(TLT) Archives

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

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.

**Why Are They So Low?**

April 16, 2019

Diary, Newsletter, Summary

Global Market Comments
April 16, 2019
Fiat Lux

Featured Trade:

(WHY YOU WILL LOSE YOU JOB IN THE NEXT FIVE YEARS,
AND WHAT TO DO ABOUT IT),
(BLK)

April 15, 2019

Diary, Newsletter, Summary

Global Market Comments
April 15, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR QE IS BACK!),
(SPY), (TLT), (TSLA), (DIS), (FCX), (GOOG), (MSFT), (AMZN)

The Market Outlook for the Week Ahead, or QE is Back!

Diary, Newsletter, Research

Let me warn you in advance that I am only going off drugs long enough to write this newsletter.

This year’s flu has finally laid me low and let me tell you it is a real killer. Perhaps it is my advanced age that has magnified its effects. Then I developed an allergic reaction to the flu medicine I was taking. For a couple of days there, I was looking like the Michelin Man.

However, I did have a lot of time to read research. And what I learned was sobering.

For a start, we are fully back to a quantitative easing market. In one fell swoop, the Fed went from an expectation of four interest rate hikes in 2019 to none. By ending quantitative tightening early, it has cut the amount of cash it is withdrawing from the financial system from $4.3 trillion to only $1.5 trillion.

The Fed is in effect reflating the bubble one more time. And what do you do in a QE-driven economy. YOU BUY EVERYTHING! This explains why stocks, bonds, commodities, and energy have all been marching upward in unison this year even though that is supposed to be theoretically impossible.

Yes, the decade long liquidity-driven bull market may have another leg up to go.

A higher high inevitably leads to a lower low. The trades you are executing now may be akin to picking up pennies in front of a steam roller. We are clearly planting the seeds of the next financial crisis. But for now, the pain trade is clearly to the upside.

Those of who who traded through the dotcom bubble are seeing déjà vu all over again. Huge money-losing tech companies are now floating IPOs on a daily basis. This too will end in tears, which is why I have recommended to followers to avoid all of them. This is a sucker’s game.

There is a cloud behind this silver lining. After a ballistic 21.43% move in the Dow Average in four months, markets are trading as if risk is a thing of the past. The euphoria is here and complacency rules. That means the number of new possible low risk/high return trades out there has fallen to zero.

There is another cloud to worry about. The more excess stimulus the Fed provides the economy now, the fewer resources it will have to get us out of the next recession, which might be only a year off. As a result, everyone is long but extremely nervous. They are still participating in the party but are standing next to the exit door. Pent up volatility is building like a volcano ready to explode.

The other great revelation is that markets have been trading extremely short term in nature, only one quarter ahead of what the real economy is doing. So, a stock market meltdown in Q4 2018 discounted a collapsing GDP growth in Q1 2019 of a 1% rate or less. That is down 80% from a year ago peak.

The ultra-strong market in Q1 is anticipating an economic rebound in Q2, After that, who knows?

That’s why I am moving both of my trading portfolios for Global Trading Dispatch and the Mad Hedge Technology Letter to 100% cash positions in the coming week.

Last week was the week when Walt Disney (DIS) morphed from being a has-been media stock hobbled by a failing holding in ESPN to a dynamic company that is suddenly taking over the world. The reward was an eye-popping 25% move in three weeks, which we caught.

Copper demand is rocketing, off of soaring global electric car production. Each vehicle needs 22 pounds of the red metal, and 4 million have been built so far. That number reached 5 million by June. Take a second bite of the apple with (FCX) as well.

General Electric got slaughtered again, with an earnings downgrade from Morgan Stanley. It will take years to sort out this mess. Avoid (GE).

The 30-year fixed rate mortgage plunged to 4.03% and may save the spring selling season for residential real estate.

Apple Topped $200. It looks like the market is finally buying the services story. Stand aside for the short term. It’s had a great run, up 42% from the December low. I’m waiting for 5G until I buy my next iPhone, probably next year.

The Mad Hedge Fund Trader hit a new all-time high briefly, up 15.46% year to date, and beating the pants off the Dow Average. Good thing I didn’t buy the bearish argument. There’s too much cash floating around the world. However, my downside hedges in Disney and Tesla cost me some money when I stopped out. I was late by a day.

We are taking profits on a six-month peak of 13 positions across the GTD and Tech Letter services and will wait for markets to tell us what to do next.

April is so far down -1.50%, as my downside hedges in Tesla (TSLA) and Disney (DIS) cost me some sofa change. My 2019 year to date return retreated to +13.92%, paring my trailing one-year return back up to +27.22%.

My nine and a half year return backed off to +314.06%. The average annualized return appreciated to +33.65%. I am now 100% in cash.

The Mad Hedge Technology Letter has gone ballistic, with an aggressive and unhedged 30% long which expires this week. It is maintaining positions in Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN), which are clearly going to new highs.

It’s going to be a dull week on the data front after last week’s fireworks.

On Monday, April 15 at 8:30 AM, we get the April Empire State Index. Citibank (C) and Goldman Sachs (GS) report.

On Tuesday, April 16, 9:15 AM EST, we learn March Industrial Production. Netflix (NFLX) and IBM (IBM) report.

On Wednesday, April 17 at 2:00 PM, we get the Fed Beige Book Indicators. Morgan Stanley reports (MS).

On Thursday, April 18 at 8:30 the Weekly Jobless Claims are produced. At 10:00 AM EST, we obtain the March Index of Leading Economic Indicators. American Express (AXP) reports.

On Friday, April 19 at 8:30 AM, the markets are closed for Good Friday.

As for me, I am staying planted in my bed reading up on research and watching HBO until I kick this flu. After that, I should be good for the rest of the year.

Good luck and good trading.

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

Flat on my Back

April 11, 2019

Diary, Newsletter, Summary

Global Market Comments
April 11, 2019
Fiat Lux

Featured Trade:
(THE UNITED STATES OF DEBT),
(TLT), (TBT), ($TNX),

April 10, 2019

Diary, Newsletter, Summary

Global Market Comments
April 10, 2019
Fiat Lux

Featured Trade:

(A NOTE ON OPTIONS CALLED AWAY),
(TLT),
(NOTICE TO MILITARY SUBSCRIBERS)

April 8, 2019

Diary, Newsletter, Summary

Global Market Comments
April 8, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE FLIP-FLOPPING MARKET),
(SPY), (TLT), (TSLA), (BA), (LUV), (DAL)

The Market Outlook for the Week Ahead, or the Flip-Flopping Market

Diary, Newsletter

Easy come easy go.

Flip flop, flip flop.

Up until March 25, the bond market was discounting a 2019 recession. Bonds soared and stocks ground sideways. Exactly on that day, it pushed that recession out a year to 2020.

For that was the day that bond prices hit a multiyear peak and ten-year US Treasury yields (TLT) plunged all the way to 2.33%. Since then, interest rates have gone straight up, to 2.52% as of today.

There was also another interesting turn of the calendar. Markets now seem to be discounting economic activity a quarter ahead. So, the 20% nosedive we saw in stocks in Q4 anticipated a melting Q1 for the economy, which is thought to come in under 1%.

What happens next? A rebounding stock market in Q2 is expecting an economic bounce back in Q2 and Q3. What follows is anyone’s guess. Either continuing trade wars drag us back into a global recession and the stock market gives up the $4,500 points it just gained.

Or the wars end and we continue with a slow 2% GDP growth rate and the market grinds up slowly, maybe 5% a year.

Which leads us to the current quandary besieging strategists and economists around the world. Why is the government pressing for large interest rate cuts in the face of a growing economy and joblessness at record lows?

Of course, you have to ask the question of “what does the president know that we don’t.” The only conceivable reason for a sharp cut in interest rates during “the strongest economy in American history” is that the China trade talks are not going as well as advertised.

In fact, they might not be happening at all. Witness the ever-failing deadlines that always seem just beyond grasp. The proposed rate cut might be damage control in advance of failed trade talks that would certainly lead to a stock market crash, the only known measure of the administration view of the economy.

This also explains why politicization of the Fed is moving forward at an unprecedented rate. You can include political hack Stephen Moore who called for interest rate RISES during the entire eight years of the Obama administration but now wants them taken to zero in the face of an exploding national debt. There is also presidential candidate Herman Cain.

Both want the US to return to the gold standard which will almost certainly cause another Great Depression (that’s why we went off it last time, first in 1933 and finally in 1971). The problem with gold is that it’s finite. Economic growth would be tied to the amount of new gold mined every year where supplies have been FALLING for a decade.

The problem with politicization of the Fed is that once the genie is out of the bottle, it is out for good. BOTH parties will use interest rates to manipulate election outcomes in perpetuity. The independence of the Fed will be a thing of the past.

It has suddenly become a binary world. It either is, or it isn’t.

Positive China rumors lifted markets all week. Is this the upside breakout we’ve been looking for? Buy (FXI). While US markets are up 12% so far in 2019, Chinese ones have doubled that.

The Semiconductor Index, far and away the most China-sensitive sector of the market, hit a new all-time high. Advanced Micro Devices (AMD), a Mad Hedge favorite, soared 9% in one day. It’s the future so why not? This is in the face of semiconductor demand and prices that are still collapsing. Buy dips.

Verizon beat the world with its surprise 5G rollout. It’s really all about bragging rights as it is available only in Chicago and Minneapolis and it will take time for 5G phones to get to the store. 5G iPhones are not expected until 2020. Still, I can’t WAIT to download the next Star Wars movie on my phone in only ten seconds.

US auto sales were terrible in Q1, the worst quarter in a decade, and continue to die a horrible death. General Motors (GM) suffered a 7% decline, with Silverado pickups off 16% and Suburban SUVs plunging 25%. Is this a prelude to the Q1 GDP number? Risk is rising. You have to wonder how much electric cars are eating their lunch, which now accounts for 4% of all new US sales.

Tesla (TSLA) disappointed big time, and the stock dove $30. Q1 deliveries came in at only 63,000 as I expected, compared to 90,700 in Q4, down 30.5%. I knew it would be a bad number but got squeezed out of my short the day before for a small loss. That’s show business. It’s all about damping the volatility of profits.

By cutting the electric car subsidy by half from $7,500 in 2019 and to zero in 2020, the administration seems intent on putting Tesla out of business at any cost. I hear the company has installed a revolving door at its Fremont headquarters to facilitate the daily visits by the Justice Department and the SEC. Did I mention that the oil industry sees Tesla as an existential threat?

The March Nonfarm Payroll Report rebounded to a healthy 196,000, just under the 110-month average. Weekly Jobless Claims dropped to New 49-Year Low. Whatever the problems the economy has, it’s not with job creation. But at what cost? Of course, we have to cut interest rates!

Boeing successfully tested new software, even taking the CEO for a ride. Maybe it will work this time. Airlines will love it. (BA) shares have already made back half their $80 losses since the recent crash and we caught the entire move. Buy (BA), (DAL), and (LUV).

The Mad Hedge Fund Trader hit a new all-time high briefly, up 15.46% year to date, and beating the pants off the Dow Average. Good thing I didn’t buy the bearish argument. There’s too much cash floating around the world. However, my downside hedges in Disney and Tesla cost me some money when I stopped out. I was late by a day.

We are taking profits on a six-month peak of 13 positions across the GTD and Tech Letter services and will wait for markets to tell us what to do next.

March turned positive in a final burst, up +1.78%. April is so far down -1.76%. My 2019 year to date return retreated to +13.69%, paring my trailing one-year return back up to +26.59%.

My nine and a half year return recovered to +313.83%, pennies short of a new all-time high. The average annualized return appreciated to +33.62%. I am now 80% in cash and 20% long, and my entire portfolio expires at the April 18 option expiration day in 9 trading days.

The Mad Hedge Technology Letter has gone ballistic, with an aggressive and unhedged 40% long, rising in value almost every day. It is maintaining positions in Microsoft (MSFT), Alphabet (GOOGL), and PayPal (PYPL), and Amazon (AMZN), which are clearly going to new highs.

It’s going to be a dull week on the data front after last week’s fireworks.

On Monday, April 8 at 10:00 AM, February Factory Orders are released.

On Tuesday, April 9, 6:00 AM EST, the March NFIB Small Business Optimism Index is published.

On Wednesday, April 10 at 8:30 AM, we get the March Consumer Price Index.

On Thursday, April 11 at 8:30 AM EST, the Weekly Jobless Claims are announced. The March Producer Price Index is printed at the same time.

On Friday, April 12 at 10:00 AM, the April Consumer Sentiment Index is published.

The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, I have two hours until the next snow storm pounds the High Sierras and closes Donner Pass. So I have to pack up and head back to San Francisco.

But I have to get a haircut first.

Incline Village, Nevada is the only place in the world where you can get a haircut from a 78-year-old retired Marine Master Sargent, Louie’s First Class Barbers. Civilian barbers can never grasp the concept of “high and tight with a shadow”, a cut only combat pilots are entitled to. He’ll regale me with stories of the Old Corps the whole time he is clipping away. I wouldn’t miss it for the world.

Good luck and good trading.

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

Tag Archive for: (TLT)

Why Are They So Low?

Flat on my Back

**Why Are They So Low?**