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Mad Hedge Fund Trader

The True Cost of the Coronavirus

Tech Letter

Tech shares are hoping to stage a rebound after the coronavirus-fueled rout that saw the Nasdaq’s 2-day drop by 6.38%, which is its worst since June 2016.

Readers can now pencil in a fresh readjustment to growth expectations of zero to low single digits in tech shares for fiscal year of 2020.

That is why Thursday morning was greeted by another 3% drop at the open – proceed with caution to not get trapped in the proverbial dead cat bounce vortex in the short-term.

A major tech consolidation could take place because let’s get real, the unpredictability is having a major impact on technology companies and uncertainty is a substantial input in heightened risk.

What are the realistic scenarios that are still left on the table?

  • Tech firms could slash prices, a deflationary element that promotes deteriorating profit margins seen as a net negative to revenue causing companies to miss revenue targets.
  • Unsold inventory could lead to working capital issues crushing balance sheets for the smaller tech firms.
  • Loss-making enterprise confront solvency issues if debt repayment hardship ripples through finance departments and could be a serious threat to credit markets as a whole.

Firms trading on the Nasdaq will slash price targets and profit estimates that could uncoil another leg down in the Nasdaq index.

In fact, it has already happened as PayPal (PYPL), Microsoft (MSFT), and Apple (AAPL) issued revenue warnings saying they do not expect to meet their revenue goals because of the coronavirus.

On an operational level, softness is what I see when delving into the semantics of Amazon (AMZN) whose ranking algorithm demotes product sellers who go out of stock.

The coronavirus has crippled supply chains, and to avoid a lack of stock, sellers are raising prices to slow sales, while planning to move production to other countries.

This is on top of the backbreaking supply problems that companies face because of the ill-effects of the trade war.

If the Amazon algorithm punishes the seller, once stock is replenished, they must overspend on advertising to climb back to the top of product searches.

The surveys I have taken out with Amazon sellers in the last few days show a precarious situation where sellers are stretched to the limit relying on numerous uncertain variables that are completely out of their control,

Even if the local government allows Chinese factories to restart, it will be understaffed while workers from other provinces self-quarantine.

The third-party marketplace accounts for more than half of Amazon’s retail sales with a robust base of manufacturers and sellers in China.

Google (GOOGL) and Microsoft are accelerating efforts to shift hardware production to Southeast Asia amid the worsening coronavirus outbreak, opening factories in Vietnam and Thailand as well.

Google is set to begin production of the Pixel 4A smartphone and also plans to manufacture its next-generation flagship smartphone called the Pixel 5 in Vietnam.

Google is also on the verge of building factories in Thailand for “smart home” related products, including voice-activated smart speakers like the Nest Mini.

Google and Microsoft’s plans are a giant shift away from their prior generation-long China manufacturing strategy and the coronavirus has only supported a strategy to remove China as a core manufacturing hub.

It is getting so bad in China that they are evaluating the feasibility and cost implications to uninstall some production equipment and ship it from China to Vietnam, literally packing up and taking their show on the road.

The have already initiated the process by asking a key sourcing contact to convert an old Nokia factory in the northern Vietnamese province of Bac Ninh to handle the production of Pixel phones.

Data center server production was also rerouted to Taiwan last year.

The coronavirus threat is only speeding up the move into South East Asia and Google and Microsoft hope to avoid the geopolitical risk in the region.

Remember that all of this rejigging of production will add costs and only the biggest can absorb mega hits to the balance sheets.

As for the coronavirus, business is becoming more complicated as the ban on Chinese nationals and flights from China could build barriers to business, and now South Korea has joined the list.

Korea’s Samsung Electronics, the world’s largest smartphone maker, has operated a smartphone supply chain in northern Vietnam for years but still relies on some components made in China.

While there are many moving parts, the average investor needs to wait on optimal entry points.

Japan announced school shutdowns for a month and tech shares have only priced in the coronavirus eventually entering the U.S., but if there are mass shutdowns of American cities and schools, then tech shares will see another stinging sell-off.

The contagion could eventually lead to the Olympics in Tokyo being canceled, high-profile corporate management getting infected, and the Chinese economy being sidelined for most of 2020.

All of these events are highly negative to the global economy which is why potential risks have exploded through the roof in such a short time.

Slinging mud at the wall will not work in times like this, but this does have the makings of a once-in-a-year entry point into tech shares.

February 28, 2020/by Mad Hedge Fund Trader
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-02-28 08:02:572020-05-11 13:13:54The True Cost of the Coronavirus
Mad Hedge Fund Trader

February 26 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 26 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: There’s been a moderation of new coronavirus cases in China. Is this what the market needs to find a bottom?

A: Absolutely it is; of course, the next risk is that cases keep increasing overseas. The final bottom will come when overseas cases start to disappear, and that could be a month or two off.

Q: How low will interest rates go after the coronavirus?

A: Well, interest rates already hit new all-time lows before the virus became a stock market problem. The virus is just giving it a turbocharger. Our initial target of 1.32% for the ten-year US Treasury bond was surpassed yesterday, and we think it could eventually hit 1.00% this year.

Q: What is the best way to know when to buy the dip?

A: When the Volatility Index (VIX) starts to drop. If you can get the volatility index down to the mid-teens and stay there, then the market will stabilize and start to rise fairly sharply. A lot of the really high-quality stocks in the market, like United Airlines (UAL), Walt Disney (DIS), Apple (AAPL) and Amazon (AMZN), have really been crushed by this selloff. So those are the names people are going to look at for quality at a discount. That’s going to be your new investment theme, buying quality at a discount.

Q: Do recent events mean that Boeing (BA) is headed down to 200?

A: I wouldn’t say $200, but $280 is certainly doable. And if you get to $280, then the $240/$250 call spread all of a sudden looks incredibly attractive.

Q: What does a Bernie Sanders presidency mean for the market?

A: Well, if he became president, we could be looking at like a 50-80% selloff—at least a repeat of the ‘09 crash. However, I doubt he will get elected, or if elected, he won’t have control of congress, so nothing substantial will get done.

Q: Is this the beginning of Chinese (FXI) bank failures that will cause an economic crisis in mainland China?

A: It could be, but the actual fact is that the Chinese government is doing everything they can to rescue troubled banks and companies of all types with short term emergency loans. It’s part of their QE emergency rescue package.

Q: Can you explain what lower energy prices mean for the global economy?

A: Well, if you’re an oil consumer (USO), it’s fantastic news because the price of gas is going down. If you’re an oil producer (XLE), like for people in the Middle East, Texas, Louisiana, Oklahoma, and North Dakota, it’s terrible news. And if you’re involved anywhere in the oil industry, or own energy stocks or MLPs, you’re looking at something like another great recession. I have been hugely negative on energy for years. I’ve seen telling people to sell short coal (KOL). It’s having a “going out of business” sale.

Q: Should I aggressively short Tesla (TSLA) here? Surely, they couldn’t go up anymore.

A: Actually, they could go up a lot more. I would just stay away from Tesla and watch in amazement—there’s no play here, long or short. It suffices to say that Tesla stock has generated the biggest short-selling losses in market history. I think we’re up to about $15 billion now in short losses. Much smarter people than us have lost fortunes trying in that game. 

Q: Was that an Amazon trade or a Google trade?

A: I sent out both Amazon and an Apple trade alert this morning. You should have separate trade alerts for each one.

Q: Are chips a long term buy at today’s level?

A: Yes, but companies like NVIDIA (NVDA), Micron Technology (MU), and Advanced Micro Devices (AMD) may be better long-term buys if you wait a couple of weeks and we test the new lows that we’ve been talking about. Chips are the canary in the coal mine for the global economy, and we have not gotten an all-clear on the sector yet. If you’re really anxious to get into the sector, buy a half of a position here and another half 10% down, which might be later this week.

Q: When will Foxconn reopen, the big iPhone factory in China?

A: Probably in the next week or so. Workers are steadily moving back; some factories are saying they have anywhere from 60-80% of workers returning, so that’s positive news.

Q: Are bank stocks a sell because of lower interest rates?

A: Yes, absolutely. If you think the 10-year treasury is running to a 1.00% yield as I do, the banks will get absolutely slaughtered, and we hate the sector anyway on a long-term basis.

Q: What about future Fed rate cuts?

A: Futures markets are now pricing in possibly three more rate cuts this year after discounting no more rate cuts only a few weeks ago. So yes, we could get more interest rates. I think the government is going to pull all the stops out here to head off a corona-induced recession.

Q: Once your options expire, is it still affected by after-hours trading?

A: If you read the fine print on an options contract, they don’t actually expire until midnight on a Saturday night after options expiration day, even though the stock market stops trading on a Friday. I’ve never heard of a Saturday exercise, but you may have to get a batch of lawyers involved if you ever try that.

Q: What’s the worst-case scenario for this correction?

A: Everything goes down to their 200-day moving averages, including Indexes and individual stocks. You’re talking about Apple dropping to $243 and Microsoft (MSFT) to $144, and NASDAQ (QQQ) to 8,387. That could tale the Dow Average (INDU) to maybe 24,000, giving up all the 2019 gains.

Good Luck and Good Trading

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

February 28, 2020/by Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2019/12/golden-nugget.jpg 425 570 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-02-28 08:02:482020-05-11 14:24:56February 26 Biweekly Strategy Webinar Q&A
Mad Hedge Fund Trader

February 28, 2020 – Quote of the Day

Diary, Newsletter, Quote of the Day

“The VIX right here is unsustainably low. I think China has more of a downside surprise. Analyst expectations for earnings are overly aggressive. There are just a few too many things that can go wrong out there,” said Vadim Zlotnikov, chief market strategist at Alliance Bernstein.

February 28, 2020/by Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2020/02/surfer.png 329 381 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-02-28 08:00:362020-02-28 08:16:46February 28, 2020 - Quote of the Day
Arthur Henry

Get Ready to Take a Leap Back into Leaps

Diary, Newsletter

Just as every cloud has a silver lining, every stock market crash offers generational opportunities.

In a month or two, there will be spectacular trades to be had with LEAPS. What are LEAPS, you may ask?

This is the best strategy with which to cash in on the gigantic market swoons, which have become a regular feature of our markets.

Since the advent of the recent incredible market volatility, I have been asked one question.

What do you think about LEAPS?

LEAPS, or Long Term Equity AnticiPation Securities, is just a fancy name for a stock option spread with a maturity of more than one year.

You execute orders for these securities on your options online trading platform, pay options commissions, and endure option like volatility.

Another way of describing LEAPS is that they offer a way to rent stocks instead of buying them, with the prospect of enjoying years’ worth of stock gains for a fraction of the price.

While these are highly leveraged instruments, you can’t lose any more money than you put into them. Your risk is well defined.

And there are many companies in the market where LEAPs are a very good idea, especially on those gut-wrenching 1,000-point down days.

Interested?

Currently, LEAPS are listed all the way out until January 2022, some 695 days away.

However, the further expiration dates will have far less liquidity than near month options, so they are not a great short-term trading vehicle. That is why limit orders in LEAPS, as opposed to market orders, are crucial.

These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.

Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.

Like all options contracts, a LEAP gives its owner the right to “exercise” the option to buy or sell 100 shares of stock at a set price for a given time.

LEAPS have been around since 1990, and traded on the Chicago Board Options Exchange (CBOE).

To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.

If a LEAP expires “out-of-the-money” – when exercising, you can lose all the money that was spent on the premium to buy it. There’s no toughing it out waiting for a recovery as with actual shares of stock. Poof, and your money is gone.

LEAPS are also offered on exchange-traded funds (ETFs) that track indices like the Standard & Poor’s 500 index (SPY) and the Dow Jones Industrial Average (INDU), so you could bet on up or down moves of the broad market.

Not all stocks have options, and not all stocks with ordinary options also offer LEAPS.

Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or “writer,” of the LEAP contract until the LEAP owner exercises.

Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.

They offer more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.

And for a moderate increase in risk, they present outsized profit opportunities.

For the right investor, they are the ideal instrument.

Let me go through some examples to show you their inner beauty.

By now, you should all know what vertical bull call spreads are. If you don’t, then please click their link for a quickie video tutorial. You must be logged in to your account.

Let’s go back to February 9, 2018 when the Dow Average plunged to its 23,800 low for the year. I then begged you to buy the Apple (AAPL) June, 2018 $130-$140 call spread at $8.10, which most of you did. A month later, that position is worth $9.40, up some 16.04%. Not bad.

Now let’s say that instead buying a spread four months out, you went for the full year and three months, to June 2019.

That identical (AAPL) $130-$140 would have cost $5.50 on February 9. The spread would be worth $9.40 today, up 70.90%, and worth $10 on June 21, 2019, up 81.81%.

So, by holding a 15-month to expiration position for only a month, you get to collect 86.67% of the maximum potential profit of the position.

So, now you know why we leap into LEAPS.

When the meltdown comes, and that could be as soon as today, use this strategy to jump into longer-term positions in the names we have been recommending and you should be able to retire early.

What’s out there today? Take a look at Boeing (BA), one of the most undervalued companies in the market, thanks to their 737 MAX woes.

Today, (BA) shares were trading at a lowly $305. Let say that Boeing shares recover to $350 by the end of 2020. You can buy a January 2021 $340-$350 vertical bull call spread for $3.00.  If Boeing makes it back up to $350 by the January 15, 2021 option expiration, the LEAP will expire worth $10, an increase of 233%.

It gets better. You can buy a (BA) January 2022 $370-$380 call spread for $2.15. If Boeing recovers to $380 by the January 21, 2022 expiration it will expire worth $10, giving you a gain of 365%!

What if you think that Boeing is overdue for a monster rally back to its old all-time high of $450?

You can buy a (BA) January 2022 $420-$430 calls spread for $0.90. If Boeing makes it all the way back to $430 by the January 21, 2022 expiration, it will expire worth $10, giving you a gain of 1,011%! Caution: If the shares only make it back up to $429, the position becomes worthless.

Now you know why I like LEAPS so much. Play around with the names and the numbers and I’m sure you will find something you like. But remember one thing. Buying LEAPS is only a trade to consider at long time market bottoms, not tops!

buying leaps

 

buying leaps

 

Time to Leap Into LEAPS
February 27, 2020/by Arthur Henry
https://www.madhedgefundtrader.com/wp-content/uploads/2020/02/leap-of-faith.jpg 400 400 Arthur Henry https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Arthur Henry2020-02-27 08:04:432020-05-12 22:29:43Get Ready to Take a Leap Back into Leaps
DougD

The Super Bull Argument for Gold

Diary, Newsletter
bullish on gold

With global stock markets in free fall and interest rates everywhere headed to zero, the outlook for gold has gone from strength to strength.

Shunned as the pariah of the financial markets for years, the yellow metal has suddenly become everyone’s favorite hedge.

Now that gold is back in fashion, how high can it really go?

The question begs your rapt attention, as the Coronavirus has suddenly unleashed a plethora of new positive fundamentals for the barbarous relic.

It turns out that gold is THE deflationary asset to own. Who knew?

I was an unmitigated bear on the price of gold after it peaked in 2011. In recent years, the world has been obsessed with yields, chasing them down to historically low levels across all asset classes.

But now that much of the world already has, or is about to have negative interest rates, a bizarre new kind of mathematics applies to gold ownership.

Gold’s problem used to be that it yielded absolutely nothing, cost you money to store, and carried hefty transactions costs. That asset class didn’t fit anywhere in a yield-obsessed universe.

Now we have a horse of a different color.

Europeans wishing to put money in a bank have to pay for the privilege to do so. Place €1 million on deposit on an overnight account, and you will have only 996,000 Euros in a year. You just lost 40 basis points on your -0.40% negative interest rate.

With gold, you still earn zero, an extravagant return in this upside-down world. All of a sudden, zero is a win.

For the first time in human history, that gives you a 40-basis point yield advantage by gold over Euros. Similar numbers now apply to Japanese yen deposits as well.

As a result, the numbers are so compelling that it has sparked a new gold fever among hedge funds and European and Japanese individuals alike.

Websites purveying investment grade coins and bars crashed multiple times last week, due to overwhelming demand (I occasionally have the same problem). Some retailers have run out of stock.

And last week, the virus went pandemic as silver rocketed 8.6% and others like Palladium (PALL) were also frenetically bid.

So I’ll take this opportunity to review a short history of the gold market (GLD) for the young and the uninformed.

Since it last peaked in the summer of 2011 at $1,927 an ounce, the barbarous relic was beaten like the proverbial red-headed stepchild, dragging silver (SLV) down with it. It faced a perfect storm.

Gold was traditionally sought after as an inflation hedge. But with economic growth weak, wages stagnant, and much work still being outsourced abroad, deflation became rampant.

The biggest buyers of gold in the world, the Indians, have seen their purchasing power drop by half, thanks to the collapse of the rupee against the US dollar. The government increased taxes on gold in order to staunch precious capital outflows.

Chart gold against the Shanghai index, and the similarity is striking, until negative interest rates became widespread in 2016.

In the meantime, gold supply/demand balance was changing dramatically.

While no one was looking, the average price of gold production soared from $5 in 1920 to $1,400 today. Over the last 100 years, the price of producing gold has risen four times faster than the underlying metal.

It’s almost as if the gold mining industry is the only one in the world which sees real inflation, since costs soared at a 15% annual rate for the past five years.

This is a function of what I call “peak gold.” They’re not making it anymore. Miners are increasingly being driven to higher risk, more expensive parts of the world to find the stuff.

You know those tires on heavy dump trucks? They now cost $200,000 each, and buyers face a three-year waiting list to buy one.

Barrick Gold (GOLD), the world’s largest gold miner, didn’t try to mine gold at 15,000 feet in the Andes, where freezing water is a major problem, because they like the fresh air.

What this means is that when the spot price of gold fell below the cost of production, miners simply shut down their most marginal facilities, drying up supply. That has recently been happening on a large scale.

Barrick Gold, a client of the Mad Hedge Fund Trader, can still operate, as older mines carry costs that go all the way down to $600 an ounce.

No one is going to want to supply the sparkly stuff at a loss. So, supply disappeared.

I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value, and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD).

They claim the move in the yellow metal we are seeing now is only the beginning of a 30-fold rise in prices, similar to what we saw from 1972 to 1979, when it leapt from $32 to $950.

So, when the chart below popped up in my inbox showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using.

To match the gain seen since the 1936 monetary value peak of $35 an ounce, when the money supply was collapsing during the Great Depression, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by 800% from the recent $1,050 low.  That would take our barbarous relic friend up to $8,400 an ounce.

To match the move from the $35/ounce, 1972 low to the $950/ounce, 1979 top in absolute dollar terms, we need to see another 27.14 times move to $28,497/ounce.

Have I gotten your attention yet?

I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. These figures make my own $2,300/ounce long-term prediction positively wimp-like by comparison.

The seven-year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg, South Africa to unload my own Krugerrands in 1979, was triggered by a number of one-off events that will never be repeated.

Some 40 years of unrequited demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold.

South Africa, the world’s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence, my more subdued forecast.

But then again, I could be wrong.

In the end, gold may have to wait for a return of real inflation to resume its push to new highs. The previous bear market in gold lasted 18 years, from 1980 to 1998, so don’t hold your breath.

What should we look for? The surprise that your friends get out of the blue pay increase, the largest component of the inflation calculation.

This is happening now in technology and is slowly tricking down to minimum wage workers. When I visit open houses in my neighborhood in San Francisco, half the visitors are thirty-somethings wearing hoodies offering to pay cash.

It could be a long wait for real inflation, possibly into the mid-2020s, when shocking wage hikes spread elsewhere.

I’ll be back playing gold again, given a good low-risk, high-return entry point.

You’ll be the first to know when that happens.

As for the many investment advisor readers who have stayed long gold all along to hedge their clients’ other risk assets, good for you.

You’re finally learning!
Gold Backing of the US Monetary Base

 

 

 

 

John Thomas -Gold

February 26, 2020/by DougD
https://www.madhedgefundtrader.com/wp-content/uploads/2014/07/John-Thomas-Gold-e1455831491219.jpg 297 400 DougD https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png DougD2020-02-26 08:04:052020-05-11 14:24:36The Super Bull Argument for Gold
Mad Hedge Fund Trader

What’s Behind the Tech Meltdown

Tech Letter

Tech shares are on a knife’s edge.

The world finally cared about the coronavirus and this meant the spreading of it from Chinese soil to other regions of the world with meaningful foreign death tolls.

Tech shares, for a time, became the de facto safe haven for coronavirus investors to hide out until Iran and South Korea reported an explosion of cases on the same day.

Tech shares bore the brunt of the carnage in the markets and have experienced one of the worst 2-day performances in the history of the technology-dominated Nasdaq index.

Global supply chains are in a state of paralysis as the Middle Kingdom has turned into 1.4 billion homesitters.

Even worse, the rapid spread of the virus hits home the fact that other parts of the world could enter an imminent lockdown on business.

This is bearish for not only the standard tech multinational, but all global operations and economy.

Many tech traders were wiped out unable to sell in the frantic sell-off.

We will get the lowdown on how some tech-based hedge funds went bust shortly because more than a few bet on a quick coronavirus solution.

Well, this is not a 1-day fix and Mr. Market is always correct.

The truth is that this virus is sowing economic uncertainty across the globe and there are really 2 ways from here, will it get worse or better?

If further meaningful contagion is prevented in the next few days, there could be a massive rally in many of the best in show that tech has to offer.

However, that seems implausible.

If new cases vanish from the headlines for a few days, a relief rally will be on our hands, but there are reports as we speak from Austria, Spain, and Romania.

Investors are waiting for bullish crumbs like a Central Bank announcement or vaccine development to help, but that likely won’t stem the negative momentum or come in time.  

The virus also destroys any potential tech IPOs this year such as Airbnb, and they will most likely shelve their IPO and wait for the virus and its fallout to dissipate.

The debt market will also be hesitant to give the benefit of the doubt to major loss-makers like Lyft and Uber who have poor unit economics.

Apple, Facebook, Amazon, Microsoft and Google-parent Alphabet comprise over 20% of the S&P and lost a combined $250 billion in one trading day then backed that up with an even worse loss.  

Then there is the pending situation of if the Chinese economy isn’t up and running soon, “millions” of local businesses could go bust in the second biggest economy.

So even if a consensus thesis of stock markets usually powering through pandemics is still valid, the economic damage could be too hideous to ignore sending markets even lower.

One of the ironic winners of this horrid virus has been Bitcoin which has seen a price rise 15% in the last one month.

A global pandemic strengthens the use case for this “digital gold” almost signaling that the current governing status quo and monetary system are unfit for operation.

Now is not the time to dive in and bet the ranch.

The likelihood of the coronavirus halting tech’s ability to operate grows higher by the hour.

Risks are currently skewed to the downside with the market pricing into tech shares that the coronavirus will spread inside the U.S. and affect tech firms’ profitability for the rest of 2020 and even perhaps bring forward a global tech recession.

A tech recession is not yet off the table, and the policy response will be vital if the contagion spirals out of control.

The Mad Hedge Technology Letter is 100% in cash and readers should wait for the dip to bottom out.

 

February 26, 2020/by Mad Hedge Fund Trader
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-02-26 08:02:142020-05-11 13:13:19What's Behind the Tech Meltdown
Mad Hedge Fund Trader

Why US Bond Yields are Going to Zero

Diary, Newsletter

I just checked my trading record for the past three years and discovered that I have executed no less than 61 Trade Alerts selling short bonds and all but one was profitable. It really has been my “rich uncle” trade.

However, all good things must come to an end.

I have been scanning the horizon for another short bond trade to strap on and I have to tell you that right now, it’s just not there.

Bond volatility has been incredibly low in recent months, with United States US Treasury Bond Fund (TLT) prices trapped in a microscopic and somnolescent $3.5 point range. What’s much worse is that bonds were stuck in an incredibly snug 14 point range for two and a half years with no place to go but sideways.

As a result, the risk/reward for going out one month for a bear but spread in the (TLT) is no longer favorable.

So what was the market trying to shout at us with such boring price action?

That a major upside breakout in prices and downside breakdown in yields was imminent!

As they say in technical analysis land, the longer the base, the bigger the breakout.

It is becoming painfully obvious that since 2016, the bond market hasn’t been putting in a topping process. It is building a long term BOTTOM. That means the next major bond move could be a major RISE in prices and collapse in bond yields.

Let me tell you what is wrong with this picture.

When stocks melted down during Q4 of 2018, bond yield plunged by 65 basis points, as they should have. But what did yields do when the Dow Average rallied by 4,500 points after the Christmas Eve Massacre? Absolutely nothing. Here we are today at a scant 1.35%, exactly where we were at the end of 2018.

If you look at real interest rates we are already below zero. The January Consumer Price Index came in at a lowly 2.5%. Take that from a ten-year US Treasury yield of 1.35% today and we are at negative -1.15%, even worse than Germany!

Not good, not good. As any long term pro will tell you, it is the bond market that is always right.

Yes, the next target in actual bond yields could be ZERO. The 3.25% peak in yields we saw last in September 2018 was probably the top in this economic cycle. That’s what my former Berkeley economics professor Janet Yellen thinks. So does Ben Bernanke.

And how much have bond yield dropped during recessions? Some 400 basis points. That’s how you get to zero, and possible negative numbers at the bottom of the next cycle.

The reasons for a historically low peak in bond yields are, well, complicated. Past cycles I’ve seen during my lifetime’s yields peak anywhere from 6%-12%.

For a start, after waiting for a decade for inflation to show, it never did. Wages, far and away the largest component of inflation, are only growing at a 3.1% annual rate according to the January Nonfarm Payroll Report, and even they are rolling over now.

The harsh reality is that companies have been able to cap labor costs with technology improvements, and that trend looks to accelerate, not slow down. Falling rates are not so much an indicator of an impending recession as they are hyper accelerating technology.

There is no way that wages are going to increase with malls emptying out and businesses moving online. Tesla’s recent parabolic move is only the latest in a long term trend.

Yes, the rise of the machines is happening.

I thought that the $1 trillion tax stimulus package would provide a steroid shot to an already hot economy and fuel inflation. But I was wrong. Instead, tax savings and cash repatriated from abroad went almost entirely into share buybacks and the bond market, not capital spending as promised.

And what do the wealthy do with new cash flow? They buy more bonds, not invest in job-creating start-ups or other high-risk plays.

The Fed has become a willing co-conspirator in the zero rate scenario. Governor Jay Powell has made abundantly clear that rate rises are on hold for the foreseeable future and that there may not be any at all this year. In fact, the next Fed move may be a cut rather than a rise.

The Fed’s policy of quantitative easing, or QE, is also reaccelerating. Instead of unwinding its balance sheet back to the $800 million last seen in 2008, which was the original plan when QE started a decade ago, it is back to pedal to the metal. The coronavirus pandemic is pouring more gasoline on this fire. That will give our nation’s central bank far less flexibility with which to act during the next recession.

Did I just say the “R” word?

It’s become clear that the tax package and $2  trillion in new government debt bought us exactly two quarters of above-average economic growth. Since Q2 2018, the GDP growth rate has plunged from a 4.2% annualized rate to an expectation of well under 2% for Q1 2020.

That’s an eye-popping decline of more than 76% in the US growth rate in two years. If the Fed is truly data-dependent, and they tell us every day of the year that they are, these numbers have to be inciting panic in Washington. Hence the sudden, out of the blue clamor for more stimulus from Washington.

If ten-year yields truly go to zero, what would they do to the (TLT)? That would take them from today’s $122 to over $200. There they will be joined by the industrialized countries that are already there, with German ten-year bunds yielding -0.48% and ten year Japanese government bonds at -0.06%.

Where will that take home mortgage rates? Oh, to about 2%, where they already are in Europe now. We may be on the refinance opportunity of the century.

That is if you still have a job.

 

 

The Last Time Real Rates Were Zero

February 25, 2020/by Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2019/03/unemployment.png 316 435 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-02-25 08:04:112020-02-25 07:51:10Why US Bond Yields are Going to Zero
The Mad Hedge Fund Trader

Testimonial

Diary, Newsletter, Testimonials

I have been in the money management business for 35 years and really enjoy your service.

I just want to say that the way you handled the start of the year which was a combination of exploiting opportunities from an oversold market combined with your overall risk mitigation strategies was not only brilliant but profitable as well.

I am up on the year and glad to have not participated in the insanity of a market short-term meltdown.

Moreover, one of the reasons I like your service so much is I am prohibited from making specific stock buys/sells without permission from our trading desk in NY and that can take time as well as prohibitions within days of earnings announcements or if the firm is buying/selling.

So using market indices through ETFs is not only helpful and productive, but outright brilliant.

So a million thanks again!

Bill
Cleveland, Ohio

February 25, 2020/by The Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2019/03/john-thomas-beach-view.png 389 520 The Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png The Mad Hedge Fund Trader2020-02-25 08:02:352020-02-25 07:52:56Testimonial
Mad Hedge Fund Trader

Where the Next Action is in Technology

Tech Letter

I have been adamant that 2020 is a time to be cherry-picking the best of the 2nd tier tech stocks like Twitter, eBay, Adobe, and Fortinet.

But investors must be aware that in the 2nd and 3rd tiers of the tech landscape, nothing is guaranteed, and the downside price action and the inflection points can be hard to swallow.

One stock that has been on both sides of the fence is cloud computing company Dropbox (DBX).

Dropbox shares exploded Friday morning up over 23% trending towards their best single-day performance.

Believers think this stock has finally shaken off the cobwebs.

Dropbox has it hard as it competes with the behemoths of Amazon, Google, and Microsoft for the same pie in the Cloud game.

To keep its head above water, they must tread harder than the bigger guns and the lack of traction in the past year doomed them to a -26% share return for investors.

Well, investors have gotten back their losses in one day and could close above its initial-public-offering price of $21 for the first time since September.

My underlying thesis of second-tier tech stocks either sinking or swimming partly has to do with the manner in which they are able to navigate against bigger companies who are in catch-and-kill mode via buyouts.

A highly bullish signal was when management at Dropbox decided to raise its operating-margin and free-cash outlook for 2020 and over the long term.

Superior operating margin was one of the hyped-up metrics that management tried to sell investors post-IPO but they never followed through and the stock cratered.

Dropbox has also revealed that higher margins will not be at the expense of cost cuts affecting the top line and has more to do with superior growth drivers which are always positive.

The new operating margin forecast for Dropbox is between 28% to 30% compared with a prior range of 20% to 22%, and that is a big deal.

There is a nuanced relationship between growth and profitability and Dropbox cannot lose sight of either because if top line misses badly, the operating margin beat is less meaningful.

At the bare minimum, the tone of the earnings report has investors chomping at the bit inciting a massive rally in shares and turning around the narrative for this once beleaguered company.

Many times the negativity can become a self-fulfilling prophecy.

It is difficult to break momentum in software stocks in either direction and now the onus is on Dropbox’s management to prove they can surpass margin forecasts or there could be a reverse 20% drop in the stock.

There are still bears out there who believe this wasn’t enough to convince them to change their mind.

Bears have cited a lack of sustained growth and a tendency to miss on subscriber numbers as the Achilles heel.  

Because of the small nature of these companies, volatility goes hand in hand with their price action.

The Mad Hedge Technology Letter prefers to bundle itself with stocks that have more reliable price action.

A perfect example of volatility disturbing a stock would be a cybersecurity company that I have been quite bullish on named Zscaler (ZS).

The cloud security company delivered lighter-than-expected profit guidance for the third quarter and fiscal year and the stock slipped down 15%.

That would never happen to Google or Facebook shares in the same scenario.

Zscaler’s second-quarter report was robust and even had a billings’ beats of 15% year-over-year.  

Meanwhile, hints of revenue deceleration and margin contraction in the second half were enough to kill shares in trading.

Traders who can filter through the bluster must time entry points in small-cap tech perfectly otherwise one mistimed word on an earnings report can sink a trade with no chance to exit.

Separating the wheat from the chaff is what we do here at the Mad Hedge Technology Letter.

 

February 24, 2020/by Mad Hedge Fund Trader
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2020-02-24 09:02:332020-05-11 13:13:13Where the Next Action is in Technology
Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or The Wake-Up Call

Diary, Newsletter

After weeks of turning a blind eye, poo-pooing, and wishfully ignoring the global Coronavirus pandemic, traders are finally getting a wake-up call.

It turns out that the prospect of a substantial portion of the world’s population dying over the next few months cannot be offset by quantitative easing after all.

At least for the short term.

This weekend we learned that all Asian cruises have been cancelled. More factories in South Korea have been shut down for the lack of Chinese parts. Technology conferences in San Francisco have been cancelled. Some 80% of all Chinese flights are grounded.

GM assembly lines in Michigan are slowing, both from missing parts and customers. And we have just learned that a section of Italy near Milan has been quarantined, thanks to a major outbreak there.

I learned the true severity of Corona a week ago when I ended up sitting next to a research doctor who worked for San Francisco-based Gilead Sciences (GILD) on a first-class flight from Melbourne, Australia to San Francisco.

He was returning from Wuhan, China, the epicenter of the virus. Since all flights from China to the US are now banned, he had to route his return home via Australia.

What he told me was alarming.

The Chinese are wildly understating the spread of the Coronavirus by perhaps 90% to minimize embarrassment to the government, which kept the outbreak secret for a full six months.

Bodies are piling up outside of hospitals faster than they can be buried. Police are going door to door arresting victims and placing them in gigantic quarantine centers. Every covered public space in the city is filled with beds and the roads are empty. Smaller cities and villages have set up barriers to bar outsiders.

He expected it would be many months before the pandemic peaked. It won’t end until the number of deaths hits the tens of thousands in China and at least the hundreds in the US.

The frightening close in the S&P 500 (SPY) on Friday and the horrific trading in futures overnight in Asia suggest that the worst is yet to come.

Since the beginning of 2019, we have been limited to mere 5% downturns in the major indexes, creating a parabola of euphoric share prices. This time, we may not get off so lightly.

There is no doubt that Corona will take a bite out of growth this year. The question is how much. Central banks could well dip in for yet another round of QE to save the day.

The bigger question for you and me is whether investors are willing to look through to the other side of the disease and use this dip as an opportunity to buy. If they are, we are looking another 5% draw down. If they aren’t, then we are looking for 10%, or even more.

Then there is the worst-case scenario. If Corona reaches the proportion of the 1918 Spanish flu pandemic where 5% of the world’s population died, then we are looking at a global depression and an 80% stock market crash.

Hopefully, modern science, antibiotics, and rapid response research teams will prevent that from happening. We already have the Corona DNA sequence and several vaccines are already in testing. In 1918, they didn’t even know what DNA was.

The disease could well be peaking now as the course of the last surprise epidemic, that of Ebola in 2014, suggests (see chart below). Until then, we shall just have to hope and pray.

In addition to praying, I’ll be raising cash and adding hedges just in case providence is out of range.

30-Year Treasury Bond Yields (TLT) hit all-time lows following on from the logic above, calling for a melt-up of all asset prices. Collapsing interest rates doesn’t signal an impending recession but a hyper-acceleration of technology wiping out jobs by the millions and capping any wage growth. I’m looking for 1.00% on the ten-year. Money will remain free as far as the eye can see.

Apple tossed Q2 guidance, giving up most Chinese sales because of the big Coronavirus shutdown. The stores have been closed. The stock dives overnight, down $10. Shutdown of its main production factory at Foxconn didn’t help either. Nintendo is also struggling with production of its wildly popular Switch game. When you lose the leader, watch out for the rest of the market.

Massive Chinese Stimulus should head off any sharp downturn in the economy. Will an interest rate cut and a huge dose of QE be enough to offset the deleterious effects of the Coronavirus? Ask me again in another month.

Expats fled Asia and are not returning until the epidemic is over. My plane on the way home was full of Americans taking families home to avoid the plague. It’s yet another drag on the global economy.

Housing Starts plunged 3.6% in January, while permits hit a 13-year high. It’s all a giant interest rate play fueled by massive liquidity.

US Existing Home Sales faded in January, down 1.3%, to a seasonally adjusted rate of 5.46 million units. Inventories are down to an incredible 3.1 months, near an all-time low. I guess consumers don’t want to rush out and buy a new home if they are about to die of a foreign virus.

The Fed Minutes came out and it looked like the central bank wanted to keep American interest rates unchanged. The January meeting showed a stronger forecast for the economy, so no chance of another interest rate cut here. Even last month, Coronavirus was becoming an issue.

Leading Economic Indicators soared, up 0.8%, versus 0.4%. It’s the highest reading in 2 ½ years. If Coronavirus is going to hurt our economy, it’s not evident in the numbers yet.

The Philly Fed was also red hot, at 36.7. It’s another non-confirmation of the Corona threat.

Despite the fact that we may be facing the end of the world, the Mad Hedge Trader Alert Service managed to maintain new all-time highs. I used the steadily falling prices and sharply rising volatility Index of last week to scale into an aggressive long position from 100% cash.

I bought deep in-the-money call spreads in FANG stocks like (AAPL) and (MSFT) I also picked up additional positions in shares most affected by the Coronavirus, like Carnival Cruise Lines (CCL), United Airlines (UAL), and Wynn Resorts (WYNN), which are all down 25% from recent peaks.

My Global Trading Dispatch performance rose to a new all-time high at +359.73% for the past ten years. February stands at +0.69%. My trailing one-year return is stable at 46.61%. My ten-year average annualized profit ground back up to +35.38%. 

All eyes will be focused on the Coronavirus still, with deaths over 2,000. The weekly economic data are virtually irrelevant now. However, some important housing numbers will be released.

On Monday, February 24 at 8:30 AM, the Dallas Fed Manufacturing Index is published.

On Tuesday, February 25 at 8:30 AM, the S&P Case Shiller National Home Price Index for December is out .

On Wednesday, February 26, at 8:00 AM, January New Home Sales are released.

On Thursday, February 27 at 8:30 AM, the government announced the second look at Q4 GDP. Weekly Jobless Claims are also out at 8:30.

On Friday, February 28 at 9:45 AM, the Chicago Purchasing Manager Index is printed.

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

As for me, we have just suffered the driest February on record here in California, so I’ll be reorganizing my spring travel plans. Out goes the skiing, in comes the beach trips. Such is life in a warming world.

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

 

 

 

 

 

 

February 24, 2020/by Mad Hedge Fund Trader
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