Q: Will deflation outpace inflation given the rapid pace of technology?
A: The answer is yes. We will get some inflation but not much. That’s why I am calling the top in this interest rate cycle in the bond market at 4% instead of the 6%, 8%, or 10% we saw in earlier economic cycles. There have really been no real wage increases to really affect the big macro picture. Yes, we got the $2 an hour wage increase at Walmart (WMT), but in the grand scheme of things, that’s really not much money. You’ll make money on those bond shorts but you won’t get a bond crash.
Q: What market is the best way to hedge market risk now?
A: The answer is that the S&P 500 (SPY) has the best hedging tools out there. Go with a deep out-of-the-money, long-dated (SPY) put. And when I say deep-out-of-the-money I’d say 10%, so you should be buying $250 puts on the (SPY), and when I say long dated, go out to June or July, or six months so time decay doesn’t kill you. In that situation, just a 5% correction in the market will cause your $250 put to double in value. That will give you a 100% return and a lot of hedging value for a little bit of money if you need downside protection, which your financial advisors absolutely need to be putting on right now.
Q: What about the dividends on those puts (SPY)?
A: If you are long a put, you also can become liable for the quarterly dividend payment on the S&P 500. The way to avoid the assignment risk is to put on put option spreads in the Russel 2000, where there is a much lower dividend payment. It’s too small to make an exercise worth it. The other way is to never do quarterly expiration options when the dividends are payable in only a few days. Going forward, do February puts, skip March, and then do April, May options to avoid assignment risk.
Q: Do we buy General Electric (GE)?
A: The answer is no. It?’s trading at $17 and the breakup value of this company is $15. This was a classic widow and orphan stock. Everybody in the universe owned this and it was in the Dow average. There’s a lot of long term capitulation selling going and they may break the company up. There is a ton of stuff that could happen you have no insider advantage of what is going to happen, so just stay away. This has become a special situation stock. There are too many better things to buy right now than (GE).
Q: How will AMD earnings turn out?
A: The answer is they should be good. I like the whole chip sector. It had a sell off on the intel chip design flaw and the actual fact is that I have another Trade Alert already written to buy the stock with a call spread because the charts for the whole chip sector are setting up pretty nicely. That’s my view on (AMD).
Q: Is it time to buy Goldman Sachs (GS)?
A: I would say yes. This is a good entry point. You wanted a dip to buy on? This is the dip. Eventually rising interest rates will bail out (GS) and increase bond trading volume where they really make their money, not on the directional call but on the volume. Last quarter the bond trading volume was terrible that generated losses, and by the way, the tax bill allowed them to take a one off write off of $5 billion on their 2017 earnings. That was included in the loss that they announced this morning. Give it one more day, let it sell off a little more, then look to buy. I doubt it will drop below the 200-day average at $231 and we may not even break the 50-day at $248.
Q: What do you think about Alibaba (BABA)?
A: The answer is I like it as a Chinese FANG. Alibaba is essentially a combination of Amazon (AMZN), Alphabet (GOOGA), and PayPal (PYPL) in China, it has had a near doubling over the past year, and I still think there is more in it. I am positive on the FANG’S this year but I don’t think you’ll get the same meteoric returns we got last year.
Q: Will NVIDIA (NVDA) really double again?
A: The answer is yes, but only off that $180 low that we got in December, and we are already well on the way there. A year ago, I said Nvidia would double and that was the one stock you had to buy. And this year I am also saying Nvidia is my double for the year. The trends in technology are so overwhelmingly in favor of this one name that you absolutely have to buy it on every dip. Don’t even ask any questions.
Q: Is TBT more for trading than investing?
A: It is because you have a negative carry on the TBT of about 6% per year. You have to pay two times the US Treasury coupon on an annualized basis, which today is 2.55%, plus the management fees. So ideally, it’s a trade and not a long-term investment. Any short play in a high yielding security like this is going to cost money to run over time.
Q: Where do you think TLT will be at the end of February?
A: I would say lower. I’m hoping we will break the $120 level. So here at the $125 level it looks pretty attractive on the short side. Again, we aren’t talking gigantic numbers. When we used to see bond sell offs we were talking about 10 to 20 points, now we are looking at 3 to 5 points.
Q: Should i double my (TLT) short position?
A: The answer is yes, but let’s see if we can squeeze a little more upside action out of it to $126 like I just mentioned.
Q: Should I keep buying the CRISPR stocks on dips like Intellia Therapeutics (NTLA) and Editas (EDIT)?
A: Absolutely yes, this is like the first floor of a 100-story building. These CRISPR stocks have a lot more to go, and by the way, every single of one of these guys are a takeover target from a major pharma company. I am very bullish.
Q: What about the Aussie dollar (FXA)?
A: It is a commodity currency and we have a commodity boom going on. Eventually, the Aussie should hit US$1.00, so if Australians have any foreign bills to pay, delay them. They will become cheaper by 10% in the next couple of months. This a classic commodity currency because their biggest exports are iron ore, coal, etc.
Q: Should I sell Baker Hughes (BHGE) now?
A: I would take profits here. This company is 60% owned by (GE) and given all the ruckus going on in (GE), this company could get sold and might threaten the 30% gain in one month that we just had. No one ever got fired for taking a profit.
Q: Should we put on an options bull call spreads in the various oil names?
A: Answer is yes, but I would go deep-in-the-money, so when we get the inevitable correction, you won’t get shaken out of your position. Also, I’d go short dated which is another way of controlling your risk by only buying the front month call spreads and just adding new ones as the old ones expire. It’s a classic late cycle trading strategy.
Q: Do you have any comments on defense companies?
A: I would stand aside at this point because these stocks, like Raytheon (RTN) and Lockheed Martin (LMT) have all doubled in the last year or two. We’ve had no new wars and we’ve had no increase in defense spending approved by congress. Too many other better things to play and it’s very late in the cycle for defense at this point.