Posts

October 8, 2019

Global Market Comments
October 8, 2019
Fiat Lux

Featured Trade:

(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F), (TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (RSX), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL),

September 6, 2019

Global Market Comments
September 6, 2019
Fiat Lux

Featured Trade:

(SEPTEMBER 4 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (FXY), (FXB), (USO), (XLE), (TLT), (TBT),
(FB), (AMZN), (MSFT), (DIS), (WMT), (IWM), (TSLA), (ROKU), (UBER), (LYFT), (SLV), (SIL)

September 4 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 4 Global Strategy Webinar broadcast from Silicon Valley with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

 

Q: If Trump figures out the trade war will lose him the election; will he stop it?

A: Yes, and that is a risk that hovers over all short positions in the market at all times these days because stocks will soar (INDU) when the trade war ends. We now have 18 months of share appreciation that has been frustrated or deferred by the dispute with China. The problem is that the US economy is already sliding into recession and it may already be too late to turn it around.

Q: Do you see the British pound (FXB) dropping more on the Brexit turmoil? Do you think the UK will stay in the EU?

A: If the UK ends Brexit through an election, then the pound should recover from $1.19 all the way back up to $1.65 where it was before Brexit happened four years ago. If that does happen, it will be one of the biggest trades of the year anywhere in the world, going long the British pound. This is how I always anticipated it would end. I was in England for the Brexit vote and I was convinced that if they held the election the next day, it would have lost. The only reason it won was because nobody thought it would— a lot like our own 2016 election. That brings Britain back into the EEC, saves Europe, and has a positive impact on markets globally. So, this is a big deal. Not to do so would be economic suicide for Britain, and I think wiser heads will prevail.

Q: Do you think it’s a good idea for Saudi ARAMCO to go public in Japan as reports suggest?

A: When the Arabs want to get out of the oil business (USO), (XLE), you want to also. That’s what the sale of ARAMCO is all about. They’re going to get a $1 trillion or more valuation, raising $100 billion in cash. And guess who the biggest investors in alternative energy in California are? It’s Saudi Arabia. They see no future in oil, nor should you. This is why we’ve been negative on the sector all year. By the way, bankruptcies by frackers in the U.S. are at an all-time high, another indicator that low oil prices can’t be tolerated by the US industry for long.

Q: Is it time to buy the ProShares Ultra Short 20 year Plus Treasury Bond Fund (TBT)?

A: No, not yet; I think we’re going to break 1.33% — the all-time low yield for the (TLT) will probably be somewhere just below 1.00%. We probably won’t go to absolute zero because we still have a growing economy. The countries that already have negative interest rates have shrinking economies or are already in recession, like Germany or Great Britain can justify zero rates.

Q: Are you going to run all your existing positions into expiration?

A: I’m going to try to—it’s only 12 days to expiration, and we get to keep the full profit if we do. As long as the market is dead in the middle here, there are no other positions to put on, no extreme low to buy into or extreme high to sell into. It’s a question of letting this sort of nowhere-trend play out, but also there’s nothing else to buy, so there is no need to raise cash. So, we’re 60% invested now and we’re going to try running as many of those into expiration as we can. Looks like all the long technology positions are safe (FB), (AMZN), (MSFT), (DIS). The only thing we’re pressing here are the shorts in Walmart (WMT) and Russell 2000 (IWM).

Q: Do you think it’s a good idea for Tesla (TSLA) to build another Gigafactory in Shanghai, China during a trade war? Will this blow up in Elon’s face?

A: I don’t think so because the Chinese are desperate for the Tesla technology and they just gave Tesla an exemption on import duties on all parts that need to go there to build the cars. So, that’s a very positive development for Tesla and I believe the stock is up about $10 since that news came out.

Q: Will Roku (ROKU) ever pull back? Would you buy it up here?

A: No, we recommended this thing last year at $40; it’s now up to $165, and up here it’s just wildly overbought, in chase territory. Of course, the reason that’s happening is that the big concern last year was Amazon wiping out Roku, yet they ultimately ended up partnering with Roku, and that’s worth about a 400% gain in the stock. You know the second you get into this, it’s over. There are just too many better fish to fry in the technology area.

Q: What happens if our existing Russell 2000 (IWM) September 2019 $153-$156 in-the-money vertical BEAR PUT spread Russell 2000 position closes between $156 and $153?

A: You lose money. You will get the Russell 2000 shares put to you, or sold to you at $153.00, which means you now own them, and you’ll get a big margin call from your broker for owning the extra shares. If ever it looks like we’re getting close to the strike price going into expiration, I come out precisely because of that risk. You don’t want random chance dictating whether you’re going to make money in your position or not going into expiration. If you’re worried about that, I would get out now and you can still come out with a nice profit. Or, you can always wait for another down day tomorrow.

Q: Is it time to get super aggressive shorting Lyft (LYFT) or Uber (UBER) when they openly admit that they won’t make a profit anytime in the near future?

A: The time to short Uber (UBER) and Lyft was at the IPO when the shares became available to sell. Down here I don’t really want to do very much. It’s late in the game and Uber’s down about one third from its IPO price. We begged people to stay away from this. It’s another example where they waited for the company to go ex-growth before it went public, but it didn’t leave anything for the public. It was a very badly mishandled IPO—it’s now at $31 against a $45 IPO price and was at a new all-time low just 2 days ago. You knew when they offered the drivers shares, the thing was in trouble. Sometime this will be a buy, but not yet. Go take a long nap first.

Q: Is the fact that rich people are hoarding cash a good indicator that a recession is approaching?

A: Yes, absolutely. Bonds yielding 1.45% is also an indication that the wealthy are hoarding cash from other investment and parking it in US treasury bonds. I went to the Pebble Beach Concourse d’ Elegance vintage car show a few weeks ago and all of the $10 million plus cars didn’t sell, only those priced below $100,000. That is always a good indicator that the wealthy are bailing ahead of a recession. If you can’t get a premium price for your vintage Ferrari, trouble is coming.

Q: Argentina just implemented currency controls; is this the start of a rolling currency crisis among emerging nations?

A: No, I believe the problems are unique to Argentina. They’ve adopted what is known as Modern Momentary Theory—i.e. borrowing and printing money like crazy. Unfortunately, this is unsustainable and results in a devalued currency, general instability, and the eventual hanging of their leaders from the nearest lamppost. This is exactly the same monetary policy that the Trump administration has been pursuing since he came into office. Eventually, it will lead to tears, ours, not his.

Q: Is the new all-electric Porsche Taycan a threat to Tesla?

A: No, it’s not. Their cheapest car is $150,000 and it gets one third less range than Tesla does. It’s really aimed at Porsche fanatics, and I doubt they will get outside their core market. In the meantime, Tesla has taken over the middle part of the electric market with the Model 3 at $37,000 a car. That’s where the money is, and Porsche will never get there.

Q: How will the US pull out of recession if the interest rates are at or below zero?

A: It won’t—that’s what a lot of economists are concerned about these days. With interest rates below zero, the Fed has lost its primary means to stimulate the economy. The only thing left to do is use creative means like feeding the economy with currency, which Europe has been doing for 10 years, and Japan for 30, with no results. That’s another reason to not allow rates to get back to zero—so we have tools to use when we go into a recession 12-24 months from now.

Q: What’s the best way to buy silver?

A: The ETF iShares Silver Trust (SLV) and, if you want to be aggressive, the silver miners with the Global X Silver Miners ETF (SIL).

Q: Have global central banks ruined the western economic system as we know it for future generations?

A: They may have—mostly by printing too much money in the last 10 years in order to get us out of recession. This hasn’t really worked for Europe or Japan, mind you, though who knows how much worse off they would be if they hadn’t. What it did do here is head off a Great Depression. If we go back to money printing in a big way, however, and it doesn’t work, we will not have prevented a Great Depression so much as pushed it back 10 or 15 years. That’s the great debate ongoing among economists, and it will eventually be settled by the marketplace.

 

 

 

 

 

 

June 14, 2019

Global Market Comments
June 14, 2019
Fiat Lux

Featured Trade:

(WEDNESDAY JUNE 26 BRISBANE, AUSTRALIA STRATEGY LUNCHEON)
(MAY 29 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (BYND), (AMZN), (GOOG), (AAPL), (CRM), (UT), (RTN), (DIS), (TLT), (HAL), (BABA), (BIDU), (SLV), (EEM)

June 12 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader June 12 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Do you think Tesla (TSLA) will survive?

A: Not only do I think it will survive, but it’ll go up 10 times from the current level. That’s why we urged people to buy the stock at $180. Tesla is so far ahead of the competition, it is incredible. They will sell 400,000 cars this year. The number two electric car competitor will sell only 25,000. They have a ten-year head start in the technology and they are increasing that lead every day. Battery costs will drop another 90% over the next decade eventually making these cars incredibly cheap. Increase sales by ten times and double profit margins and eventually, you get to a $1 trillion company.

Q: Beyond Meat (BYND)—the veggie burger stock—just crashed 25% after JP Morgan downgraded the stock. Are you a buyer here?

A: Absolutely not; veggie burgers are not my area of expertise. Although there will be a large long-term market here potentially worth $140 billion, short term, the profits in no way justify the current stock price which exists only for lack of anything else going on in the market. You don’t get rich buying stocks at 37 times company sales.

Q: Are you worried about antitrust fears destroying the Tech stocks?

A: No, it really comes down to a choice: would you rather American or Chinese companies dominate technology? If we break up all our big tech companies, the only large ones left will be Chinese. It’s in the national interest to keep these companies going. If you did break up any of the FANGS, you’d be creating a ton of value. Amazon (AMZN) is probably worth double if it were broken up into four different pieces. Amazon Web Services alone, their cloud business, will probably be worth $1 trillion as a stand-alone company in five years. The same is true with Apple (AAPL) or Google (GOOG). So, that’s not a big threat overhanging the market.

Q: Is it time to buy Salesforce (CRM)?

A: Yes, you want to be picking up any cloud company you can on any kind of sizeable selloff, and although this isn’t a sizeable selloff, Salesforce is the dominant player in cloud plays; you just want to keep buying this all day long. We get back into it every chance we can.

Q: Do you think the proposed merger of United Technologies (UT) and Raytheon (RTN) will lower the business quality of United Tech’s aerospace business?

A: No, these are almost perfectly complementary companies. One is strong in aerospace while the other is weak, and vice versa with defense. You mesh the two together, you get big economies of scale. The resulting layoffs from the merger will show an increase in overall profitability.

Q: I had the Disney (DIS) shares put to me at $114 a share; would you buy these?

A: Disney stock is going to go up ahead of the summer blockbuster season, so the puts are going to expire being worthless. Sell the puts you have and then go short even more to make back your money. Go naked short a small non-leveraged amount Disney $114 puts, and that should bring in a nice return in an otherwise dead market. Make sure you wait for another selloff in the market to do that.

Q: What role does global warming play in your bullish hypothesis for the 2020s?

A: If people start to actually address global warming, it will be hugely positive for the global economy. It would demand the creation of a plethora of industries around the world, such as solar and other alternative energy industries. When I originally made my “Golden Age” forecast years ago, it was based on the demographics, not global warming; but now that you mention it, any kind of increase in government spending is positive for the global economy, even if it’s borrowed. Spending to avert global warming could be the turbocharger.

Q: Why not go long in the United States Treasury Bond Fund (TLT) into the Fed interest rate cuts?

A: I would, but only on a larger pullback. The problem is that at a 2.06% ten-year Treasury yield, three of the next five quarter-point cuts are already priced into the market. Ideally, if you can get down to $126 in the (TLT), that would be a sweet spot. I have a feeling we’re not going to pull back that far—if you can pull back five points from the recent high at $133, that would be a good point at which to be long in the (TLT).

Q: Extreme weather is driving energy demand to its highest peak since 2010…is there a play here in some energy companies that I’m missing?

A: No, if we’re going into recession and there’s a global supply glut of oil, you don’t want to be anywhere near the energy space whatsoever; and the charts we just went through—Halliburton (HAL) and so on—amply demonstrate that fact. The only play here in oil is on the short side. When US production is in the process of ramping up from 5 million (2005) to $12.3 million (now), to 17 million barrels a day (by 2024) you don’t want to have any exposure to the price of oil whatsoever.

Q: What about China’s FANGS—Alibaba (BABA) and Baidu (BIDU). What do you think of them?

A: I wanted to start buying these on extreme selloff days in anticipation of a trade deal that happens sometime next year. You actually did get rallies without a deal in these things showing that they have finally bottomed down. So yes, I want to be a player in the Chinese FANGS in expectation of a trade deal in the future sometime, but not soon.

Q: Silver (SLV) seems weaker than gold. What’s your view on this?

A: Silver is always the high beta play. It usually moves 1.5-2.5 times faster than gold, so not only do you get bigger rallies in silver, you get bigger selloffs also. The industrial case for silver basically disappeared when we went to digital cameras twenty years ago.

Q: Does this extended trade war mean the end for emerging markets (EEM)?

A: Yes, for the time being. Emerging markets are one of the biggest victims of trade wars. They are more dependent on trade than any of the major economies, so as long as we have a trade war that’s getting worse, we want to avoid emerging markets like the plague.

Q: We just got a huge rebound in the market out of dovish Fed comments. Is this delivering the way for a more dovish message for the rest of the year?

A: Yes, the market is discounting five interest rate cuts through next year; so far, the Fed has delivered none of them. If they delayed that cutting strategy at all, even for a month, it could lead to a 10% selloff in the stock market very quickly and that in and of itself will bring more Fed interest rate cuts. So, it is sort of a self-fulfilling prophecy. The bottom line is that we’re looking at an ultra-low interest rate world for the foreseeable future.

Good Luck and Good Trading.

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

 

 

 

 

 

 

May 8, 2019

Global Market Comments
May 8, 2019
Fiat Lux

SPECIAL GOLD ISSUE

Featured Trade:
(THE ULTRA BULL ARGUMENT FOR GOLD),
(GLD), (GDX), (ABX), (SLV), (PALL), (PPLT)
(TESTIMONIAL)

The Ultra Bull Argument for Gold

Gold has become the ugly duckling during this bull market for stocks and bonds. However, that is not going to last.

Gold will eventually come back in fashion and when it does, how high could it really go?

The question begs your rapt attention as the possibility of Britain leaving the EC has suddenly unleashed a plethora of new positive fundamentals for the yellow metal.

It turns out that gold is THE deflationary asset to own. Who knew?

I was an unmitigated bear on the price of gold after it peaked in 2011. In recent years, the world has been obsessed with yields, chasing them down to historic levels across all asset classes.

But now that much of the world already has or is about to have negative interest rates, a bizarre new kind of mathematics applies to gold ownership.

Gold’s problem used to be that it yielded absolutely nothing, cost you money to store, and carried hefty transactions costs. That asset class didn’t fit anywhere in a yield-obsessed universe.

Now we have a horse of a different color.

Europeans wishing to put money in a bank have to pay for the privilege to do so. Place €1 million on deposit on an overnight account, and you will have only 996,000 Euros in a year. You just lost 40 basis points on your -0.40% negative interest rate.

With gold, you still earn zero, an extravagant return in this upside down world. All of a sudden, zero is a win.

For the first time in human history, that gives you a 40 basis point yield advantage over Euros. Similar numbers now apply to Japanese yen deposits as well.

As a result, the numbers are so compelling that it has sparked a new gold fever among hedge funds and European and Japanese individuals alike.

Websites purveying investment grade coins and bars crashed multiple times last week, due to overwhelming demand (I occasionally have the same problem). Some retailers have run out of stock.

And last week, the fever went pandemic as silver rocketed 14.28%, and others like Platinum (PPLT) and Palladium (PALL) were also frenetically bid.

So I’ll take this opportunity to review a short history of the gold market (GLD) for the young and the uninformed.

Since it peaked in the summer of 2011, the barbarous relic was beaten like the proverbial red-headed stepchild, dragging silver (SLV) down with it. It faced a perfect storm.

Gold was traditionally sought after as an inflation hedge. But with economic growth weak, wages stagnant, and much work still being outsourced abroad, deflation became rampant.

The biggest buyers of gold in the world, the Indians, have seen their purchasing power drop by half, thanks to the collapse of the rupee against the US dollar. The government increased taxes on gold in order to staunch precious capital outflows.

You could also blame the China slowdown for declining interest in the yellow metal which is now in its fifth year of falling economic growth.

Chart gold against the Shanghai index and the similarity is striking until negative interest rates became widespread in 2016.

The brief bid gold caught in 2015 over war fears in Syria, Ukraine, and then Iraq was worth an impressive $160 rise.

That is when the diplomats got involved and hostilities were at least delayed causing gold to roll over like the Bismarck.

In the meantime, the gold supply/demand balance was changing dramatically.

While no one was looking, the average price of gold production soared from $5 in 1920 to $1,300 today. Over the last 100 years, the price of producing gold has risen four times faster than the underlying metal.

It’s almost as if the gold mining industry is the only one in the world which sees real inflation since costs soared at a 15% annual rate for the past five years.

This is a function of what I call “peak gold.” They’re not making it anymore. Miners are increasingly being driven to higher risk, more expensive parts of the world to find the stuff.

You know those tires on heavy dump trucks? They now cost $200,000 each, and buyers face a three-year waiting list to buy one.

Barrack Gold (ABX) didn’t try to mine gold at 15,000 feet in the Andes, where freezing water is a major problem, because they like the fresh air.

What this means is that when the spot price of gold fell below the cost of production, miners will simply shout down their most marginal facilities, drying up supply. That has recently been happening on a large scale.

Barrick Gold, a client of the Mad Hedge Fund Trader, can still operate as older mines carry costs that go all the way down to $600 an ounce.

No one is going to want to supply the sparkly stuff at a loss. That should prevent gold from falling dramatically.

I am constantly barraged with emails from gold bugs whom passionately argue that their beloved metal is trading at a tiny fraction of its true value and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD).

They claim the move in the yellow metal we are seeing now is only the beginning of a 30-fold rise in prices similar to what we saw from 1972 to 1979 when it leaped from $32 to $950.

So when the chart below popped up in my inbox showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using.

To match the gain seen since the 1936 monetary value peak of $35 an ounce, when the money supply was collapsing during the Great Depression, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by 800% from the recent $1,050 low.  That would take our barbarous relic friend up to $8,400 an ounce.

To match the move from the $35/ounce, 1972 low to the $950/ounce, 1979 top in absolute dollar terms, we need to see another 27.14 times move to $28,497/ounce.

Have I gotten you interested yet?

I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. These figures make my own $2,300/ounce long-term prediction positively wimp-like by comparison.

The seven-year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg, South Africa to unload my own krugerands in 1979, was triggered by a number of one-off events that will never be repeated.

Some 40 years of unrequited demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold.

South Africa, the world’s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence, my more subdued forecast.

But then again, I could be wrong.

In the end, gold may have to wait for a return of inflation to resume its push to new highs. The previous bear market in gold lasted 18 years, from 1980 to 1998, so don’t hold your breath.

What should we look for? The surprise that your friends get out of the blue pay increase, the largest component of the inflation calculation.

This is happening now in technology, but nowhere else. When I visit open houses in my neighborhood in San Francisco, half the visitors are thirtysomethings wearing hoodies offering to pay cash.

It could be a long wait for real inflation, possibly into the mid-2020s, when shocking wage hikes spread elsewhere.

You may have noticed that I have been playing gold from the long side virtually every month since it bottomed in January. I’ll be back in there again given a good low risk, high return entry point.

You’ll be the first to know when that happens.

As for the many investment advisor readers who have stayed long gold all along to hedge their clients’ other risk assets, good for you.

You’re finally learning!

 

 

 

 

 

 

 

 

February 27, 2019

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)

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

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

It looks like Armageddon is finally here.

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

 

January 10, 2019

Global Market Comments
January 10, 2019
Fiat Lux

Featured Trade:

(JANUARY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (UUP), (FXE), (FXY), (FXA), (AAPL), (GLD), (SLV), (FCX), (SOYB), (USO), (MU), (NVDA), (AMD), (TLT), (TBT), (BIIB), (TSLA)
(TESTIMONIAL)