Trade Alert - (AMZN) - EXPIRATION
EXPIRATION of the Amazon (AMZN) March 2020 $1,350-$1,400 in-the-money vertical BULL CALL spread at $50.00 or best
Closing Trade
3-20-2019
expiration date: March 20, 2019
Portfolio weighting: 10%
Number of Contracts = 2 contracts
The net effect of the Coronavirus is to immediately drive a much larger share of commerce online, with Amazon taking the lion’s share. It is also the only place where you can buy a ten-pound bag of rice. The legacy stores are all out of it.
With the Volatility Index (VIX) then at an incredible $78, the risk/reward for a very deep in-the-money vertical call spread on the highest quality names was very favorable.
As a result, the Amazon (AMZN) March 2020 $1,350-$1,400 in-the-money vertical BULL CALL spread expired at its maximum potential value of $50.00.
The profit should be deposited into your account on Monday and the margin freed up. If it isn’t, get on the phone with your broker immediately.
I believed that Amazon (AMZN) shares were oversold in the extreme, and that there was some nice cherry-picking to be had. This is a stock that you want to hide behind the radiator and keep forever.
This was a bet that Amazon shares would NOT fall below $1,400 by the March 20 option expiration date in 5 trading days. In other words, it was a bet that (AMZN) wouldn’t fall by more than 313 points from the day I sent out the trade alert. Yes, this was 32% very deep-in-the-money call spread with only a week until expiration.
Here are the specific trades you need to close out this position:
Expiration of 2 March 2020 (AMZN) $1,350 calls at..……$590.90
Expiration of 2 March 2020 (AMZN) $1,400 calls at....….$540.90
Net Proceeds:………………………..........….…………..…….….....$50.00
Profit: $50.00 - $42.00 = $8.00
(2 X 100 X $8.00) = $1,600 or 19.05% in 5 trading days.
Global Market Comments
March 20, 2020
Fiat Lux
Featured Trade:
(TAKING A LOOK AT THE ROM)
(ROM)
(BRING BACK THE UPTICK RULE!)
Social distancing signals the death of business in March and April 2020. Enter online shopping and E-commerce.
E-commerce’s greatest strength is pulling ahead of its competition while Millennials have also been the catalyst in turning the general shopping experience into a seamless digital affair.
And now that the world is at the mercy of an invisible virus, the use case for e-commerce business models has never been brighter, more appealing, and contactless.
That’s not to say that there are still net negatives from worker’s losing their jobs and being unable to buy goods, whether online or not. The overall damage to tech companies as a result of the pandemic cannot be ameliorated with a simple panacea.
The pain is just starting as the tech market searches for a bottom.
Covid-19 cases have mushroomed to over 11,200, and investors need to digest that continued underperformance lies ahead in the short-term.
But, the long-term migration towards digital models is looking better by the second.
Essentially, the e-commerce method is being supercharged by the coronavirus and the positive unintended consequences harvested by the e-commerce business models are directly correlated to increasing fatalities.
The health scare is ushering in a giant wave of new long-term customers who are just starting their digital experiences, making investing and e-commerce a topic worth discussing.
Astonishingly, the work environment has truly metamorphosized the past two weeks - any worker who can work at home is now working at home.
No longer do we have the hesitant boss who thinks working at home is all fantasy and no production.
Local policies have been so drastic in some cities that lockdowns of schools and restaurants have become commonplace.
People in those cities have also begun shunning public, crowded places in the name of health and survival.
How bad is it out there on the streets, and how poorly are U.S. tech firms doing?
The economic pain caused by the escalating coronavirus pandemic will be worse than the Great Financial Crisis of 2008.
The Chinese economy is contracting at a 15% annual rate, while the European economy is already in severe recession because of the drop off of China revenue.
In the U.S., they are shutting down restaurants, schools and major events; people are going to be without a paycheck, and this doesn’t set up nicely for consumers to pay for tech services that aren’t utilities.
Unless there are major policy moves soon, a downward spiral will usher in something akin to a global tech recession, and U.S. Secretary of the Treasury Steve Mnuchin is already ringing the alarm bells by saying unemployment could spike to 20%.
Tech won’t avoid the carnage in this drastic scenario, and it's still not “buy the dip” time.
Many industries are already queued up at Washington’s front door for a bailout and even though tech firms are better positioned than say, the oil industry, the overall slide in demand from consumers will hit come next earnings report which is just around the corner.
The bill Washington will need to foot appears upwards of $3 trillion and it’s easy to understand why when, according to a March 2020 YouGov survey, over a quarter (27%) of those in the US and 14% in the UK said they avoided public places and that number has to be closer to 80% now.
What's important to note when it comes to investing in e-commerce, is that some tech firms are a little bit luckier than others, such as Amazon, who can’t find enough workers and is raising wages and opening 100,000 new positions across the US to ensure its delivery network can service the coronavirus pandemic.
Not only do they need full-time positions but also part-time positions will be made available to meet historical seasonal labor demand in its fulfillment centers.
Management promised to inject $350 million to raising wages by $2 per hour in the US throughout April.
Amazon announced it would limit its warehouses to critical items such as medicine and household staples to ensure they meet demand.
Right now, investing in e-commerce means the companies that provide currently popular goods, such groceries, pet supplies, beauty and personal care products, health and household items, baby products, and industrial items.
Other e-commerce companies haven’t fared as well as Amazon, such as furniture e-company Wayfair who reportedly relies on mainland China for half of its merchandise and sell only one type of product - furniture.
Wayfair’s supply chain disruptions are hurting the company’s ability to deliver furniture, but it also coincides with a massive drop off in demand as consumers shun furniture for household items and groceries.
Shares of Wayfair have dropped over 400% since January partly because the company has never been profitable and is now entering into a worsening climate to sell furniture which equated to an optimal signal for investors to dump the stock in bucketloads.
I have been bearish on Wayfair since last year and envisioned an imminent wealth-destroying effect for their business model, but I am shocked that shares dropped this rapidly.
Three weeks ago, the Boston-based company fired 500 people to help “lower costs,” validating my hypothesis.
The exorbitant cost of acquiring each additional customer was the reason I hated this company in the first place.
Uncertainty is the message of the day, and certain e-commerce companies will enjoy the turbocharging or discharging of their models.
Tech shares hate uncertainty and investors must brace themselves with regards to investing and e-commerce.
“Any sufficiently advanced technology is indistinguishable for magic, said Arthur C. Clark, futurologist and author of 2001: A Space Odyssey.
Naturally, many people are wondering about which stocks to own in light of the coronavirus. The latest development on the race to find a coronavirus cure is a joint effort involving two giant names from the biotechnology industry: Regeneron Pharmaceuticals (REGN) and Sanofi (SNY).
Taking a page off Gilead Sciences’ (GILD) move to recycle HIV drug Remdisivir and Roche Holding’s (ROG) decision to utilize rheumatoid arthritis Actemra, Sanofi and Regeneron are looking into an existing drug’s ability to offer refuge for patients suffering from COVID-19.
According to a recent announcement, the two companies are looking to test rheumatoid arthritis medication Kevzara on COVID-19 patients.
This drug was initially approved in 2017 and while it failed to reach blockbuster status at the time, Sanofi and Regeneron are preparing to transform it into the next leader in this pandemic race.
It should be noted though that Kevzara is not a coronavirus cure. Rather, the companies are hoping to use this drug to combat the symptoms related to COVID-19.
This is why it’s promising.
When a person gets infected by the novel coronavirus, the immune system is activated and starts attacking the virus to protect the body. As time passes, the immune system goes into overdrive and ends up overreacting, causing additional damage.
Gradually, the immune system starts attacking even the healthy tissue and organs as with the case for some COVID-19 patients.
This means that the coronavirus is causing an accelerated response from the immune system resulting in the patients’ damaged organs starting with the lungs.
This is where Kevzara comes in.
The drug functions as an inhibitor of the protein that triggers the patient’s immune and inflammatory response.
That is, Kevzara can stop the body from attacking itself despite the triggers caused by the coronavirus.
In terms of the specifics of this joint effort, Regeneron will take the lead for the US trials while Sanofi will be in charge of international efforts.
Aside from Kevzara, both Regeneron and Sanofi have been pursuing separate leads on how to deal with the pandemic.
Sanofi has been working in tandem with the US Department of Health and Human Services (HHS), specifically with the Biomedical Advanced Research and Development Authority (BARDA), to come up with a coronavirus vaccine.
However, it’s the coronavirus efforts of Regeneron that gained much attention in the past weeks.
In February, Regeneron and the HHS expanded their partnership to come up with potential COVID-19 treatments. So far, the biotechnology giant has decided to work on monoclonal antibodies via its VelocImmune platform.
This avenue is particularly promising since Regeneron has already come up with an antiviral drug to combat Ebola. Its collaboration with HHS has also already resulted in plans to develop a MERS treatment, which is also a type of coronavirus.
According to Regeneron executives, the company will have a coronavirus treatment ready for human testing by August. If all goes well, then it aims to produce 200K prophylactic doses.
Although its innovative coronavirus proposals are exciting, Regeneron remains focused on its older and more dependable money makers particularly the eye drug Eylea.
This strength is in display in Regeneron’s fourth quarter results, which showed better than expected numbers.
For Eylea alone, the company generated an 11% year-over-year growth in sales.
Despite the emergence of new competitors like Novartis’ (NOVN) Beovu, Regeneron’s eye drug remains the leading product in this sector. In fact, Eylea managed to cross $2 billion in global sales just for the year 2019.
As for inflammation-reducer Dupixent, the treatment’s global sales climbed 136% in 2019.
Meanwhile, revenue from its cancer immunotherapy Libtayo soared to over quintuple from the previous period.
Building from the strength of Eylea, Regeneron also announced its successful late-stage clinical study that aimed to expand the indication of the drug to moderately severe to severe non-proliferative diabetic retinopathy (NPDR).
If this Eylea expansion pushes through, then Regeneron has yet another blockbuster drug in its hands.
In the past five years, Regeneron has demonstrated a strong EPS growth, growing by 23.74% annually. Given its recent performance and based on forward-looking statements, the company can be expected to report an average of 17.4% growth on its EPS in the next two years.
Amid the panic and confusion caused by the coronavirus pandemic, it’s crucial to remain objective, especially with the stock market.
Before making a decision, ask yourself this question: “Will this current situation change the 10-year or even the 20-year outlook for the financial sector?”
Despite the paranoia proliferating in the market in the past months, I believe the answer to this question is still a resounding “no.”
For now, it would be wise to treat owning stocks like how to own businesses. It's important to think about which stocks to own during the coronavirus, but don’t do it just to make a quick buck. Rather, take a look at lasting and stable companies with the capacity to not only grow over the years but also to compound their returns.
Global Market Comments
March 19, 2020
Fiat Lux
Featured Trade:
(INVESTING ON THE OTHER SIDE OF THE CORONA VIRUS),
(SPY), (INDU), (FXE), (FXY), (UNG),
(EEM), (USO), (TLT), (TSLA)
The Coronavirus has just set up the investment opportunity of the century.
In a matter of three weeks, stocks have gone from wildly overbought to ridiculously cheap. Price earnings multiples have plunged from 20X to 13X, well below the 15.5X long term historical average. The Dow Average is now 5% lower than when Donald Trump assumed the presidency more than three years ago. The world of investing after Coronavirus is looking pretty good.
I believe that as a result of this meltdown, the global economy is setting up for a new Golden Age reminiscent of the one the United States enjoyed during the 1950s, and which I still remember fondly. In other words, when it comes to investing after Coronavirus, we are on the cusp of a new “Roaring Twenties.”
This is not some pie in the sky prediction.
It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.
For a start, medical science is about to compress 5-10 years of advancement into a matter of months. The traditional FDA approval process has been dumped in the trash. Any company can bring any medicine, vaccine, or anti-viral they want to the market, government be damned. You and I will benefit enormously, but a few people may die along the way.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million “Gen Xer’s”.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, healthcare, and “RISK OFF” assets like bonds.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward two years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xer’s being chased by 85 million of the “millennial” generation trying to buy their assets.
By then, we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes.
The middle-class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.
The stock market rockets in this scenario. And this pandemic has just given us a very low base from which to start, making investing after Coronavirus a promising prospect.
Once the virus is beaten, we could see the same fourfold return we saw from 2009 to 2020. That would take us from The Thursday low of 18,917 to 76,000 in only a few years.
If I’m wrong, it will hit 100,000 instead.
Emerging stock markets (EEM) with much higher growth rates do far better.
This is not just a demographic story. The next ten years should bring a fundamental restructuring of our energy infrastructure as well.
The 100-year supply of natural gas (UNG) we have recently discovered through the new “fracking” technology will finally make it to end users, replacing coal (KOL) and oil (USO), so this sort of energy investing after Coronavirus in particular is looking undoubtedly promising.
Fracking applied to oilfields is also unlocking vast new supplies.
Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC’s share of global reserves is collapsing.
This is all happening while the use of electric cars is exploding, from zero to 4% of the market over the past decade.
Mileage for the average US car has jumped from 23 to 24.9 miles per gallon in the last couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five-year low and collapsing.
Alternative energy technologies will also contribute in an important way in states like California, which will see 100% of total electric power generation come from alternatives by 2030.
I now have an all-electric garage, with a Tesla Model 3 for local errands and a Tesla Model X (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. Both cars are powered by my rooftop solar system.
The net result of all of this is lower energy prices for everyone.
It will also flip the US from a net importer to an exporter of energy, with hugely positive implications for America’s balance of payments.
Eliminating our largest import and adding an important export is very dollar bullish for the long term.
That sets up a multiyear short for the world’s big energy-consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.
Accelerating technology will bring another continuing positive for investing after Coronavirus.
Of course, it’s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos. But at the enterprise level, this is enabling speedy improvements in productivity that are filtering down to every business in the US, lower costs everywhere.
This is why corporate earnings have been outperforming the economy as a whole by a large margin.
Profit margins are at an all-time high.
Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development.
When the winners emerge, they will have a big cross-leveraged effect on the economy.
New healthcare breakthroughs, which are also being spearheaded in the San Francisco Bay area, will make serious disease a thing of the past.
This is because the Golden State thumbed its nose at the federal government 18 years ago when the stem cell research ban was implemented.
It raised $3 billion through a bond issue to fund its own research, even though it couldn’t afford it.
I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years, they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday.
What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver’s seat on these innovations? The USA.
There is a political element to the new Golden Age as well. Gridlock in Washington can’t last forever. Eventually, one side or another will prevail with a clear majority.
This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now but nobody wants to be blamed for.
That means raising the retirement age from 66 to 70 where it belongs and means-testing recipients. Billionaires don’t need the maximum $45,480 Social Security benefit. Nor do I.
The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cut defense spending from $755 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.
I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up.
A Pax Americana would ensue.
That means China will have to defend its own oil supply, instead of relying on us to do it for them for free. That’s why they have recently bought a second used aircraft carrier. The Middle East is now their headache, not ours.
The national debt then comes under control, and we don’t end up like Greece.
The long-awaited Treasury bond (TLT) crash never happens.
The reality is that the global economy will soon spin off profits faster than it can find places to invest them, so the money ends up in bonds instead.
Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won’t kick in for another decade.
But some individual industries and companies will start to discount this rosy scenario now.
Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.
Needless to say, investing after Coronavirus runs it's course will be a welcome change for both individual investors and the economy as a whole.
Dow Average 100-Year Chart
Another American Golden Age is Coming
"By historic, fundamental measures, stocks are extremely high. PE multiples are at 100 year highs. But if you look at stock prices relative to interest rates, they are exactly where they should be," said hedge fund legend, Stanley Druckenmiller.
Expect poor earnings results for almost every tech company as a result of the coronavirus.
The base case for the tech industry is that we are already in the middle of a recession.
The main reason for this is the expected demand/supply disruptions in the wake of Covid-19 that will dramatically drive a wedge in the profit potential which could last through mid-summer.
The silver lining is that the recovery will be robust; but we most likely won’t experience that until the 3rd quarter.
In the short-term, the path of least resistance is more weakness in tech shares, as the U.S. has failed to find enough test kits for possible coronavirus positive patients.
This means that the number of patients infected with coronavirus will be backloaded and as the test kits finally find their way to the masses, the number of sick patients will mushroom.
The Norwegian University of Science and Technology has urged all Norwegians to return home citing a “poorly developed healthcare and infrastructure” as the specific reason to vacate U.S. soil.
It is not possible for tech shares to bottom until there is a strong surge of coronavirus, which is almost a given because of the lax preparation and policy missteps beforehand.
The U.S. is now registering over 1,000 cases per day and growing.
My negative assessment was validated by the U.S. Central Bank, who chose to cut interest rates by 100 basis point and the market opened down 12% following the announcement.
The tech market is now pricing in a slew of bankruptcies and the realization of more pain is forcing sellers to take risk off the table at almost any price.
To hammer my point home, in the time of writing this article, the global number infected by coronavirus jumped from 180,000 to 196,000.
From that quick bump up, the coronavirus cases in the U.S. jumped from 4,538 to 5,853.
The revenue softness will bleed into earnings season and some tech stocks will experience a 20% decline in quarterly revenue and others will fare better with a 2% decline.
A broader problem is the disorderly market malfunctioning pervading through market trading.
Desperate rate cuts and multiple circuit breakers halting the flow of trading are ravaging investor confidence in an American economy that is known for its interconnectedness and integration.
The health solution must have a strong element of isolation and disconnection, meaning the U.S. economy will be sacrificed in the short-term.
Just as baffling, the Central Bank is out of ammunition and will not be able to cure future crises.
The U.S. has no choice but to throw financial stimulus after stimulus to keep companies afloat.
The tech firms facing a larger drop off will be Alibaba Group Holding (BABA), the giant China-based e-tailer, and online travel agency stocks Booking.com (BKNG), Expedia Group (EXPE) and TripAdvisor (TRIP).
Online travel companies face dramatic demand reduction and are the first tech product that gets hacked off in a global and fast-spreading pandemic.
Borders are closed, airlines are practically shuttered, and there is no use case for online travel apps when people are “hunkered down” and advised not to leave their homes.
Alibaba bears the brunt of the COVID-19 crisis, given its entrenched operations in the epicenter of the virus’ initial outbreak, they simply won’t be able to access supplies when factories are locked down and logistics are delayed.
Even Amazon noted that their Prime 1-day delivery was in bad shape because of the same reasons, but they have done well selling out of most household products so don't quite face the same trials of poor tech earnings.
Online ad platforms face a reckoning as well, such as Pinterest (PINS), Twitter (TWTR), and Snap (SNAP) who are dependent on brand advertising and will likely face pullbacks.
These second-tier online ad companies face a slide of around 10% year over year.
The heavy hitters will experience their own type of weakness, with Alphabet (GOOGL) and Facebook facing a 5% revenue drop.
Google’s brand advertising business will face pressure and its travel advertising segment (10-15% of total revenue) will endure significant downside.
Amazon.com (AMZN) will only endure low single-digit number weakness in revenue because many consumers turn to e-commerce ordering at home instead of going out.
Netflix (NFLX) and Spotify Technology (SPOT) are likely to experience immaterial disruptions as well as any top of the line premium digital content that can be devoured at home.
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