UPDATE - March 1, 2018
BotTrigger Trade Alerts:
→ $OSTK sold all OSTK call options
→ $SPY bought back the January 2019 $280 puts @ $22.20 for a 5% allocation.
ON WATCH: $AAPL January Puts which we will cover in a separate post exclusively dedicated to AAPL's macro bull & bear cycles that show up like clockwork via seasonality due to Apple's 2-year cycle on the release of the new form factor iPhone release.
Apparently the White House is in chaos as aids spar over the proposed steel and aluminum tariffs. Spar they should; this is a potential game changer of monumental proportions. In retaliation to Trump’s tariff’s, Europe and China have already floated out proposals of their own. They’re in discussions to target products like Harley Davidson motorcycles, bourbon, cheese, orange juice, tomatoes, potatoes, livestock grain sorghum, and soybeans. Trump has until April 11th to make a decision on steel and April 19th to make a decision on aluminum but some expected him to make a decision as early as today while industry CEO’s visit the White House for an impromptu meeting. As the threat of trade war begins, it’s still a far cry from the Smoot-Hawley Tariff Act that was signed into law on June 17, 1930 that raised taxes on over 20,000 imported goods but it is a step in that direction. During the Great Depression these tariffs reduced American exports and imports by more than half. Back in 1930 there was similar opposition to tariff’s as we’re seeing today. A petition was signed by 1,028 economists asking President Hoover to veto the legislation, automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill calling it an ‘economic stupidity’, and JP Morgan CEO Thomas Lamont said he ‘almost went down on his knees to beg Hoover to veto the asinine Hawley-Smoot tariff’.
At first, the tariff seemed to be a success. According to historian Robert Sobel, ‘Factory payrolls, construction contracts, and industrial production all increased sharply.’ However, larger economic problems loomed in the guise of weak banks. When the Bank of Austria failed in 1931, the global deficiencies of the Smoot-Hawley Tariff became apparent. US imports decreased 66% from $4.4 billion (1929) to $1.5 billion (1933), and exports decreased 61% from $5.4 billion to $2.1 billion. Imports from Europe decreased from a 1929 high of $1.3 billion to just $390 million during 1932, while US exports to Europe decreased from $2.3 billion in 1929 to $784 million in 1932. Overall, world trade decreased by 66% between 1929 and 1934. How did it end? The 1932 Democratic campaign platform pledged to lower tariffs. After winning the election, President Roosevelt and the Democratic Congress passed Reciprocal Trade Agreements Act of 1934. This act allowed the President to negotiate tariff reductions on a bilateral basis.
It’s very difficult to invest into much of anything on the long side until this trade dispute is resolved. Today we sold all OSTK exposure as it announced an SEC probe into its supposedly pre-approved SEC token trading platform. Simply put, this is not a time to be long much of anything. As Paul Tudor Jones warned Wednesday in an interview with Goldman Sachs, we could be on the verge of a surge in inflation and a surge in the 10-year yield. Tudor Jones said, ’We have the strongest economy in 40 years, at full employment. The mood is euphoric. But it is unsustainable and comes with costs such as bubbles in stocks and credit…With rates so low, you can't trust asset prices today. And if you can't tell by now, I would steer very clear of bonds. … Bonds are the most expensive they've ever been by virtually any metric. They're overvalued and over-owned.’
Tudor Jones continues, ‘I think the recent tax cuts and spending increases are something we will all look back on and regret. ... Together [they] will give us a budget deficit of 5% of GDP — unprecedented in peacetime outside of recessions...This reminds me of the late 1960s when we experimented with low rates and fiscal stimulus to keep the economy at full employment and fund the Vietnam War. ... We are setting the stage for accelerating inflation, just as we did in the late ‘60s.’
This is a market that appears to be in a topping process after nine years of easy monetary policy. It could be a long ways down from here. Today we’re purchasing a 5% allocation of SPY January 2019 $280 puts. Come next week, we may add exposure to our $XHB puts via the January 2019 $45 puts instead of the September position we're currently holding. Depends largely on if we bounce or continue the downtrend.
Be patient and let this all come in. New setups will emerge
ORIGINAL POST - Feb 28, 2018
$XHB September 2018 $45 Puts bought @ $5.05 for a 3% allocation. As this downtrend begins to garner steam we're using these long dated puts to capture exposure to the downside of this Homebuilders ETF. On the weekly time frame we also have the MACD momentum oscillator in a bearish crossover which has been historically indicative of near to intermediate term downward trends. Both the technical & fundamental narratives are in support of our thesis that we're likely to see further downwards pressure.
As a leading indicator, housing will be one of the first shoe’s to drop due to higher interest rates. It’s happening. Analysts were expecting pending home sales to rise 0.5% in January but it came in at -4.7%, thereby joining new home sales and existing home sales in negative territory. Since we're getting a close below $41 on the XHB we're initiating our puts position today. The health of the housing market is an economic variable that cannot be directly manipulated which makes it a unique indicator. In a rising interest rate environment, XHB homebuilder puts provide a trustworthy portfolio hedge. And if a trade war involving building materials escalates between the United States and China then XHB will experience additional downside pressure.
Concerning the trade war…it has officially begun. Yesterday the U.S. Commerce Department slapped stiff duties on aluminum foil from China after concluding the Chinese producers receive unfair subsidies and have been dumping aluminum foil in the American market. U.S. imports of aluminum foil were $389 million in 2016. The proposed tariff ranges from 49% to 106% depending upon the company. This proposal now goes before the U.S. International Trade Commission which is expected to issue a ruling after voting on March 15th. If left in a vacuum, these protectionist tariff’s would indeed help U.S. manufacturers to better compete. The problem is that tariff’s lead to retaliation. China’s official response accurately explains: ‘China is strongly dissatisfied…The U.S. has unreasonably, excessively employed trade-remedy measures. It would not help ‘rejuvenate’ the American aluminum foil industry. Instead, it will affect employment in the U.S. and hurt the interests of American consumers.’
Witnessing this launch of a trade war confirms why billionaire Wilbur Ross decided to take the lowly cabinet position of Commerce Secretary in the Trump administration. When he took the job, nobody could believe it. Why would one of the most well-connected hedge fund managers on earth choose politics over his other endeavors? To help answer the question, one should know that Wilbur Ross and Donald Trump actually go way back. In the 1980’s and 90’s Ross worked as the right hand man for Baron Rothschild at Rothschild, Inc. Rothschild owned a real estate firm called Resorts International which had the reputation as a vehicle for money laundering, drug trafficking and gambling. In 1987 the Rothschild group decided bring Trump on board as the new face of the franchise. Trump quickly expanded to include three Atlantic City casinos which got into financial trouble during the downturn of 1990. It was Wilbur Ross who saved Trump in 1990 by renegotiating the debt. At that time Ross insisted that Trump was worth saving, saying, ‘The Trump name is still very much an asset.’ Since those early days, Ross has risen to prominence as the leader ‘Grand Swipe’ of Wall Street’s most exclusive fraternity Kappa Beta Phi. Today, Trump and Ross are neighbors in both Florida and New York. To get an idea of Ross’s vulture investment philosophy, he was quoted in an interview with New York magazine, ‘We’re a phoenix that rebuilds itself from the ashes.’ Nobody understands the impact of a trade war better than the Rothschild’s and Wilbur Ross. Knowing the backstory of Trump and Ross, it should come as no surprise that Trump’s agenda is moving towards that of his old friend. Possible implementation of steel and aluminum tariff’s in March/April 2018 represents a major pivotal point for the global economy. If implemented, consumer prices will rise, inflation will rise, interest rates will rise dramatically, and economic growth will spiral.