Global Market Comments
August 6, 2019
Fiat Lux
Featured Trade:
(I HAVE AN OPENING FOR THE MAD HEDGE FUND TRADER CONCIERGE SERVICE),
(DON’T MISS THE AUGUST 7 GLOBAL STRATEGY WEBINAR),
(HAVE WE SEEN “PEAK AUTO SALES”),
(GM), (TM), (F), (HMC), (TSLA), (NSANY),
There is no limit to my desire to get an early and accurate read on the US economy, which at the end of the day is what dictates the future returns on our investments.
I flew over one of my favorite leading economic indicators only last week.
Honda (HMC) and Nissan (NSANY) import millions of cars each year through their Benicia, California facilities where they are loaded on to hundreds of rail cars for shipment to points inland as far as Chicago.
In 2009, when the US car market shrank to an annualized 8.5 million units, I flew over the site and it was choked with thousands of cars parked bumper to bumper in their white plastic wrappings, rusting in the blazing sun and bereft of buyers.
Then, “cash for clunkers” hit (remember that?). The lots were emptied in a matter of weeks, with mile-long trains lumbering inland, only stopping to add extra engines to get over the High Sierras at Donner Pass. The stock market took off like a rocket, with the auto companies leading.
I flew over the site last weekend, and guess what? The lots are full again. Not only that, the trains lined up to take them away are gone. US Auto Sales peaked in October 2017 when they fell just short of a 19 million annualized rate. As of the end of June this year, they had fallen to a 15.1 million annualized rate. July is looking worse still.
And this is what I’m worried about. Auto Sales may not only be peaking for this economic cycle. They may be peaking for all time.
This is my logic.
As they slowly age, Millennials are about to become the principal buyers of automobiles. The problem is that Millennials are purchasing cars at a far slower rate than previous generations.
This is because they have a much higher concentration in urban areas where the cost of car ownership is the most expensive in history. $40 for parking for an evening? Give me a break. But good luck finding free on-street parking, and if you do, your windows will probably get smashed.
In cities like San Francisco, public transportation, bicycles, and electric scooters are the preferred mode of transportation.
It doesn’t help that this generation is shouldering the burden of the bulk of $1.5 trillion in student loan debt. When you owe $2,000 a month in interest, there is little room for a car payment, and you probably don’t have the credit rating to buy a car anyway.
When they do buy cars, all-electric is their first choice, if they can get access to overnight charging. A lot of companies are making this easy by offering free charging for electric commuters in corporate parking lots. This explains why Tesla (TSLA) has taken deposits from 400,000 for their low-end Tesla 3, which has a two-year waiting list for new buyers.
When Millennials do drive, such as on business, for weekend trips or summer vacations, they either rent or “share.” Driving around the city, you see cars parked everywhere with bizarre names like Upshift, Getaround, Zipcar, Turo, and Casual Carpool.
Indeed, Detroit takes the car-sharing threat so seriously that the Big Three have all bought into the technology, with General Motors taking a stake in Maven. (GM) plans to start its own peer-to-peer car-sharing service this summer.
This is all a mystery for my generation, which grew up tearing apart old cars and putting them back together. I spent a year trying to put the engine on my 1955 Volkswagen back together. When I gave up, I towed the car and a big box full of greasy parts to a local mechanic, a German Army veteran. When he finished, even he had four parts left over.
Do you know who believes my rash, possible MAD theory? Investors in auto stocks, one of the worst-performing sectors of the stock market this year. Shares like those of General Motors (GM) keep breaking new valuation lows.
What was (GM)’s price earnings multiple today? Try a miserable zero since the company loses money, one of the lowest of all S&P 500 stocks. Hapless portfolio managers keep getting sucked into the shares, which have become one of the ultimate value traps.
It is all further evidence that my cautious view on the US economy is correct, that multiple crises overseas are ahead of us, and that the stock market could drop 5%-10% at any time. The auto industry should lead the charge to the downside, especially General Motors (GM) and Ford (F).
As for Tesla (TSLA), better to buy the car than the stock.
Sorry, the photo is a little crooked, but it's tough holding a camera in one hand and a plane's stick with the other while flying through the turbulence of the San Francisco Bay’s Carquinez Straight.
Air traffic control at nearby Travis Air Force base usually has a heart attack when I conduct my research in this way, with a few joyriding C-130s having more than one near miss.
Global Market Comments
July 30, 2019
Fiat Lux
Featured Trade:
(THE IDIOT’S GUIDE TO INVESTING),
(TSLA), (BYND), (JPM)
(THE SECRET FED PLAN TO BUY GOLD),
(GLD), (GDX), (PALL), (PPLT),
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)
Mad Hedge Technology Letter
July 22, 2019
Fiat Lux
Featured Trade:
(DOES ARTIFICIAL INTELLIGENCE WORK FOR YOU?),
(TSLA), (AMZN), (FB)
Anti-A.I. physicist Professor Stephen Hawking was a staunch supporter of preserving human interests against the future existential threat from machines and artificial intelligence (A.I.).
He was diagnosed with motor neuron disease, more commonly known as Lou Gehrig's disease, in 1963 at the age of 21 and sadly passed away March 14, 2018 at the age of 76.
Famed for his work on black holes, Professor Hawking represented the human quest to maintain its superiority against quickly advancing artificial acculturation.
His passing was a huge loss for mankind as his voice was a deterrent to A.I.'s relentless march to supremacy. He was one of the few who had the authority to opine on these issues. Gone is a voice of reason.
Critics have argued that living with A.I. poses a red alert threat to privacy, security, and society as a whole. Unfortunately, those most credible and knowledgeable about A.I. are tech firms. They have shown that policing themselves on this front is remarkably unproductive.
Mark Zuckerberg, CEO of Facebook (FB), has labeled naysayers as "irresponsible" and dismissed the threat. After failing to prevent Russian interference in the last election, he is exhibiting the same defensive posture translating into a de facto admission of guilt. His track record of shirking accountability is becoming a trend.
Share prices will materially nosedive if A.I. is stonewalled and development stunted. Many CEOs who stake careers on doubling or tripling down on A.I. cannot see it die out. There is too much money to lose.
The world will see major improvements in the quality of life in the next 10 years. But there is another side to the coin which Zuckerberg and company refuse to delve into...the dark side of technology.
Defective Amazon (AMZN) Alexa recently produced unexplained laughter because of a mistaken command to start laughing. Despite avoiding calamity, these small events show the magnitude of potential chaos capable of haywire A.I. functions. If one day a user attempts to order a box of tissues and Alexa burns down the house, who is liable?
Tesla's (TSLA) CEO Elon Musk has shared his anxiety about robots flipping the script on humans. Musk acknowledges that A.I. and autonomous vehicles are important factors in the battle for new technology.
The winner is yet to be determined as China has bet the ranch with unlimited resources from Chairman Xi.
The quagmire with China has been squarely centered around the great race for technological supremacy.
A.I. is the ultimate X factor in this race and whoever can harness and develop the fastest will win.
Musk has hinted that robots and humans could merge into one species in the future.
Is this the next point of competition among tech companies? The future is murky at best.
Bill Gates noted that robots should be taxed like humans.
This reflects the bubble in which the ultra-elite reside.
This comment implies that humans and robots are at the same level. It shows a severe lack of empathy for the 40% of working Americans who will be replaced by machines over the next 10 years.
The West is comprised of a deeply hierarchical system of winners and losers. Hawking's premise that evolution has inbuilt greed can be found in the underpinnings of America's economic miracle.
Wall Street has bred a culture that is entirely self-serving regardless of the bigger system in which it finds itself.
Most of us are participating in this perpetual money game chase because our system treats it as a natural part of life.
A.I. will help more people do well in this paper chase to the detriment of the majority.
Quarterly earnings performance is paramount for CEOs.
Return value back to shareholders, or face the sack in the morning.
It's impossible to convince anyone that America's capitalist model is deteriorating in the greatest bull market of all time.
Wall Street has an insatiable hunger for cutting-edge technology from companies that sequentially beat earnings and raise guidance.
Flourishing technology companies enrich the participants creating a Teflon-like resistance to downside market risk.
The issue with Professor Hawking's work is that his timeframe is too far in the future.
Professor Hawking was probably correct, but it will take 25 years to prove it.
The world is quickly changing as science fiction becomes reality.
The year 2020 will signal the real beginning of A.I. in tangible form when autonomous fleets flood main streets and is another step in the direction of human's overreliance on machines.
People on Wall Street are a product of the system in place and earn a tremendous amount of money because they proficiently execute a specialized job.
Traders are busy focusing on how to move ahead of the next guy.
Firms building autonomous cars are free to operate as is.
Hyper-accelerating technology spurs on the development of A.I., machine learning, and enhanced algorithms.
Record profits will topple, and investors will funnel investments back into an even narrower grouping of technology stocks after the weak hands are flushed out.
Professor Hawking said we need to explore our technological capabilities to the fullest in order to avoid extinction.
In 2019, exploring these new capabilities still equals monetizing through the medium of products and services.
This is all bullish for equities as the leading companies associated with A.I. have a red carpet laid out in front of them.
And let me remind you that technology is still the least regulated industry on the planet even if sentiment has pivoted this year.
The only solution is keeping companies accountable by a function of law or creating a third-party task force to regulate A.I.
In 2019, the thought of overseeing robots sounds crazy.
However, by 2020, it might be as normal as uncontrollable laughter from your smart home device.
Global Market Comments
July 8, 2019
Fiat Lux
Featured Trade:
(STANDBY FOR THE COMING GOLDEN AGE OF INVESTMENT),
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),
(TLT), (NSANY), (TSLA)
I believe that the global economy is setting up for a new Golden Age reminiscent of the one the United States enjoyed during the 1950s, and which I still remember fondly.
This is not some pie in the sky prediction.
It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million “Gen Xers”.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, health care, and “RISK OFF” assets like bonds.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward six years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xers being chased by 85 million of the “millennial” generation trying to buy their assets.
By then, we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes.
The middle-class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.
The stock market rockets in this scenario.
Share prices may rise very gradually for the rest of the teens as long as tepid 2-3% growth persists.
After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 100,000 by 2030.
If I’m wrong, it will hit 200,000 instead.
Emerging stock markets (EEM) with much higher growth rates do far better.
This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well.
The 100-year supply of natural gas (UNG) we have recently discovered through the new “fracking” technology will finally make it to end users, replacing coal (KOL) and oil (USO).
Fracking applied to oilfields is also unlocking vast new supplies.
Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC’s share of global reserves is collapsing.
This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.
Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five-year low.
Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation by 2020.
I now have an all-electric garage with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow.
The net result of all of this is lower energy prices for everyone.
It will also flip the US from a net importer to an exporter of energy with hugely positive implications for America’s balance of payments.
Eliminating our largest import and adding an important export is very dollar-bullish for the long term.
That sets up a multiyear short for the world’s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.
Accelerating technology will bring another continuing positive. Of course, it’s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos.
But at the enterprise level, this is enabling speedy improvements in productivity that is filtering down to every business in the US, lower costs everywhere.
This is why corporate earnings have been outperforming the economy as a whole by a large margin.
Profit margins are at an all-time high.
Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development.
When the winners emerge, they will have a big cross-leveraged effect on economy.
New health care breakthroughs will make serious disease a thing of the past which are also being spearheaded in the San Francisco Bay area.
This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented.
It raised $3 billion through a bond issue to fund its own research even though it couldn’t afford it.
I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years, they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday.
What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver’s seat on these innovations? The USA.
There is a political element to the new Golden Age as well. Gridlock in Washington can’t last forever. Eventually, one side or another will prevail with a clear majority.
This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for.
That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don’t need the maximum $30,156 annual supplement. Nor do I.
The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cut defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.
I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up.
A Pax Americana would ensue.
That means China will have to defend its own oil supply, instead of relying on us to do it for them for free. That’s why they have recently bought a second used aircraft carrier. The Middle East is now their headache.
The national debt then comes under control, and we don’t end up like Greece.
The long-awaited Treasury bond (TLT) crash never happens.
The reality is that the global economy is already spinning off profits faster than it can find places to invest them, so the money ends up in bonds instead.
Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won’t kick in for another decade.
But some individual industries and companies will start to discount this rosy scenario now.
Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.
Global Market Comments
June 17, 2019
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE SCARY THING ABOUT THE MARKETS)
(SPY), (TLT), (GLD), (TSLA)
There’s one big scary thing about the markets right now. As I mentioned last week, the major indexes are sitting on a precipice of a right shoulder of a ‘Head and Shoulders” top.
Traders are expecting a trade war settlement and a Fed interest rate cut in July. While the economy in no way needs a rate cut, stock markets desperately do. In fact, they need another dose of steroids just to remain level. It reminds me of a certain recent California governor (I’ll be back).
If we get them, markets will grind up a few percentage points to a new all-time high. If we don’t, the top is in, possibly for this entire economic cycle, and a 25% swan dive is in the cards.
It's what traders call “Asymmetric risk.” If we get the bull case, you make sofa change. If we don’t, you lose dollars. It’s what I call picking up pennies in front of a steamroller. But in the 11th year of a bull market, that’s all you get. The truly disturbing part of this is that this setup is happening with valuation close to a historic high at a 17.5X price earnings multiple.
We’ll get a better read on Wednesday at 2:00 PM EST when the Fed announces its decision on interest rates. The post meeting statement will be more crucial than usual. What’s in a word, Shakespeare might have asked? If the Fed drops the word “Patient”, then a July interest rate cut is a sure thing. The algos reading the release at the speed of light will be the first to know.
It was initially off to the races last Monday when the one-week trade war with Mexico came to an end and some immigration issues were settled.
The tariffs are off, even though the Mexicans say the terms were already agreed to months ago.
There is no big ag buy either. The economy is still sliding into a recession, and the bond market has already discounted three of the next five quarter point rate cuts.
US exports are in free fall, with Long Beach, America’s busiest port, seeing seven straight months of declines in shipping volumes. They were off 19.5% in May alone. Recession indicator no. 199.
Buy bonds (TLT), gold (GLD), and short the US dollar (UUP), says my old friend, hedge fund legend Paul Tudor Jones. He is certainly reading the writing on the wall. The legendary trading billionaire believes that plunging interest rate cuts are going to dominate the scenery for the rest of 2019.
Tanker attacks sent oil soaring. After 50 years of waiting, it finally happened, torpedo attacks against two tankers in the Straits of Hormuz bound for China. Oil rocketed 4%, then gave up the rally, and stocks are amazingly up on the day.
Go figure. A decade ago, this would have been a down 1,000-point day for stocks and Texas tea would have soared to $100. Clearly, tensions in the Middle East are ratcheting up, but with the US now the swing oil producer, why bother?
With US oil production climbing to 17 million barrels a day by 2024, up from 5 million b/d in 2005, the Middle East can blow itself up and nobody cares. The US by then will have created an entire Saudi Arabia’s worth of new oil production over a 20-year period. US troops there are defending China’s oil supply, not ours.
The US budget deficit soared by 38.7% YOY, to $739 billion. It’s the fastest growth in government borrowing since WWII. Much of today’s economic growth in on credit and this can only end in tears. Enjoy the good times while they last.
Major semiconductor maker Broadcom (AVGO) disappointed hugely on earnings, tanking the market, and the stock plunged a heartbreaking 12%. The trade war gets the entire blame. It turns out that Broadcom’s biggest customer is the ill-fated Huawei whose CFO is now sitting in a Canadian jail awaiting extradition to the US. Other semiconductor stocks especially got slammed. The canary in the coal mine just died.
China’s industrial production hit a 17 year low, and yes, it’s because of the trade war, trade war, trade war. When your biggest customers come down with the Asian flu, you at the very least catch a severe cold. Start shopping for Robitussin.
Global Trading Dispatch closed the week up 15.38% year-to-date and is down by -0.34% so far in June. That’s show business. You work your guts out trying to understand this market and it turns out to be for free. Or worse yet, you get a bill without an amount due. This is something that regular salary earners don’t understand.
My nine and a half year profit appreciated to +315.52%, pennies short of a new all-time high. I think I’ll be flatlining at a high for a while to create a base from which I can jump to new highs. The average annualized return ticked up to +33.21%. With the trade war with China raging, I am now 100% in cash with Global Trading Dispatch and 100% cash in the Mad Hedge Tech Letter.
My twin bets on Tesla (TSLA) worked out very nicely and I took profits on both. It was an option play whereby I expected that (TSLA) shares would not fall below $150 or rise above $240 by the June 21 option expiration.
Several followers have seen good success using every Tesla dip below $200 to go naked short August $100 or $125 Tesla puts in small quantities for a decent amount of change.
The long view here is to wait for some kind of summer meltdown and then go long into a year-end rally as 2020 election-related turbochargers start to hit the market.
The coming week will be all about waiting for the Fed to jump. We also get some important updates on housing data.
On Monday, June 17 at 8:30 AM EST the Empire State Manufacturing Index is out.
On Tuesday, June 18, 8:30 AM EST, the May Housing Starts are released.
On Wednesday, June 19 at 2:00 PM EST, the Federal Reserve decision on interest rates is announced. Vital is whether the word “Patient” remains in their statement.
On Thursday, June 20 at 8:30 AM, the Weekly Jobless Claims are printed. We also get the Philadelphia Fed Manufacturing Index.
On Friday, June 21 at 10:00 AM, we learn May Existing Home Sales. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, by the time you read this, I will be winging my way somewhere over the Pacific Ocean. It’s a 14-hour flight from California to New Zealand, and the plane carries two crews.
It’s a genuine four movie flight. I’ll take off on Sunday and don’t arrive until Tuesday because I’ll be crossing the International Dateline. When I arrive, I’ll feel like death warmed over. It’s all in the name of research and finding that next great trading idea.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
