Global Market Comments
April 30, 2020
Fiat Lux
SPECIAL HOUSING ISSUE
Featured Trade:
(WHY A US HOUSING BOOM IS IMMINENT)
(LEN), (KBH), (PHM)
Lately, my inbox has been flooded with emails from subscribers asking if the housing market is about to crash as a result of the pandemic and if they should sell their homes.
They have a lot to protect. Since prices hit rock-bottom in 2011 and foreclosures crested, the national real estate market has risen by 50%.
The hottest markets, like those in Seattle, San Francisco, and Reno, are up by more than 125%, and certain neighborhoods of Oakland, CA have shot up by 500%.
Looking at the recent housing statistics, I can understand their concern. The grim tidings are:
*2.9 Million Homes Now in Forbearance, and the number is certainly going to rise from here. Laid off renters are defaulting on payments, depriving owners of meeting debt obligations. It’s just a matter of time before this creates a financial crisis. Avoid the banks for now, no matter how cheap they get.
* Existing Home Sales Collapsed by 15.4%, in March. Realtors expect this figure to drop 40% in the coming months. Open houses are banned, sellers are pulling listings, and buyers low-balling offers. However, price declines in the few deals going through are minimal. When will the zero interest rates come through? Mortgage interest rates are higher now than before the pandemic because 6% of all home loans are now in default.
* Pending Home Sales Down a Staggering 20.8% in March, and off 16.3% YOY. The worst is yet to come. The West, the first into shelter-in-place, was down a monster 26.8%. Prices still aren’t moving because nobody can buy or sell.
*Chinese Buying of West Coast homes has vaporized over trade war fears, and then of the Covid-19 lockdown, which started with a shutdown of all flights from China.
I have a much better indicator of future housing prices than the depressing numbers above. The way homebuilder stocks like Lennar (LEN), KB Homes (KBH), and Pulte Homes (PHM) are trading, I’d say your home will be worth a lot more in a year, and possibly double in another five years. Many of these stocks are up nearly 100% since the March 23 bottom.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth over the last 20 years is that 85 million baby boomers are retiring to be followed by only 65 million “Gen Xer’s”. When you are losing 20 million consumers, economies don’t grow very fast. For more about millennial investing habits, please click here.
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 to the other side of the pandemic and the reverse happens. The baby boomers will be 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 14 years and a severe scarcity of housing hits. Even before the pandemic, new home construction was taking place at half the 2008 peak. Residential real estate prices will naturally soar. Labor shortages will force wage hikes.
The middle-class standard of living will then reverse a 40-year decline. Annual GDP growth will return from the subdued 2% rate of the past three years to near the torrid 4% seen during the 1990s. It all leads to my “Return of the Roaring Twenties” scenario which you can learn about by clicking here.
It gets better.
It is certain that a future administration will restore tax deductions for state and local real estate taxes (SALT) lost in the 2017 tax bill. The cap on home mortgage interest rate deductions will also rise.
These two events will trigger an immediate 10% increase in the value of your home on an after-tax basis and more on the coasts.
So, if someone approaches you with a discount offer for your home, I would turn around and run a mile the other way.
You should also pile into the stocks, options, and LEAPS of housing stocks in any future market dip.
In Your Future?
“All men dream, but not equally,” said T.E. Lawrence, known as Lawrence of Arabia.
Tech stakeholders have won out by corporate American extracting a King’s ransom in the form of a favorable stimulus and unwavering government support for the next lucrative explosion upwards in tech shares.
We have moved into a post-industrial capitalistic apocalyptic world for better or worse and I will give you another hot tip – RingCentral, Inc. (RNG).
The company is poised to rise with all corporate tech boats moving forward.
Inside the deep underbelly of U.S. Capitalism 2.0, the financial fallout and response to it mirrors the last crisis of 2008 signaling to investors to buy tech growth stocks and lots of it.
That might be a cynical take of how the cookie is crumbling but just look at the Teflon tech market that shrugs off the unemployed who are standing in food lines.
Then consider that many of the small business loans were front run by the corporate crowd by hijacking almost $900 million in funds allocated to the small business relief program that was meant to go to main street.
It’s a sign of the pecking order of the future and investors must input the new data into their models going forward.
Corporate America value and its economic extraction machine are powering ahead leaving main street behind offering opportunities for tech-savvy investors.
What does this mean? This is demonstrably bullish for the tech sector and could initiate the Golden Age of 5G investing.
Big tech will get bigger and corporate America will lurch out of the coronavirus epidemic positioned the strongest precisely because they have been best, fully funded, and the strongest tech companies have the country’s best balance sheets.
I advise investors to look at tech growth and RingCentral is one of the leaders in this field.
RingCentral is a robust cloud communications company that is at the vanguard of the Unified Communications as a Service (UCaaS) space.
RingCentral has about 2 million users on its platform and according to management is “the last service to be turned off” in this wonky economy that is mostly shut down.
The knock-on effect of the coronavirus is that RingCentral app downloads are up 400% month over month, online meetings on the platform are up over 200%, and messaging is up over 90%.
RingCentral is regarded as one of the originators of the UCaaS market, which projects to grow at a double-digit pace for the next ten years.
Unified Communications as a service (UCaaS) is the concept of integrating enterprise communication services, such as messaging, voice, and video, into one platform and ecosystem.
The company is brilliantly placed to turn rising demand for UCaaS services into real revenues in Q2 and Q3.
RingCentral (RNG) has launched its highly effective RC Video product for meeting applications.
RingCentral Video is bundled across the entire RC Office portfolio for free and preliminary analysis indicates that the product outperforms for basic multi-user video conferencing requirements via the Chrome browser, including screen sharing.
RingCentral is fighting with Zoom to be at the top of the food chain.
The company’s robust cloud communication platform ties together message, call, and video.
The open platform nature allows for easy integrations and strong brand equity.
The stats don’t lie with RingCentral reporting 30%-plus revenue growth in each of the past three years.
The company is growing out of their ears and when you add in a favorable margin profile, this robust revenue growth will lead into equally robust profit growth cycle.
I will assume in my model that the company will grow 20% over the next 10 years with several hundred basis points of gross margin expansion.
If the company can hit these moderate performance targets, I can’t imagine anything other than the stock being much higher than it is today in the future.
Secular tailwinds cannot be understated as the stock is on the verge of surpassing its prior high of $245, making a perfect V-shaped recovery from the nadir of $139, and breaking out as the rest of the economy comes back online.
The almost doubling of the stock can be extrapolated to many other tech growth stocks that have experienced similar price action in the past 45 days.
Slip this one into your portfolio as tech goes from strength to strength.
Global Market Comments
April 29, 2020
Fiat Lux
Featured Trade:
(LEARNING THE ART OF RISK CONTROL)
Global Market Comments
April 28, 2020
Fiat Lux
Featured Trade:
(EIGHT “REOPENING” STOCKS TO BUY AT THE MARKET BOTTOM)
(UAL), (DAL), (UNP), (CSX), (WYNN), (MGM), (BRK/A), (BA)
With the massive technology rally off the March 23 market bottom, the risk/reward for entering new trades has dramatically shifted.
Back then. I was begging followers to load the boat with the best big tech and biotech & healthcare names with call options and two-year LEAPS (Long Term Equity Participation Securities).
One reader told me he bought Humana (HUM) call options for 70 cents and sold them for a breathtaking $30 for a profit of 4,280%! FedEx showed up with a bottle of single malt Glenfiddich Scotch whiskey the next day.
The times have changed. Many tech stocks are now only a few dollars short of new all-time highs, like Microsoft (MSFT) and Apple (AAPL), or are at all tie highs, such as Amazon (AMZN), Teledoc (TDOC), and Zoom (ZM).
What a difference 6,000 Dow points make!
As a result, it is far more interesting now to pick up stocks that currently look like potential chapter 11 candidates, but will likely prosper once the American economy starts to reopen. Call it my “Reopening Portfolio.”
You can buy any of the stocks below outright, sit on them, and probably reap a double over the next two years. However, if you are a much more aggressive kind of trader like me, then you might consider LEAPS, where 500%-%1,000% profits are possible.
The advantage of a stock or a two-year LEAPS is that if we get a second Coronavirus wave in the fall, which is highly likely, you can outlast any short term pain and still come out a huge winner.
Some of these names we sold short at the market top and made a killing. It is now time to flip to the other side.
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPS, allow plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire-sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 131.8% profit from an average stock price increase of only 17.6%.
That is a staggering return 7.7 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way, your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright.
Enjoy.
United Airlines (UAL) just raised $1 billion in a new equity issue to tide it over hard times. That is just a drop in the bucket for what it needs. It’s hard to imagine the company coming through the crisis without any government involvement. The most likely is for the feds to offer a big chunk of cash in exchange for a minority ownership. Around 35% might work, which is the portion the US Treasury of General Motors (GM) during the 2008-09 crash. Still, if you’re looking for a double in the shares, that just water off a duck’s back.
LEAPS: the January 21 2022 $45-$50 vertical bull call spread at a price of 83 cents delivers a 525% gain with the stock at $50, up 94.5% from the current level.
Delta Airlines (DAL) is Warren Buffet’s favorite airline, although he has been selling lately. All of the arguments above apply for this best run of US Airlines.
LEAPS: January 21 2022 $40-$45 vertical bull call spread at a price of 83 cents delivers a 502% gain with the stock at $45, up 98.8% from the current level.
MGM Resorts (MGM)
Yes, Las Vegas is reopening soon, but it certainly won’t resemble the old Vegas. (MGM) is the dominant hotel owner of the strip, owning the Bellagio, Mandalay Bay, Aria Resort, and MGM Grand hotels. It also has a China presence.
LEAPS: the January 21 2022 $25-$30 vertical bull call spread at 75 cents delivers 566% gain with the stock at $30, up 95.6% from the current level.
Wynn Hotels (WYNN)
We killed it on the short side with (WYNN), capturing an eye-popping 90% decline. (WYNN) is poised to lead the upturn. It has a major exposure in Macao, where China will lead any economic recovery.
LEAPS: the January 21 2022 $140-$150 vertical bull call spread at 90 cents delivers a 455% gain with the stock at $150, up 81% from the current level.
Union Pacific (UNP)
The reopening of industrial American means a resurgence of railroad traffic. These are not your father’s railroads. Over the last 30 years, they have evolved into highly efficient operators that offer the cheapest way far to over heavy good and bulk commodities, virtually turning into closet high-tech companies. (UNP) had the additional advantage in that as the country’s dominant East/West road, it stands to benefit the most from a recovery in trade with China. That is a likely outcome of any future administration.
LEAPS: the January 21 2022 $180-$185 vertical bull call spread at $1.40 delivers a 257% gain with the stock at $185, up 15.00% from the current level.
CSX Corp. (CSX)
Same arguments here, except that (CSX) wins on North/South trade, especially with Mexico. With a NAFTA 2 new trade agreement in place, this company benefits from an extra turbocharger.
LEAPS: the January 21 2022 $75.00-$77.50 bull call spread at 84 cents delivers a 495% gain with the stock at $77.50, up 16.27% from the current level.
Berkshire Hathaway (BRK/A)
Yes, they make more than sheets these days. Warren Buffet’s flagship holding company is the poster bot for industrial American. The shares are high priced, but after this 32% pullback, you may finally have a chance to get in.
LEAPS: the June 17 2022 $225-$230 vertical bull call spread at $2.61 delivers a 91.5% gain with the stock at $230, up 22.7% from the current level.
Boeing Co. (BA)
This has been the worst falling knife situation in the market for the last two years, cratering from $450 to $85, or down 81%. The decertification of the 737 MAX started the rot, and the grounding of its major airline customers was the coup de grace. This is another company that may require a government bailout and stock ownership, as it is a strategic national value. You may have to wait until the next administration as its Washington State location is currently politically incorrect.
LEAPS: the June 17 2022 $185-$190 bull call spread at $1.25 delivers a 400% gain with the stock at $190, up 47.8% from the current level.
Buy all eight of these and if they all work, your average return will be 411.4%.
Enjoy!
Time to Swing the Ax
“I don’t think anyone has made money in the long term by betting against the United States,” said Kevin Bernzott of Bernzott Capital Advisors.
It’s hard to imagine that Microsoft’s earnings report on Wednesday will be anything other than remarkable as their growth drivers plow ahead in a digital-first economy.
The only risk that could soften shares following the report is the forward guidance.
Bill Gates asserted that the U.S. economy will come back to “semi-normal” in the next 2 months, and I wouldn’t bet against management putting a positive spin on the path going forward tying the company’s short-term prospects with the comeback of the wider economy. By semi-normal, he means still falling economic growth, just at a slower rate.
There is a high probability that this “semi-normal” state of the economy will last for longer than we think, but even in that scenario, Microsoft will outperform competition widening the gap between the haves and have nots.
Another theme picking up traction is the massive volume of business that will migrate digitally and will want to work with a quality cloud provider who is not their direct competitor Amazon.
What is there to like about Microsoft?
Almost all of it is the short answer.
Momentum in Microsoft’s cloud computing platform is strong and has experienced a surge in usage becoming a lifeline to many companies that have been forced to go all digital.
Even in the cutthroat COVID-19 environment, I still believe Microsoft’s Azure cloud expanded 50% year over year in the past quarter.
Even more successful, Microsoft’s workspace communication product, Teams, has seen a dramatic surge in popularity as co-workers try to solve company problems remotely.
Teams broke a daily record of 2.7 billion meeting minutes, up 200% from 900 million minutes on March 16.
In late March, Teams has 44 million daily active users (DAU), and 93 firms have implemented Microsoft Teams in the Fortune 100.
Another strong data point is Microsoft 365 and Dynamics 365 suite of solutions.
Every company needs these platforms as a utility to boost enterprise productivity.
The subscriber base has benefited from the avalanche of remote workers with their array of tools.
Microsoft’s professional network LinkedIn platform is likely to show outperformance adding to the top line in the quarter to be reported.
Another outstanding segment that can’t be overlooked is gaming, and specifically a meaningful increase in the Xbox Live monthly active users and a boost in the adoption of Game Pass subscriptions.
The only negative segment that is probable will most likely be the hardware segment as a deteriorating trend in PC shipments in the first quarter rears its ugly head because of coronavirus crisis-induced supply constraints.
A demand shock doesn’t help as well.
Consumers just don’t have the cash to upgrade their Microsoft Surface computer-tablet hybrid device.
Total PC shipments in first-quarter 2020 declined 12.3% year over year to 51.6 million units.
Another damper on profitability could come in the form of higher investments in cloud and AI engineering, amid stiff competition from Amazon (AMZN) in the cloud computing vertical and Slack (WORK) in enterprise communication domain.
Even with the global economy coming to a standstill, growing cloud sales by 50% would represent a massive relative victory in the broader scheme of things.
As the economy opens back up, Microsoft is well-positioned to capture much more of the rapid transformation into digital the has been a dramatic side-effect form this pandemic.
The company is already worth over $1.3 trillion and in a new economic world where big tech gets bigger, I see nothing in their path that will slow them down.
The anticipation of the new reality that Microsoft will become more influential post-COVID gives way to a rapid recovery in shares that will only gain steam as the 5G revolution approaches.
Microsoft will easily become a $200 stock and if the U.S. economy opens up sooner than people expect, then nail down this stock for a price of $230 a share by year-end.
I am strongly bullish Microsoft for the rest of 2020.
Global Market Comments
April 27, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GREAT LOOK THROUGH)
(INDU), (SPX), (MSFT), (AAPL), (FB), (VXX)
