(TLT) Archives

October 2 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 2 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: Would you do the S&P 500 (SPY) bull call spread if you didn’t have time to enter the short leg yesterday?

A: I would, because once again, once the Volatility Index (VIX) gets over $20, picking these call spreads is like shooting fish in a barrel. I think the long position I put on the (SPY) this morning is so far in the money that you will be sufficiently safe on a 12-day and really a 2-week view. There is just too much cash on the sidelines and interest rates are too low to see a major December 2018 type crash from here.

Q: I could not come out of the United States Oil Fund (USO) short position—should I keep it to expiration?

A: Yes, at this point we’re so close to expiration and so far in the money that you’d need a 30% move in oil to lose money on this. So, run it into expiration and avoid the execution costs.

Q: How do you see TD Ameritrade (AMTD) short term?

A: Well, it was down approximately 25% yesterday, so I would buy some cheap calls and go way out of the money so as not to risk much capital—on the assumption that maybe next week into the China trade talks, we get some kind of rally in the market and see a dramatic rise. 25% does seem extreme for a one-day move just because one broker was cutting his commissions to zero. By the way, I have been predicting that rates would go to zero for something like 30 years; that’s one of the reasons I got out of the business in 1989.

Q: Would you consider buying Roku (ROKU) at the present level?

A: Down 1/3 from the top is very tempting; however, I’m not in a rush to buy anything here that doesn’t have a large hedge on it. What you might consider doing on Roku is something like a $60-$70 or $70-$80 long-dated call spread. That is hedged, and it’s also lower risk. Sure, it won’t make as much money as an outright call option but at least you won’t be catching a falling knife.

Q: Will we see a yearend rally in the stocks?

A: Probably, yes. I think this quarter will clear out all the nervous money for the short term, and once we find a true bottom, we might find a 5-10% rally by yearend—and I’m going to try to be positioned to catch just that.

Q: At which price level do you go 100% long position?

A: If we somehow get to last December lows, that’s where you add the 100% long position. And there is a chance, while unlikely, that we get down to about 22,000 in the Dow Average (INDU), and that’s where you bet the ranch. Coming down from 29,000 to 22,000, you’re essentially discounting an entire recession with that kind of pullback. But we’re going to try to trade this thing shorter term; the market has so far been rewarding us to do so.

Q: The United States Treasury Bond Fund (TLT) looks like it’s about to break out. How do you see buying for the November $145 calls targeting $148?

A: We are actually somewhat in the middle of the range for the (TLT), so it’s a bit late to chase. We did play from the long side from the high $130s and took a quick profit on that, but now is a little bit late to play on the long side. We go for the low-risk, high-return trades, and $145 is a bit of a high-risk trade at this point. I would look to sell the next spike in the (TLT) rather than buy the middle where we are now.

Q: Will Boeing (BA) get recertified this year?

A: Probably, yes—now that we have an actual pilot as the head of the FAA—and that will be a great play. But if the entire economy is falling into a recession, nothing is a good play and you want to go into cash if you can’t do shorts. That would give us a chance to buy Boeing back closer to the $320 level, which was the great entry point in August.

Q: Do you expect General Motors (GM) shares to bounce if they settle with the union on their strike?

A: Maybe for a day or two, but that’s it. The whole car industry is in recession already. The union picked the worst time to strike because GM has a very high 45-day inventory of unsold cars which they would love to get rid of.

Q: What are the chances of a deal with China (FXI)?

A: Zero. How hard do the Chinese really want to work to get Trump reelected? My guess is not at all. We may get the announcement of a fake deal that resumes Chinese agricultural purchases, but no actual substance on intellectual property theft or changing any Chinese laws.

Q: Will they impeach Trump?

A: Impeach yes, convict no; and it’s going to take about 6 months, which will be a cloud hanging over the market. The market’s dropped about 1,000 points since the impeachment inquiry has started.

Q: What about the dollar?

A: I'm staying out of the dollar due to too many conflicting indicators and too much contra-historical action going on. The dollar seems high to me, but I’ve been wrong all year.

Q: E*Trade (ETFC) just announced free stock trading—what are your thoughts?

A: All online brokers now pretty much have to announce free trading in order to stay in business, otherwise you end up with the dumbest customers. It’s bad for the industry, but it’s good for you. The fact that all of these companies are moving to zero shows how meaningless your commissions became to them because so much more money was being made on selling your order flow to high frequency traders or selling your data to people like Facebook (FB).

Q: What’s your take on the Canadian dollar (FXC)?

A: It will go nowhere to weak, as long as the US is on a very slow interest rate-cutting program. The second Canada starts raising rates or we start cutting more aggressively is when you want to buy the Loonie.

Q: Fast fashion retailer Forever 21 went bankrupt—is it too late to short the mall stocks?

A: No but be very disciplined; only short the rallies. Last week would have been a good chance to get shorts off in malls and retailers. You really need to sell into rallies because the further these things go down, the more volatility increases as the prices go low. Obviously, a $1 move on a $30 stock is only 3% but a $1 move on a $10 stock is 10%. If you’re the wrong way on that, it can cost you a lot of money, even though the thing’s going to zero.

Q: Comments on defense stocks such as Raytheon (RTN)?

A: This is a highly political sector. If Trump gets reelected, expect an expansion of defense spending and overseas sales to Saudi Arabia, which would be good for defense. If he doesn’t get reelected, that would be bad for defense because it would get cut, and sales to places like Saudi Arabia would get cut off. I stay out of them myself because it’s essentially a political play and we’re very late in the cycle.

Q: Mark Zuckerberg says presidential candidate Elizabeth Warren’s proposal is an existential threat. Do you agree with him and her policies? Will they crash the economy?

A: They would be bad for the economy; however, I think it’s highly unlikely Warren gets elected. The country’s looking for a moderate president, not a radical one, and she does not fit that description. If you did break up the Tech companies, they’d be worth more individually than they are in these great monolithic companies.

Q: Does the Russell 2000 (IWM) call spread look in danger to you?

A: It’s a higher risk trade, however we are hedged with that short S&P 500, so we can hang onto the long (IWM) position hedging it with your short S&P 500 (SPY) trade reducing your risk.

Q: What do you have to say about shrinking buybacks?

A: It’s another recession indicator, for one thing. Corporate buybacks have been driving the stock market for the last 2 years at around a trillion dollars a year. They have suddenly started to decline. Why is that happening? Because companies think they can buy their stocks back at lower levels. If companies don't want to buy their stocks, you shouldn’t either.

Q: When is the time for Long Term Equity Anticipation Securities (LEAPS)?

A: We are not in LEAPS territory yet. Those are long term, more than one-year option plays. You really want to get those at the once-a-year horrendous selloffs like the ones in December and February. We’re not at that point yet, but when we get there, we’ll start pumping out trade alerts for LEAPS for tech stocks like crazy. Start doing your research and picking your names, start playing around with strikes, and then one day, the prices will be so out of whack it will be the perfect opportunity to go in and buy your LEAPS.

Q: Was it a Black Monday for brokerages when Charles Schwab (SCHW) cut their commission to zero?

A: Yes, but it’s been one of the most predicted Black Mondays in history.

Q: Will the Fed save the market?

A: I would think they have no ability to save the market because they really can’t cut interest rates any more than they already have. There really are no companies that need to borrow money right now, and any that does you don’t want to touch with a ten-foot pole. The economy is not starved for cash right now—we have a cash glut all over the world—therefore, lowering interest rates will have zero impact on the economy, but it does eliminate the most important tool in dealing with future recessions. You go into a recession with interest rates at zero, then you’re really looking at a great depression because there’s no way to get out of it. It’s the situation Europe and Japan have been in for years.

Good Luck and Good Trading
John Thomas
CEO $ Publisher
The Diary of a Mad Hedge Fund Trader

October 2, 2019

Diary, Newsletter, Summary

Global Market Comments
October 2, 2019
Fiat Lux

Featured Trade:

(TEN MORE REASONS WHY BONDS WON’T CRASH),
(TLT), (TBT), (ELD), (MUB)
(COFFEE WITH RAY KURZWEIL), (GOOG)

Ten More Reasons Why Bonds Won’t Crash

Diary, Newsletter, Research

I have never been one to run with the pack.

I’m the guy who eternally marches to a different drummer, not in the next town, but the other hemisphere.

I would never want to join a club that would lower its standards so far that it would invite me as a member. (Groucho Marx told me that just before he died).

On those rare times that I do join the lemmings, I am punished severely.

Like everyone and his brother, his fraternity mate, and his long-lost cousin, I thought bonds would fall this year and interest rates would rise.

After all, this is normally what you get in the eleventh year of an economic recovery. This is usually when corporate America starts to expand capacity and borrow money with both hands, driving rates up.

Of course, looking back with laser-sharp 20/20 hindsight, it is so clear why fixed income securities of every description have refused to crash.

I will give you 10 reasons why bonds won’t crash. In fact, they may not reach a 3% yield for decades.

1) The Federal Reserve is pushing on a string, attempting to force companies to increase hiring, keeping interest rates at artificially low levels.

My theory on why this isn’t working is that companies have become so efficient, thanks to hyper-accelerating technology, that they don’t need humans anymore. They also don’t need to add capacity.

2) The U.S. Treasury wants low rates to finance America’s massive $22.5 trillion and growing national debt. Move rates from 0% to 6% and you have an instant financial crisis, and maybe even a government debt default.

3) Constant tit-for-tat saber-rattling by the leaders of China and the United States has created a strong underlying flight to safety bid for Treasury bonds.

The choices for 10-year government bonds are Japan at -0.25%, Germany at -0.50%, and the U.S. at +1.62%. It all makes our bonds look like a screaming bargain.

4) This recovery has been led by consumer spending, not big-ticket capital spending.

5) The Fed’s policy of using asset price inflation to spur the economy has been wildly successful. But bonds are included in these assets, and they have benefited the most.

6) New rules imposed by Dodd-Frank force institutional investors to hold much larger amounts of bonds than in the past.

7) The concentration of wealth with the top 1% also generates more bond purchases. It seems that once you become a billionaire, you become ultra conservative and only invest in safe fixed-income products. The priority becomes “return of capital” rather than “return on capital.”

This is happening globally. For more on this, click here for “The 1% and the Bond Market.”

8) Inflation? Come again? What’s that? Commodity, energy, precious metal, and food prices are disappearing up their own exhaust pipes. Industrial revolutions produce deflationary centuries, and we have just entered the third one in history (after No. 1, steam, and No. 2, electricity).

9) The psychological effects of the 2008-2009 crash were so frightening that many investors will never recover. That means more bond buying and less buying of all other assets.

10) The daily chaos coming out of Washington and the extreme length of this bull market is forcing investors to hold more than the usual amount of bonds in their portfolios. Believe it or not, many individuals still adhere to the ancient wisdom of owning their age in bonds.

I can’t tell you how many investment advisors I know who have converted their practices to bond-only ones.

Call me an ornery, stubborn, stupid old man.

Hey, even a blind squirrel finds an acorn once a day.

September 27, 2019

Diary, Newsletter, Summary

Global Market Comments
September 27, 2019
Fiat Lux

Featured Trade:
(IF BONDS WON’T GO DOWN, STOCKS CAN’T EITHER),
($NIKK), (TLT), (TBT), ($TNX),
(TESTIMONIAL)

September 25, 2019

Diary, Newsletter, Summary

Global Market Comments
September 25, 2019
Fiat Lux

Featured Trade:

(I HAVE AN OPENING FOR THE MAD HEDGE FUND TRADER CONCIERGE SERVICE),
(HOW THE RISK PARITY TRADERS ARE RUINING EVERYTHING!),
(VIX), (SPY), (TLT),
(TESTIMONIAL),

September 23, 2019

Diary, Newsletter, Summary

Global Market Comments
September 23, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or GRIDLOCKED),
(MSFT), ($INDU), (SPY), (TLT), (GM)

The Market Outlook for the Week Ahead, or Gridlocked

Diary, Newsletter, Research

Market’s are gridlocked.

Traders don’t want to chase the market at an all-time high on top of a 2,000-point rally. They don’t want to sell short either since a Tweet could come out at any time triggering a squeeze.

Will the trade war continue for another week or a year?

On top of all that, we have a president who attempts to manipulate the market more than any in history.

And here is the problem. While the major indexes remain dead unchanged over the past 18 months, earnings have been falling. That has made them more expensive than at any time over the past several years.

And this is in the face of an onslaught of negative economic data that continues to deteriorate by the day, all caused by the trade war.

So, as a result, there is nothing to do here. The market is too high to buy and too low to sell. Clients call me with trade ideas, and I tell them they are reaching. There is nothing worse than reaching for the marginal trade when there is really nothing to do.

At least I’ll have something to do in the coming week. I’ll be launching the Mad Hedge Biotech and Health Care Letter, the newest addition to our family of research services. In addition to technology, I expect Biotech and Health Care to be one of the top-performing sectors in the coming decade.

I have taken out a full-time researcher in the field who has been grinding out reports for me since January 1. The invitation to the webinar should reach you in a few days where I will explain why keeping up with this sector is so important.

There is no law that says you have to have a trade on every day of the year. Cash is beautiful. Better than that, cash has option value. It’s worth a fortune to have dry powder when markets meltdown or melt-up. You get to catch other investors’ trades when they are puking. That is the best time ever to make money.

When my four technology positions expired at their maximum profit point on Friday, I celebrated. I went down to a bankruptcy sale for an antique store in Berkeley and bought a vintage Champaign magnum bottle for $10.

The week was kicked off by mass drone strikes that took out Saudi oil production, axing 6 million barrels a day off the global market. Half of that will be back in a day. Oil prices spike $10, the largest one-day move in history. This is clearly the end result of the US unilaterally pulling out of the US Iran Nuclear Agreement and the economic sanctions that followed, thus inviting retaliation.

General Motors (GM) workers struck, with 48,000 hourly workers hitting the picket lines. The last strike in 1998, also at a market top, lasted for 54 days. Could be this the long-awaited inflationary run-up in wages? Expect many more strikes to come.

China’s economy slowed, with Industrial output up 4.4%, the slowest since 2002. Trade war impacts will keep hitting the economy for months to come. The bad news? Business is not responding to recent stimulus and, with 70% of the country’s oil originating in Saudi Arabia, they now have a bigger headache.

Recreational Vehicle sales are falling off a cliff, down 22% YOY, as consumer cut back discretionary spending. It’s another reliable pre-recession indicator.

Recession fears are the highest in a decade, according to the Bank of America Merrill Lynch fund manager survey. Some 38% of managers are making the bear call versus 34% in August. Only 7% of managers expect value to outperform growth over the next 12 months.

Some 53% of CFOs think we’ll be in a recession in a year, and 67% by end 2020. These are the highest pessimism numbers in a decade. Germany already in recession is the largest concern, followed by a slowing China. It’s all linked. We are all one global economy, like it or not.

Philly Fed plunged, from 16.8 to 12.0, indicating fading business confidence. The trade war universally gets the blame. Notice how nervous everyone is getting.

Apple got tagged with a $14 billion fine in another “not invented here” penalty issued by the Irish government. It’s another attack on American big tech. Apple says they followed Irish tax law to the letter.

The Fed cut a quarter but talks down future rate hikes. Buy the rumor, sell the news. Probably no rate cut for October, so December is the next time we get a swing at the piñata. This will have zero effect on the economy, but further punishes savers.

Microsoft (MSFT) announced a $40 billion share buyback and raises its dividend by 11%. It’s a huge positive for the company and the market in general. I’ll try to buy the Thursday opening if it doesn’t open up at a stupid price. Buy Seattle real estate….and more Microsoft. Bill Gates’ creation has bought back 25% of its shares over the past decade.

The Mad Hedge Trader Alert Service still doing well in this indecisive market. My Global Trading Dispatch reached a new all-time high of 336.07% and my year-to-date ground up to +35.83%. My ten-year average annualized profit bobbed up to +34.57%.

I took profits in my long bond position (TLT) earlier in the week, capturing a four-point rally there. I am left with my short position in oil (US), which needs a $9 a barrel move against it to lose money. That should be fine as long as there is not another attack on the Saudi oil fields.

It is interesting to note that this ramped up the implied volatilities on oil options going into the Friday close over fears of just such an event. We will get all that back at the Monday morning opening….as long as the weekend proves peaceful.

On Monday, September 23 at 8:30 AM, the Chicago Fed National Activity Index for August is out.

On Tuesday, September 24 at 9:00 AM, the S&P Case-Shiller National Home Price Index is updated, for July.

On Wednesday, September 25, at 8:30 AM, we learn August New Home Sales.

On Thursday, September 26 at 8:30 AM, the Weekly Jobless Claims are printed. We also obtain the final read for Q2 GDP.

On Friday, September 27 at 8:30 AM, the August Durable Goods is printed. The Baker Hughes Rig Count is released at 2:00 PM.

As for me, I’ll be doing a ten-mile backpack through Point Reyes National Seashore with a 60-pound pack and feasting on freeze-dried food in front of a campfire. Got to remain bootcamp-ready. You never know when Uncle Sam is going to come calling again.

Good luck and good trading.

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

September 20, 2019

Diary, Newsletter, Summary

Global Market Comments
September 20, 2019
Fiat Lux

Featured Trade:

(SEPTEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (FDX), (FB), (HYG), (JNK), (EEM), (BABA), (JD), (TBT), (FXE), (UUP), (AMZN), (FB), (DIS), (MSFT), (USO), (INDU),
(THE GREAT TRADING GURU SPEAKS)

September 18 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 18 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: What would happen to the United States Treasury Bond Fund (TLT) if the Fed does not lower rates?

A: My bet is that it would immediately have a selloff—probably several points—but after that, recession worries will take bond prices up again and yields down. I don’t think we have seen the final lows in interest rates by a long shot. That’s why I bought the (TLT) last week.

Q: Is it good to buy FedEx (FDX) considering the 13% fall today?

A: I use the 3-day rule on these situations. That's how long it takes for the dust to settle from an earnings shock like this and find the real price. The problem with FedEx is that it’s a great early recession predictor. When the number of delivered packages decreases, it’s always an indicator that the economy as a whole is slowing down, which we know has been happening. It’s one of the most cyclical stocks out there, therefore one of the most dangerous. I wouldn’t bother with FedEx right now. Go take a long nap instead.

Q: Would you be a buyer of Facebook (FB) here, given they seem to have weathered all the recent attacks from Washington?

A: Not here in particular, but I would buy it 20% down when it gets to the bottom edge of its upward channel—it still looks like it’s going crazy. They’re literally renting or buying buildings to hire an additional 50,000 people in San Francisco anticipating huge growth of their business, so that’s a better indicator of the future of Facebook than anything.

Q: Will junk bonds be more in demand now that rates are cratering?

A: Junk bonds (HYG), (JNK) are driven more by the stock market than the bond market, as you can see in the huge rally we just had. Junk bonds are great because their default ratios are usually far below that which the interest rate implies, but you really have to trade them like stocks. Think of them as preferred stocks with really high dividends. When the stock market tops, so will junk bonds. Remember in 2008, junk yields got all the way up to 15% compared to today’s 5.6%.

Q: What will happen to emerging markets (EEM) as rates lower?

A: If lower interest rates bring a weaker US dollar, that would be very positive for emerging markets over the long term and they would be a great buy. However, emerging markets will take the hardest hit if we actually do go into a recession. So, I would pass for now.

Q: What are your thoughts on Alibaba (BABA) and JD.com (JD)?

A: They are great for the long term. However, expect a lot of volatility in the short term. As long as the trade war is going on, these are going to be hard to trade until we get a settlement. (JD) is already up 50% this year but is still down 40% from pre trade war levels. These things will all be up 20-30% when that happens. If you can take the heat until then, they would probably be okay for a long-term portfolio globally diversified.

Q: What do you have to say about the ProShares Ultra Short 20+ Year Treasury ETF (TBT)—the short bond ETF?

A: If you have a position, I’d be selling now. We just had a massive 20%, 4-point rally from $22 to $27 and now would be a good time to take a profit, or at least get out closer to your cost. The zero interest rates story is not over yet.

Q: Would you short the US dollar?

A: I would most likely short it against the euro (FXE), which now has a massive economic stimulus and quantitative easing program coming into play which should be positive for it and negative for the US dollar (UUP). That’s most likely why the euro has stabilized over the last couple of weeks. That said, the dollar has been unexpected high all year despite falling interest rates so I have been avoiding the entire foreign exchange space. I try to stay away from things I don’t understand.

Q: If all our big tech September vertical bull call spreads are in the money, what should we do?

A: You do nothing. They all expire at the Friday close in two trading days. Your broker should automatically use your long call position to cover your short call position and credit your account with the total profit on the following Monday, as well as release the margin for holding that position. After that, we’ll probably wait for another good entry point on all the same names, (AMZN), (FB), (DIS), (MSFT).

Q: If the US fires a cruise missile at Iran, how would the market react?

A: It would selloff pretty big—markets hate wars. And the US wouldn’t send one missile at Iran; it would be more like 100, probably aimed at what little nuclear facilities they have. I doubt that is going to happen. The world has figured out that Trump is a wimp. He talks big but there is never any action or follow through. Inviting the Taliban to Camp David while they were still blowing up our people? Really?

Q: Will the housing market turn on the turbochargers after this dip in rates?

A: It wouldn't turn on the turbochargers, but it might stabilize the market because money is available now at unprecedentedly low interest rates. However, we still have the loss of the SALT deductions—the state and local taxes and real estate taxes that came in with the Trump tax bill. Since then, real estate has been either unchanged or has fallen on both the East and West coast where the highest priced houses are. It’s the most expensive houses that take the loss of the SALT deduction the hardest. Don’t expect any movement in these markets until the SALT deduction comes back, probably in 16 months.

Q: What catalyst do you think would cause a 10% correction in the next 2-3 months?

A: Trump basically saying “screw you” to the Chinese—a tweet saying he’s going to bring another round of tariff increases. That’s worth a minimum of 2,000 points in the Dow Average (INDU), or about 7% percent. Either that or no move in Fed interest rates—that would also create a big selloff. My guess is that and adverse development in the trade war will be what does it. That’s why my positions are so small now.

Q: We have a big short position in the United States Oil Fund (USO) now. Are you going to run this into expiration until October $18?

A: Even though oil has already collapsed by 10% since we put this position on last Friday, premiums in oil options are still close to record levels. So, it pays us to hang on for the time decay. The world is still massively oversupplied in oil and the Saudis were able to bring half of the lost production back on in a day. Oil will keep falling unless there is another attack and it is unlikely we will see one again on this scale. And, we only have 20 more days to go to capture the full 14.8% profit.

Good luck and good trading.
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader