While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
September 16, 2020
Fiat Lux
Featured Trade:
(THE BULL CASE FOR BANKS),
(JPM), (BAC), (C), (WFC), (GS), (MS)
Banks have certainly been the red-headed stepchild of equity investment in 2020.
While technology shares have rocketed by two, three, and four-fold, banks have remained mire in the muck, down 35% on the year while the S&P 500 is up 6%.
However, all that is about to change.
Banks have become the call option on a US economic recovery. When the economic data runs hot, banks rally. When it’s cold, they sell-off. So, in recent months bank share prices have been flat-lining.
You have to now ask the question of when the data stay hot, how high will banks run?
There also is a huge sector rotation issue staring you in the face. Where would you rather put new money, stocks at all-time highs trading at ridiculous multiples, or a quality sector in the bargain basement? Big institutions have already decided what to do and are buying every dip.
Banks certainly took it on the nose with the onset of the pandemic. Interest rates went to zero and loan default rates soared, demanding a massive increase in loan loss provisions.
Much more stringent accounting rules also kicked in during January known as “Current Expected Credit Losses.” That requires banks to write off 100% of their losses immediately, rather than spread them out over a period of years.
Then in June, the Federal Reserve banned bank share buybacks and froze dividends to preserve capital in expectation of more loan defaults.
So what happens next?
For a start, fall down on your knees and thank Dodd-Frank, the Obama era financial regulation bill.
Banks carped for years that it unnecessarily and unfairly tied their hands by limiting leverage ratios to only 10:1. Morgan Stanley reached 40:1 going into the Great Recession and barely made it out alive, while ill-fated Lehman Brothers reached a suicidal 100:1 and didn’t.
That meant the banks went into the pandemic with the strongest balance sheets in decades. No financial crisis here.
Thanks to government efforts to bring the current Great Depression to a quick end, generous fees have been raining down on the banks from the numerous loan programs they are helping to implement.
And trading profits? You may have noticed that options trading volume is up a monster 95% so far in 2020 and increased by a positively meteoric 120% in August. That falls straight to the banks’ bottom lines. If you’re wondering why your online trading platform keeps crashing, that’s why.
I list below my favorite bank investments using the logic that during depressions, you want to buy Rolls Royces, Teslas, and Cadillacs at deep discounts, not Volkswagens, Fiats, or Trabants.
JP Morgan (JPM) – Is the crown jewel of the sector, with the best balance sheet and the strongest customers. It has over reserved for losses that are probably never going to happen, stowing away some $25 billion in the last quarter alone.
Morgan Stanley (MS) - Brokerage-oriented ones like Morgan Stanley (MS) and Goldman Sachs (GS) are benefiting the most from the explosion in stock and options trading. I’ll pick my former employer (MS), where I once accounted for 80% of equity division profits, as (GS) is still mired in the aftermath of the $5 billion Malaysia scandal.
Bank of America (BAC) - is another quality play with a fortress balance sheet.
Citigroup (C) – Is the leveraged play in the sector with a slightly weaker balance sheet and more aggressive marketing strategy. It seems like they’re always trying to catch up with (JPM). This week’s revelation of a surprise $900 million “operational loss” and the penalties to follow knocked 13% of the share price. This is the high volatility play in the sector.
And what about Wells Fargo (WFC), you may ask, the cheapest bank of all? Unfortunately, it still has to wear a hair suit because of its many regulatory transgressions, before, during, and after the financial crisis so I’ll give it a miss. Oh, and Warren Buffet is selling too.
"If you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels," said Oracle of Omaha, Warren Buffett.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Biotech & Healthcare Letter
September 15, 2020
Fiat Lux
Featured Trade:
(ASTRAZENECA’S BUMP IN THE ROAD)
(MRNA), (AZN), (PFE), (MRK), (JNJ), (GSK), (SNY), (CVAC), (BNTX), (INO)
Moderna (MRNA) was the first company to test its COVID-19 vaccine candidate on humans. However, AstraZeneca (AZN) and its partner Oxford University have been setting out the most aggressive timelines.
In fact, AstraZeneca sealed deals with the promise of delivering vaccine results as early as September.
The possibility of that happening, already precariously hanging by a thread, was completely eliminated earlier this month when the company halted its COVID-19 vaccine program after a subject showed severe adverse reactions.
Needless to say, news of AstraZeneca’s suspension of its late-stage 30,000-patient trial rattled the markets.
However, it looks like investors are simply shaking off the panic as other COVID-19 vaccine stocks continue to gain momentum.
In fact, even AstraZeneca only suffered a 2% slide following the announcement.
Shares of its COVID-19 rivals Pfizer (PFE), Merck (MRK), Johnson & Johnson (JNJ) went up 1% each, while GlaxoSmithKline (GSK) and Sanofi (SNY) rose 2%.
Bigger jumps were seen in smaller biotechnology companies with Moderna and CureVac (CVAC) being 4% higher and Novavax (NVAX), Inovio (INO), and BioNTech (BNTX) climbing 6%.
Still, a lot is riding on AstraZeneca’s vaccine candidate. The company has secured more contracts compared to its rivals.
To date, AstraZeneca has disclosed deals to supply roughly 3 billion doses to different nations including the US, Europe, Australia, Japan, Brazil, Latin America, and even China.
Its leading competitors, Moderna and Pfizer, have only managed to commit a small fraction of AstraZeneca’s supply.
Although AstraZeneca’s decision would cause some delay, experts assure the public that this is a normal occurrence in the vaccine development process.
It is actually a good sign especially given the fast-tracked timelines for the COVID-19 programs.
This voluntary pause from AstraZeneca means that the standards for vaccine development are still stringently followed by the developers despite the tight deadlines and competition.
A third-party safety board was already assigned to review AstraZeneca’s case, with the company expecting results in the next weeks.
So, what happens next?
There are few possible outcomes of this scenario. The ideal result would be for the board to find that the adverse effect has no connection to AstraZeneca’s vaccine candidate.
If this is the case, then the company can restart trials as early as next week. Although it obviously suffered a delay, AstraZeneca says it is still on track and can submit efficacy data before 2020 ends.
If everything else falls into place and from a manufacturing standpoint, AstraZeneca can still deliver a vaccine by the end of the year or early 2021.
If the adverse effect is caused by the vaccine though, then it could spell trouble not only for AstraZeneca but also for some of its rivals using the same technology.
The company utilized a neutralized virus for delivery, which is the same method used by other developers like Johnson & Johnson.
In comparison, Moderna and Pfizer’s vaccine candidates used a new technique involving messenger-RNA. This method stimulates a person’s body to produce a protein, which can help build immunity against the coronavirus.
The worst-case scenario is that if the problem turns out to be an immune reaction to the coronavirus fragments.
This would set back all the COVID-19 vaccine developers because it is the common element among them.
Although the COVID-19 vaccine candidate is a high-value product, AstraZeneca remains poised to prosper no matter what happens as a result of the pandemic or even the overall financial market.
The company is consistently generating strong revenue growth. In particular, its cancer lineup of non-small cell lung cancer treatments Tagriss and Imfinzi, and ovarian cancer therapy Lynparza have been showing remarkable momentum amid the crisis.
However, it is AstraZeneca’s pipeline that makes this stock impressive.
So far, the company has 166 programs that are under clinical development. Of those, 24 have already reached late-stage trials.
What’s even more exciting is that 9 of these late-stage studies are for new drugs. Meanwhile, the remaining 15 are additional approvals for expanded indications of existing products.
AstraZeneca offers one of the most promising product portfolios and clinical pipelines in the healthcare and biotechnology industry. It also provides impressive shareholder reward programs.
Most importantly, this single COVID-19 vaccine candidate is definitely not a make-or-break type of development for the company – not by a very long shot.
Therefore, bargain hunters may want to capitalize on AstraZeneca’s shares on any weakness resulting from this trial suspension.
I am going to suggest you book your three-day profit on BMY.
Go ahead and close the position.
Here is how you do it.
Sell to Close October 9th - $59 Call for $2.00
Buy to Close July 24th - $63 Call for $.35
The net credit will be $1.65 per spread. With a cost of $1.15, this results in a profit of $.50 per spread.
If you traded the suggested 8 lot, the cash return will be $400.
This works out to a return of 43% for 3 days.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more