Posts

October 21, 2019

Global Market Comments
October 21, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE FORK IN THE ROAD),
(SPY), (TLT), (WMT), (GM), (FXI), (NFLX)

September 16, 2019

Global Market Comments
September 16, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or CHOPPY WEATHER AHEAD),
(SPY), (TLT), (FB), (GOOGL), (M), (C),
 (XOM), (NFLX), (DIS), (FXE), (FXI)

The Market Outlook for the Week Ahead, or Choppy Weather Ahead

When commercial pilots fly across the US, they often give each other a heads up about dangerous conditions so other can avoid them. “Chop” is a common one, clear air turbulence that appears on no instruments. Usually, a simple altitude change of a few thousand feet is enough to deal with the problem.

“Chop” is what we traders have had to deal with in the stock market a lot for the past 18 months ever since the trade war with China started. Look at the S&P 500 (SPY) and you see that we have been covering the same ground over and over again, much like trench warfare in WWI. Since April 2018, we have crossed the $270-$290 space no less than six times.

We are just now kissing the upper edge of that band. What happens next depends on your beliefs. If you think the trade war will end in the next month and we don’t go into recession, then the markets will break out to new all-time highs, blasting all the way up to $320. If you don’t, you want to be fading this move, unloading risk, and entertaining short plays.

I’ll let you decide.

As for me, I have been suspicious of this rally since it started the third week of August. It has been led by banks, energy, retailers, and all the other garbage with terrible fundamentals that have been falling for years. In other words, it is pure short covering. There is no net money coming into the market. In the meantime, technology has not fallen, it has ground to a halt awaiting the next flood of capital.

It was Apple (AAPL) day in Silicon Valley, with the world’s largest company rolling out a host of new services and upgrades. The new Apple TV Plus streaming service was the focus, coming out with a $5 a month price, easily undercutting Disney Plus (DIS) at $10 and Netflix (NFLX) at $15.

It is an in-between generation year, so we didn’t get anything big. But with 200 million iPhones needing replacement in coming years (AAPL) is still a good long-term hold. All eyes will be on the share buy backs.

The next antitrust assault on big tech arrived, with Facebook (FB) and Google (GOOGL) now in the sights of 49 US states. This will go nowhere as technology has been leading to lower prices, not higher ones. What is the monopoly value of a service that is given away for free? The choice is very simple: let the US continue to dominate tech, or let China take it over.

Job growth is slowing, and the belief that it has peaked for this cycle is growing. Job openings fell 31,000 in August to 7.2 million according to the Department of Labor. The big loss was in wholesale trade, the big gain in information technology. The economy is moving from old to new.

The John Bolton firing, the national security advisor, crushed oil as the chance of a major Middle Eastern war decline, knocking $1.50 off of Texas Tea. That negotiation with the Taliban didn’t go so well, with them blowing up our people while talking with Mike Pompeo. The risk is that Trump’s next national security advisor could be worse. That’s been the trend. The last national security advisor took money from the Russians.

Europe pulled out all the stops (FXE), renewing a stimulus program with massive quantitative easing. Euro interest rates also to be cut. Eventually, a lot of that money will end up back in the US, the only place in the world with decent investment returns. That’s why our stocks are now a few pennies short of a new all-time high.

We saw more of Trump talking up the market ahead of trade talks, with the administration considering half a deal on trade tariffs, while throwing technology under the bus with an intellectual property walkaway. Good for the Midwest, terrible for the west coast.

The bond market meltdown continued, with one of the sharpest collapses in history, down 11 points in a week, The ten-year US Treasury bond yield (TLT) has spiked from 1.44% to 1.90% in a week. Hope you got the rate lock on your refi last Friday. Long bonds had become the most overcrowded trade in a decade. Give it a month to digest, then take another run at the highs in prices, lows in yields.

China (FXI) bought ten shiploads of soybeans (SOYB), hoping for a positive outcome in the October trade talks. Or did they make the purchase to start the trade talks in the first place? Who knows? Price spikes 5%, at last! It’s why stocks are pushing to new all-time highs.

The budget deficit toped $1 trillion in the first 11 months of fiscal 2019, the highest since the financial crisis. Running deficits this big during peace time with 2% economic growth will leave us with no way to get out of the next recession. It’s setting up the most predictable financial crisis in history, the next one. It’s just a matter of time before the chickens come home to roost. By the time Trump leaves office, the national debt will have increased by $4 trillion, or 20%.

The Mad Hedge Trader Alert Service is treading water in this wildly unpredictable month.

My Global Trading Dispatch stands near an all-time high of 334.99% and my year-to-date remains level at +34.85%. My ten-year average annualized profit bobbed up to +34.35%. 

I’ll be running my 40% long in technology stocks into the September 20 options expiration because there is nothing else to do. After watching the bond market crater by 11 points, I could no longer restrain myself and stuck my toe in the water with a small long with yields at 1.90%. I may have to sweat a move to a 2.00% yield, but no more. I break even at 2.10%.

The coming week will be one of the biggest of the year, thanks to the Fed.

On Monday, September 16 at 8:30 AM, the New York Empire State Manufacturing Index is out.

On Tuesday, September 17 at 9:15 AM, the US Industrial Production is published.

On Wednesday, September 18, at 8:30 AM, August Building Permits are released. At 2:30 PM, the Federal Reserve announces its interest rate decision. If they don’t cut look out below?

On Thursday, September 19 at 8:30 AM, the Weekly Jobless Claims are printed. At 10:00 AM, Existing Home Sales are printed.

On Friday, September 20 at 8:30 AM, the Baker Hughes Rig Count is released at 2:00 PM.

As for me, my entire weekend is committed to the Boy Scouts, doing assorted public services projects with the kids, timing a mile run for the Physical Fitness merit badge, and cleaning up San Francisco Bay. Hopefully, I will get some time to review my charts. I usually look at 200 a weekend.

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

August 22, 2019

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)

What the Next Recession Will Look Like

The probability of a recession taking place over the next 12 months is now ranging as high as 40%. If the trade war with China escalates, you can mark that up to 100%.

And here’s the scary part. Bear markets front-run recessions by 6-12 months, i.e. now. The bear case is now more persuasive than at any time in the last decade.

We’ll get a better read when the Chinese announce their retaliation for the last American escalation of tariffs on September 1, or in eight trading days. The timing couldn’t be worse. The bad news will come over the US three-day Labor Day weekend, allowing market volatility (VIX) to bunch up, setting up an explosive Tuesday, September 3 opening.

So, it’s time to start asking the question of what the next recession will look like. Are we in for another 2008-2009 meltdown, when friends and relatives lost homes, jobs, and their entire net worth? Or can we look forward to a mild pullback that only economists and data junkies like myself will notice?

I’ll paraphrase one of my favorite Russian authors, Fyodor Dostoevsky, who in Anna Karenina might have said, “all economic expansions are all alike, while recessions are all miserable in their own way.”

Let’s look at some major pillars in the economy. A hallmark of the last recession was the near collapse of the financial system, where the ATMs were probably within a week of shutting down nationally. The government had to step in with the TARP, and mandatory 5% equity ownership in the country’s 20 largest banks.

Back then, banks were leveraged 40:1 in the case of Morgan Stanley (MS) and Goldman Sachs (GS), while Lehman Brothers and Bear Stearns were leveraged 100:1. In that case, the most heavily borrowed companies only needed markets to move 1% against them to wipe out their entire capital. That’s exactly what happened. (MS) and (GS) came within a hair’s breadth of going the same way.

Thanks to the Dodd Frank financial regulation bill, banks cannot leverage themselves more than 10:1. They have spent a decade rebuilding balance sheets and reserves. They are now among the healthiest in the world, having become low margin, very low-risk utilities. It is now European and Chinese banks that are going down the tubes.

How about real estate, another major cause of angst in the last recession? The market couldn’t be any more different today. There is a structural shortage of housing, especially at entry-level affordable prices. While liar loans and house flipping are starting to make a comeback, they are nowhere near as prevalent a decade ago. And the mis-rating of mortgage-backed securities from single “C” to triple “A” is now a distant memory. (I still can’t believe no one ever went to jail for that!).

And interest rates? We went into the last recession with a 6% overnight rate and 7% 30-year fixed rate mortgage. Now, overnight rates are at 2.25% and the 30-year is at 3.6% with both falling like a stone. It’s hard to imagine a real estate crisis with rates at zero and a shortage of supply.

The auto industry has been in a mild recession for the past two years, with annual production stalling at 16.8 million units, versus a 2009 low of 9 million units. In any case, the challenges to the industry are now more structural than cyclical, with new buyers decamping en masse to electric vehicles made on the west coast.

Of far greater concern are industries that are already in recession now. Energy has been flagging since oil prices peaked seven years ago, despite massive tax subsidies. It is suffering from a structural over supply and falling demand.

Retailers have been in a Great Depression for five years, squeezed on one side by Amazon and the other by China. A decade into store closings and the US is STILL over stored. However, many of these shares are already so close to zero that the marginal impact on the major indexes will be small.

Financials and legacy banks are also facing a double squeeze from Fintech innovation and collapsing interest rates. There isn’t much margin in a loan where the customer is paying only 3.6%, and 2% in a year. All of those expensive national networks with branches on every street corner will be gone in the 2020s.

And no matter how bad the coming recession gets, technology, now 26% of the S&P 500, will keep powering on. Combined revenues of the four FANGs in Q2 came in at $118.7 billion and earnings were at $26.5 billion. That leaves a mighty big cushion for any slowdown. That’s a lot more than the “eyeballs” and market shares they possessed of a decade ago.

So, netting all this out, how bad will the next recession be? Not bad at all. I’m looking at a couple of quarters small negative numbers. Then the end of the China trade war, which can’t last any more than 18 months, and ultra-low interest rates, will enable recovery and probably another decade of decent US growth.

The stock market, however, is another kettle of fish. While the economy may slow from a 2.2% annual rate to -0.1% or -0.2%, the major indexes could fall much more than that, say 30% to 40%. Don’t forget, we already saw a horrendous 20% swan dive in the run-up to last December.

Earnings multiples are still at a 17X high compared to a 9X low in 2009. Shares would have to drop 47% just to match the last low, and earnings are already falling. Equity weightings in portfolios are high. Money is pouring out of stock funds into bond ones.

Corporations buying back their own shares have been the principal prop from the market for the past three years. Some large companies, like Kohls (KSS), have retired as much as 50% of their outstanding equity in ten years.

So get used to the high market volatility (VIX) we have seen in August. It could be only the trailer for the main show.

 

 

 

 

The Next Bear Market is Not Far Off

August 7, 2019

Mad Hedge Technology Letter
August 7, 2019
Fiat Lux

Featured Trade:

(CORD-CUTTING IS ACCELERATING)
(DIS), (T), (NFLX), (CMCSA)

Cord-Cutting is Accelerating

Cord-cutting is picking up steam – that is the last thing traditional media want to hear.

There are several foundational themes that this newsletter has glued onto readers’ foreheads.

The generational pivot to cloud-based media is one of them.

It’s easy to denominate this phenomenon down to Netflix (NFLX) but in 2019, this trend is so much more than Netflix.

E-marketer published a survey showing that cord-cutters will surpass 20% of all U.S. adults by the end of 2019.

The rapid demise of traditional television has been equally as mind-numbing with the 100.5 million subscribers in 2014 turning into 86.5 million subscribers today.

Comcast (CMCSA) has tried to buck the trend by homing in on fast broadband internet, but that strategy can only go so far.

Disney (DIS), WarnerMedia, and NBCUniversal Disney have really gotten their ducks in a row and are on the verge of launching their own unique streaming services.

Disney’s service entails a 3-segment strategy bringing in Hulu and ESPN Plus to the Disney fold.

The Disney service will revolve around family content at its core so don’t expect Game of Thrones lookalikes.  

WarnerMedia’s hopes to cash in on its HBO brand while peppering it with original series and programming from Warner Bros. and DC.

Disney will be able to lean on family brands of Marvel, Star Wars, and Pixar, and newly acquired National Geographic.

Marvel Cinematic Universe is a growth asset pumping out more than $22 billion at the box office across 23 movies.

Disney Plus will also have a solid collection of Disney films to play with, which could make it indispensable to parents and comes with no ads making it even more appealing to kids.

Disney will also deploy some mix of bundles to diversify its offerings and personalize services for viewers who do not want its entire lineup of content.

The soon-to-be HBO Max will implement HBO original content along with WarnerMedia brands like Warner Bros., DC Entertainment, TBS, TNT, and CNN.

HBO Max will have a treasure trove of old Warner Bros. movies and TV shows, like “Friends” and “The Fresh Prince of Bel Air,” that has played extremely well on Netflix.

HBO will get those titles back at the end of 2019.

HBO has also tied up with BBC Studios to stream “Doctor Who.”

“You should assume that HBO Max will have live elements,” said Randall Stephenson, chairman and CEO of AT&T, on the company’s second quarter conference call.

This roughly translates into HBO Max snapping up live sports and music events to complement scripted content.

This is something that Netflix has shied away from and live events are best monetized through live ads.

The last big label service to go into effect is NBC’s yet to be named streaming service.

NBCUniversal will have the luxury of offering their cable subscribers a chance to pivot to an in-house online streaming service making the move seamless.

At first, the 21 million US cable-TV subscribers will receive the streaming content for free.

Some of the assets that will trot out on the NBC platform are “The Office,” because NBC is removing it from Netflix for 2021.

As cord-cutters hasten their move to streaming, this trio of loaded content-creating firms will benefit as long as they maintain a high quality of content and the pipeline to please fidgety consumers.

 

 

 

July 26, 2019

Mad Hedge Technology Letter
July 26, 2019
Fiat Lux

Featured Trade:

(WHY 3D PRINTING WILL BOOST THE AIRPLANE INDUSTRY),
(SSYS), (ETSY), (MSFT), (BA), (NFLX), (GE), (LMT)

Why 3D Printing Will Boost the Airplane Industry

If you need a new investment idea – here’s one.

3D printing.

Yes, the same 3D printing that was once considered a raging but hopeless fad.

A lot has changed since then.

Early adopters were largely cut down at the knees as they tried to traverse the rocky terrain from a niche market to going full out mainstream.

The teething pains echo bitcoin which was the fad of 2017, on the contrary, this technology it is built on is rock solid, yet the path to sustainability is littered with corpses.

Production complications and the lack of specialists in the industry meant that problems were rampant and nurturing an industry from scratch is harder than you think.

It is time to stand up and take notice of 3D printing, this time it is here to stay.

Certain tech companies love this technology.

Etsy (ETSY) e-commerce participants gravitate towards 3D printing because it gets firms from paper to the real world in a fraction of the time.

The cost of production doesn’t change whether you’re producing one item or a million because of the economies of scale.

The previous 3D printing bonanza was a frenzy and this corner of tech became known for the use of buzzwords representing the potential to reinvent the world.

With lofty expectations, there was a natural disappointment when outsiders understood growing pains were part of the critical evolution instead of a direct route to profits.

The initial goal was to democratize production which sounds eerily similar to bitcoins mantra of democratizing money.

The way to do this was to make it simple to produce whatever one wishes.

That would assume that the general public could pick up professional production 3D printing skills on arrival.

That was wishful thinking.

The truth was that applying 3D printers was time-draining and aggravating.

Issues cropped up like faulty first-generation hardware or software -problems that overwhelmed newbies.

Then if everything was going smoothly on that front, there was the larger issue of realizing it’s just a lot harder to design specific things than initially thought without a deep working knowledge of computer-aided software (CAD) design.

Most people know how to throw a football, but that doesn’t mean that most people can wake up one day in their pajamas and convince themselves they will be the next starting quarterback to lead an NFL team to the Super Bowl.

The high-quality 3D printing designs were reserved for authentic professionals that could put together complicated designs.

The move to compiling a comprehensive library will help spur on the 3D printing revolution while upping the foundational skill base.

Then there is the fact that 3D printing technology is a lot better now than it once was, and the printing technology has come down in price making it more affordable for the masses.

These trends will propel broad-based adoption and as the printing process standardizes, more products can rely on this technology from scratch.

The holy grail of 3D printing would be 3D printing on demand like Netflix (NFLX), but imagine this on-demand 3D printing would function to personalize a physical product on the spot.

Think of a hungry customer walking into a restaurant and not even looking at a menu because one sentence would be enough to trigger specific models in the database that could conjure up the design for the meal.

This would involve integrating artificial intelligence into 3D printing and the production process would quicken to minutes, even seconds.

At some point, crafting the perfect meal or designing a personalized Tuscan villa could take minutes.

The 3D printing industry is reaching an inflection point where the advancement of the technology, expertise, and an updated production process are brewing together at the perfect time.

The company at the forefront of this phenomenon is Stratasys (SSYS).

Stratasys produces in-office prototypes and direct digital manufacturing systems for automotive, aerospace, industrial, recreational, electronic, medical and consumer products.

And when I talk about real pros who have the intellectual property to whip out a complex CAD-based 3D design, I am specifically talking about Stratasys who have been in this business since the industry was in infancy.

And if you add in the integration of cloud software, 3D printing would dovetail nicely with it.

All the elements are in place to fuel this industry into the mainstream.

Take for example airplanes made by Boeing (BA) and Airbus, 3D printer-designed parts comprise only 0.1% of the actual plane now.

It is estimated that 3D printed design parts could consist up to 20% of the overall plane.

These massive airline manufacturers like Boeing (BA) have profit margins of around 15% to 20%, and carving out more 3D printer-designed parts to integrate into the main design will boost profit margins to up to 50%.

The development of the 3D printing process into aerospace technology is happening fast with Boeing inking a five-year collaboration agreement with Swiss technology and engineering group Oerlikon to develop standard processes and materials for metal 3D printing.

Any combat pilot knows who Oerlikon is because they are famed for building ultra-highspeed machines to shoot down, you guessed it, airplanes and missiles.

They will collaborate to use the data resulting from their agreement to support the creation of a standard titanium 3D printing processes.

Only last November, GE announced that GE’s Aviation’s GEnx-2B aircraft engine for the Boeing 747-8 will apply a 3D printed bracket approved by the Federal Aviation Administration (FAA) for the engine, replacing a traditionally manufactured power door opening system (PDOS) bracket.

With the positive revelations that the (FAA) is supporting the adoption of 3D printing-based designs, GE is preparing to begin imminent mass production of the 3D printed brackets at its Auburn, Alabama facility.

Eric Gatlin, general manager of GE Aviation’s additive integrated product team gushed that “It’s the first project we took from design to production in less than ten months.”

Defense companies are also dipping their toe into the water with aerospace company Lockheed Martin (LMT), the world’s largest defense contractor, winning a $5.8 million contract with the Office of Naval Research to help further develop 3D printing for the aerospace industry.

They will partner up to investigate the use of artificial intelligence in training robots to independently oversee the 3D printing of complex aerospace components.

3D printed designs have the potential to crash the cost of making big-ticket items from cars to nuclear plants while substantially shortening the manufacturing process.

Further emphasis on cornering the North America aerospace market could cement this stock as a no-brainer buy of 2019 as the (FAA) embraces more of the technology opening up the addressable market for the active participants.

As it stands, Stratasys is the industry leader in this field, and placing best of breed tech companies into your portfolio will put you in better position to weather the squalls of the capricious tech sector.

The company is still relatively unknown even though it has been around for ages.

Stratasys is a company to put on your radar and remember this space as the 3D printing market blossoms.

It’s nonetheless still a speculative punt but a compelling part of the tech industry.

 

 

July 5, 2019

Mad Hedge Technology Letter
July 5, 2019
Fiat Lux

Featured Trade:

(THE BALL IS IN NETFLIX’S COURT)
(NFLX), (DIS), (AAPL), (IQ), (KHC)