Global Market Comments
July 20, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE’S YOUR SERVING OF ALPHABET SOUP),
(SPY), (TLT), (GLD), (TSLA), (DRI), (WYNN), (H), (AMC)
Global Market Comments
July 20, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE’S YOUR SERVING OF ALPHABET SOUP),
(SPY), (TLT), (GLD), (TSLA), (DRI), (WYNN), (H), (AMC)
Here is your generous helping of alphabet soup. If you look very closely, you can find some bay leaves, oregano, black pepper, and lots of V’s, W’s, U’s, and L’s.
Now, let’s play a game and see who can pick the letter that most accurately portrays the current economic outlook.
Here is a code key:
V – the very sharp collapse we saw in Q1 and Q2 is followed by an equally sharp recovery in Q3 and Q4.
W – The sharp recovery in Q3 and Q4 fails and we see a double-dip extending into 2021.
U – The economy stays at the bottom for a long time before it finally recovers.
L – The economy collapses and never recovers.
The question is, in which of these forecasts should we invest our investment strategy?
For a start, you can throw out the “L”. Every recession flushes out a covey of Cassandras who predicts the economy will never recover. They are always wrong.
I believe what we are seeing play out right now is the “W” scenario. This is the best cash scenario for traders, as it calls for a summer correction in the stock market when we can load the boat a second time. If you missed the March low you will get a second bite of the Apple.
With corona cases soaring nationwide, and deaths skyrocketing, it is safe to write off the “V” recovery scenario.
If I’m wrong, we will get a “U”, a longer recovery. This cannot be dismissed lightly as the unemployment rate is about to take off as the PPP money runs out, state unemployment benefits are exhausted, and mass evictions ensue.
If I limited the outlook to only four possible scenarios, I’d be kidding you. The truth is far more complicated.
Each industry gets its own letter of the alphabet. Technology, some 27% of total stock market capitalization gets no letter at all because it is thriving, thanks to the global rush to move commerce online. That explains the single-minded pursuit of this sector by investors since the market 23 bottom.
Hotel chains like Hyatt Hotels (H) and casinos like Wynn Resorts (WYNN) get a “U” because they will recover after a long period of suffering. As for Movie theaters like AMC Entertainment Holdings (AMC) and restaurant chains such as Darden Restaurants (DRI), they get an “L” because it is hard to see any sustainable recovery before widespread use of a vaccine.
Weekly Jobless Claims remained at Historic Levels, at 1.3 million, reaching a total of 51 million since the pandemic began. We are about to see a huge surge in the unemployment rate as PPP money and state unemployment benefits run out. Without help from the federal government, millions will be thrown out on the street.
Tesla hit $1,800, up $255, on the news they may join the S&P 500 forcing a ton of institutional buying. Its market capitalization is now a staggering $330 billion, more than the entire global car industry combined. They also cut Model Y prices by $3,000, from $53,000 to $50,000, in another effort to keep new entrants at bay. The model Y is expected to be the biggest seller in history, hence the ballistic move in the shares now. Close your eyes and keep buying (TSLA) on dips.
Tesla is dead, long live Tesla, says Morgan Stanley analyst Adam Jonas. The big upside here will not be in (TSLA) itself, but in supplier companies such as ST Microelectronics, NXP Semiconductors (NXPI), Cree (CREE), and China’s CATL. Jonas, an early Tesla bull, still maintains a $3,000 target, but that is now only a double from here, a far cry from the 110X move behind us off the post IPO low.
5G cell phones could offset Corona losses to the global economy, or so says a French economic research institute. Productivity improvement alone could be worth $2.2 trillion a year. The big winner? Apple (AAPL). Is this really why stocks are going up so fast?
California shut down again as hospital emergency rooms approach capacity. All indoor business has ceased for a state that accounts for 21% of US GDP. The Golden State saw 8,357 new cases on Sunday. Unfortunately, it gives more credence to my “W” shaped recovery for the economy. Stocks noticed about three hours into the Monday session, diving 550 points. It’s not me! I tested negative last week.
Homebuilders saw the best June in history, up 55% YOY. Builders and supplies are now in short supply and prices are rising sharply. New homes are being favored over existing ones, which can’t be viewed through standardized virtual presentations. Keep buying (LEN), (KBH), and (PHM) on dips as the gale-force Millennial tailwind continues unabated.
Homebuilder Confidence jumped back to pre-pandemic levels, up a massive 14 points to 72. The golden age for the sector is just beginning as Millennials working in tech move to the burbs where the home office rules. Lumber is in short supply, thanks to Trump's tariffs with Canada, so prices just hit a two-year high. Keep buying.
We may get our fifth stimulus bill next week, as the Senate attempts to protect corporations from Covid-19 liability. Almost all of the $3 trillion in stimulus so far has ended up in the stock market, and another trillion can only be bullish.
Moderna claimed success with a true Covid vaccine, with 100% results in a 45-person human trial. (MRNA) soared by 15% on the news. A late July trial will involve 30,000. The company has never produced a product before using its RNA technology. Keep buying biotechs on dips. I’m long (SGEN), (ILMN), and (REGN). Dow futures up 300 in Asia on the news.
US air travel was down 89% in May, YOY. Whatever recovery you’re seeing in the economy it’s not happening here. I’m 200,000 miles a year guy and I probably won’t go near a plane until 2022. Avoid all airline stocks on pain of death. There are much better fish to fry.
Apple won a European antitrust case big time, ducking a massive 14.4 billion fine. Stock was up $7 on the news and is rapidly approaching my two-year target of $400. It's yet another case of “not invented here.” European regulators jealous of American success constantly assault US big tech. They view it as just another cost of doing business.
US budget deficit soared to $867 billion in June, taking it to an unprecedented $10.4 trillion annual rate. The national debt will rocket by 50% this year. Your grandkids are going to have a monster bill to pay. Keep selling every rally in the US dollar (UUP) and the bond market (TLT) and buy gold (GLD).
When we come out 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 still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch enjoyed another sizzling week, up a red hot +2.73%. My eleven-year performance rocketed to a new all-time high of 384.54%. A triple weighting in biotech did the heavy lifting. A four-day short position in the bond market (TLT) was the icing on the cake.
That takes my 2020 YTD return up to an enviable +28.63%. This compares to a loss for the Dow Average of -6.2%, up from -37% on March 23. My trailing one-year return popped back up to a record 68.19%, also THE HIGHEST IN THE 13 YEAR HISTORY of the Mad Hedge Fund Trader. My eleven-year average annualized profit recovered to a record +36.32%, another new high.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here. It’s jobs week and we should see an onslaught of truly awful numbers.
On Monday, July 20, IBM (IBM) reports Q2 earnings.
On Tuesday, July 21 at 7:30 AM EST, the June Chicago Fed National Activity Index is released. Microsoft (MSFT), Tesla (TSLA), and Lockheed Martin (LMT) report earnings.
On Wednesday, July 22, at 7:30 AM EST, the all-important Existing Home Sales for June are published. Amazon (AMZN) and Thermo Fisher Scientific (TMO) report earnings. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, July 23 at 8:30 AM EST, the frightful Weekly Jobless Claims are announced. American Airlines (AA) report.
On Friday, June 24, at 7:30 AM EST, the New Home Sales for June are published. The Baker Hughes Rig Count is out at 2:00 PM EST. Verizon (VZ) reports earnings.
As for me, I have been going down memory lane looking at my old travel photos because that’s all I can do in quarantine.
I am now banned in Europe.
So are you for that matter. In fact, there are very few countries in the world that will accept an American visitor. With the world’s highest Covid-19 infection, rates we are just too dangerous to have around. This is tough news for a guy who usually travels around the world once or twice a year.
It’s not the first time I have been banned from a country.
During the 1980s, The Economist magazine of London sent me to investigate the remote country of Nauru, one-half degree south of the equator in the middle of the Pacific Ocean. They had the world’s highest per capita income due to the fact that the island was entirely composed of valuable bird guano.
During an interview with the president, I managed to steal a top-secret copy of the national budget. I discovered that the president’s wife had been commandeering aircraft from Air Nauru to go on lavish shopping expeditions in Sydney, Australia where she was blowing $200,000 a day, all at government expense.
It didn’t take long for missing budget to be found. I was arrested, put on trial, sentenced to death for espionage, and locked up to await my fate.
Then one morning, I was awoken by the rattling of keys. The editor of The Economist in London had made a call. I was placed in handcuffs and placed on the next plane out of the country. When I was seated next to an Australian passenger, he asked “Jees, what did you do mate, kill someone?” On arrival, I sent the story to the Australian papers (click here for the story).
I have not been back to Nauru since.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
July 17, 2020
Fiat Lux
Featured Trade:
(JULY 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(EEM), (GLD), (GDX), (NEM), (GOLD), (UUP), (FXA), (FXE), (FXY), (AMZN), (AAPL), (GOOGL), (FB), (BIDU), (TLT), (TBT), (IBB), (ROM)
Below please find subscribers’ Q&A for the July 15 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Do you expect foreign equities to begin to outperform US equities sometime soon?
A: I expect them to outperform imminently simply because Europe did their shutdown properly, a total shutdown, and got rid of the virus, so their economy and schools are opening. We did a partial shutdown, some states did not shut down at all, and as a result, the epidemic is on fire here, and our shutdown will have to last an extra six months to a year. So that means you’ll probably want to be rotating out of US stocks and into emerging stocks, and the (EEM) is the ETF to go with there.
Q: Would you buy gold LEAPS at this point?
A: Normally, I say only buy LEAPS on capitulation selloffs like we had in March. We actually put out 25 LEAP recommendations on the long side in tech and biotech in March and they all proved spectacular winners. However, at this point, gold is just short of an all-time high; if you break the high you could get a $500 or $1,000 move very quickly to the upside. If you want to do LEAPS, I would go out one year, I would go fairly close to the money, something like a $200-$210 LEAP in the (GLD) ETF. Your much bigger bang, by the way, would be to do LEAPS on the individual stocks; go 10% or 20% out of the money, you might make 100%-200% on those and the stocks to do there would be Newmont Mining (NEM) and Barrick Gold (GOLD).
Q: Would the US or any other country consider backing their currency with gold?
A: Absolutely not. We went off the gold standard in 1972 for a reason. That’s because they're not making it anymore; there isn't enough gold to support growth in a global economy. On the other hand, a supply of paper is unlimited, and that's why we've had such terrific economic growth since we’ve gone off the gold standard.
Q: I’m seeing some really great deals in energy. Should I get involved?
A: Absolutely not. Don’t confuse “gone down a lot” with “cheap.” We think the oil business is long term going out of business. It can't compete with alternatives and electric cars; the economics for investing in a non-scalable energy form just are not there. It’s like asking an analog adding machine to compete with a computer.
Q: Is it too late to sell the US dollar or the Invesco DB US Dollar Index Bullish Fund ETF (UUP)?
A: No, we’re only in the very early stages of the collapse of the US dollar, so you want to be buying all of the nondollar ETFs like the Australian dollar (FXA), the euro (FXE), and the Japanese yen (FXY). Massive over issuance of currency will destroy its value, that’s one of the seminal lessons of currency markets. The US is not immune to that.
Q: Biotech is getting overheated here—should I buy the rumor, sell the news?
A: We’re also just in the opening stages of the biotech golden age. Even if they cure corona tomorrow, there are another 100 diseases they will cure over the next 10 years using all of the new advanced technology that has just been developed, like gene editing, monoclonal antibodies, and quantum computers. It’s another reason to subscribe to the Mad Hedge Biotech and Healthcare Letter for $1,500 a year (click here).
Q: I see Bill Gross is bullish on value stocks—would you go with that view?
A: No, leave the value stocks for Bill Gross. He's semi-retired and hasn’t been as good on the stock market lately as he used to be, as much as he is a dear friend. This is a chasing-a-winner type market. I would wait for value stocks. You could die a long horrible death by the time value stocks turn around so I would avoid them. Go for earnings growth, that’s the only thing that counts in the future.
Q: What would you recommend as a portfolio starter?
A: I would recommend 100% cash. I know you don’t want to hear that you should keep cash if you just bought an expensive trade alert service, but the fact is the risk now is the highest it’s been in years. I only add new trade at market sweet spots, and you don’t get those every day of the year. I will send you an alert if I see a low-risk high-return trade. Wait for the summer correction—that will set up another bet-the-ranch opportunity. Don’t worry about trade alerts, we’ll be doing about 400 of them this year, but they do tend to come in bunches at market bottoms and market tops.
Q: Do American companies have much of a chance against Chinese tech?
A: The US has an overwhelming lead, which will probably increase at an exponential rate. I think the threat of Chinese tech is vastly overstated by the administration. They needed an enemy to protect us from to stick around. The reality is that the US is so far ahead it’s unbelievable; that’s the reason they steal our technology. And they only have leads in very specific areas, such as surveillance of large populations. I wouldn’t worry too much about tech—if the Chinese really had a lead on tech, would Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Facebook (FB) all be going to new highs every day, while Baidu (BIDU) lagged?
Q: Should we close out the Regeneron call spread?
A: At this point, we’re so far in the money I would just wait two more days and it will expire at its maximum $10 value, and you can avoid all the fees. You’ll end up making $1,600 or 16.28% 15 trading days.
Q: Presidential candidate Joe Biden has just had a huge surge in the polls in battleground states. Will he be damaging to the market?
A: No, ever since he started his rise in the polls, the stock market has been rising almost every day, and that’s even after announcing in advance that he’s going to raise corporate taxes from 21% to 28%. He’s also going to eliminate the carried interest, which should have been eliminated a long time ago. I imagine there will be some super punitive Roosevelt style 90% tax on net taxable income over a billion dollars—a real billionaire’s punishment tax, as they’ve basically made all the money for the last 30 years. The stock market is voting with confidence for the future Biden government, who am I to disagree? The market is always right.
Q: Will gold hit a new high?
A: Yes, I think we will have a new high in a couple of weeks. That's why I said it’s a rare case when you actually buy LEAPS in a rising market, especially if you go one or two years out. Guess where gold will be in two years? My bet is $3,000, so a $200/$210 LEAP in the (GLD) could bring in a 1,000% return, The overwhelming fundamentals are in favor of gold. I'll keep hammering away at that in the newsletter.
Q: I only trade stocks; how can I take advantage of your recommendations?
A: First of all, buy the stocks. Second, you can buy stocks on margin, which gives you double exposure. Third, there are many 2X ETFs on the stocks or sectors we recommend, like the (TBT), which you can also trade in a stock account. For example, for biotech, you can get your exposure there through the (IBB), and through tech, you can buy the 2X (ROM); but I wouldn’t buy it today because it is too high. In fact, only about 25% of our followers do options, the rest trade stocks or use it to manage their own long-term portfolios.
Q: Will we hit 0% yielding US Treasuries (TLT)?
A: Probably not, that move is behind us. We got down to a 31 basis points yield at the lows. Now, massive oversupply from the US government will be the primary factor dictating Treasury prices, and that means going down a lot.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
July 16, 2020
Fiat Lux
Featured Trade:
(THE TRADE OF THE CENTURY IS SETTING UP),
(TLT),
(A COW-BASED ECONOMICS LESSON)
Global Market Comments
July 15, 2020
Fiat Lux
Featured Trade:
(11 FACTORS THAT COULD KILL OFF THIS BULL MARKET)
I have lately been besieged with emails from followers asking if they should sell everything, put all their money into cash, and if the great bull market is well and truly over.
My answer is the same to all. If a full-throated and affirmative “NOT YET”. Things may look scary now, but they could get a lot worse, and eventually, that will take place.
I’ll tell you why. I have a laundry list of issues that could kill the bull once and for all. And while some of them are flashing alarm signals, many aren’t. I’ll go through them one by one.
The Pandemic Gets Totally Out of Control – Shutting down much of the economy and preventing kids from going back to school. As the stimulus tap (call it what it really is, disaster rescue) runs dry, tens of millions will lose jobs. Stocks could make a secondary low similar to the one we saw in March.
The Trade War –If each escalation is met with Chinese retaliation, then both countries will stay in a Depression. At some point, cooler heads may prevail but that is no sure thing. Having met several men who endured the 1936-38 Long March, I can assure you that the Chinese have a far better ability to sustain pain than we do. And the Chinese don’t have an election this year.
Cyber Terrorism – Imagine that you sat down to turn on your computer one day and nothing happened. The Internet was down, all financial transactions ceased, the power went out, and all food distribution ceased. America’s Internet infrastructure is far more vulnerable than most people realize. That's why I have been recommending cybersecurity stocks for the past decade. Certainly, my own local utility, PG&E (PGE) doesn’t maintain security to s military standard. It should.
Debt Levels in China – It’s easy to forget that perhaps 40% of China’s government-owned financial institutions are de facto bankrupt. They have been accumulating bad loans for decades and hiding them on their balance sheets and essential negative net worth. If one suddenly goes under, it could easily lead to a cascading series of bankruptcy’s much like we saw in the US during the 2008 financial crisis that spills over to the US and Europe. Back then, we lost Lehman Brothers and Bear Steans and could have lost everyone if the government hadn’t stepped in.
Debt levels in the US – Passage of the latest stimulus bill means the US national debt is about to soar from $24 to $22 trillion by 2021. The markets are ignoring this for now. It won’t forever.
Movement to the Left – Trump has run the most radically right-wing government in American history. Can you believe that we are now in the concentration camp business? The risk is that the electorate responds by installing a radical left-wing government in 2020 in reaction. That would bring a return of 90% personal tax rates, 28% corporate tax rates, the elimination of long term capital gains treatments, and other policies with a strong anti-business tilt.
Global Interest Rates at Zero –Once at zero central banks will be powerless to get us out of recessions buy cutting rates. Just look at how Japan has done over the past 30 years.
2020 Election – It going to be loaded with fireworks to be sure. The rancor may get so extreme on both sides that it literally scares people out the market.
Middle East War – War with Iran, which is now threatened daily by the administration, will be an enormous drag on the US economy. Investment shifts from machinery to weapons, which have no impact on productivity.
Trump Blows Up – The president implements a policy that is so deleterious to the US economy that the stock market panics. Some would argue we are already there.
Climate Change Accelerates – That is already happening but is hurting countries closer to the equator than ourselves, like India and Egypt. The US military certainly considers this an existential threat. Increased severe hurricanes, heat caused crop failures, wildfires, and more frequent flooding are already having severe localized effects. Imagine all that getting much worse. And there are severe impacts which we haven’t even thought about yet. The first effect we have already seen? Higher insurance premiums for everyone. Good luck getting new fire insurance in California or flood insurance in Florida.
She Doesn’t Live Forever
"There's a 70% chance you could lose it all," said Jeff Bezos to his parents when asking for a $100,000 investment to start Amazon. "I want you to know the risks because I want to be able to come home for Thanksgiving."
Global Market Comments
July 14, 2020
Fiat Lux
Featured Trade:
(UPDATE ON THE COVID-19 VACCINE FRONTRUNNER)
(AZN), (MRNA), (RHHBY), (LLY), (PFE), (JNJ)
With the flu season just around the corner and herd immunity nowhere in sight, the pressure to develop a COVID-19 vaccine becomes even more urgent. From where things stand right now though, it looks like we could have a vaccine either already available on the market or ready to hit the market around this time in 2021.
We know we’ll need hundreds of millions of vaccine doses, and the majority of the vaccine programs today are getting built on industrial-scale vaccine platforms. This is positive news.
On an even more positive update, a handful of biotechnology and health care companies are now on late-stage testing for the COVID-19 vaccine.
Leading the charge so far is AstraZeneca (AZN), which received $1.2 billion in financial assistance courtesy of the US government’s Operation Warp Speed program.
AstraZeneca is working on an experimental vaccine, called AZD1222, with the University of Oxford and China National Pharmaceutical Group (Sinopharm).
So far, this is the only COVID-19 vaccine candidate in late-stage Phase 3 trials.
The trials are scheduled to be conducted in different countries, with some already in progress in South Africa, Brazil, and of course, the UK.
The stage will enroll over 10,000 people in the UK alone. The goal is to determine AZD1222’s efficacy in a sizeable group aged 18 and older.
What we know about AstraZeneca’s vaccine candidate is that it’s created from a weakened version of adenovirus, which comes from one of the virus types that causes the common cold. It also includes genetic material from COVID-19, which was added to help the patient’s body recognize the pathogen and trigger a defense mechanism to fight off the infection.
Researchers say that the best-case scenario is for the Phase 3 efficacy results of the AstraZeneca vaccine to be available by this fall.
However, AstraZeneca remains an attractive stock even sans its Covid-19 program thanks to its remarkable drug pipeline. With the foresight to stockpile drugs during this pandemic, the company’s earnings are projected to continuously grow.
In the past five to six years, AstraZeneca has been aggressive in investing in its pipeline to combat patent losses. Now, the company joins Roche (RHHBY) and Eli Lilly (LLY) in the list of companies with the most innovative candidates that are poised to launch commercial products capable of driving growth in the next decade.
A notable growth driver for AstraZeneca is its cancer franchise, particularly its key drug Tagrisso, which is set to tap into a massive market.
Before AstraZeneca was dubbed the leader in the COVID-19 vaccine race, there was Moderna (MRNA). Actually, this small biotechnology company is also expected to begin its late-stage Phase 3 trial in July.
Like AstraZeneca, Moderna is also one of the companies included in the Operation Warp Speed project and received $483 million from the government.
Unlike AstraZeneca, Moderna appears to be experiencing delays due to conflicts between the company’s experts and the US government scientists.
While Moderna shares jumped by over 200% since the pandemic started, these reported tensions represent a risk for its investors. It is particularly alarming because the company is a clinical-stage biotechnology company with no marketed products.
Although Moderna’s timeline remains to be the most aggressive, it could easily drown in the competition.
Keep in mind that other companies competing for the top spot in the COVID-19 race are all established and armed with extensive experience in launching new drugs to market. The list includes Pfizer (PFE), which has a market capitalization of $185.86 billion, and Johnson & Johnson (JNJ) with $375.40 billion.
Needless to say, the inexperience of companies like Moderna could prove to be a handicap in this highly competitive race.
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