Global Market Comments
August 5, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or TAKING THE ELEVATOR DOWN),
($INDU), (SPY), (TLT), (IWM), (WMT), (FXB)
Tag Archive for: (TLT)
It is often said the markets take the escalator up and the elevator down. A thousand Dow points in three days? That’s like taking the elevator down from the 101st floor of the Empire State Building down to the basement in one shot.
Welcome to your new $30 billion tax, or about $90 per American per year. That will be the effect of the new 10% tariff increase on $300 billion worth of goods imported from China. Unfortunately, this comes on top of an existing $210 per American, bring the total bill due from the China trade war to $300 per person.
Clearly, the Chinese think they can get a better deal from the next president and are inclined to wait it out. This has been my base case since the trade war started 18 months ago.
It was one of the most frenetic, emotion-charged, and violent weeks of the year, with almost daily wild swings on a daily basis. This is the environment where hedge funds and newsletters like this one earn their pay.
The July Nonfarm Payroll Report came in at 164,000, keeping the headline unemployment report to 3.7%. Average hourly earnings grew by a hot 3.2% YOY. The previous two months were revised down by 41,000. Overall, it was a disappointing report.
Manufacturing has been especially weak all year, adding only 16,000 jobs in July and averaging 8,000 jobs a month all year. The headline charge into the services economy continues. Retail lost 3,600, the sixth consecutive monthly decline. The strength was in Professional Services, up 31,000, Health Care at 30,000, and Social Assistance at 20,000.
The broader U-6 “discouraged worker” structural unemployment rate dropped from 7.2% to 7.0%, a new cycle low.
The British Pound (FXB) crashed by 1%, as the harsh reality of a hard Brexit looms. That’s because Boris Johnson, the pro Brexit activist, was named UK prime minister and filled his cabinet with anti-EC doormats. It virtually guarantees a recession there and will act as an additional drag on the US economy.
The end result may be a “Disunited Kingdom”, with Scotland declaring independence in order to stay in the EC, and Northern Ireland splitting off to create a united Emerald Island. The stock market there will crater and the pound will go to parity against the greenback.
Home Price Gains are Still Shrinking, from a 3.5% to a 3.4% annual gain in May, according to the S&P Corelogic Case Shiller National Home Price Index. The Median Home Price hit a new high of $285,700. That can’t buy you a parking space in San Francisco. This is removing a major leg from the economy.
Las Vegas saw the biggest increase at 6.4%, followed by Phoenix at 5.7% and Tampa at 5.1%. Shrinking price gains in the face of falling interest rates is a classic pre-recessionary indicator.
Apple hurdled a low bar, with an upward forward guidance delivering a 5% pop in the stock. Revenues rose 1% to $53.8 billion, while profits dropped 7%. The future looks bright on the eve of 5G iPhones. Hardware drops to less than half of sales for the first time. Services revenues jump to 21% of the total.
China is still a drag. Amazingly, Apple only bought $17 billion worth of its own stock last quarter against a commitment of $100 billion. So why are analyst “BUY” ratings at a decade low? Maybe it's because threats of retaliation in the China trade war are hanging over Apple like a sword of Damocles.
It took only three words to kill Wall Street. Confusion reigns. “Mid Cycle Adjustment” was how Fed governor Jay Powell described Wednesday’s 25 basis point interest rate cut, the first in 12 years, absolutely what the market didn’t want to hear. That implies that the Fed is “one and done,” and that there will be no more interest rate cuts in this economic cycle.
The president added insult to injury piling abuse on his own appointee, further eroding confidence in the independence of the Fed. A truly data dependent Fed wouldn’t have budged last week.
Bonds soared on “one and done.” Higher rates for longer give a new lease on life for the fixed income markets everywhere. Since 2008, major central bank balance sheets have exploded from $3 trillion to $16 trillion, and there is nowhere better for this mountain of money to go but the ten-year US Treasury bond.
Yields have smashed the four-year low at 1.82% and are headed to 1.40% by yearend. The market is wildly overbought for now on the back of an instant three-point rally, so keep buying those dips. Next up is the century low in rates.
Oil crashed 8% on increased global recession fears, in the worst plunge in four years and one of the biggest swan dives in history. The strong dollar doesn’t help either. I have recommended that investors avoid energy like the plague all year and it has worked like a charm. Long term, it’s going out of business anyway, so I don’t even want to trade it here.
Retailers got destroyed on the China news, with stocks down 6%-12% across the board. Best Buy (BBY) did a 12% swan dive. This will be the stick that broke the camel’s back for a lot of retailers already hanging on by their fingernails. Some 42% of US apparel, 69% of footwear, and 84% of accessories come from China.
Squeezed by Amazon on one side and administration China policies on the other, this will spell the death of retail. It looks like we’re going to have to go barefoot this winter. Thank goodness there’s global warming. The death spiral was further confirmed by the weak jobs figures in retail this morning.
I went into the week 100% in cash, giving me the dry powder to pursue the short side aggressively. I always tell followers that cash is a position, that it has option value, and this was a classic example of how well that can work.
The second I heard about the China tariff increase, I went pedal to the metal and increased my shorts from 0% to 40%, against 60% cash. My current shorts include the S&P 500 (SPY), US Treasury bonds (TLT), the Russel 2000 (IWM), and the giant retailer (WMT).
I see August as the best short selling opportunity of the year. I put out my first shorts the day after the Fed rate cut. My Global Trading Dispatch has hit a new all-time high of 320.30% and my year-to-date shot up at +20.16%. A robust earned a robust 1.83% so far in August, and 4.78% since I went back into the market from Zermatt, Switzerland three weeks ago.
My ten-year average annualized profit bobbed up to +33.13%. My Mad Hedge Market Timing Index saw one of the sharpest declines in its history, plunging from 65 to 23 on only two days. We could even be back to “BUY” territory by the end of next week.
The coming week will be a feeble one on the data front. Believe it or not, it could be a quiet week.
On Monday, August 5 at 2:00 PM, the July ISM Non-Manufacturing PMI is out.
On Tuesday, August 6 at 2:00 PM, the June JOLTS Jobs Openings report is published.
On Wednesday, August 7, at 8:30 AM, June Consumer Credit is released.
On Thursday, August 8 at 8:30 AM, the Weekly Jobless Claims are printed.
On Friday, August 9 at 8:30 AM, July Core Purchasing Price Index is printed, an inflation indicator.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, believe it or not, I have not been to the beach this year. As a native Californian, that is near high treason. So I am loading up the old Tesla with an ice chest, boogie boards, and kids and headed to nearby Stinson Beach in Marin County. I’m going early to beat the traffic and will take my usual short cuts I learned while living there eons ago.
Surf’s up!
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
July 31, 2019
Fiat Lux
SPECIAL FIXED INCOME ISSUE
Featured Trade:
(ITALY’S BIG WAKE UP CALL),
(TLT), ($TNX), (TBT), (SPY), ($INDU), (FXE), (UUP), (USO),
(WELCOME TO THE DEFLATIONARY CENTURY),
(TLT), (TBT),
Those planning a European vacation this summer just received a big gift from Mario Draghi, the outgoing president of the European Central Bank. His promise to re-accelerate quantitative easing in Europe has sent the Euro crashing and the US dollar soaring.
Over the last two weeks, the Euro (FXE) has fallen by 2.5%. That $1,000 Florence hotel suite now costs only $975. Mille Gracie!
You can blame the political instability in the Home of Caesar, which has not had a functioning government since WWII. The big fear is that the extreme left would form a collation government with the extreme right that could lead to its departure from the European Community and the Euro. Think of it as Bernie Sanders joining Donald Trump!
In fact, Italy has had 62 different governments since WWII. They change administrations like I change luxury cars, about once a year. Welcome to European debt crisis part 27.
I can’t remember the last time markets cared about what happened in Europe. It was probably the first Greek debt crisis in 2011. As a result, German ten-year bunds have cratered from 0.60% to -0.40%. But they care today, big time.
Given the reaction of the global financial markets, you could have been forgiven for thinking that the world had just ended.
US Treasury Bond yields (TLT) saw their biggest plunge in years, off 120 basis points to 2.05%.
Even oil prices collapsed for an entirely separate set of reasons, the price of Texas Tea pared 20% since April on spreading global recession fears.
Saudi Arabia looks like it's about to abandon the wildly successful OPEC production quotas that have been boosting oil prices for the past year. Iran has withdrawn from the nuclear non-proliferation treaty, responding with an undeclared tanker war in the Persian Gulf, which I flew over myself only a few weeks ago. The geopolitical premium is back with a vengeance.
So if the Italian developments are a canard, why are we REALLY going down?
You’re not going to like the answer.
It turns out that rising inflation, interest rates, oil and commodity prices, the US dollar, US national debt, budget deficits, and stagnant wage growth are a TERRIBLE backdrop for risk in general and stocks specifically. And this is all happening with the major indexes at the top end of recent ranges.
In other words, it was an accident waiting to happen.
Traders are extremely nervous, global uncertainty is high, the seasonals are awful, and Washington is a ticking time bomb. If you were wondering why I was issuing so few Trade Alerts in July, these are the reasons.
This all confirms my expectation that markets could remain stuck in increasingly narrow trading ranges for the next six months until the presidential election begins in earnest.
Which is creating opportunities.
The global race towards zero interest has the US as the principal laggard. So you should keep buying every serious dip in the bond market.
Stocks are still wildly overvalued for the short term, so I’ll keep my low profile there. As for gold (GLD) and the currencies, I keep buying dips there as well.
So watch for those coming Trade Alerts. I’m not dead yet, just resting. The contest here is to make as much money as you can, not to see how many trades you can clock. That is a brokers' game, not yours.
Waiting for My Shot
Global Market Comments
July 29, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE BAD OMENS ARE THERE),
(INTC), (GOOGL), (AMZN), (JPM), (FXB),
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
Global Market Comments
July 26, 2019
Fiat Lux
Featured Trade:
(JULY 24 BIWEEKLY STRATEGY WEBINAR Q&A),
(FCX), (VIX), (VXX), (UUP), (TLT), (EEM), (ELD), (CEW), (GLD),
(FXA), (FXE), (FXC), (FXY), (FXB), (AMZN),
(TESTING TESLA’S SELF DRIVING TECHNOLOGY),
(TSLA)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader July 24 Global Strategy Webinar broadcast from Zermatt, Switzerland with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What are your thoughts on the Freeport McMoRan (FCX) long position here?
A: We could take a profit here. We probably have about 50% of the maximum potential profit, but I want to hang on and go to the max on this because we’re so far in the money. Cash always has a premium ahead on any Fed interest rate decision. But long term, I think the stock could double, and with the earnings report now out of the way, we have room to run.
Q: What can you say about semiconductor stocks?
A: Long term we love them, short term they are too high to chase here. I would wait for any kind of pullback and, better yet, pull back from the other side of the next recession. We’re not seeing an improvement in prices or orders so this is strictly a technical/momentum-driven trade right now.
Q: How do you play the Volatility Index (VIX)?
A: There are numerous ways you can do it; you can buy call options on the (VIX), you can buy futures on the (VIX), or you can buy the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX). We are probably a week away from a nice entry point on the long side here.
Q: Does a languishing U.S. dollar mean emerging market opportunities?
A: It absolutely does. If we really start to get a serious drop in the U.S. dollar (UUP)—like 5-10%—it will be off to the races for commodities, bonds (TLT), emerging stock markets (EEM), emerging bond markets (ELD), emerging currencies (CEW), and gold (GLD). All of your weak dollar plays will be off to the races—that’s why I went straight into bonds, the Aussie (FXA), and copper through Freeport McMoRan (FCX). All of these trades have been profitable.
Q: When should we sell the U.S. dollar?
A: How about now? For any kind of strength in a dollar against the (FXA), (FXE), (FXC) and (FXY), I would be buying any dips on those foreign exchange ETFs. We’re about to enter a six-month - one-year period weakness on the dollar. It could be the easiest trade out there. The only one I would avoid is the British pound (FXB) because of its own special problems with Brexit. You never want to go long the currency of a country that is destroying itself, which is exactly what’s happening with the pound.
Q: Should I start selling pounds?
A: It’s pretty late in the pound game now. We went into Brexit with the pound at $1.65 and got all the way down to $1.20. We’re a little bit above that now at $1.21. If for some reason, you get a surprise pop in the pound, say to $1.25, that’s where I would sell it, but down here, no.
Q: I missed the (FCX) trade—would you get in on the next dip?
A: Yes, we may not get many dips from here because the earnings were out. Today, they were not as bad as expected, and that was keeping a lot of buyers out of the market on (FCX), so any dips you can get, go a dollar out on your strikes and then take it because this thing could double over the medium term. If the trade war with China ends, this thing could make it to the old high of $50.
Q: Is now a good time to refi my home?
A: Yes, because by the time you get the paperwork and approvals and everything else done (that’ll take about 2 months), rates will likely be lower; and in any case you’re looking to refi either a 7/1 ARM or a 15-year fixed, and the rates on those have already dropped quite substantially. I was offered 3.0% for a 15-year fixed loan on my home just the other day.
Q: On trades like (FCX), why not sell short the put spread?
A: It’s really six of one, half dozen of the other. The profit on either one should be about the same. If it isn’t, an options market maker will step in and arbitrage out the difference. That’s something only an algorithm can do these days. I recommend in-the-money call spreads versus shorting sell short vertical bear put credit spreads because for beginners, in-the-money call spreads are much easier to understand.
Q: The Mueller hearings in Congress are today. Is there any potential impact on the market?
A: The market has completely detached itself from Washington—it couldn't care less about what’s happening there. I don't think politics have the capacity to affect stock prices. The only possible impact was the prospect of the government shutdown in September. That seems to have been averted in the latest deal between the House and the White House.
Q: What about Amazon (AMZN)?
A: Like the rest of technology, long term I love it, but short term it’s overdue for a small correction. I’m looking for Amazon to go to $3,000 a share—it’s essentially taking over the world. The antitrust threats will go absolutely nowhere; Congress doesn’t even understand what these companies do, let alone know how to break them up. I wouldn’t worry about it.
Q: I just received an email inviting me to buy a new Bitcoin auto trading system that is guaranteed to make me a millionaire in four months. It is being promoted by Nicole Kidman. Do you think I should try it?
A: I wouldn’t touch this with a ten-foot pole. No, wait. I wouldn’t touch this with a 100-foot pole! Whenever a new type of security comes out, these types of "get rich quick" investment scams come out of the woodwork. Cryptocurrency is no different. Nicole Kidman was probably paid $500,000 to make the pitch by a promotor. Or more likely, Nicole Kidman has nothing to do with these people and they just swiped her picture off the Internet. I hear about these things daily. Follow their plan and you are more likely to get completely wiped out than become a millionaire. There are NO get rich quick schemes. There are only get rich slowly strategies, such as following this newsletter. Click here to see the above-mentioned scam which you should avoid at all cost. Gee, do you think Nicole Kidman would be interested in promoting the Mad Hedge Fund Trader?
Global Market Comments
July 22, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR BRACE YOURSELF),
(SPY), (TLT), (FXA), (FCX), (MSFT),
(TESTIMONIAL)
When you have constant jet log, you often have weird dreams. Take this morning, for example.
I dreamed that Fed governor Jay Powell invited me over to his house for breakfast. While he was cooking the bacon and eggs, Donald Trump started to call him every five minutes ordering him to lower interest rates. Jay got so distracted that the bacon caught fire, the house burned down, and we all died.
Fortunately it was only a dream. But like most dreams, parts of it were borrowed from true life.
Brace yourself, this could be the deadest, least interesting, most somnolescent week of the year. Thanks to all of those “out of office” messages we are getting with our daily newsletter mailings, I know that most of you will be out on vacation. Trading desks everywhere are now manned by “B” teams.
Then, the most important data release of the month doesn’t come out until Friday morning. It will be weak, but how weak? Q1 came in at a robust 3.1%. Q2 could be under 1%. The bigger unknown is how much of this widely trumpeted slowdown is already in the market?
Given the elevated levels of stock markets everywhere, most traders will rather be inclined to bet on which of two flies crawls up a wall faster. Such are the dog days of summer.
We here in Europe are bracing for the next ratchet up in climate change, where every temperature record is expected to be broken. It is forecast to hit 92 in London, 106 in Paris, and 94 in Berlin. Still, that's a relief from India, where it was 120. Five more years of global warming and India will lose much of its population as it will become uninhabitable.
I shall have to confine my Alpine climbing to above 8,000 feet where hopefully it can reach the 70s. By the way, the air conditioning in Europe sucks, and the bars always run out of ice early.
While the Fed is expected by all to cut interest rates a quarter point next week, we have suddenly received a raft of strong economic data points hinting that it may do otherwise.
Inflation hit an 18-month high, with the CPI up a blistering 0.3% in June. That’s why bonds (TLT) took a sudden four-point hit. Soaring prices for apparel (the China trade war), used cars, rents, and healthcare costs led the charge. Is this the beginning of the end, or the end of the beginning?
The Empire State Factory Index hits a two-year high, leaping from -8.6 in June to 4.3 in July. No recession here, at least in New York.
Microsoft (MSFT) blew it away, with spectacular Q2 earnings growth, wiping out conservative analyst forecasts. Azure, the company’s cloud business, rose a spectacular 64%. Nothing like seeing your number one stock pick for 2019 take on all comers. Buy (MSFT) on every dip.
An early read on Q2 GDP came in at a sizzling 1.8%. Many forecasts were under 1%, thanks to the trade wars, soaring budget deficits, and fading tax revenues. That’s still well down from the 3.1% seen in Q1. It seems no one told Main Street, where retail sales and borrowing are on fire, according to JP Morgan’s Jamie Diamond.
US Retail Sales rose a hot 0.4% in June, raising prospects that the Fed may not cut interest rates after all. Stocks and bonds both got hit. Don’t panic yet, it’s only one number.
If the Fed only looks at the data above, it would delay a rate cut for another quarter. If they choose that option, the Dow Average would plunge 1,000 points in a week. The market-sensitive Fed knows this too.
However, the Fed has to be maintaining a laser-like focus on the Conference Board Index of Leading Economic Indicators, which lately have been rolling over like the Bismarck and always presage a recession. For your convenience, I have included a 60-year chart below with the recessions highlighted.
And there were a few soft spots in the numbers as well.
China growth slowed to 6.2%, a 27-year low. Never mind that the real rate is probably only 3%. The slowdown is clearly the outcome of the trade war. That’s what happens when you make war on your largest customer. Markets rallied because it was not worse.
Banks beat on earnings, but stocks yawned, coming off an “OK” quarter. It’s still the sector to avoid with a grim backdrop of sharply falling interest rates. They’re also getting their pants beat by fintech, from which there is no relief.
There is no end to the China trade war in sight, as Trump once again threatened another round of tariff increases. It looks like the trade war will outlast the presidential election, since the Chinese have no interest in helping Trump get reelected. The puzzle is that the stock market could care less.
Trump’s war on technology expanded. First, Facebook (FB) got hit with a $5 fine over privacy concerns. Now Google (GOOGL) is to be investigated for treason for allegedly helping the Chinese military. In the meantime, Europe is going after Amazon (AMZN) on antitrust concerns. If the US isn’t going to dominate technology, who will. Sorry, but this keyboard doesn’t have Chinese characters.
June US Housing Starts fell 0.9%, while permits dove 6%. If builders won’t build in the face of record low interest rates, their outlook for the economy must be grim. Maybe the 36% YOY decline in buying from Chinese has something to do with it.
Oil popped on the US downing of an Iranian drone in the Straits of Hormuz, which I flew over myself only last week on my way to Abu Dhabi. Expect this tit for tat, “Phony War” to continue, making Texas tea (USO) untradeable. In the meantime, the International Energy Agency has cut oil demand forecasts, thanks to a slowing global economy.
My strategy of avoiding stocks and only investing in weak dollar plays like bonds (TLT), foreign exchange (FXA), and copper (FCX) has been performing well. After spending a few weeks out of the market, it’s amazing how clear things become. The clouds lift and the fog disperses.
My Global Trading Dispatch has hit a new high for the year at +17.78% and has earned a respectable 2.54% so far in July. Nothing like coming out of the blocks for an uncertain H2 on a hot streak.
My ten-year average annualized profit bobbed up to +33.12%. With the markets now in the process of peaking out for the short term, I am now 70% in cash with Global Trading Dispatch and 100% cash in the Mad Hedge Tech Letter. If there is one thing supporting the market now, it is the fact that my Mad Hedge Market Timing Index has pulled back to a neutral 44. It’s a Goldilocks level, not too hot and not too cold.
The coming week will be a fairly sedentary one on the data front after last week’s fireworks, except for one big bombshell on Friday.
On Monday, July 22, the Chicago Fed National Activity Index is published.
On Tuesday, July 23, we get a new Case Shiller National Home Price Index. June Existing Home Sales follow.
On Wednesday, July 24, June New Home Sales are released.
On Thursday, July 25 at 8:30 AM EST, the Weekly Jobless Claims are printed. So are June Durable Goods.
On Friday, July 26 at 8:30 AM EST, we get the most important release of the week, the advance release of US Q2 GDP. The numbers are expected to be weak, and anything above 1.8% will be a surprise, compared to 3.1% in Q1. Depending on the number, the market will either be up big, down big, or flat. I can already hear you saying “Thanks a lot.”
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be attending a fund raiser tonight for the Zermatt Community band held in the main square in front of St. Mauritius church. If you don’t ski, there isn’t much to do in the winter here but practice your flute, clarinet, French horn, or tuba.
We’ll be eating all the wurst, raclete, beer, and apple struddle we can. As an honorary citizen of Zermatt with the keys to the city, having visited here for 51 years, I get to attend for free.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Market Timing Index
Global Market Comments
July 15, 2019
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, JULY 19 ZERMATT, SWITZERLAND STRATEGY SEMINAR)
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE COMES YOUR NEXT HEART ATTACK),
(INDU), (SPY), (TLT), (GLD), (FXA), (USO)
