO'S TRYING TO BREAK INTO YOUR HOME NOW?),
(GRUB), (DPZ), (AMZN), (BABA), (YUM), (YELP), (MS)
