August 9, 2019

Global Market Comments
August 9, 2019
Fiat Lux

Featured Trade:

(SPY), (XLK), (GLD), (DIS), (TLT),
 (FXA), (FXY), (VIX), (VXX), (UNG), (USO)

August 7 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader August 7 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Are we headed for a worldwide depression with today’s crash and interest rates?

A: No, I think the interest rates are more of an anomaly unique to the bond market. There is a global cash glut all around the world and all that money is pouring into bonds—not for any kind of return, but as a parking place to avoid the next recession. The economic data is actually stronger than usual for pre-recession indicators. US interest rates going to zero is just a matter of coming in line with the rest of the world. Three to six months from now we may get our final bear market and recession indicators.

Q: Do you think the market has more downside?

A: Yes; if the 200-day moving average for the (SPY) doesn’t hold, then you’re really looking at a potential 20% correction, not the 8% correction we have seen so far.

Q: Which sector would you focus on for any dips?

A: Technology (XLK). If they lead the downturn, they’re going to lead the upturn too. It’s the only place where you have consistent earnings growth going out many years. You’re really all looking for an opportunity to go back into Tech, but the answer is a firm not yet.

Q: Would you buy gold (GLD), even up here?

A: Only if you can take some pain. We’re way overdue for a correction on essentially everything—stocks, bonds, gold, commodities—and when we get it, you can get a real snapback on all these prices. The time to enter gold trade was really a month ago before we took off, and I’ve been bullish on gold all year. So, I think you kind of missed the entry point for gold just like you missed the entry point for shorts on the stock market last week. You only want to be selling decent rallies now. You don’t want to be selling into a hole that makes the risk/reward no good.

Q: What can you say about the (FXA) (the Australian dollar)?

A: It’s holding up surprisingly well given the carnage seen in the rest of the financial markets. I want to stand aside until we get some stability, at which point I think (FXA) will pop up back to the $71 level. New Zealand cutting their rates by 50 basis points really came out of the blue and could eventually feed into a weaker Aussie.

Q: Do you think China (FXI) has no reason to make a trade deal until the US elections?

A: Absolutely not; and this puts a spotlight on the administration’s total inexperience in dealing with China. I could have told you on day one: there’s no way they’re going to settle. Pride is a major factor in China. They have long memories of the opium wars and all the abuses they received at the hands of the western powers and are highly sensitive to any kind of foreign abuse. If you want to get the opposite of a settlement, do exactly what Trump is doing. The administration’s policy has no chance of accomplishing anything. He’s willing to take a lot more pain in the stock market until he gets a deal and that’s bad for all of us.

Q: How does the extra 10% tariff affect the market?

A: Think of everything you’re buying for Christmas; the price goes up 10%. That’s the effect, and it completely wipes out any earnings the retail industry might have had. It’s only bad. We are suffering less harm than China in the trade war, but we are suffering, nonetheless.

Q: Do you think volatility will spike soon?

A: It may very well have already spiked. I don’t think we’ll get a spike as high as in past selloffs because there’s a big short volatility industry that has come back. Any moves more than $30, you have short sellers come in there very quickly to hammer things back down. Also (VIX) isn’t necessarily something you want to be buying after the stock market has already dropped 8%. That train has left the station.

Q: Would a weaker dollar benefit the US economy?

A: Yes; it makes our exports cheaper on the global market. However, if the rest of the world is weakening their currencies as well, it will have no effect. Also, the last time this kind of currency war was attempted was in the early 1930s, and the outcome was the Great Depression.

Q: Defensive stocks—the China story is getting uglier?

A: In this kind of market, I’ve never been a big fan of defensive stocks like utilities or healthcare because defensive stocks go down in bear markets, just at a slower rate than growth stocks because they never went up in the first place. The best defensive stock is cash.

Q: If US interest rates are going to zero, how about buying leaps on (TLT)?

A: Multi-year highs is just not leap buying territory. Multiyear lows are where you buy LEAPS, which are Long Term Equity Participation Certificates. They are basically long-dated 1-2-year call options on stocks that are rising over the long term. The better trade—when we get to zero interest rates and it becomes impossible for rates to go any lower—would be to do a reverse leap. If (TLT) goes up to $200, I would do something like a $150-$160 on the put side betting that sometime over the next 2 years, interest rates go back up again and bonds go down. Too late for LEAPS on bonds, too early for LEAPS on equities.

Q: Do you buy out of the money LEAPS?

A: Yes; that is where you get the triple-digit returns. For example, you can buy the Walt Disney (DIS) June 2021 $150-$160 vertical bull call spread today for $3.30. If we close over $160 by then the spread will be worth $10, up 203% from your cost. And you only need a rise of 25% from here to get that return. This is why I love LEAPS, but only at medium term market bottoms.

Q: Is crude oil (USO) going to $25 on a barrel global slowdown fears?

A: I think you need an actual recession to go down to $25; in the current environment, $42 is a nice target. The basic problem is global structural oversupply and falling demand, which is a classically unfortunate combination for prices. 

Q: When will interest rates go to zero?

A: Sooner than later, I would say. My original guess was sometime next year but at the rate we’re going, we could be there by the end of the year.

Q: Would you get involved in natural gas (UNG)?

A: Absolutely not; this is the high season for natural gas right now when summer air conditioner use creates peak demand. It certainly has been hot this summer, especially on a global basis, and if you can’t rally natural gas in this environment you never will. There is also a huge contango in (UNG) which most people can’t beat.





July 8, 2019

Global Market Comments
July 8, 2019
Fiat Lux

Featured Trade:

(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),

Standby for the Coming Golden Age of Investment

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.


Dow Average 1900-2015


Another American Golden Age is Coming

January 9, 2019

Global Market Comments
January 9, 2019
Fiat Lux

2019 Annual Asset Class Review
A Global Vision


Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLI), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE),

(DIG), (RIG), (USO), (UNG), (USO), (OXY),
(GLD), (GDX), (SLV),
(ITB), (LEN), (KBH), (PHM)

December 12, 2018

Global Market Comments
December 12, 2018
Fiat Lux

Featured Trade:

(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),

November 26, 2018

Global Market Comments
November 26, 2018
Fiat Lux

Featured Trade:
(FB), (AAPL), (AMZN), (NFLX),
(GOOG), (SPY), (TLT), (USO), (UNG), (ROM)

October 16, 2018

Global Market Comments
October 16, 2018
Fiat Lux

Featured Trade:

(KOL), (BHP), (UNG),

May 15, 2018

Global Market Comments
May 15, 2018
Fiat Lux

Featured Trade:
(SPY), (INDU), (FXE), (FXY), (UNG), (EEM), (USO),

Catching Dinner with Secretary of Energy Nominee, Rick Perry

Given that my friend, former Texas Governor, Rick Perry, was nominated for the position of Secretary of Energy yesterday, I thought I would recount a dinner I had with him.

The irony is great since Rick promised to close down the agency while campaigning for president in 2012.

It confirms my suspicion that many of the people Trump is appointing have the mission to destroy the agencies they will head.

As a precondition to joining a dinner with the former Texas governor, I had to promise a few things.

I was not allowed to bring up the fact that he shoots coyotes while jogging. I couldn?t mention statistics proving that 70% of the jobs created in his state during his 12-year tenure as governor were government, not private.

Having agreed to all of that, I was told, ?Sure, come along, we?d love to hear your questions and your insights.?

Perry was making his 12th?visit to the Golden State in the past two years to convince local companies, plagued with onerous taxes, stringent regulations and high operating costs, to pull up stakes and move camp to the Lone Star State.

When I first shook hands with the governor, I was surprised at how short he was. But then he wasn?t wearing the three-inch heeled cowboy boots that normally elevated him at home.

Then I mentioned my secret words: ?Go Aggies.? He recoiled.

?How did you know?? he demanded.

I told him that during the early 1970s, I drove my sister from California to his home state so she could attend Texas A&M University. Perry was a cadet then, and I speculated that they had probably dated.

He answered, ?Nah, I didn?t play around much in those days.?

Probably not.

But after that, he melted, only engaging me in serious conversation, while sticking to canned, stock answers to questions from everyone else.

I was Rick Perry?s new best friend.

As he spoke, I realized that he was much more reasonable in his views than when appealing to his ultra conservative base back home. That is simply the mark of a savvy and successful politician.

Perry said that the country needs both states to lead change and succeed, and that he rooted for California to do well.

The governor was still basking in the glow of Toyota?s recent announcement that it was moving 3,000 jobs from Long Beach, California to Texas.?

It has been a controversial win for him, as his state is paying $10,000 in subsidies per person to lure the white-collar work force.

I spoke to Toyota USA CEO, Jim Lentz, about this recently. He said the real reason had to do with working in the same time zone as the company?s large manufacturing facilities in Kentucky and Tennessee.

A lower cost of living, cheaper rents, and discount labor costs were also issues. Lower taxes were at the bottom of a list of ten priorities.

Past experience has shown that most departing workers, fleeing from California, return after three years. It seems the summer heat and humidity kill them.?

Thus chastened, they are more than willing to pay a premium for the lifestyle here, despite the higher taxes and earthquakes.

Perry says the US needs an ?all of the above? solution to its energy problems. It is not a good idea to be dependent on foreign energy sources, especially from unstable countries.

Despite its stereotype as an oil-based economy, Texas was now the top producer of wind power in the country. The installed base there now exceeds 12 gigawatts, making it the fifth largest in the world.

My friend, T. Boone Pickens, has been a major investor in wind power generation there.

An aggressive approvals process made possible the construction of long distance transmission lines needed to send it to other states and eventually to California itself, thus creating a national market for wind power.

The governor says that Texas will become a major exporter for liquefied natural gas within the next two years. Cheniere Energy (LNG), the front-runner in the field, has been a favorite recommendation of mine for the past five years, and? Trade Alert followers have chased the shares up from $6 to $70.

Despite the controversy over fracking wells polluting fresh water supplies, Perry says there has not been a single incidence of this occurring in Texas. This is no doubt a result of the state?s ferocious regulation of the energy industry, of which I, myself, have no small amount of experience.

Thanks in part to new federal regulations, air pollution has fallen dramatically in Texas. Ozone emissions have dropped by 23% since 2000, while nitrous oxides are off by 57%.

These, and other measures have enabled the US to cut its dependence on foreign oil imports from 33% to 15% since 2000. During the same period, natural gas production, which produces half the carbon of oil based fuels, has soared by 57%.

At that point, another guest raised his hand and asked his stance on gay rights. Perry opined that sexuality was a choice that could be controlled, and that gay marriage would never get his support. An audible hiss was heard in the roomwhich Perry stonily ignored.

That invited the question about the legalization of marijuana. He simply said that it would never be legalized in his state, and, ?If people want to get high, they can go to Colorado.?

Finally, a woman at the table asked about reproductive rights. When Perry said that he was proud to sign a Texas law limiting termination to the first five months of pregnancy, murmurs were heard. The law is not expected to survive a pending challenge at the Supreme Court.

Another attendee queried his view of Hillary Clinton. I braced myself. He then surprised me by saying that he thought she was ?a very capable Secretary of State and a great public servant.?

That spoke volumes to me. It meant that with access to all his private polling data, Rick Perry thought that Hillary would win the 2016 presidential election. As the astute politician that he is, Perry doesn?t want to burn his bridges.

Perry likes to tell people that he is probably the last governor who used an outhouse on a dry cotton farm near Abilene, West Texas.

He became an Eagle Scout and I confirmed this with the secret scout handshake.

He earned a degree in animal science at Texas A&M where he was also a Corps Cadet and a yell leader. His first part-time job was as a door-to-door salesman. When he graduated, he joined the Air Force and became a C-130 pilot.

Perry originally started in politics as a Democrat, getting elected to the Texas House of Representatives in 1984.

He worked on Al Gore?s presidential campaign in 1988. This was back when Southern Democrats were more conservative than the right wing of the Republican Party.Perry became a Republican in 1989.

He moved up to the governorship in 2000, when sitting governor George W. Bush was elected president. Perry has been reelected three times, making him the longest tenured Texas governor in history.

Perry said that his time spent as the front runner in the 2012 presidential election ?were the three most exhausting hours of my life.?

He then repeated his ?Oops? moment when, if elected, he couldn?t remember the third government department he would close (it was the Department of Commerce, in addition to Energy and Education). That was probably to head off someone else bringing it up first.

I told the governor I knew two facts about our respective states which I bet he didn?t know. He asked what they were.

I responded that California and Texas were the only two states that had been independent countries before joining the Union. California had been the Bear Flag Republic for six months until mid 1848, while the Republic of Texas stood on its own for a decade, until 1846. Texans have been regretting joining the Union ever since.

Today, the two states make up 19.1% of America?s GDP, and 20.4% of its population.

The other mystery fact was that while Texas was independent, it maintained an embassy in London, England on St. James Street.Today, the space is occupied by a pub and is across the street from the Ritz Hotel and next door to my old office at The Economist?magazine headquarters. Perry said he?d check it out on his next visit there.

As the dinner wound down, I asked the governor if he had ever driven a Tesla Model S-1. He said he hadn?t. I asked if he would like to because my own high performance model was conveniently parked out front. He said he?d love to.

At that point, the plain clothed Texas Rangers who accompany him as bodyguards noticeably tensed up.

I have some experience providing quick tutorials for the uninitiated on how to drive this incredible electric car from the future. My chassis number is 125 out of a fleet of 45,000 and is one of the oldest S-1s around.

Newcomers invariably underestimate the car?s power and acceleration, which works out to about 450 horsepower in the carbon world. This can be unexpectedly dangerous for newbies.

With some careful coaching, Perry gingerly drove the car a few times around San Francisco?s Huntington Park, atop Nob Hill with two nervous, but heavily armed, Rangers in the back seat.

When we carefully turned back onto California Street and came to a stop in front of the Mark Hopkins Hotel, Perry pronounced the vehicle ?a marvelous piece of technology?.

With that, Perry invited me to visit the governor?s mansion the next time I visited Austin, Texas.

I said I?d be honored, and silently drove my Tesla off into the night, thus christened by a true Texan.wtic usoxle

rick-perry-2You Want Me to Do What?