Global Market Comments
September 21, 2018
Fiat Lux
Featured Trade:
(SEPTEMBER 19 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (VIX), (VXX), (GS), (BABA), (BIDU), (TLT), (TBT),
(TSLA), (NVDA), (MU), (XLP), (AAPL), (EEM),
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA,
GLOBAL STRATEGY LUNCHEON)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 19 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: Do you expect a correction in the near term?
A: Yes. In fact, we may even see it in October. Markets (SPY) have been in extreme, overbought territory for a month now, the macro background is terrible, trade wars are accelerating, and interest rates are rising sharply. The only thing holding the market up is the prospect of one more quarter of good earnings, which companies start reporting next month. So once that’s out of the way, be careful, because people are just hanging on to the last final quarter before they sell.
Q: I just got out of my cannabis stock, what should I do now?
A: Thank your lucky stars you got away with that—it was an awful trade and you made money on it anyway. Stay away in droves. After all, the cannabis industry is all about growing a weed and how hard is that? This means the barriers to entry are zero. In fact, I’m thinking of growing some in my own backyard. My tomatoes do well, so why not Mary Jane?
Q: The Volatility Index (VIX) is now at $11.79—should I buy?
A: No, the rule of thumb for the (VIX) is to wait for it to sit on a bottom for one to two weeks and let some time decay work itself out. You’ll see that in the ETF, the iPath S&P 500 VIX Short-Term Futures ETN (VXX). When it stops breaking to new lows, that means it’s ready for another bounce. I would wait.
Q: What do you think about banks here? Is it time to get in?
A: No, these are not promising charts. If anything, I’d say Goldman Sachs (GS) is getting ready to do a head and shoulders and go to new lows. I would stay away from financials unless I see more positive evidence. The industry is ripe for disruption from fintech, which has already started. That’s said, they are way overdue for a dead cat bounce. That’s a trade, not an investment.
Q: Would you short Alibaba (BABA) and Baidu (BIDU) here?
A: No. Shorting is what I would have done six months ago; now it’s far too late. If anything, I would be a buyer of those stocks here, based on the possibility that we will see progress or an end to the trade war in the next couple of months. If the trade wars continue, they will put the U.S. in recession next year, and then you don’t want to own stocks anywhere.
Q: Is Apple (AAPL) going to get hit by the trade wars?
A: So far, this has not been the case, but they are whistling past the graveyard right now—an obvious target in the trade wars from both sides. For instance, the U.S. could suddenly start applying a 25% import duty to iPhones from China, which would make your $1,000 phone a $1,250 phone. Similarly, the Chinese could hit it in China, restricting their manufacturing in one way or another. I’m being very cautious of Apple for this reason. The stock already has one $10 drop just because of this worry.
Q: Can the U.S. ban China from selling bonds?
A: No, they can’t. The global U.S. Treasury bond market (TLT) is international by nature—there is no way to stop the selling. It would take a state of war to reach the point where the Fed actually seizes China’s U.S. Treasury bond holdings. The last time that happened was when Iran seized the U.S. embassy in Tehran in 1979. Iran didn’t get its money back until the Iran Nuclear Deal in 2015. Before that you have to go back to WWII, when the U.S. seized all German and Japanese assets. They never got those back.
Q: What are your thoughts on the chip sector?
A: Stay away short-term because of the China trade war, but it’s a great buy on the long term. These stocks, like NVIDIA (NVDA) and Micron Technology (MU) have another double in them. The fundamentals are outrageously good.
Q: Is the market crazy, or what?
A: Yes, it is crazy, which is why I’m keeping 90% cash and 10% on the short side. But “Markets can remain irrational longer than you can stay liquid,” as my friend John Maynard Keynes used to say.
Q: What’s your take on the Consumer Staples sector (XLP)?
A: It will likely go up for the rest of the year, into the Christmas period; it’s a fairly safe sector. The uptrend will remain until it doesn’t.
Q: Should we buy TBT now?
A: No, the time to buy the ProShares Ultra Short 20+ Year Treasury ETF (TBT) was two months ago. Now is the time to sell and take profits. I don’t think 10-year U.S. Treasury yields (TLT) are going above 3.11% in this cycle, and we are now at 3.07%. Buy low and sell high, that’s how you make the money, not the opposite.
Q: Does this webinar get posted on the website?
A: Yes, but you have to log in to access it. Then hover your cursor over My Account and a drop-down menu magically appears. Click on Global Trading Dispatch, then the Webinars button, and the last nine years of webinars appear. Pick the webinar you want and click on the “PLAY” arrow. Just give us a couple of hours to get it up.
Q: Can Chinese companies use Southeast Asia as a conduit to export to the U.S.?
A: Yes. This is an old trick to bypass trade restrictions. For example, most of the Chinese steel coming into the U.S. is through third countries, like Singapore. Eventually they do get found out, at which point companies or imports from Vietnam will be identified as Chinese origin and get hit with the import duties anyway, but it could take a year or two for those illegal imports to get discovered. This has been going on ever since trade started.
Q: Will the currency crisis in Argentina and Turkey spread to a global contagion?
A: Yes, and this could be another cause of a global recession late next year. The canaries in the coal live there (EEM).
Q: Would you use the DOJ probe to buy into Tesla (TSLA)?
A: No, buy the car, not the stock as it is untradeable. This is in fact the third DOJ investigation Tesla has undergone since Trump came into office. The last one was over how they handled the $400 million they have in deposits for their 400,000 orders. It turns out it was all held in an escrow account. There are easier ways to make money. It’s a black swan a day with Tesla. This is what happens when you disrupt about half of the U.S. GDP all at once, including autos, the national dealer network, big oil, and advertising. All of these are among the largest campaign donors in the U.S.
Global Market Comments
September 14, 2018
Fiat Lux
Featured Trade:
(SOME GOOD NEWS FROM TESLA), (TSLA),
(SOME SAGE ADVICE ABOUT ASSET ALLOCATION)
I’ll give you a chance to pick yourself off the floor first.
While the media focus seems to be overwhelmingly on problems with the Tesla 3 (TSLA) production these days, the fact is that some of the company’s other business lines are growing like gangbusters.
Orders for the groundbreaking Tesla Powerwall were up an eye-popping 450% during the first half of 2018. This device costs $5,800 ($4,060 after the federal alternative investment tax credit) and can store enough power to run your house for three days. When integrated with your solar rooftop array the combined system allows you to reap a greater return from your alternative energy investment.
Tesla could sell more Powerwalls but is constrained by lithium ion battery supplies from its Sparks, Nevada, Gigafactory. Doubling the world’s lithium ion battery supply in one shot, Tesla is already shopping for a location for a second Gigafactory.
As the company made ramping up Tesla 3 production to 100,000 units this year its top priority, the car has first call on battery supplies.
Tesla has also recently completed several utility-sized battery projects that have consumed lithium ion supplies, including those in Australia, Moss Landing, California, for PG&E, and for Green Mountain Energy in Vermont.
This means that Tesla has already carved out a dominant position in a market that is expected to grow by tenfold over the next five years. GTM Research estimated that sales of energy storage products in the U.S. will soar from $541 million in 2018 to $1 billion in 2019 and $4.6 billion by 2013.
It is developing into a global market. The U.S. only accounts for 30% of the global battery storage market, with energy poor Japan and South Korea holding major shares.
Tesla competitors include Florida-based NextEra Energy in America, E.on in Germany, and Fluence, a joint venture between Siemens and AES, also from Germany. Germany seems to be the place where green energy philosophies and top-rate engineering meet.
It’s impossible to see how much the battery business is contributing to Tesla’s overall bottom line as it does not break out earnings separately. They are subsumed within a Tesla division that once comprised Solar City, which Tesla took over in 2016. Running two businesses off a single lithium ion supply was a stroke of genius, permitting vertical integration and vast economies of scale.
However, Tesla’s solar business saw revenues rise by 56.7% to $784 million over the year-earlier period. Selling a product with exponential demand but limited supply is a good place to be in.
It is puzzling to see so much media attention paid to a company with a market capitalization of only $50 billion. Last week, the controversial firm soaked up perhaps a quarter of all financial reporting coverage.
But when you add up all of the industries that Tesla is radically disrupting, such as autos, the oil industry, the dealer local network, local power utilities, and advertising, it comes close to 25% of U.S. GDP.
If I had just taken the online payments system, auto, rocket, solar, and the battery industries a decade into the future and made $30 billion for myself along the way, I’d probably be smoking a joint, too.
And Elon is only 47. It makes you wonder what you’ve been doing with all your free time.
Global Market Comments
September 12, 2018
Fiat Lux
THE FUTURE OF AI ISSUE
Featured Trade:
(THE NEW AI BOOK THAT INVESTORS ARE SCRAMBLING FOR),
(GOOG), (FB), (AMZN), MSFT), (BABA), (BIDU),
(TENCENT), (TSLA), (NVDA), (AMD), (MU), (LRCX)
Global Market Comments
September 7, 2018
Fiat Lux
Featured Trade:
(MONDAY, OCTOBER 15, 2018, ATLANTA, GA,
GLOBAL STRATEGY LUNCHEON),
(SEPTEMBER 5 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (MU), (MSFT), (LRCX), (GOOGL), (TSLA),
(TBT), (EEM), (PIN), (VXX), (VIX), (JNK), (HYG), (AAPL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 5 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: Do you think the collapse of commodity prices in the U.S. will affect the U.S. election?
A: Absolutely, it will if you count agricultural products as commodities, which they are. We have thousands of subscribers in the Midwest and many are farmers up to their eyeballs in corn, wheat, and soybeans. It won’t swing the entire farm vote to the Democratic party because a lot of farmers are simply lifetime Republicans, but it will chip away at the edges. So, instead of winning some of these states by 15 points, they may win by 5 or 3 or 1, or not at all. That’s what all of the by-elections have told us so far.
Q: What will be the first company to go to 2 trillion?
A: Amazon, for sure (AMZN). They have so many major business lines that are now growing gangbusters; I think they will be the first to double again from here. After having doubled twice within the last three years, it would really just be a continuation of the existing trend, except now we can see the business lines that will actually take Amazon to a much bigger company.
Q: Is this a good entry point for Micron Technology (MU)?
A: No, the good entry point was in the middle of August. We are at an absolute double bottom here. Wait for the tech washout to burn out before considering a re-entry. Also, you want to buy Micron the day before the trade war with China ends, since it is far and away its largest customer.
Q: Is Micron Technology a value trap?
A: Absolutely not, this is a high growth stock. A value trap is a term that typically applies to low price, low book to value, low earning or money losing companies in the hope of a turnaround.
Q: I didn’t get the Microsoft (MSFT) call spread when the alert went out — should I add it on here?
A: No, I am generally risk-averse this month; let’s wait for that 4% correction in the main market before we consider putting any kind of longs on, especially in technology stocks which have had great runs.
Q: How do you see Lam Research (LRCX)?
A: Long term it’s another double. The demand from China to build out their own semiconductor industry is exponential. Short term, it’s a victim of the China trade war. So, I would hold back for now, or take short-term profits.
Q: Is this a good entry point for Google (GOOGL)?
A: No, wait for a better sell-off. Again, it’s the main market influencing my risk aversion, not the activity of individual stocks. It also may not be a bad idea to wait for talk of a government investigation over censorship to die down.
Q: Would you buy Tesla (TSLA)?
A: No, buy the car, not the stock. There are just too many black swans out there circling around Tesla. It seems to be a disaster a week, but then every time you sell off it runs right back up again. Eventually, on a 10-year view I would be buying Tesla here as I believe they will eventually become the world’s largest car company. That is the view of the big long-term value players, like T. Rowe Price and Fidelity, who are sticking with it. But regarding short term, it’s almost untradable because of the constant titanic battle between the shorts and the longs. At 26% Tesla has the largest short interest in the market.
Q: I’m long Microsoft; is it time to buy more?
A: No, I would wait for a bit more of a sell-off unless you’re a very short-term trader.
Q: What would you do with the TBT (TBT) calls?
A: I would buy more, actually; preferably at the next revisit by the ProShares Ultra Short 20 Year Plus Treasury ETF (TBT) to $33. If we don’t get there, I would just wait.
Q: What’s your suggestion on our existing (TLT) 9/$123-$126 vertical bear put spread?
A: It expires in 12 days, so I would run it into expiration. That way the spread you bought at $2.60 will expire worth $3.00. We’re 80% cash now, so there is no opportunity cost of missing out with other positions.
Q: Do you like emerging markets (EEM)?
A: Only for the very long term; it’s too early to get in there now. (EEM) really needs a weak dollar and strong commodities to really get going, and right now we have the opposite. However, once they turn there will be a screaming “BUY” because historically emerging nations have double the growth rate of developed ones.
Q: Do you like the Invesco India ETF (PIN)?
A: Yes, I do; India is the leading emerging market ETF right now and I would stick with it. India is the next China. It has the next major infrastructure build-out to do, once they get politics, regulation, and corruption out of the way.
Q: Do you trade junk bonds (JNK), (HYG)?
A: Only at market tops and market bottoms, and we are at neither point. When the markets top out, a great short-selling opportunity will present itself. But I am hiding my research on this for now because I don’t want subscribers to sell short too early.
Q: With the (VXX), I bought the ETF outright instead of the options, what should I do here?
A: Sell for the short term. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) has a huge contango that runs against it, which makes long-term holds a terrible idea. In this respect it is similar to oil and natural gas ETFs. Contango is when long-term futures sell at a big premium to short-term ones.
Q: How much higher for Apple (AAPL)?
A: It’s already unbelievably high, we hit $228 yesterday. Today it’s $228.73, a new all-time high. When it was at $150, my 2018 target was initially $200. Then I raised it to $220. I think it is now overbought territory, and you would be crazy to initiate a new entry here. We could be setting up for another situation where the day they bring out all their new phones in September, the stock peaks for the year and sells off shortly after.
Global Market Comments
August 20, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
IS THE TRADE WAR ON OR OFF?),
(AAPL), (UUP), (EEM), (NFLX), (TSLA), (GOOGL), (SOYB),
(SOME SAGE ADVICE ABOUT ASSET ALLOCATION)
Is the trade war on or off? Trillions of dollars in cash flow and investment depend on the answer to the question.
Traders and investors can be forgiven for being confused. It was only a week ago that a doubling of duties on Turkish imports were threatened because of an American pastor locked up there two years ago, triggering a stock meltdown.
Then, on Wednesday night presidential economic advisor Larry Kudlow hinted that he would meet with a Chinese trade delegation, prompting a 400-point Dow melt-up. Please note that except for Apple (AAPL), technology stocks did not participate in the rally one iota.
In the meantime, Apple continued its relentless march to my $220 target for $2018, so you might think about taking some money off the table. The market capitalization now stands at a staggering $1.05 trillion, the largest in the world.
It vindicates my call that at any time the administration could suddenly declare victory in the trade war, prompting a major stock market rally, regardless of the outcome.
So what happens next. Expect the trade talks to fail, or not happen at all. Market meltdowns will be followed by melt-up, then meltdowns again. Certainly, that's what the soybean (SOYB) market believes, that new canary in the coal mine for our global trade wars. It barely moved this week.
Hey, if trading were easy it would pay the federal minimum wage rate of $7.25 an hour, so quit your complaining!
As if trade wars were the only thing to worry about these days.
There is a mass protest underway at Alphabet (GOOGL) over the company's proposal to re-enter the China market. No one wants to assist the Middle Kingdom's harsh censorship regime, and some 1,000 employees have already signed a petition to this effect.
Emerging markets (EEM) continue to get pounded by trade wars and a strong U.S. dollar (UUP), which has the effect of increasing their companies' local currency debt.
Elon Musk continues his slow motion public nervous breakdown, cutting Tesla's stock at the knees down to $305. I hope you all took my advice last week to unload the stock at $380.
Netflix (NFLX) shares are undergoing a serious pullback now that it is in between upgrade launches, and the trade wars and strong dollar eat into international subscriber growth, about 80% of the total. Don't forget to buy this dip.
With the Mad Hedge Market Timing Index stuck dead on 50, I am not inclined to reach for trades here. A reading of 50 gives you the perfect "do nothing" indicator.
As is always the case when I return from vacation my first few trades are a rude awakening. August is now showing a modest return of 0.23%. My 2018 year-to-date performance has clawed its way up to 25.03% and my nine-year return appreciated to 302.61%. The Averaged Annualized Return stands at 34.91%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 32.24%.
This coming week housing statistics will give the most important insights on the state of the economy.
On Monday, August 20, there will be nothing of note to report. It will just be another boring summer day.
On Tuesday, August 21, same thing.
On Wednesday, August 22 at 9:15 AM, we learn July Existing Home Sales. Will the rot continue? Weekly EIA Petroleum Inventory Statistics are out at 10:30 AM. The Fed Minutes from the meeting six weeks ago are out at 2:00 PM EST.
Thursday, August 23 leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 12,000 last week to 212,000. Also announced are July New Home Sales. The two-day Jackson Hole Symposium of central bankers starts in the morning.
On Friday, August 24 at 8:30 AM EST, we get July Durable Goods. Then the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, it is back to school week for me, so I will be making the rounds with the new teachers at two schools. I have to confess that at my age I have trouble distinguishing between the students and the teachers.
Finally, a sad farewell to Aretha Franklin, the Queen of soul, who provided me with a half century of listening pleasure. When I was young, I couldn't afford to go see her, and when I got old I didn't have the time. Isn't life lived backward?
Good luck and good trading.
Global Market Comments
August 15, 2018
Fiat Lux
Featured Trade:
(WHY BONDS CAN'T GO DOWN),
(TLT), (TBT), ($TNX), (TUR), (TSLA),
(HOW TO MAKE MORE MONEY THAN I DO),
(AMZN), (LRCX), (ABX), (AAPL), (TSLA), (NVDA)