(WMT) Archives

The Market Outlook for the Week Ahead, or Will He, or Won’t He?

Once again, the markets are playing out like a cheap Saturday afternoon matinee. We are sitting on the edge of our seats wondering if our hero will triumph or perish.

The same can be said about financial markets this week. Will a trade deal finally get inked and prompt the Dow Average to soar 2,000 points? Or will they fail once again, delivering a 2,000-point swan dive?

I vote for the latter, then the former.

Still, I saw this rally coming a mile off as the Trump put option kicked in big time. That's why I piled on an aggressive 60% long position right at last week’s low. Carpe Diem. Seize the Day. Only the bold are rewarded.

Or as Britain’s SAS would say, “Who dares, wins.”

It takes a lot of cajones to trade a market that hasn’t moved in two years, let alone take in a 55% profit during that time. But you didn’t hire me to sit on my hands, play scared, and catch up on my Shakespeare.

I think markets will eventually hit new all-time highs sometime this year. The game is to see how low you can get in before that happens without getting your head handed to you first.

Last week saw seriously dueling narratives. The economic data couldn’t be worse, pointing firmly towards a recession. But the administration went into full blown “jawbone” mode, talking up the rosy prospects of an imminent China trade deal at every turn.

This was all against a Ukraine scandal that reeled wildly out of control by the day. Is there a country that Trump DIDN’T ask for assistance in his reelection campaign? Now we know why the president was at the United Nations last week.

The September Nonfarm Payroll Report came in at a weakish 136,000, with the Headline Unemployment rate at 3.5%, a new 50-year low.

Average hourly earnings fell. Apparently, it is easy to get a job but impossible to get a pay raise. July and August were revised up by 45,000 jobs.

Healthcare was up by 39,000 and Professional and Business Services 34,000. Manufacturing fell by 2,000 and retail by 11,0000. The U-6 “discouraged worker” long term unemployment rate is at 6.9%.

The US Manufacturing Purchasing Managers Index collapsed in August from 49.7 to 47.9, triggering a 400-point dive in the Dow average. This is the worst report since 2009. Manufacturing, some 11% of the US economy, is clearly in recession, thanks to the trade war-induced loss of foreign markets. A strong dollar that overprices our goods doesn’t help either.

The Services PMI Hit a three-year low, from 53.1 to 50.4, with almost all economic data points now shouting “recession.” The only question is whether it will be shallow or deep. I vote for the former.

Consumer Spending was flat in August. That’s a big problem since the average Joe is now the sole factor driving the economy. Everything else is pulling back. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1% last month as an increase in outlays on recreational goods and motor vehicles was offset by a decrease in spending at restaurants and hotels.

The Transports, a classic leading sector for the market, have been delivering horrific price action this year giving up all of its gains relative to the S&P 500 since the 2009 crash.

Oil (USO) got crushed on recession fears, down a stunning 19.68% in three weeks. The global supply glut continues. Over production and fading demand is not a great formula for prices.

Toyota Auto Sales (TM) cratered by 16.5% in September, to 169,356 vehicles in another pre-recession indicator. It’s the worst month since January during a normally strong time of the year. The deals out there now are incredible.

Online Brokerage stocks were demolished on the Charles Schwab (SCHW) move to cut brokerage fees to zero. TD Ameritrade (AMTD) followed the next day and was spanked for 23%, and E*TRADE (ETFC) punched for 17. These are cataclysmic one0-day stock moves and signal the end of traditional stock brokerage.

The Mad Hedge Trader Alert Service has blasted through to yet another new all-time high. My Global Trading Dispatch reached new apex of 341.86% and my year-to-date accelerated to +41.72%. The tricky and volatile month of October started out with a roar +5.40%. My ten-year average annualized profit bobbed up to +35.06%.

Some 26 out of the last 27 trade alerts have made money, a success rate of 96.29%! Under promise and over deliver, that's the business I have been in all my life. It works.

I used the recession-induced selloff since October 1 to pile on a large aggressive short dated portfolio. I am 60% long with the (SPY), (IWM), (USO), (WMT), (AAPL), and (GOOGL). I am 20% short with positions in the (SPY) and (C), giving me a net risk position of 40% long.

The coming week is all about the September jobs reports. It seems like we just went through those.

On Monday, October 7 at 9:00 AM, the US Consumer Credit figures for August are out.

On Tuesday, October 8 at 6:00 AM, the NFIB Business Optimism Index is released.

On Wednesday, October 9, at 2:00 PM, we learn the Fed FOMC Minutes from the September meeting.

On Thursday, October 10 at 8:30 AM, the US Inflation Rate is published. US-China trade talks may, or may not resume.

On Friday, October 11 at 8:30 AM, the University of Michigan Consumer Sentiment for October is announced.

The Baker Hughes Rig Count is released at 2:00 PM.

As for me, I’m still recovering from running a swimming merit badge class for 60 kids last weekend. Some who showed up couldn’t swim, while others arrived with no swim suits, prompting a quick foray into the lost and found.

One kid jumped in and went straight to the bottom, prompting an urgent rescue. Another was floundering after 15 yards. When I pulled him out and sent him to the dressing room, he started crying, saying his dad would be mad. I replied, “Your dad will be madder if you drown.”

I never felt so needed in my life.

Good luck and good trading.

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

September 6, 2019

Diary, Newsletter, Summary

Global Market Comments
September 6, 2019
Fiat Lux

Featured Trade:

(SEPTEMBER 4 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (FXY), (FXB), (USO), (XLE), (TLT), (TBT),
(FB), (AMZN), (MSFT), (DIS), (WMT), (IWM), (TSLA), (ROKU), (UBER), (LYFT), (SLV), (SIL)

September 4 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 4 Global Strategy Webinar broadcast from Silicon Valley with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: If Trump figures out the trade war will lose him the election; will he stop it?

A: Yes, and that is a risk that hovers over all short positions in the market at all times these days because stocks will soar (INDU) when the trade war ends. We now have 18 months of share appreciation that has been frustrated or deferred by the dispute with China. The problem is that the US economy is already sliding into recession and it may already be too late to turn it around.

Q: Do you see the British pound (FXB) dropping more on the Brexit turmoil? Do you think the UK will stay in the EU?

A: If the UK ends Brexit through an election, then the pound should recover from $1.19 all the way back up to $1.65 where it was before Brexit happened four years ago. If that does happen, it will be one of the biggest trades of the year anywhere in the world, going long the British pound. This is how I always anticipated it would end. I was in England for the Brexit vote and I was convinced that if they held the election the next day, it would have lost. The only reason it won was because nobody thought it would— a lot like our own 2016 election. That brings Britain back into the EEC, saves Europe, and has a positive impact on markets globally. So, this is a big deal. Not to do so would be economic suicide for Britain, and I think wiser heads will prevail.

Q: Do you think it’s a good idea for Saudi ARAMCO to go public in Japan as reports suggest?

A: When the Arabs want to get out of the oil business (USO), (XLE), you want to also. That’s what the sale of ARAMCO is all about. They’re going to get a $1 trillion or more valuation, raising $100 billion in cash. And guess who the biggest investors in alternative energy in California are? It’s Saudi Arabia. They see no future in oil, nor should you. This is why we’ve been negative on the sector all year. By the way, bankruptcies by frackers in the U.S. are at an all-time high, another indicator that low oil prices can’t be tolerated by the US industry for long.

Q: Is it time to buy the ProShares Ultra Short 20 year Plus Treasury Bond Fund (TBT)?

A: No, not yet; I think we’re going to break 1.33% — the all-time low yield for the (TLT) will probably be somewhere just below 1.00%. We probably won’t go to absolute zero because we still have a growing economy. The countries that already have negative interest rates have shrinking economies or are already in recession, like Germany or Great Britain can justify zero rates.

Q: Are you going to run all your existing positions into expiration?

A: I’m going to try to—it’s only 12 days to expiration, and we get to keep the full profit if we do. As long as the market is dead in the middle here, there are no other positions to put on, no extreme low to buy into or extreme high to sell into. It’s a question of letting this sort of nowhere-trend play out, but also there's nothing else to buy, so there is no need to raise cash. So, we’re 60% invested now and we’re going to try running as many of those into expiration as we can. Looks like all the long technology positions are safe (FB), (AMZN), (MSFT), (DIS). The only thing we’re pressing here are the shorts in Walmart (WMT) and Russell 2000 (IWM).

Q: Do you think it’s a good idea for Tesla (TSLA) to build another Gigafactory in Shanghai, China during a trade war? Will this blow up in Elon’s face?

A: I don’t think so because the Chinese are desperate for the Tesla technology and they just gave Tesla an exemption on import duties on all parts that need to go there to build the cars. So, that’s a very positive development for Tesla and I believe the stock is up about $10 since that news came out.

Q: Will Roku (ROKU) ever pull back? Would you buy it up here?

A: No, we recommended this thing last year at $40; it’s now up to $165, and up here it’s just wildly overbought, in chase territory. Of course, the reason that’s happening is that the big concern last year was Amazon wiping out Roku, yet they ultimately ended up partnering with Roku, and that’s worth about a 400% gain in the stock. You know the second you get into this, it’s over. There are just too many better fish to fry in the technology area.

Q: What happens if our existing Russell 2000 (IWM) September 2019 $153-$156 in-the-money vertical BEAR PUT spread Russell 2000 position closes between $156 and $153?

A: You lose money. You will get the Russell 2000 shares put to you, or sold to you at $153.00, which means you now own them, and you’ll get a big margin call from your broker for owning the extra shares. If ever it looks like we’re getting close to the strike price going into expiration, I come out precisely because of that risk. You don’t want random chance dictating whether you’re going to make money in your position or not going into expiration. If you’re worried about that, I would get out now and you can still come out with a nice profit. Or, you can always wait for another down day tomorrow.

Q: Is it time to get super aggressive shorting Lyft (LYFT) or Uber (UBER) when they openly admit that they won’t make a profit anytime in the near future?

A: The time to short Uber (UBER) and Lyft was at the IPO when the shares became available to sell. Down here I don’t really want to do very much. It’s late in the game and Uber’s down about one third from its IPO price. We begged people to stay away from this. It’s another example where they waited for the company to go ex-growth before it went public, but it didn’t leave anything for the public. It was a very badly mishandled IPO—it’s now at $31 against a $45 IPO price and was at a new all-time low just 2 days ago. You knew when they offered the drivers shares, the thing was in trouble. Sometime this will be a buy, but not yet. Go take a long nap first.

Q: Is the fact that rich people are hoarding cash a good indicator that a recession is approaching?

A: Yes, absolutely. Bonds yielding 1.45% is also an indication that the wealthy are hoarding cash from other investment and parking it in US treasury bonds. I went to the Pebble Beach Concourse d’ Elegance vintage car show a few weeks ago and all of the $10 million plus cars didn’t sell, only those priced below $100,000. That is always a good indicator that the wealthy are bailing ahead of a recession. If you can’t get a premium price for your vintage Ferrari, trouble is coming.

Q: Argentina just implemented currency controls; is this the start of a rolling currency crisis among emerging nations?

A: No, I believe the problems are unique to Argentina. They’ve adopted what is known as Modern Momentary Theory—i.e. borrowing and printing money like crazy. Unfortunately, this is unsustainable and results in a devalued currency, general instability, and the eventual hanging of their leaders from the nearest lamppost. This is exactly the same monetary policy that the Trump administration has been pursuing since he came into office. Eventually, it will lead to tears, ours, not his.

Q: Is the new all-electric Porsche Taycan a threat to Tesla?

A: No, it’s not. Their cheapest car is $150,000 and it gets one third less range than Tesla does. It’s really aimed at Porsche fanatics, and I doubt they will get outside their core market. In the meantime, Tesla has taken over the middle part of the electric market with the Model 3 at $37,000 a car. That’s where the money is, and Porsche will never get there.

Q: How will the US pull out of recession if the interest rates are at or below zero?

A: It won’t—that’s what a lot of economists are concerned about these days. With interest rates below zero, the Fed has lost its primary means to stimulate the economy. The only thing left to do is use creative means like feeding the economy with currency, which Europe has been doing for 10 years, and Japan for 30, with no results. That’s another reason to not allow rates to get back to zero—so we have tools to use when we go into a recession 12-24 months from now.

Q: What’s the best way to buy silver?

A: The ETF iShares Silver Trust (SLV) and, if you want to be aggressive, the silver miners with the Global X Silver Miners ETF (SIL).

Q: Have global central banks ruined the western economic system as we know it for future generations?

A: They may have—mostly by printing too much money in the last 10 years in order to get us out of recession. This hasn’t really worked for Europe or Japan, mind you, though who knows how much worse off they would be if they hadn’t. What it did do here is head off a Great Depression. If we go back to money printing in a big way, however, and it doesn’t work, we will not have prevented a Great Depression so much as pushed it back 10 or 15 years. That’s the great debate ongoing among economists, and it will eventually be settled by the marketplace.

September 3, 2019

Diary, Newsletter, Summary

Global Market Comments
September 3, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or VISIBILITY IS POOR),
(SPY), (TLT), (FXB), (WMT), (USO), (XLE)

The Market Outlook for the Week Ahead, or Visibility is Poor

Diary, Free Research, Newsletter

I have a pretty good view from my home on a mountaintop in San Francisco.

To the west, I can see through the Golden Gate Bridge all the way out to the Farallon Islands 20 miles off the coast. To the south, there is Stanford’s Hoover Tower and all of Silicon Valley. In the winter I can look east and see the snow-covered High Sierras 200 miles away.

However, during last year’s wildfires, I couldn’t see a thing. Visibility ended at 100 yards, the cars parked outside were covered in ash, and I could barely breathe. We were all confined indoors.

I kind of feel that’s the way the stock market is right now. You can’t see a thing, so it’s better to stay indoors.

Not only are market gyrations subject to unpredictable and random, out-of-the-blue influences. The old playbook about cross market correlations and how asset classes respond at different points of the economic cycle doesn’t work either.

The good news is that August is over, the second worth trading month of the year. The bad news? September is the WORST trading month of the year!

So, what does a trader do on the first day of the worst investment month of the year?

Research.

That's what I’ll be doing, waiting for the next cataclysmic collapse to buy or the next euphoric bubble to sell short. Until then, I’ll be sitting tight. Just running my existing long/short trading book, I’ll be up 3.4% by the September 20 option expiration date in 15 trading days.

There is one BIG positive for the economy that no one is talking about. The home ATM is open for business, and open like it’s never been open before.

The thirty-year fixed rate mortgage rate is now at 3.56%, 10 basis points over a decade low and 20 basis points above an all-time low (see the chart below). There are currently $9.4 trillion of outstanding home mortgages in the US. Some $5 trillion is in Fannie Mae and Freddie Mac conforming loans, some 90% of which have interest rates higher than the current market.

If just ten million of these mortgages refinance obtaining an average of $4,560 in annual savings each, that will amount to a de facto tax cut of $456 billion per year, not an inconsequential amount. And Goldman Sachs thinks we could be in for as much as 37 million refis. It could be enough to offset the negative impact of the trade war.

As for the past week, it seemed like a disaster a day.

Trump ordered all US companies out of China. Like you can reverse 40 years’ worth of trillions of dollars of investment with a Tweet. If they did, an iPhone would cost $10,000 and your low-end laptop $15,000. An escalation of the trade war is the last thing your 401k wanted to hear. Kiss that early retirement goodbye.

Oil crashed (USO) on trade war escalation, with the industry now seeing a recession as a sure thing. Russian cheating on quotas is pouring the fat on the fire creating a massive supply glut in the face of shrinking demand. Take a long nap before considering any energy investment (XLE). The long-term charts show they are all going to zero.

Prime Minister Boris Johnson suspended Parliament, prompting a free fall in the pound. It’s to keep Parliament from blocking his hard Brexit, where it would certainly loose by a landslide. It’s all up to the Queen now, the monarch, not the rock group.

The yield inversion is deepening, with the US Treasury selling two-year notes today at a 1.56% yield, with ten-year yield closing at 1.45%. And that’s with the Treasury selling a total of a gob smacking $113 billion worth of bonds last week, which should have driven rates UP! US ten-year TIPS now showing negative interest rates.

Company stock buy backs are fading. That's a big deal as corporations retiring their own shares have been the biggest buyers in the market for the past two years. As if you needed another reason for downside risk.

US 15% tariffs hit on Sunday, and the Chinese paused in retaliation. Christmas is about to get more expensive. Many large retailers won’t make it until the new year. Keep selling short Macy’s (M) on rallies.

Bond yields hit new lows, at 1.44% for ten-year US Treasury bonds. The next stop is zero. Fixed income markets are saying that a recession is imminent. “Inversion” will be the world of the year for 2019. Go refi that home if you can get a banker on the phone!

There is no way out of the next recession, says hedge fund titan Ray Dalio. With global rates below zero, you can’t cut to stimulate business. You can’t do any more quantitative easing either, as the world is already glutted with paper. This is the trap Japan has been caught in for the last 30 years. It is all sobering food for thought.

US growth slowed with the second reading of the Q2 GDP marked down from 2.1% to 2.0%. The downturn has continued since the economy peaked 18 months ago. Q3 will be much worse when the trade war and earnings downgrades hit big time. And then there’s the soaring deficit. Sow the wind, reap the whirlwind.

US Consumer Sentiment took a dive from 98.4 to 89.8 in August. Has the spending boom just peaked? If so, we’re all toast. The "tariff cliff" is already taking its toll.

The Mad Hedge Trader Alert Service has posted its best month in two years. Some 22 or the last 23 round trips, or 95.6%, have been profitable, generating one of the biggest performance jumps in our 12-year history.

My Global Trading Dispatch has hit a new all-time high of 334.48% and my year-to-date shot up to +34.35%. My ten-year average annualized profit bobbed up to +34.30%.

I raked in an envious 16.01% in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.

As long as the Volatility Index (VIX) stays above $20, deep in-the-money options spreads are offering free money. I am now 60% invested, 40% long big tech and 20% short Walmart (WMT) and the Russell 2000, with 20% in cash. It rarely gets this easy.

The coming week will be all about jobs, jobs, jobs.

Monday, September 2, markets were closed for the US Labor Day.

Today, Tuesday, September 3 at 10:00 AM, the August ISM Purchasing Manager’s Index is out.

On Wednesday, September 4, at 2:00 PM, the Fed Beige Book for July is published.

On Thursday, September 5 at 8:30 AM EST, the Weekly Jobless Claims are printed. At 10:30, we learn the ADP Report for private hiring.

On Friday, September 6 at 8:30 AM, the August Nonfarm Payroll Report is printed.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I’ll be filling out the paperwork for my own home refi. JP Morgan Chase Bank (JPM) is offering the best deals, in my case a 30-year fixed rate no-cash-out jumbo loan for only 3.4%. Now where did I put that tax return?

Good luck and good trading.

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

Five Stocks to Buy at the Market Bottom

Diary, Newsletter

With the Dow Average down 2,000 points in four weeks, you are being given a second bite of the apple before the yearend tech-led rally begins.

So, it is with great satisfaction that I am rewriting Arthur Henry’s Mad Hedge Technology Letter’s list of recommendations.

By the way, if you want subscribe to Arthur’s groundbreaking, cutting edge service, please click here at https://hi290.infusionsoft.com/app/orderForms/tl-sub

It’s the best read on technology investing in the entire market.

You don’t want to catch a falling knife, but at the same time, diligently prepare yourself to buy the best discounts of the year.

The China trade war has triggered a tsunami wave of selling, tearing apart the tech sector with a vicious profit-taking few trading days.

No doubt that asset managers are frantically locking in profits for the rest of the year and protecting ebullient performance from a first quarter to remember.

This week shouldn’t deter investors from picking up bargains that were non-existent since December because the bulk of the highest quality tech names churned higher with lurching momentum.

Here are the names of five of the best stocks to slip into your portfolio in no particular order once the madness subsides.

Apple

Steve Job’s creation is weathering the gale-fore storm quite well. Apple has been on a tear reconfirming its smooth pivot to a software services-tilted tech company. The timing is perfect as China has enhanced their smartphone technology by leaps and bounds.

Even though China cannot produce the top-notch quality phones that Apple can, they have caught up to the point where local Chinese are reasonably content with its functionality.

That hasn’t stopped Apple from vigorously growing revenue in greater China 20% YOY during a feverishly testy political climate that has their supply chain in Beijing’s crosshairs.

The pivot is picking up steam and Apple’s revenue will morph into a software company with software and services eventually contributing 25% to total revenue.

They aren’t just an iPhone company anymore. Apple has led the charge with stock buybacks and will gobble up a total of $150 billion in shares by the end of 2019. Get into this stock while you can as entry points are few and far between.

Amazon (AMZN)

This is the best company in America hands down and commands 5% of total American retail sales or 49% of American e-commerce sales.

It became the second company to eclipse a market capitalization of over $1 trillion. Its Amazon Web Services (AWS) cloud business pioneered the cloud industry and had an almost 10-year head start to craft it into its cash cow. Amazon has branched off into many other businesses since then oozing innovation and is a one-stop wrecking ball.

The newest direction is the smart home where they seek to place every single smart product around the Amazon Echo, the smart speaker sitting nicely inside your house. A smart doorbell was the first step along with recently investing in a prefab house start-up aimed at building smart homes.

Microsoft (MSFT)

The optics in today look utterly different from when Bill Gates was roaming around the corridors in the Redmond, Washington headquarter, and that is a good thing in 2019.

Current CEO Satya Nadella has turned this former legacy company into the 2^nd largest cloud competitor to Amazon, and then some.

Microsoft Azure is rapidly catching up to Amazon in the cloud space because of the Amazon-effect working in reverse. Companies don’t want to store proprietary data to Amazon’s server farm when they could possible destroy them down the road. Microsoft is mainly a software company and gained the trust of many big companies especially retailers.

Microsoft is also on the vanguard of the gaming industry taking advantage of the young generation’s fear of outside activity. Xbox-related revenue is up 36% YOY, and its gaming division is a $10.3 billion per year business.

Microsoft Azure grew 87% YOY last quarter. The previous quarter saw Azure rocket by 98%. Shares are cheaper than Amazon and almost as potent.

Square (SQ)

CEO Jack Dorsey is doing everything right at this fin-tech company blazing a trail right to the doorsteps of the traditional banks.

The various businesses they have on offer makes me think of Amazon’s portfolio because of the supreme diversity. The Cash App is a peer-to-peer money transfer program that cohabits with a bitcoin-investing function on the same smartphone app.

Square has targeted the smaller businesses first and is a godsend for these entrepreneurs who lack immense capital to create a financial and payment infrastructure. Not only do they provide the physical payment systems for restaurant chains, they also offer payroll services and other small loans.

The pipeline of innovation is strong with upper management mentioning they are considering stock trading products and other bank-like products. Wall Street bigwigs must be shaking in their boots.

The recently departed CFO Sarah Friar triggered a 10% collapse in share price on top of the market meltdown. The weakness will certainly be temporary, especially if they keep doubling their revenue every two years like they have been doing.

Roku (ROKU)

Benefitting from the broad-based migration from cable TV to online streaming and cord-cutting, Roku is perfectly placed to delectably harvest the spoils.

This uber-growth company offers an over-the-top (OTT) streaming platform along with the necessary hardware and picks up revenue by selling digital ads.

Founder and CEO Anthony Woods owns 21 million shares of his brainchild and insistently notes that he has no interest in selling his company to a Netflix or Apple.

Roku’s active accounts mushroomed 46% to 22 million in the second quarter. Viewers are reaffirming the obsession with on-demand online streaming content with hours streamed on the platform increasing 58% to 5.5 billion.

The Roku platform can be bought for just $30 and is easy to set up. Roku enjoys the lead in the over-the-top (OTT) streaming device industry controlling 37% of the market share leading Amazon’s Fire Stick at 28%.

The runway is long as (OTT) boxes nestle cozily in only 40% of American homes with broadband, up from a paltry 6% in 2010.

They are consistently absent from the backbiting and jawboning the FANGs consistently find themselves in partly because they do not create original content and they are not an offshoot from a larger parent tech firm.

This growth stock experiences the same type of volatility as Square.

Be patient and wait for 5-7% drops to pick up some shares.

You Have to Know Which Flowers to Pick

August 26, 2019

Diary, Newsletter, Summary

Global Market Comments
August 26, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TWEET THAT SANK A THOUSAND SHIPS),

(SPY), (TLT), (GOOGL), (FB), (DIS), MSFT), (WMT), (IWM)

The Market Outlook for the Week Ahead, or The Tweet that Sank a Thousand Ships

Diary, Newsletter

I always wondered who the enemy was. Now, I know.

Not only is Fed governor Jerome Powell responsible for the upcoming recession, I also heard he fixed the 1918 World Series where the Chicago White Sox deliberately lost.

And come to think of it, Jack the Ripper and D.B Cooper were never caught either. If Tweets are to be believed, the Fed now needs to seek guidance from the president before any subsequent policy decision.

It all reminds me of the last days of the Third Reich when Adolph Hitler was ordering into action divisions that no longer existed.

And I love all of it.

An 850 point top to bottom swan dive in the Dow Average vaporized all my short positions, which I had put on days ago for just this eventuality. It also allowed me to get back into Microsoft (MSFT) down $5, which I have been struggling to get back into for months.

My only miss of the month has been in Gold (GLD), whose move continues to be so parabolic that I haven’t been able to get you, or me, into it.

No doubt the administration will respond with another charm offensive, as this did this week, and ignite another ferocious short-covering rally.

The harsh truth is that confidence is eroding by the day. And the escalating talk of a recession can, in itself, cause a recession. So much depends on belief when share price earnings multiples are trading at a lofty 17X. But it is all looking increasingly like a little boy trying to head off a flood by holding his finger in a hole in a dike.

There’s no more waiting to see if the trade war escalates again on September 1. We already have the answer. It now appears we have instant escalation all the time with every Tweet. It’s not exactly what I want to bet my retirement fund on.

I have been getting questions as to why I have been adding long positions with the outlook so grim. For a start, these positions are all triply hedged.

I’m long a call against a short call with an identical maturity. I have low beta long positions hedged against high beta short positions. And finally, I don’t think we can break down below the 200-day moving average in the major indexes until the September 20 Fed meeting when they FAIL to cut interest rates again because the data isn’t there yet.

The net, net, net of all of this is that my portfolio can take a 1,000-point hit in the Dow Average and its no big deal.

And don’t forget. Ultra-low interest rates will put a higher floor under the market than we have seen in past selloffs.

I pray the insanity keeps up (did I hear a reference to the Messiah the other day?) because it is allowing me to ship out Trade Alerts as fast as I can write them.

Stocks rose briefly on German stimulus prospects. It's an idea imported from America, heavy borrowing and massive deficit spending to float the economy. It’s just what the world needs, more freshly printed money, like the last $17 trillion worked so well. It’s all confirmation that Europe is already in recession.

The US now has the world’s highest interest rates, at 3.60% for 30-year fixed-rate loans. Only the US offers loans of this duration, thanks to heavy government subsidies through Fannie Mae and Freddie Mac.

Floating rate loans in France are 1.39%, in Germany are 1.0%, Japan at 0.65%. In Denmark, banks will lend at a negative -0.50%. Yes, they will pay you to live in your house. But when you’re borrowing at -0.90% you can do that. Only China has higher interest rates, with an overnight at 4.60%. The irony runs deep.

Unsurprisingly, the Congressional Budget Office cut 0.3% off of its 2020 growth forecast and the US budget deficit will rise to a ruinous $1 trillion two years sooner than expected. Fading business investment and weakening consumer spending will be the problems. The trade war is also a drag. It’s funny how no one wants to spend in front of a recession.

“Mid Cycle Adjustment” is how the Fed described the last interest rates cut in minutes released on Wednesday. It makes further cuts less likely. So does a stock market trading 5% below all-time highs. They also mention the cut as an “insurance policy” not actually justified by the current economic data. Three weeks ago, the fed cut rates for the first time in a decade.

The Mad Hedge Trader Alert Service is posting its best month in two years. Some 22 of the last 23 round trips have been profitable, generating one of the biggest performance jumps in our 12-year history.

My Global Trading Dispatch has hit a new all-time high of 334.61% and my year-to-date shot up to +34.47%. My ten-year average annualized profit bobbed up to +34.62%.

I have coined a blockbuster 16.14% so far in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.

As long as the Volatility Index (VIX) stays above $20, deep-in-the-money options spreads are offering free money. I am now 80% invested, 60% long big tech and 20% short, with 20% in cash. It rarely gets this easy.

The coming week will be a snore on the data front. Believe it or not, it could be quiet, as we grind through the last week of the summer.

On Monday, August 26 at 8:30 AM, US Durable Goods for July are out.

On Tuesday, August 27 at 9:00 AM, we get a new S&P Case Shiller National Home Price Index for June

On Wednesday, August 28, at 10:30, we learn the EIA Crude Oil Stocks for the previous week.

On Thursday, August 29 at 8:30 AM, the Weekly Jobless Claims are printed. July Pending Home Sales are published at 10:00 AM.

On Friday, August 30 at 10:00 AM, the University of Michigan Consumer Sentiment is printed.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, it will be a busy weekend with volunteer work at the Alameda Food Bank due and CPR training at the local fire department. I feel like I am getting my Eagle Scout rank all over again.

Good luck and good trading.

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

Time to Bring in the Heavy Guns

August 19, 2019

Diary, Newsletter, Summary

Global Market Comments
August 19, 2019
Fiat Lux

Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHAT A ROLLER COASTER RIDE!),
(SPY), (TLT), (VIX), (VXX), (M),
(WMT), (FB), (AMZN), (GOOGL), (IWM)

The Market Outlook for the Week Ahead, or What a Roller Coaster Ride!

Diary, Newsletter

I like roller coasters. The Giant Dipper at the Santa Cruz Boardwalk is tough to beat, the last operating wooden coaster in the United States. And I’ll always have fond memories of the Cyclone at Coney Island in New York.

I especially liked this week in the financial markets, which provided more profitable trading opportunities, both on the long and the short side, that any other week of the past decade.

Perhaps the highpoint was on Thursday when I was staring at my screens watching ten year US Treasury bond yields (TLT) bottom at a near historic 1.46%, and my own Mad Hedge Market Timing Index plunging to a lowly 19.

Impulsively, I covered the last of my short positions and started piling on longs in the FANGs. The next morning, the Dow Average opened up 300 points. But then, it’s easy to be bold and decisive when you’re up 30% on the year, compared to only 11% for the Dow Average.

And guess what? The best may be yet to come!

As long as the Volatility Index stays over $20, you will be able to print all the money you want with options spreads. I’m talking 10%-15% A MONTH!

All eyes are now on September 1 when the Chinese announce their own retaliation to our tariff increase. Will they target ag again? Or does the bond market (TLT) take the hit this time (the Chinese government owns $900 billion worth of our debt).

And now for the question that everyone is asking: How far will the stock market fall in this cycle. We have already plunged 10% from the highs on an intraday basis. Could we drop another 10% in this period of high anxiety? Certainly. However, I tend to think it will be less than that.

The initial market pop on Monday came when the new Chinese tariffs were delayed, from September 1 to December 15, on some items. Tell me who saw this one coming. The potential costs of the tariffs are hitting the US more than China. It was worth a 550-point rally in the Dow Average. In 50 years, I’ve never seen such blatant market manipulation.

Gold hit a new six-year high, with the collapse of the Argentine Peso a new factor. A poor election result drove the beleaguered currency down 15% in one day, a massive move.

Now you have to worry about what’s happening in China AND Argentina. For the first time in history, gold now has a positive yield versus the Europe and the Japanese Yen, which both offer negative interest rates.

Hong Kong is becoming a factor driving US markets down. If there is a repeat if the 1989 Tiananmen Square massacre where thousands died, global markets could collapse. The hit to growth will be more than it currently can stand in its present weakened state.

Inflation is taking off, with Core Consumer Inflation for July coming in at a red hot 0.3%, delivering the strongest two-month price burst since 2006. If it keeps up, you can kiss those future interest rate cuts goodbye.

Germany is in recession. That is the only conclusion possible when you see Q2 at -0.1% growth and the economy still in free fall. The ZEW’s figures regarding Germany yesterday were nothing short of horrific as the Economic Sentiment Index fell to -44. When you damage China’s economy, it puts the rest of the world into recession. The global economy has become so interlinked, it can’t become undone without another great recession.

Bonds rates bottomed yesterday, at least for the short term, the intraday low for the ten-year US Treasury yield hitting 1.46%. Welcome to inversion land, where long term interest rates are below short-term ones. Confidence in the economy is melting like an Alaskan glacier. But with three more 25 basis point rate cuts to come, an eventual break below 1.0% is inevitable. Watch for stocks to remake half their recent losses.

Consumer Sentiment cratered in August from 97.0 estimated to 92.1. And that was before the stock market sold off. Consumer spending remains strong. The last time it was this strong was at the market top in 2008, the market top in 1999, and the market top in 1987.

July Housing Starts plunged 4.0%, to 1.191 million units as homebuilders move into recession mode. Not even record low-interest rates can get them to stick their necks out this time. Those that did last time got wiped out.

It’s been pedal to the metal all month with the Mad Hedge Trade Alert Service, with no less than 31 Trade Alerts going out so far. Some 18 or the last 19 round trips have been profitable, generating one of the biggest performance jumps in our 12-year history.

Since July 12, we have clocked a blistering 15.15% in profits or $15,150 for the model $100,000 trading portfolio.

My Global Trading Dispatch has hit a new all-time high of 330.65% and my year-to-date shot up to +30.51%. My ten-year average annualized profit bobbed up to +34.20%.

I have coined a blockbuster 12.18% so far in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.

The coming week will be a snore on the data front. Believe it or not, it could be quiet.

On Monday, August 19, nothing of note is released.

On Tuesday, August 20 at 10:30 AM, we get API Crude Oil Stocks.

On Wednesday, August 21, at 10:00 the Existing Home Sales are published for July.

On Thursday, August 22 at 8:30 AM, the Weekly Jobless Claims are printed. The Jackson Hole conference of global central bankers and economists begins.

On Friday, August 23 at 8:30 AM the July New Home Sales are announced.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I will be attending the Pebble Beach Concourse d’Elegance vintage car show where I will be exhibiting my 1925 Rolls Royce Phantom I, the best car ever made.

I don’t mind the wooden brakes, but it’s too bad they didn’t make adjustable seats in those days to fit my 6’4” frame. However, its price appreciation has been better than Apple’s (AAPL) which I bought as a fixer upper in England during the 1980s for $20,000. My average cost on Apple is a split adjusted 25 cents.

My Rolls will be shown alongside James Bond’s 1964 Aston Martin which sold for $6.3 million, a 1939 Volkswagen Type 64 priced at more than $20 million, and a $13 million 1958 Ferrari 250 GT BBT.

And what am I doing next weekend? Taking the Boy Scouts to the Six Flags roller coaster farm in Vallejo.

Good luck and good trading.

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