Global Market Comments
May 29, 2020
Fiat Lux
Featured Trade:
(JOIN THE JUNE 4 TRADERS & INVESTORS SUMMIT),
(THE CONTINUING DEATH OF RETAIL),
(AMZN), (WMT), (M), (JWN),
(TESTIMONIAL)
If you had to pick the biggest loser of our ongoing pandemic and the trade wars, it would be the retail industry (XRT). Higher costs which can’t be passed on, rising minimum wages, lower selling prices, and a massive inventory glut is not what money-making is all about.
Now, take all of those problems and drop your revenues by half, thanks to the pandemic. A future where touching, feeling, and trying on things before you buy them is about to become an extravagant luxury.
The stocks have delivered as expected, providing one of the worst-performing sectors of the past three years. Half of them probably won’t even make it until Christmas.
In fact, Sears and Macy’s have announced more store closings nationwide. The overhead is killing them in a micro margin world devoid of window shopping customers.
So, I stopped at a Walmart (WMT) the other day on my way to Napa Valley to find out why.
I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long stem roses would prove useful. I happened to know you could get these for $10 a dozen at Walmart, 60% cheaper than anywhere else.
After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.
The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there, customers OR employees.
The Macy’s downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.
However, it now appears we have reached both a tipping point and a point of no return. The future is happening faster than anyone thought possible. The pandemic has forced business evolution to move at hyper fast forward and the Death of Retail is no exception.
I remember the first purchases I made at Amazon 20 years ago. I personally knew the founder, Jeff Bezos, from my Morgan Stanley days. The idea sounded so dubious that I made my initial purchases with a credit card with only a low $1,000 limit. That way, if the wheels fell off, my losses would be limited.
And how stupid was that name, Amazon, anyway? At least he didn’t call it “Yahoo” because it was already taken.
Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don’t have to fight traffic, engage in the parking space wars, or wait in line to pay.
It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!
A used 42-inch Sub Zero refrigerator with a front door ice maker and water dispenser? Have it there in two days, with free shipping at one fifth the $17,000 full retail price.
So I was not surprised when I learned that Amazon accounted for 25% of all new online sales in 2019 in a market that is already growing at a breathtaking 20% YOY.
In 2000, after the great “Y2K” disaster that failed to show, I met with Bill Gates Sr. to discuss his foundation’s investments.
It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds. It turned out to be a brilliant move, coming mere months before the Dotcom bust and a 20-year bull market in fixed income which only peaked two months ago.
Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that unlike most other foundations their size, they hadn’t invested a dollar in commercial real estate. Today, that looks like a prescient move in the extreme with 60% of mall tenants skipping their rent.
It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers, and rendering commuting unnecessary. Shopping malls would become low rent climbing walls and paintball game centers.
Mr. Gates’ prediction may finally be occurring. In the San Francisco Bay area, the only employed people are those who are telecommuting.
Even before the pandemic, it was common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.
The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company, with no office. Everyone works at home in four countries around the world. Oh, and we all use Amazon to do our shopping.
The downside to this is that whenever there is a snowstorm anywhere in the country, it affects our output. Two storms are a disaster, and at three, such as last winter, we grind to a virtual halt.
The main thing I am worried about is the Internet in the Philippines which is unable to handle the tenfold increase in demand since the start of the pandemic. They don’t have our infrastructure. If you wonder why your customer support at any company has suddenly gotten poor, that is the reason.
You may have noticed that I can work from anywhere and anytime (although sending a Trade Alert from the back of a camel in the Sahara Desert was a stretch), so was sending out an Alert while hanging on the cliff face of a Swiss Alp. But they both made money.
Moroccan cell coverage is better than ours, but the dromedary’s swaying movement made it hard to hit the right keys.
The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we’re hiring, especially in marketing.
It is happening because the entire “bricks and mortar” industry is getting left behind by the march of history.
Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of Amazon, with higher prices and worse service. It is all “hour late and dollar short” stuff.
In the meantime, Amazon has soared by an eye-popping 56% since the March 23 low and is one of the top-performing big-cap stocks of 2020. There is now a cluster of Amazon analyst forecasts targeting the $3,000 mark, including me.
And here is the bad news. Bricks and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!
There’s a good reason why you haven’t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.
I did this when I realized that management never knew beforehand which of their products would succeed and which would bomb, and therefore, were constantly clueless about future earnings.
The business for them was an endless roll of the dice. That is a proposition in which I was unwilling to invest. There were always better trades.
I confess that I had to look up the ticker symbols for this story, as I never use them.
You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers, citing how “cheap” they are because the prices are so low.
Never confuse a low stock price with “cheap.”
It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when “cheap” was on its way to zero for almost every company. Don’t buy the next coal company.
So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.
Or better yet, go shopping at Amazon. The deals are to die for.
To read “An Evening with Bill Gates Sr.,” please click here.
Thanks for the great newsletter and advice. I truly enjoy it. You are one of a kind!
Credits to you as my financial navigator, as I am finally making some serious money after years of doing it the hard and wrong way.
Kind regards
Rolf
Global Market Comments
May 28, 2020
Fiat Lux
Featured Trade:
(THE IRS LETTER YOU SHOULD DREAD),
(PANW), (CSCO), (FEYE),
(CYBR), (CHKP), (HACK), (SNE)
“Statistics building off an extremely small base is extremely misleading. The recent economic gains look like typos in some of these categories. Let me know when you have gains from the January base and I’ll believe in the recovery, ” said Josh Brown, an investment advisor.
Global Market Comments
May 27, 2020
Fiat Lux
Featured Trade:
(JOIN THE JUNE 4 TRADERS & INVESTORS SUMMIT),
(IT’S NOT YOU FATHER’S MARINE CORPS)
This being the week for Memorial Day, I think I will be forgiven for posting one more military piece.
Most Americans don’t know that the US Marine Corps is the oldest government institution in the United States. It was founded at Tun Tavern on Water Street in Philadelphia on November 10, 1775, nearly eight months before the establishment of the country itself on July 4, 1776.
Their original mission was to act as snipers from the top of ships’ masts against British ships, engage in hand-to-hand combat when boarding the enemy, and preventing mutinies by press-ganged crews. It was truly a different age.
Having been involved with the USMC for nearly 50 years in many forms, following in the footsteps of my father in WWII and my grandfather in WWI, I can tell you than many Marines have not strayed far from a bar since.
During the past 245 years, the Marine Corps has built a storied reputation as an elite force of shock troops which will fight anywhere at any time. They literally went into battle from the “shores of Montezuma to the shores of Tripoli”, according to the Marine Corps Hymn.
Over the past century, my own family has served at Belleau Wood, France, where the Germans gave them their nickname, the “Devil Dogs.” Dad was at Guadalcanal, Bougainville, Samoa, and New Zealand.
My own contribution included Cambodia, Guam, Japan, Thailand, Burma, Laos, Croatia, Serbia, Iraq, Kuwait, Saudi Arabia, and most recently, Guadalcanal. We have a family footlocker of war souvenirs to die for. Yes, three months ago I was digging out Japanese bullets fired at dad from his foxhole at the base of Hill 27 (click here for the link).
Now, for the first time in nearly three centuries, the Corps is undergoing radical change. Since 1990, it has been primarily engaged in desert warfare in the Middle East, far from its naval roots. Now that the US has largely withdrawn from this part of the world, it is remaking itself to meet future challenges. In short, it is going back to sea.
In 2018, the Pentagon engaged in a ground-up rethink of its mission. It concluded that “great power competition with China and Russia” would become its primary mission. The consequences are earth-shaking for both the USMC and the country as a whole.
The emergence of high-precision Chinese long-range missiles has rendered an American WWII style dominance of the Western Pacific by our ten aircraft carriers obsolete. These massive, majestic ships manned by 5,000 men each have become white elephants and liabilities in future warfare.
They will be replaced by fast-moving commando-type companies of 50-150 Marines moving atoll to island and bottling up the Chinese Navy with high tech drones, rockets, and anti-ship missiles. The traditional 12-man rifle company platoon is gone. The costly carriers will be reduced to safer support roles thousands of miles at sea.
The implications for the USMC are far-reaching. General David H. Berger, the gentleman who sent me to Guadalcanal, has proposed cutting the Corps from 186,000 to 170,000 men. He will eliminate most artillery, all tanks, and cut the number of F-35 fighters by 30%. The new structure would be designed to work anywhere in the world at a moment’s notice. You can never predict the next crisis, so you have to prepared for all contingencies.
During my reserve days, I once commanded a Marine tank battalion on maneuvers. The indestructible M-1 Abrams tanks were powered by turbine engines, possessed a faultless laser sighting system, and drove like a Cadillac right of the assembly line over the cruelest desert terrain.
But at 50 tons each, they are hard to move around in a hurry. During Desert Shield and Desert Storm, we had to enlist a coal-fired WWII mothball fleet to get them to Saudi Arabia and even that took six months.
As for the 155 mm howitzer, they have been outmoded since WWII. All-weather Boeing AH64D Apache Longbow helicopters are far more mobile and effective and can refuel air to air. But every weapons system breeds its own constituency. Everyone agrees with me except artillerymen.
In the end, it will be politics that determines the future of the Marine Corps. Constancies fight bitterly to hold on to antiquated weapons system to preserve jobs. I remember that during Desert Storm, a Florida congressman fought tooth and nail to keep a massive Humvee contract even though with no armor, they were helpless against IEDs. Hundreds of Marines died as a result.
The same will be true for M1 tanks built in Ohio, the F-35 Lightning II manufactured in Texas, and nuclear-powered aircraft carriers in Virginia.
Notice these are all battleground states in this election. How you vote may determine where I next serve. So, vote carefully.
To participate in the discussion of our future national defense, please click here.
Semper Fidelis.
An Old Marine on Guadalcanal
“By the time you spot a bandwagon, it is too late to get on,” said Sir Martin Franklin, co-chairman of the APi Group.
Global Market Comments
May 26, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or LOOKING FOR THE NEW AMERICA),
(FB), (AAPL), (NFLX), (GOOGL), (MSFT), (TSLA), (VIX)
We are getting some tantalizing tastes of the new America that will soon arise from the wreckage of the pandemic.
Companies are evolving their business models at an astonishing rate, digitizing what’s left and abandoning the rest, and taking a meat cleaver to costs.
The corporate America that makes it through to the other side of the Great Depression will earn far more money on far fewer sales. That has been the pattern of every recession for the past 100 years.
While the pandemic may take earnings down from $162 per S&P 500 share in 2019 to only $50 in 2020, it sets up a run at a staggering $500 a share during the coming Roaring Twenties and Golden Age. All surprises will be to the upside and anything you touch will make you look like a genius.
For example, Target’s online sales have exploded 153%, allowing customers to order their groceries online and pick them up at curbside. (TGT) pulled this off in a mere three weeks. Without a pandemic, it would have taken three years to implement such a radical idea, if ever.
Survival is a great motivator.
The (SPY) has been greatly exaggerating the public’s understanding of the stock market. Five FANGs and Tesla (TSLA) with 50%-200% moves off the bottom have made the index look irrationally strong.
The fact is that the majority who have shares have not even made a 50% retracement of this year’s losses. A lot of stocks, especially the reopening ones, are still crawling back of subterranean bottoms.
Investors now have the choice of chasing wildly expensive stocks that have already had spectacular runs, or cheap ones that will go bankrupt by the end of the year. It is a Hobson’s choice for the ages. I expect 10% of the S&P 500 to go under by the end of 2020.
I am spending a lot of time on the ground talking to businesses in California and Nevada and have come to two conclusions. They cannot fathom the true depth of the Depression we are now in and are greatly underestimating the length of time it may take to recover. We may not see the headline unemployment rate under 10% for years unless the government redefines the statistics, which they always do.
The S&P 500 is not the economy. It only employs 25% of America’s private sector labor force accounting for 20% of its total costs. Real estate accounts for another 15%. That leaves 35% of costs that can be completely eliminated or reengineered. This creates enormous share price upside possibilities.
The concentration of the market is the most extreme I have ever seen, with five stocks getting most of the action, (FB), (AAPL), (NFLX), (GOOGL), and (MSFT).
There is a staggering $3.6 trillion in equity allocations sitting on the sidelines in cash. All those who got out at the March bottom are now desperately trying to get back in at the May top. Algorithms are making sure you get out cheap and get back expensive.
It will all end in tears.
One of the stunning developments of the crash has been the near doubling of retail stock trading. Options trading has increased even more. Millions of stimulus check recipients have poured their newfound wealth into the stock market instead of spending it on consumer goods, like they were supposed to.
This explains the over-concentration on the five FANG stocks, (FB), (AAPL), (NFLX), (GOOGL), and (MSFT), the greatest momentum stocks are out age, but in high speculative ones like Tesla (TSLA). The lowest cost online platforms like Tastyworks (click here) and Robin Hood (click here).
All of this is completely irrevocably changing the character of the stock market, perhaps permanently. This may also explain why the Volatility Index remains stuck above$26.
Fed Governor Jerome Powell said no recovery without vaccine, and that’s without a second wave. It could be a long wait. In the meantime, the Atlanta Fed said Q2 US GDP will be down -42%, the weakest quarter in American history. We find out mid-July.
Housing Starts collapsed by 30.2% in April, in the sharpest drop on record. But prices aren’t falling. There is still a massive bid under the market from still-employed millennials. Your home could be you best performing asset this year. The 30-year fixed rate mortgage at 3.0% is a big help.
Weekly Jobless Claims topped 2.4 million, taking the two-month total to a breathtaking 39 million. One out of four Americans is now unemployed, matching the Great Depression peak. US deaths just topped 98,000, 21 times China’s fatality rate where the disease originated and with four times our population. People will keep losing jobs until the death rate peaks, which could be many months, or years.
Leading Economic Indicators crashed by 4.4% for April, showing the economy is still in free fall. So, how much more stock do you want to buy here?
Up to 60% of mall tenants aren’t paying rent, with $7.4 billion skipped in April alone. See my earlier “Death of the Mall” piece. It’s another harsh example of the epidemic accelerating all existing trends.
The market is not reflecting the long-term damage to the economy, says my old buddy and Morgan Stanley colleague David Gerstenhaber. When the bailouts run out, the economy could go into free fall. It could take years to get below 10% unemployment rate again, as many of the layoffs and furloughs are permanent. Keep positions small. Anything could happen. I spent the 1987 crash with David.
Existing Home Sales cratered an incredible 17.8% in April to an annualized 4.88 million units, the largest one-month drop since 2010. Inventory dropped to an all-time low of only 1.7 million, down 19.7%, presenting a 4.1-month supply. Sellers failed to list and those who had a home took them off. Unbelievably, this pushed median home prices to a new all-time high of 286,000, up 7.4% YOY. The biggest sales fall in the west, where the US epidemic started.
China took over Hong Kong, suspending most civil liberties in response to Trump’s multiple attacks. And you know what? There is nothing we can do about it that hasn’t already been done. Talk about going into battle with no dry powder. I’m sure the US 7th Fleet will be out there soon to provoke an attack. Anything to distract attention from the 100,000 Americans who died from Covid-19 on Trump’s watch. As if markets didn’t already have enough to worry about.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $0 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance had another fabulous week, up an awesome +4.97%, and blasting us up to a new eleven-year all-time high of 77%. It has been one of the most heroic performance comebacks of all time.
My aggressive short bond positions really delivered some nice profits, despite the fact the bond market went almost nowhere. That’s because time decay for the June 19 expiration is really starting to kick in. I also got away with a small long in the bond market for the second time in two weeks.
That takes my 2020 YTD return up to +10.86%. That compares to a loss for the Dow Average of -12.6%. My trailing one-year return exploded to 50.85%, nearly an all-time high. My eleven-year average annualized profit exploded to +35.21%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here at https://coronavirus.jhu.edu.
On Monday, May 25, I’ll be leading the neighborhood veterans parade for Memorial Day. Markets are closed.
On Tuesday, May 26 at 9:00 AM, the S&P Case Shiller National Home Price Index is released.
On Wednesday, May 27, at 4:30 PM, weekly EIA Crude Oil Stocks are published.
On Thursday, May 28 at 8:30 AM, Weekly Jobless Claims are announced. We also get the second estimate for the Q1 GDP is printed. At 10:00 AM, April Pending Home Sales are announced.
On Friday, May 29, at 2:00 PM, the Baker Hughes Rig Count follows at 2:00 PM.
As for me, I will be hitting the town beaches at Lake Tahoe for the first time this spring, mask in hand, where waitresses serve you mixed drinks on order. Outdoors will be the only safe place this year.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
