(QQQ) Archives - Page 11 of 15 - Mad Hedge Fund Trader

July 1 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the July 1 Mad Hedge Fund Trader 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: You obviously do well with deep-in-the-money call and put spreads, but I struggle to get your prices.

A: Raise the strike prices or raise the price that you’re bidding for them closer to my limit. It’s really hard to keep current prices in this market with such extreme volatility (VIX), especially when you’re having melt-ups going on in Tesla (TSLA) and so on. Our trade alerts are just a starting point to get you going in the right direction in the right stock. The people who make the most money with the trade alert service are those who use my market timing to buy futures, either at the money risk reversals on stocks (long the call and short the put), or outright futures in gold (GLD), currencies (FXE), and bonds (TLT).

Q: How high can Tesla go?

A: My immediate target is $1200 (which has already been hit), and the rumors I'm hearing is that they will be good if you factor in the two months that the Fremont factory was closed. And after that, it’s $2,500 and then there's Ron Baron’s target of $5,000, who’s been in the stock himself since it was at $100 a share. Ron was a little late in finding my research on the company. I first got in at $16.50 after I toured the Fremont factory.

Q: Is it possible there will be a national mandate to wear masks, which could boost stocks?

A: Not under this president. Do not expect help from this administration on this pandemic. They've figured out they can’t beat it so they are just walking away and leaving the states to figure out what they can. You’ll have to wait for another president to get a national mask mandate if we’re still alive by that time. I am getting a lot of emails from Europe complaining that the United States is extending the pandemic by having so many people refusing to wear masks here or admit that the disease even exists. They are horrified.

Q: What do you think about the biotech ETF (IBB)?

A: I’d be buying it with both hands. Even without the pandemic, a new bull market started last September in biotech because the fundamentals long term were fantastic. But you had to be a scientist to see it back then. They really had the highest earnings growth with the lowest price earnings multiples in the entire stock market. The pandemic just gave it a supercharger. That’s why I started the Mad Hedge Biotech & Healthcare Letter (click here).

Q: Which ETF should I use for biotech?

A: The iShares NASDAQ Biotechnology ETF (IBB). It's a basket of the top 20 global biotech firms but will underperform single biotech stock picks by half, as any basket does.

Q: What about the long-term portfolio?

A: I will get to it. It seems like our long-term portfolio is changing every week, so it’s difficult to really look at anything in the long term. These days, long term is a week with all the volatility we’re getting. I imagine I’d be getting rid of any energy stocks on this rally though. I see oil going back to zero.

Q: You say stay long NASDAQ (QQQ) and short S&P 500 (SPY) for the rest of the year, but you project new highs for the S&P 500?

A: Yes, both can go up, but NASDAQ will go up faster, and that’s what hedge funds are doing. That gives you a market neutral position, sucks a lot of the risk out of that position, and it’s even crash-proof as we saw in the winter when the markets were melting down. And like hedge funds, you can leverage that up 5 or 10 times. So yes, that trade will work all day long, even if both indexes go to new highs. I imagine NASDAQ will outperform on the upside relative to SPY by a factor of two or three to one.

Q: Is there a good substitute to use versus your deep-in-the-money alerts if you have a smaller account?

A: You can just buy the stocks. Or, you can just buy the stocks on margin, which is 2 to 1—50% margin requirement there. There are many ways to skin a cat. The call spreads actually give you the most bang per buck because you get a lot of leverage with a small dollar amount upfront and limited risk.

Q: I heard that hedge funds have huge shorts. Is this setting up another short squeeze? Will they eventually be right?

A: Yes, that may have been what happened on Monday and Tuesday, a squeeze on the shorts driving prices much higher. They will eventually be right a little bit, but you’re certainly not going to get the major declines we saw in February/March because of all the QE and government support. The pandemic is no longer a surprise.

Q: Will COVID-19 fears keep volatility elevated until there is a vaccine?

A: Absolutely, yes. That’s great news for our options strategy, which is why we’re 100% invested almost all the time these days because higher volatility doubles the premiums you get for options. My current strategy is that once a position hits 90% of its maximum profit, I dump it and put on another position to take in an extra $1,500-$2,000. I did that with Tesla and gold (GLD) last week. This is the golden age of the in-the-money put and call spread strategy and we are better at executing it than anyone else.

Q: What do you have to say about the jobs report?

A: The entire US economic data system is breaking down because we’re seeing such immense swings month to month. Reporting lags are getting amplified one hundredfold. The June Nonfarm Payroll Report showed an increase of 4.8 million jobs and an unemployment rate of only 11.1% (I never thought I’d ever say “only 11.1%”). However, the state jobless claims are indicating an unemployment rate of at least 22%. Go walk down the Main Street of any town and you’ll see that the state figures are right. All the forecasting is relatively pointless. How can we get a fall in unemployment when nothing is open?

Q: Are you recording this webinar?

A: Yes, we usually post the recorded webinar on the site 2 hours after we finish so our many international subscribers don’t have to stay up until the middle of the night to watch it. That’s how long it takes to convert the webinar into a video format we can post online.

Q: When setting up LEAPS (Long Term Equity Participation Securities), do you buy straight calls at-the-money or in-the-money?

A: You buy deep, out-of-the-money spreads. Let's say you bought a (TSLA) $1,500/$1,550 deep-in-the-money call spread, and it expires at the maximum profit point with the stock over $1,550. You’ll make about a 500% return on that because it’s so far out of the money; the leverage is enormous. Will Tesla close over $1,550 in two years? Probably.

Q: How do I get into Tesla?

A: Close your eyes and buy at market, and hope we get $1,200 tomorrow on great Q2 sales numbers. Or, wait for another one of these huge selloffs—Tesla does have a history of selling off 50% at any given time, and then you go into a LEAPS there and get a 500% return. Most investors prefer the latter if they know about LEAPS. Remember, our last “BUY” into Tesla was a year ago when the stock was at $180. By the way, a lot of the shorts in Tesla stock were financed by big oil money and when oil crashed, they lost the ability to post more margin. So, they were forced to cover their shorts at gigantic losses, creating this super spike in the share price. Elon Musk, who owns 20% of the company, is laughing all the way to the bank.

Q: How do we pick the best strike prices for long-term LEAPS?

A: Go 30% out-of-the-money. There you get your 500% return. If you really want to be aggressive and you think the stock has 50% of upside, then go 50% out-of-the-money. There your return will be about a 1,000% profit over 2 years.

Q: How long are these trades for? I haven’t received any trade alerts.

A: Please contact customer support and we’ll find out if they are being filtered out by your spam folder. Global Trading Dispatch is sending out trade alerts virtually every day for all asset classes, so you should have received several of them by now. The Mad Hedge Technology Letter sends out fewer because they are confined to a narrow part of the market.

Q: What is your favorite stock in the gold space?

A: Newmont Mining (NEM). They have the strongest balance sheet of the major gold companies because they engage in fewer takeovers than the other big gold companies.

Good Luck and Stay Healthy

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

February 28, 2020

Diary, Newsletter, Summary

Global Market Comments
February 28, 2020
Fiat Lux

Featured Trade:

(FEBRUARY 26 BIWEEKLY STRATEGY WEBINAR Q&A),
(VIX), (VXX), (SPY), (TLT), (UAL), (DIS), (AAPL), (AMZN), (USO), (XLE), (KOL), (NVDA), (MU), (AMD), (QQQ), (MSFT), (INDU)

February 26 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 26 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: There’s been a moderation of new coronavirus cases in China. Is this what the market needs to find a bottom?

A: Absolutely it is; of course, the next risk is that cases keep increasing overseas. The final bottom will come when overseas cases start to disappear, and that could be a month or two off.

Q: How low will interest rates go after the coronavirus?

A: Well, interest rates already hit new all-time lows before the virus became a stock market problem. The virus is just giving it a turbocharger. Our initial target of 1.32% for the ten-year US Treasury bond was surpassed yesterday, and we think it could eventually hit 1.00% this year.

Q: What is the best way to know when to buy the dip?

A: When the Volatility Index (VIX) starts to drop. If you can get the volatility index down to the mid-teens and stay there, then the market will stabilize and start to rise fairly sharply. A lot of the really high-quality stocks in the market, like United Airlines (UAL), Walt Disney (DIS), Apple (AAPL) and Amazon (AMZN), have really been crushed by this selloff. So those are the names people are going to look at for quality at a discount. That’s going to be your new investment theme, buying quality at a discount.

Q: Do recent events mean that Boeing (BA) is headed down to 200?

A: I wouldn't say $200, but $280 is certainly doable. And if you get to $280, then the $240/$250 call spread all of a sudden looks incredibly attractive.

Q: What does a Bernie Sanders presidency mean for the market?

A: Well, if he became president, we could be looking at like a 50-80% selloff—at least a repeat of the ‘09 crash. However, I doubt he will get elected, or if elected, he won’t have control of congress, so nothing substantial will get done.

Q: Is this the beginning of Chinese (FXI) bank failures that will cause an economic crisis in mainland China?

A: It could be, but the actual fact is that the Chinese government is doing everything they can to rescue troubled banks and companies of all types with short term emergency loans. It’s part of their QE emergency rescue package.

Q: Can you explain what lower energy prices mean for the global economy?

A: Well, if you’re an oil consumer (USO), it’s fantastic news because the price of gas is going down. If you’re an oil producer (XLE), like for people in the Middle East, Texas, Louisiana, Oklahoma, and North Dakota, it’s terrible news. And if you’re involved anywhere in the oil industry, or own energy stocks or MLPs, you’re looking at something like another great recession. I have been hugely negative on energy for years. I’ve seen telling people to sell short coal (KOL). It’s having a “going out of business” sale.

Q: Should I aggressively short Tesla (TSLA) here? Surely, they couldn’t go up anymore.

A: Actually, they could go up a lot more. I would just stay away from Tesla and watch in amazement—there’s no play here, long or short. It suffices to say that Tesla stock has generated the biggest short-selling losses in market history. I think we’re up to about $15 billion now in short losses. Much smarter people than us have lost fortunes trying in that game.

Q: Was that an Amazon trade or a Google trade?

A: I sent out both Amazon and an Apple trade alert this morning. You should have separate trade alerts for each one.

Q: Are chips a long term buy at today’s level?

A: Yes, but companies like NVIDIA (NVDA), Micron Technology (MU), and Advanced Micro Devices (AMD) may be better long-term buys if you wait a couple of weeks and we test the new lows that we’ve been talking about. Chips are the canary in the coal mine for the global economy, and we have not gotten an all-clear on the sector yet. If you’re really anxious to get into the sector, buy a half of a position here and another half 10% down, which might be later this week.

Q: When will Foxconn reopen, the big iPhone factory in China?

A: Probably in the next week or so. Workers are steadily moving back; some factories are saying they have anywhere from 60-80% of workers returning, so that’s positive news.

Q: Are bank stocks a sell because of lower interest rates?

A: Yes, absolutely. If you think the 10-year treasury is running to a 1.00% yield as I do, the banks will get absolutely slaughtered, and we hate the sector anyway on a long-term basis.

Q: What about future Fed rate cuts?

A: Futures markets are now pricing in possibly three more rate cuts this year after discounting no more rate cuts only a few weeks ago. So yes, we could get more interest rates. I think the government is going to pull all the stops out here to head off a corona-induced recession.

Q: Once your options expire, is it still affected by after-hours trading?

A: If you read the fine print on an options contract, they don’t actually expire until midnight on a Saturday night after options expiration day, even though the stock market stops trading on a Friday. I’ve never heard of a Saturday exercise, but you may have to get a batch of lawyers involved if you ever try that.

Q: What’s the worst-case scenario for this correction?

A: Everything goes down to their 200-day moving averages, including Indexes and individual stocks. You’re talking about Apple dropping to $243 and Microsoft (MSFT) to $144, and NASDAQ (QQQ) to 8,387. That could tale the Dow Average (INDU) to maybe 24,000, giving up all the 2019 gains.

Good Luck and Good Trading

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

August 16, 2019

Diary, Newsletter, Summary

Global Market Comments
August 16, 2019
Fiat Lux

Featured Trade:

(DON’T MISS THE AUGUST 21 GLOBAL STRATEGY WEBINAR),
(WHY CRASHING YIELDS COULD BE SIGNALING AN END TO THE STOCK SELLOFF),
(TLT), (QQQ), (DBA), (EEM), (UUP)

May 6, 2019

Diary, Newsletter, Summary

Global Market Comments
May 6, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE’S ANOTHER BOMBSHELL),
(DIS), (QQQ), (AAPL), (INTU), (GOOGL), (LYFT), (UBER), (FCX))

The Market Outlook for the Week Ahead, or Here’s Another Bombshell

Diary, Newsletter

I was all ready to write this week that massive monetary stimulus created by the Federal Reserve will cause the stock market to continue its slow-motion melt up.

The president had other ideas.

As of this writing, the US will impose without warning a surprise 25% increase in tariffs on $200 billion worth of Chinese imports, effective Friday, or in four days.

Clearly, the trade negotiations are not going as well as advertised by the administration. My bet is that the stock market won’t like this. All I can say is that I’m glad I’m 90% in cash and 10% in a Walt Disney vertical bull call spread that expires in nine trading days.

The bigger and unanswerable question is whether this is just a negotiating strategy already well known by the Bronx Housing Authority that sets up a nice dip to buy? Or is it this the beginning of a long overdue summer correction?

Nobody knows.

Certainly, the rally was getting long in the tooth, rising almost every day in 2019, with NASDAQ reaching new all-time highs. Those who kept their big-cap technology stock through the sturm und drang of the December meltdown have been rewarded handsomely. Index players reigned supreme.

However, we live in unprecedented times. Never before has a stock market received this much artificial stimulus at an all-time high unless you hark back to the Tokyo 1989 top. Japanese shares are now trading at 43% lower than that high….30 years later. We all know that our own decade-old bull market will eventually end in tears, but will it be in days, weeks, months, or years?

I had plenty of great wisdom, wonderful sector selections, colorful witticisms, and killer stock picks to serve up to you this week, but they have all be outrun by events. There’s nothing to do now but wait and see how the market responds to this tariff bombshell at the Monday morning opening.

After three months of decidedly mixed data, the information flow on the economy suddenly swung decidedly to the positive. The jobs data could have been more positive.

Of course, the April Nonfarm Payroll Report was a sight to behold. It came in at 263,000, about 80,000 more than expected, and more than makes up for last month’s dismal showing. It was a bull’s dream come true. This is what overheating looks like fueled by massive borrowing. Play now, pay later.

The headline Unemployment Rate fell a hefty 0.2% to 3.6%, the most since 1969 when the Vietnam War was raging, and the economy was booming. I remember then that Levi Strauss (LEVI) was suffering from a denim shortage then because so much was being sent to Southeast Asia to use as waterproof tarps. Wages rose 3.2% YOY.

Professional and Business Services led at a massive 76,000 jobs, Construction by 33,000 jobs, and Health Care by 27,000 jobs. Retail lost 12,000 jobs.

The ADP came in at a hot 275,000 as the private hiring binge continues. Then the April Nonfarm Payroll Report blew it away at 263,000. The headline unemployment rate plunged to a new 49-year low at 3.6%.

Consumer Spending hit a decade high, up 0.9% in March while inflation barely moved. Is Goldilocks about to become a senior citizen?

Apple (AAPL) blew it away with a major earnings upside surprise. The services play is finally feeding into profits. Stock buybacks were bumped up from $100 billion to $150 billion. Don’t touch (AAPL) up here with the stock just short of an all-time high. How high will the shares be when Apple’s revenue split between hardware and software revenues is 50/50?

Pending Home Sales jumped 3.8% on a signed contract basis. No doubt the market is responding to the biggest drop on mortgage rates in a decade. At one point, the 30-year fixed rate loan fell as low as 4.03%. Avoid housing for now, it’s still in a recession.

Topping it all off, the Fed made no move on interest rates. Like this was going to be a surprise? This may be the mantra for the rest of 2019. The big revelation that the Fed will start ending quantitative tightening now and not wait until September, as indicated earlier. More rocket fuel for the stock market. Let the bubble continue.

Uber (UBER) hit the Road for its IPO with valuations being cut daily, from a high of $120 billion to a recent low of $90 billion. The issue goes public on Friday morning. Rival Lyft (LYFT) definitely peed on their parade with their ill-fated IPO plunging 33%.

It wasn’t all Champaign and roses. San Francisco home prices fell for the first time in seven years. The median price is now only $830,000, down 0.1% YOY. Back up the truck! Clearly a victim of the Trump tax bill, this market won’t recover until deductions for taxes are restored. That may take place in two years….or never!

The Mad Hedge Fund Trader suffered a modest setback with the sudden collapse of copper prices last week, thus giving up all its profit in Freeport McMoRan (FCX). Global Trading Dispatch closed the week up 14.48% year to date and is down -1.48% so far in May. My trailing one-year retreated to +18.85%.

Reflecting the huge sector divergence in the market, the Mad Hedge Technology Letter leaped to another new all-time high on the back of two new very short-term positions in Intuit (INTU) and Google (GOOG), which we picked up after the earnings debacle there. Some 11 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.

My nine and a half year profit shrank to +314.62%. The average annualized return backed off to +33.11%. With the markets at all-time highs and my Mad Hedge Market Timing Index forming a 2 ½ month high, I am now 90% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter.

The coming week will be pretty boring after last week’s excitement, at least on the hard data front.

On Monday, May 6, Occidental Petroleum (OXY), now engaged in a ferocious takeover battle for Anadarko, reports. So does (AIG).

On Tuesday, May 7, 3:00 PM EST, we obtain March Consumer Credit. (LYFT), one of the worst performing IPOs this year, gives its first ever earnings report.

On Wednesday, May 8 at 2:00 PM, we get the most important earnings report of the week with Walt Disney (DIS), along with (ROKU).

On Thursday, May 9 at 8:30 the Weekly Jobless Claims are produced. At the same time, we get the March Producer Price Index. Dropbox (DBX) reports.

On Friday, May 10 at 8:30 AM, we get the Consumer Price Index. The Baker-Hughes Rig Count follows at 1:00 PM. (UBER)’s IPO will be priced at the opening. Viacom (VIA) Reports.

As for me, I’ll be watching the Kentucky Derby on Saturday. The field is wide open, now that the favorite, Omaha Beach, has been scratched.

As I will be attending the Las Vegas SALT conference during the coming week, the Woodstock of hedge fund managers, I will take the opportunity to rerun some of my oldies but goodies. We also have recently enjoyed a large number of new subscribers so I will be publishing several basic training pieces.

Maybe it was something I said?

For more on the SALT conference, please click here (you must be logged in to your account to access this piece).

Good luck and good trading.

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

April 29, 2019

Diary, Newsletter, Summary

Global Market Comments
April 29, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR ANOTHER LEG UP FOR THE MARKET),
(SPY), (TLT), (DIS), (INTU), (FCX), (MSFT),
(QQQ), (CVX), (XOM), (OXY), (TSLA)

The Market Outlook for the Week Ahead, or Another Leg Up for the Market

Diary, Newsletter, Research

This is one of those markets where you should have followed your mother’s advice and become a doctor.

I was shocked, amazed, and gobsmacked when the Q1 GDP came in at a red hot 3.2%. The economy had every reason to slow down during the first three months of 2019 with the government shutdown, trade war, and terrible winter. Many estimates were below 1%.

I took solace in the news by doing what I do best: I shot out four Trade Alerts within the hour.

Of course, the stock market knew this already, rising almost every day this year. Both the S&P 500 and the NASDAQ (QQQ) ground up to new all-time highs last week. The Dow Average will be the last to fall.

Did stock really just get another leg up, or this the greatest “Sell the news” of all time. Nevertheless, we have to trade the market we have, not the one we want or expect, so I quickly dove back in with new positions in both my portfolios.

One has to ask the question of how strong the economy really would have been without the above self-induced drags. 4%, 5%, yikes!

However, digging into the numbers, there is far less than meets the eye with the 3.2% figure. Exports accounted for a full 1% of this. That is unlikely to continue with Europe in free fall. A sharp growth in inventories generated another 0.7%, meaning companies making stuff that no one is buying. This is growth that has been pulled forward from future quarters.

Strip out these one-off anomalies and you get a core GDP that is growing at only 1.5%, lower than the previous quarter.

What is driving the recent rally is that corporate earnings are coming in stronger than expected. Back in December, analysts panicked and excessively cut forecasts.

With half of the companies already reporting, it now looks like the quarter will come in a couple of points higher than lower. That may be worth a rally of a few more percentage points higher for a few more weeks, but not much more than that.

So will the Fed raise rates now? A normal Fed certainly would in the face of such a hot GDP number. But nothing is normal anymore. The Fed canceled all four rate hikes for 2019 because the stock market was crashing. Now it’s booming. Does that put autumn rate hikes back on the table, or sooner?

Microsoft (MSFT) knocked it out of the park with great earnings and a massive 47% increase in cloud growth. The stock looks hell-bent to hit $140, and Mad Hedge followers who bought the stock close to $100 are making a killing. (MSFT) is now the third company to join the $1 trillion club.

And it’s not that the economy is without major weak spots. US Existing Home Sales dove in March by 5.9%, to an annualized 5.41 million units. Where is the falling mortgage rate boost here? Keep avoiding the sick man of the US economy. Car sales are also rolling over like the Bismarck, unless they’re electric.

Trump ended all Iran oil export waivers and the oil industry absolutely loved it with Texas tea soaring to new 2019 highs at $67 a barrel. Previously, the administration had been exempting eight major countries from the Iran sanctions. More disruption all the time. The US absolutely DOES NOT need an oil shock right now, unless you’re Exxon (XOM), Chevron (CVX), or Occidental Petroleum (OXY).

NASDAQ hit a new all-time high. Unfortunately, it’s all short covering and company share buybacks with no new money actually entering the market. How high is high? Tech would have to quadruple from here to hit the 2000 Dotcom Bubble top in valuation terms.

Tesla lost $700 million in Q1, and the stock collapsed to a new two-year low. It’s all because the EV subsidy dropped by half since January. Look for a profit rebound in quarters two and three. Capital raise anyone? Tesla junk bonds now yielding 8.51% if you’re looking for an income play. After a very long wait, a decent entry point is finally opening up on the long side.

The Mad Hedge Fund Trader blasted through to a new all-time high, up 16.02% year to date, as we took profits on the last of our technology long positions. I then added new long positions in (DIS), (FCX), and (INTU) on the hot GDP print, but only on a three-week view.

I had cut both Global Trading Dispatch and the Mad Hedge Technology Letter services down to 100% cash positions and waited for markets to tell us what to do next. And so they did.

I dove in with an extremely rare and opportunistic long in the bond market (TLT) and grabbed a quickie 14.61% profit on only three days.

April is now positive +0.60%. My 2019 year to date return gained to +16.02%, boosting my trailing one-year to +21.17%.

My nine and a half year shot up to +316.16%. The average annualized return appreciated to +33.87%. I am now 80% in cash with Global Trading Dispatch and 90% cash in the Mad Hedge Tech Letter.

The coming week will see another jobs trifecta.

On Monday, April 29 at 10:00 AM, we get March Consumer Spending. Alphabet (GOOGL) and Western Digital (WDC) report.

On Tuesday, April 30, 10:00 AM EST, we obtain a new Case Shiller CoreLogic National Home Price Index. Apple (AAPL), MacDonald’s (MCD), and General Electric (GE) report.

On Wednesday, May 1 at 2:00 PM, we get an FOMC statement.
QUALCOMM (QCOM) and Square (SQ) report. The ADP Private Employment Report is released at 8:15 AM.

On Thursday, May 2 at 8:30 AM, the Weekly Jobless Claims are produced. Gilead Sciences (GILD) and Dow Chemical (DOW) report.

On Friday, May 3 at 8:30 AM, we get the April Nonfarm Payroll Report. Adidas reports, and Berkshire Hathaway (BRK/A) reports on Saturday.

As for me, to show you how low my life has sunk, I spent my only free time this weekend watching Avengers: Endgame. It has already become the top movie opening in history which is why I sent out another Trade Alert last week to buy Walt Disney (DIS).

I supposed that now we have all become the dumb extension to our computers, the only entertainment we should expect is computer-generated graphics with only human voice-overs.

Good luck and good trading.

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

April 24, 2019

Diary, Newsletter, Summary

Global Market Comments
April 24, 2019
Fiat Lux

Featured Trade:

(WHY ARE BOND YIELDS SO LOW?)
(TLT), (TBT), (LQD), (MUB), (LINE), (ELD),
(QQQ), (UUP), (EEM), (DBA)
(BRING BACK THE UPTICK RULE!)

Why Are Bond Yields So Low?

Diary, Newsletter

Investors around the world have been confused, befuddled, and surprised by the persistent, ultra-low level of long-term interest rates in the United States.

At today’s close, the 30-year Treasury bond yielded a parsimonious 2.99%, the ten years 2.59%, and the five years only 2.40%. The ten-year was threatening its all-time low yield of 1.33% only three years ago, a return as rare as a dodo bird, last seen in the 19^th century.

What’s more, yields across the entire fixed income spectrum have been plumbing new lows. Corporate bonds (LQD) have been fetching only 3.72%, tax-free municipal bonds (MUB) 2.19%, and junk (JNK) a pittance at 5.57%.

Spreads over Treasuries are approaching new all-time lows. The spread for junk over of ten-year Treasuries is now below an amazing 3.00%, a heady number not seen since the 2007 bubble top. “Covenant light” in borrower terms is making a big comeback.

Are investors being rewarded for taking on the debt of companies that are on the edge of bankruptcy, a tiny 3.3% premium? Or that the State of Illinois at 3.1%? I think not.

It is a global trend.

German bunds are now paying holders 0.05%, and JGBs are at an eye-popping -0.05%. The worst quality southern European paper has delivered the biggest rallies this year.

Yikes!

These numbers indicate that there is a massive global capital glut. There is too much money chasing too few low-risk investments everywhere. Has the world suddenly become risk averse? Is inflation gone forever? Will deflation become a permanent aspect of our investing lives? Does the reach for yield know no bounds?

It wasn’t supposed to be like this.

Almost to a man, hedge fund managers everywhere were unloading debt instruments last year when ten-year yields peaked at 3.25%. They were looking for a year of rising interest rates (TLT), accelerating stock prices (QQQ), falling commodities (DBA), and dying emerging markets (EEM). Surging capital inflows were supposed to prompt the dollar (UUP) to take off like a rocket.

It all ended up being almost a perfect mirror image portfolio of what actually transpired since then. As a result, almost all mutual funds were down in 2018. Many hedge fund managers are tearing their hair out, suffering their worst year in recent memory.

What is wrong with this picture?

Interest rates like these are hinting that the global economy is about to endure a serious nosedive, possibly even re-entering recession territory….or it isn’t.

To understand why not, we have to delve into deep structural issues which are changing the nature of the debt markets beyond all recognition. This is not your father’s bond market.

I’ll start with what I call the “1% effect.”

Rich people are different than you and I. Once they finally make their billions, they quickly evolve from being risk takers into wealth preservers. They don’t invest in start-ups, take fliers on stock tips, invest in the flavor of the day, or create jobs. In fact, many abandon shares completely, retreating to the safety of coupon clipping.

The problem for the rest of us is that this capital stagnates. It goes into the bond market where it stays forever. These people never sell, thus avoiding capital gains taxes and capturing a future step up in the cost basis whenever a spouse dies. Only the interest payments are taxable, and that at a lowly 2.59% rate.

This is the lesson I learned from servicing generations of Rothschilds, Du Ponts, Rockefellers, and Gettys. Extremely wealthy families stay that way by becoming extremely conservative investors. Those that don’t, you’ve never heard of because they all eventually went broke.

This didn’t use to mean much before 1980, back when the wealthy only owned less than 10% of the bond market, except to financial historians and private wealth specialists, of which I am one. Now they own a whopping 25%, and their behavior affects everyone.

Who has been the largest buyer of Treasury bonds for the last 30 years? Foreign central banks and other governmental entities which count them among their country’s foreign exchange reserves. They own 36% of our national debt with China in the lead at 8% (the Bush tax cut that was borrowed), and Japan close behind with 7% (the Reagan tax cut that was borrowed). These days they purchase about 50% of every Treasury auction.

They never sell either, unless there is some kind of foreign exchange or balance of payments crisis which is rare. If anything, these holdings are still growing.

Who else has been soaking up bonds, deaf to repeated cries that prices are about to plunge? The Federal Reserve which, thanks to QE1, 2, 3, and 4, now owns 13.63% of our $22 trillion debt.

An assortment of other government entities possesses a further 29% of US government bonds, first and foremost the Social Security Administration with a 16% holding. And they ain’t selling either, baby.

So what you have here is the overwhelming majority of Treasury bond owners with no intention to sell. Ever. Only hedge funds have been selling this year, and they have already done so, in spades.

Which sets up a frightening possibility for them, now that we have broken through the bottom of the past year’s trading range in yields. What happens if bond yields fall further? It will set off the mother of all short-covering squeezes and could take ten-year yield down to match 2012, 1.33% low, or lower.

Fasten your seat belts, batten the hatches, and down the Dramamine!

There are a few other reasons why rates will stay at subterranean levels for some time. If hyper accelerating technology keeps cutting costs for the rest of the century, deflation basically never goes away (click here for “Peeking Into the Future With Ray Kurzweil” ).

Hyper accelerating corporate profits will also create a global cash glut, further levitating bond prices. Companies are becoming so profitable they are throwing off more cash than they can reasonably use or pay out.

This is why these gigantic corporate cash hoards are piling up in Europe in tax-free jurisdictions, now over $2 trillion. Is the US heading for Japanese style yields, of zero for 10-year Treasuries?

If so, bonds are a steal here at 2.59%. If we really do enter a period of long term -2% a year deflation, that means the purchasing power of a dollar increases by 35% every decade in real terms.

The threat of a second Cold War is keeping the flight to safety bid alive, and keeping the bull market for bonds percolating. You can count on that if the current president wins a second term.

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Why Are They So Low?

**Why Are They So Low?**