Posts

August 16, 2019

Global Market Comments
August 16, 2019
Fiat Lux

Featured Trade:

(DON’T MISS THE AUGUST 21 GLOBAL STRATEGY WEBINAR),
(WHY CRASHING YIELDS COULD BE SIGNALING AN END TO THE STOCK SELLOFF),
(TLT), (QQQ), (DBA), (EEM), (UUP)

July 31, 2019

Global Market Comments
July 31, 2019
Fiat Lux

SPECIAL FIXED INCOME ISSUE

Featured Trade:
(ITALY’S BIG WAKE UP CALL),
(TLT), ($TNX), (TBT), (SPY), ($INDU), (FXE), (UUP), (USO),
(WELCOME TO THE DEFLATIONARY CENTURY),
(TLT), (TBT),

July 26, 2019

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)

July 24 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader July 24 Global Strategy Webinar broadcast from Zermatt, Switzerland with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What are your thoughts on the Freeport McMoRan (FCX) long position here?

A: We could take a profit here. We probably have about 50% of the maximum potential profit, but I want to hang on and go to the max on this because we’re so far in the money. Cash always has a premium ahead on any Fed interest rate decision. But long term, I think the stock could double, and with the earnings report now out of the way, we have room to run.

Q: What can you say about semiconductor stocks?

A: Long term we love them, short term they are too high to chase here. I would wait for any kind of pullback and, better yet, pull back from the other side of the next recession. We’re not seeing an improvement in prices or orders so this is strictly a technical/momentum-driven trade right now.

Q: How do you play the Volatility Index (VIX)?

A: There are numerous ways you can do it; you can buy call options on the (VIX), you can buy futures on the (VIX), or you can buy the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX). We are probably a week away from a nice entry point on the long side here.

Q: Does a languishing U.S. dollar mean emerging market opportunities?

A: It absolutely does. If we really start to get a serious drop in the U.S. dollar (UUP)—like 5-10%—it will be off to the races for commodities, bonds (TLT), emerging stock markets (EEM), emerging bond markets (ELD), emerging currencies (CEW), and gold (GLD). All of your weak dollar plays will be off to the races—that’s why I went straight into bonds, the Aussie (FXA), and copper through Freeport McMoRan (FCX). All of these trades have been profitable.

Q: When should we sell the U.S. dollar?

A: How about now? For any kind of strength in a dollar against the (FXA), (FXE), (FXC) and (FXY), I would be buying any dips on those foreign exchange ETFs. We’re about to enter a six-month – one-year period weakness on the dollar. It could be the easiest trade out there. The only one I would avoid is the British pound (FXB) because of its own special problems with Brexit. You never want to go long the currency of a country that is destroying itself, which is exactly what’s happening with the pound.

Q: Should I start selling pounds?

A: It’s pretty late in the pound game now. We went into Brexit with the pound at $1.65 and got all the way down to $1.20. We’re a little bit above that now at $1.21. If for some reason, you get a surprise pop in the pound, say to $1.25, that’s where I would sell it, but down here, no.

Q: I missed the (FCX) trade—would you get in on the next dip?

A: Yes, we may not get many dips from here because the earnings were out. Today, they were not as bad as expected, and that was keeping a lot of buyers out of the market on (FCX), so any dips you can get, go a dollar out on your strikes and then take it because this thing could double over the medium term. If the trade war with China ends, this thing could make it to the old high of $50.

Q: Is now a good time to refi my home?

A: Yes, because by the time you get the paperwork and approvals and everything else done (that’ll take about 2 months), rates will likely be lower; and in any case you’re looking to refi either a 7/1 ARM or a 15-year fixed, and the rates on those have already dropped quite substantially. I was offered 3.0% for a 15-year fixed loan on my home just the other day.

Q: On trades like (FCX), why not sell short the put spread?

A: It’s really six of one, half dozen of the other. The profit on either one should be about the same. If it isn’t, an options market maker will step in and arbitrage out the difference. That’s something only an algorithm can do these days. I recommend in-the-money call spreads versus shorting sell short vertical bear put credit spreads because for beginners, in-the-money call spreads are much easier to understand.

Q: The Mueller hearings in Congress are today. Is there any potential impact on the market?

A: The market has completely detached itself from Washington—it couldn’t care less about what’s happening there. I don’t think politics have the capacity to affect stock prices. The only possible impact was the prospect of the government shutdown in September. That seems to have been averted in the latest deal between the House and the White House.  

Q: What about Amazon (AMZN)?

A: Like the rest of technology, long term I love it, but short term it’s overdue for a small correction. I’m looking for Amazon to go to $3,000 a share—it’s essentially taking over the world. The antitrust threats will go absolutely nowhere; Congress doesn’t even understand what these companies do, let alone know how to break them up. I wouldn’t worry about it.

Q: I just received an email inviting me to buy a new Bitcoin auto trading system that is guaranteed to make me a millionaire in four months. It is being promoted by Nicole Kidman. Do you think I should try it?

A: I wouldn’t touch this with a ten-foot pole. No, wait. I wouldn’t touch this with a 100-foot pole! Whenever a new type of security comes out, these types of “get rich quick” investment scams come out of the woodwork. Cryptocurrency is no different. Nicole Kidman was probably paid $500,000 to make the pitch by a promotor. Or more likely, Nicole Kidman has nothing to do with these people and they just swiped her picture off the Internet. I hear about these things daily. Follow their plan and you are more likely to get completely wiped out than become a millionaire. There are NO get rich quick schemes. There are only get rich slowly strategies, such as following this newsletter. Click here to see the above-mentioned scam which you should avoid at all cost. Gee, do you think Nicole Kidman would be interested in promoting the Mad Hedge Fund Trader?

 

July 25, 2019

Global Market Comments
July 25, 2019
Fiat Lux

Featured Trade:

(HOW TO HEDGE YOUR CURRENCY RISK)
(FXA), (FXC), (UUP)
(HOW TO EXECUTE A VERTICAL BULL CALL SPREAD)
(AAPL)

June 24, 2019

Global Market Comments
June 24, 2019
Fiat Lux

Featured Trade:

(WEDNESDAY, JULY 10 BUDAPEST, HUNGARY STRATEGY LUNCHEON)
(THE TWO CENTURY DOLLAR SHORT), (UUP)

The Two Century Dollar Short

Any trader will tell you the trend is your friend, and the overwhelming direction for the US dollar (UUP) for the last 235 years has been down.

Our first Treasury Secretary, Alexander Hamilton, found himself constantly embroiled in sex scandals. Take a ten-dollar bill out of your wallet and you’re looking at a world-class horn dog, a swordsman of the first order.

When he wasn’t fighting scandalous accusations in the press and the courts, he spent much of his six years in office orchestrating a rescue of our new currency, the US dollar.

Winning the Revolutionary War bankrupted the young United States, draining it of resources and leaving it with huge debts.

Hamilton settled many of these by giving creditors notes exchangeable for then worthless Indian land west of the Appalachians.

As soon as the ink was dry on these promissory notes, they traded in the secondary market for as low as 25% of face value, beginning a centuries-long government tradition of stiffing its lenders, a practice that continues to this day.

My unfortunate ancestors took him up on his offer, the end result being that I am now writing this letter to you from California—and am part Cherokee, Delaware, and Sioux.

It all ended in tears for Hamilton who, misjudging former Vice President Aaron Burr’s true intentions in a New Jersey duel, ended up with a bullet in his back that severed his spinal cord.

Since Bloomberg machines weren’t around in 1782, we have to rely on alternative valuation measures for the dollar then, like purchasing power parity, and the value of goods priced in gold.

A chart of this data shows an undeniable permanent downtrend which greatly accelerates after 1933 when FDR banned private ownership of gold and devalued the dollar.

Today, going short the currency of the world’s largest borrower, running the greatest trade and current account deficits in history with a diminishing long-term growth rate is a no brainer.

But once it became every hedge fund trader’s free lunch, and positions became so lopsided against the buck, a reversal was inevitable.

We seem to be solidly in one of those periodic corrections which began a few years ago and could continue for months, or even years more.

The euro has its own particular problems with the cost of a generous social safety net sending EC budget deficits careening. Add to thatits the gargantuan cost of a burgeoning refugee crisis.

Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses, and possess small consuming populations.

I’m talking about the Canadian dollar (FXC), the Australian dollar (FXA), and the New Zealand dollar (BNZ), all of which will eventually hit parity with the greenback once again.

Think of these as emerging markets where they speak English, best played through the local currencies.

For a sleeper, buy the Chinese Yuan ETF (CYB) for your back book. A major revaluation by the Middle Kingdom is just a matter of time as long as its economy is growing at 6% a year or more.

I’m sure that if Alexander Hamilton were alive today, he would counsel our modern Treasury Secretary, Steven Mnuchin, to talk the dollar up, but to do everything he could to undermine the buck behind the scenes, thus over time depreciating our national debt down to nothing through a stealth devaluation.

Given Mnuchin’s performance so far regarding the dollar, I’d say he studied his history well.

Hamilton must be smiling from the grave.

 

 

A 222 Year Chart of the US Dollar priced in Hard Goods

April 24, 2019

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?

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 19th 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?

March 11, 2019

Global Market Comments
March 8, 2019
Fiat Lux

Featured Trade:

(MARCH 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (SDS), (TLT), (TBT), (GE), (IYM),
 (MSFT), (IWM), (AAPL), (ITB), (FCX), (FXE)