Global Market Comments
April 24, 2020
Fiat Lux
Featured Trade:
(APRIL 22 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (INDU), (GILD), (NEM), (GOLD), (USO),
(SOYB), (CORN), (SHOP), (PALL), (AMZN)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 22 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Will Trump louse up the recovery by bringing people back to work too soon?
A: Absolutely, that’s a risk. Georgia is reopening in a couple of days, which is purely a political decision because all of the scientists have advised against it. If that creates a secondary Corona wave, which we will know in a few weeks, then no one else is going to reopen early and the depression instantly goes from a three-month one to a six or nine-month one. Nobody wants tens of thousands of deaths on their hands. If we do reopen early, it could create a secondary spike in cases and deaths that hit around the Fall, right before the election. That is absolutely what the administration does not want to see, but they’re pursuing a course that will almost guarantee that result, so I wouldn’t be traveling to the Midwest anytime soon. Actually, I'm not going to be traveling anywhere because all the planes are grounded. Trump’s strategy is that Corona will magically go away in the summer, and those are his exact words.
Q: What is the Fed's next move?
A: I don't think they will go to negative interest rates. The disruptions to the financial system would be too widespread. Nobody is having a problem borrowing money right now unless they are in the housing market and that is totally gridlocked. Probably, the best thing is to expand QE and keep buying more fixed income instruments. They are essentially buying everything now, including mortgage-backed securities, junk bonds, securitized student loan debt, and everything except stocks. Today, we heard that the FHA is now buying defaulted mortgages which account for 6% of all the home mortgages out there, so that should help a lot in bringing the 30-year mortgage rate back in line with the 10-year, which would put it in the mid twos. So, more QE is the most likely thing there.
Q: What do you think of Remdesivir from Gilead Sciences (GILD)? Is it a buy at current levels?
A: We recommended this six months ago with our Mad Hedge Biotech & Healthcare Letter and got a spectacular result (click here for the link). This is a broad-spectrum antiviral that worked against MERS and SARS. We think it’s one of many possible treatments for the Coronavirus but it is not a vaccine. Buying the stock here is downright scary, up 30% since January. We love biotech for the long term, but this is a terrible entry point for Gilead. If it drops suddenly 10-20% on this selloff, then maybe.
Q: You seem very confident we’re going lower again. I’m reminded of the December selloff of 2018 where we saw a very quick recovery and a lot of people were shut out.
A: The difference then is that we didn’t have a global pandemic which has killed 47,000 Americans and may kill another 47,000 or more before it's all over. And I think it’s going to take a lot longer for the government to reopen the economy than they think. And corporate share buybacks, the main driver of the bull market of the past decade, are now completely absent.
Q: You seem to prefer spreads to LEAPS. Is that the only strategy you use?
A: I’m not putting long term LEAPS (Long Term Equity Participation Securities) in the model portfolio because they have two years to expiration, and I don’t want to tie up our entire trading portfolio in a two-year position. So, we are doing front months in the model trading portfolio, but every week I’m sending out lists of LEAPS for people to buy on the dips. Of course, you should go out to 2022 to minimize your risks and you should only buy them on the down 500 or 800-point days. Put a bid in on the bid side of the market (the low side of the market), and if you get a sudden puke out, a margin call, or an algorithm, you will get hit with these things at really good prices. That is the way to do long term LEAPS.
Q: Why do you think the true vaccine is a year off?
A: If you took Epidemiology 101, which I did in college, you'll learn that when you have a very large number of cases, the mutation rate vastly accelerates. My doctor here in Incline Village tested blood samples he took in northern Nevada in December and found that there were two Coronavirus variants, two different mutations. So, if there are only two, we would be really lucky. The problem is that these diseases mutate very quickly, and by the time you get a vaccine working, the DNA of the virus has moved on and last year’s vaccine doesn’t work anymore. That’s why when you get a flu shot, it includes flu variants from five different outbreaks around the world every year, and I’ve been getting those for 40 years, so I already have the antibodies for 200 different flu variations floating around my system as antibodies. Maybe that’s why I never get sick. They have been trying to get an AIDS vaccine for 40 years, and a cancer vaccine for 100 years, with no success, and it would be a real stretch for us to get a real working vaccine in a year. The best we can hope for is antivirals to treat the symptoms and make the disease more survivable.
Q: Long tail risk for long term portfolios?
A: The time to buy your long-term tail risk hedges, or the ledges of long term extremely unlikely events, was in January. That’s when they were all incredibly cheap and they were being thrown away with the trash. Now you have to pay enormous amounts for any long-term portfolio hedges. It's kind of like closing the barn door after the horses have bolted, so nice idea, but maybe we’ll try it again in another ten years.
Q: Should I buy gold options two months out or through gold LEAPS?
A: I would do both. Buying gold two months out will probably make more money faster, but for LEAPS—let’s say you bought a $2,000-$2,100 LEAPS two years out—the return on that could be 500-1000%, so it just depends on how much risk you were willing to take. I would bet that the LEAPS selling just above the all-time highs at $1,927 are probably going really cheaply because people will assume we won't get to new all-time highs for a while and they’ll sell short against that, so that may be your play. You can get even better returns on buying LEAPS on the individual gold stocks like Newmont Mining (NEM) and Barrick Gold (GOLD).
Q: How soon until we take a profit on a LEAPS spread?
A: Usually if you have 80% of the maximum potential profit, that’s a good idea. You typically have to hang out for a whole year to capture the last 20% and you’re better off buying something else unless you have an idea on how to spend the money first—then you can sell it whenever you have a profit that you are happy with. I know a lot of you who bought the 2-year LEAPS in March on our advice already have enormous profits where you’ve made 500% or more in four weeks. If you bought the 2021 LEAPS, I would roll out of those here and then buy the two-year LEAPs on the next selloff to protect yourself against a second Corona wave. Take some good profits, roll that money into longer two-year LEAPS.
Q: There seems to be a real consensus we will retest the lows. Is it possible that the low we recently had was actually a retest of the 2018 lows?
A: We actually got well below the 2018 lows, and with all of the stimulus out there now, I don’t see us going back to 18,000 in the Dow (INDU), 2,200 in the SPY, unless things get worse— dramatically worse, like a sudden spike in cases coming out of the Midwest (that’s almost a certainty) and the south. They opened their beaches and essentially created a breeding ground for the virus to then return to all the states from the visiting beachgoers. So, everyone’s got their eyes on this combined $14 trillion of QE and stimulus and they don’t want to sell their stocks now, so I don’t see a retest of the lows in that situation. I would love it if we did, then that would be like LEAPS heaven, loading up on tech LEAPS at the bottom. But even if we go retest the lows, the tech stocks aren’t going back to the lows—too many buyers are under the market.
Q: Are you using the 200-day moving average as a top?
A: That’s just one of several indicators; it’s almost a coincidence that the 200-day is right around 300 in the (SPY)’s, but also we have earnings multiples at 100-year highs—that’s another good one. And margin requirements have been greatly increasing. Any kind of leverage has been stripped out of the system, you can’t get leverage (even if you’re a well-known hedge fund) because all lenders are gun-shy after the meltdown last month, so you’re not going to be able to get that kind of leverage for a long time. And you can also bet all the money in the world that companies are not buying their stocks back, and that was essentially the largest net buyer of stocks for the last decade in the market, some $7 trillion worth. So, without companies buying back stocks, especially in the airlines, $300 in the (SPY) could be our top for the next month, or for the next six months.
Q: With Goldman Sachs forecasting four times the worst case of the 2008 great recession, will stocks not retest the market?
A: No. Remember, the total stimulus in 2009 was only $787 billion. We’re already at $6 trillion and $8 trillion in QE so we have more than ten times the stimulus that we had in 2009; so that should offset Goldman’s worst-case scenario. And they’re probably right.
Q: Why are you not shorting oil here?
A: The (USO) was at $50 three months ago, it’s now at $2. I don’t short things that have just gone from $50 to $2. And even though there’s no storage at this price, you want to be building storage like crazy, and it doesn’t take very long to build a big oil storage tank. Another outlier out there is that the US government could step in and buy 20 million barrels to top up the strategic petroleum reserve (SPR). Buying it for free is probably not a bad idea and then sell it next time we go to $20, $30, or $40 a barrel. The other big thing is that the government is mad not to impose punitive import duties on all foreign oil. Any other administration would have already done that long ago because oil prices are destroying the oil industry. But a certain president seems to have an interest in building hotels in the Middle East, and I think that’s why we don’t have import duties on Saudi oil—pure conflict of interest.
Q: Will Coronaviruses be weaker or stronger?
A: We just don’t know. This is a virus that has been in existence for less than a year; most diseases have been around for hundreds of years and we’ve been researching them forever, this one we know essentially nothing. Best case is that it goes the route of the Spanish Flu, which mutated into a less virulent form and just went away. The Black Plague from the Middle Ages did the same thing.
Q: Thoughts on food inflation going forward?
A: Food prices are collapsing and that’s because all of the distribution chains for food are broken. Farmers are having to plow food under in the field, like corn (CORN), soybeans (SOYB), and fruit, because there is no way to get it to the end-user or to the food bank. Food banks are struggling to get a hold of some of this food before it’s destroyed. I know the one in Alameda County, CA is calling farmers all over the west, trying to get truckloads of just raw food sent into the food banks. But those food banks are very poorly funded operations and don't have a lot of money to spend. In California, we have the national guard handing out food at the food banks but there is not enough—they are running out of food. Long term, agriculture is a big user of energy. They should benefit from low oil prices, but it doesn’t do any good if they can’t get their product to the market. Look at any food price and you can see it’s in free fall right now caused by the global deflation and the depression. By the way, the same thing happened in the Great Depression in the 1930s.
Q: Would you short Shopify (SHOP)?
A: No. Shopify is essentially the mini Amazon (AMZN) and has a great future; they are basically having a Black Friday every day. It’s also too late to buy it unless we have a big dip.
Q: Would you include Palladium (PALL) in your precious metals call?
A: No. Palladium especially went into this very expensive, and they are dependent on the car industry for catalytic converters, which has just fallen from a 16 million unit per month to 5 million on the way to zero. Don’t go with the alternative white metals at this time.
Q: What’s your favorite 10 times return stock?
A: Tesla, if you can get it at $500. It’s already delivered me two ten-time returns, and I’m going to go for another tenfold return on a five-year view.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 23, 2020
Fiat Lux
Featured Trade:
(HOW TO FIND A GREAT OPTIONS TRADE)
Global Market Comments
April 22, 2020
Fiat Lux
Featured Trade:
(THE MAD HEDGE DICTIONARY OF TRADING SLANG)
Global Market Comments
April 21, 2020
Fiat Lux
Featured Trade:
(OIL CATACLYSM)
(USO), (XLE)
I spent the day trying to charter a 500,000-tonne oil tanker.
No luck.
If I had found one, I could have bought oil at the close of the market today at negative -$37.78 a barrel and then immediately resold it for June delivery for $21, generating an instant $57.78 a barrel profit. At 7.33 barrels a metric ton that gives me a $211 million profit. All I have to do is keep the oil for a month. Big hedge funds are doing this right now.
When I toured Australia in February, I warned investors that crude would fall from $80 to $10 by 2030, which many called extreme. I warned them to get out of all energy investments immediately, as I have done with you for the past several years. It is an industry that is going the way of the buggy whip maker.
Instead, we saw a move from $80 to negative -$37 in two months. They must think I’m some kind of idiot, clueless about the functioning of this important commodity market, despite having invested and worked in the industry for five years.
Of course, the wild prices are a product of the futures market, where financial derivatives outnumber the underlying physical market by 100 to one. Anyone who buys here today has to take delivery by 2:30 EST on Tuesday. With all the world’s storage and shipping already committed that is impossible. You literally can’t give oil away right now.
All transportation use of oil has virtually ceased. Most airlines are grounded, no ships are sailing, and nobody is driving anymore. Of the world’s potential daily oil supply, we have crashed from 100 million b/d to 65 b/d in two months. It is a move unprecedented in history.
Throwing gasoline on the fire are 16 supertankers which sailed from Saudi Arabia but for which there are no buyers.
This panic is happening in the face of Cushing, Oklahoma’s storage capacity which is now at 61 million barrels and could be at its limit of 78 million barrels in a couple of weeks. Then where does the Texas tea go?
Since June futures are still trading at $21, I believe this carnage is due to the future expiration and should pass in a few days. But unless more storage shows up out of the blue, or the industry shuts in production of 35 million b/d, the Armageddon in the futures market will become a monthly affair.
All eyes are now on the United States Oil Fund (USO), which liquidated all its May oil contracts two weeks ago to avoid precisely this kind of debacle. All longs were rolled forward to June contracts, which expire on May 19, and into July.
(USO) now owns one-third of all June oil contracts. Some $1.5 billion poured into the (USO) last week, which then immediately dropped in value by half.
I know this sounds insane, but if you bought the (USO) at the Monday close of $3.75 and it returns to the $5.00 where it was trading last Thursday and oil was trading at $25 you should be able to make a quick 33% on your money in a few days.
I wouldn’t let this trade grow hair on it. I’ll be selling on the first rally. That’s why I’m only going with a 5% position instead of the usual 10%. Now is not the time to get greedy in the oil market.
Eventually, supply and demand will come into balance from a combination of production cuts and demand increases from a recovering global economy. Best guess is that happens in July or August at the earliest. OPEC has already cut production by 10 million barrels a day for two months and 8 million b/d for the rest of the year. After that, oil could trade back as high as $40 a barrel.
If oil stays this low for too long, the geopolitical implications are immense. There will be a second Russian Revolution, which depends on crude sales for 70% of total government revenues.
Saudi Arabia will go up in flames and the royal family will flee to Geneva, Switzerland where their money is, leaving 34 million citizens to perish. What population did the country support before the post-war oil industry took off in 1950? About 4 million. I remember Saudi Arabia in the 1960s and it was not a pleasant place. People walked barefoot on 150-degree sands.
But I diverge.
At some point, another trade of the century on the long side of oil is out there. But the price of being early is high.
A “BUY” Signal?
A “BUY” Signal?Global Market Comments
April 20, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHAT’S A FED PUT WORTH?),
(INDU), (SPX), (TLT), (ZM), (TDOC),
(NFLX), (UAL), (WYNN), (CCL)
What is a Fed put worth?
That the question that traders and investors alike are pondering.
If the government had taken no action whatsoever in the face of the Corona pandemic the Dow average would easily be at 15,000 today, if not 12,000.
After all, the economic collapse we have seen has been even greater than the Great Depression. More than 22 million unemployed in four weeks? Back then, the Dow Average fell by 90%.
Enter the Feds.
Throw in $6 trillion in expected fiscal spending and $8-$0 trillion in Federal Reserve stabilization of the money markets and quantitative easing, and it makes a heck of a difference. As a result, the national debt will rocket from $23 trillion to at least $32 trillion by next year, a far faster increase than seen after Pearl Harbor.
Stocks love this.
In the past three weeks, the Dow Average has jumped an eye-popping 35% from 18,000 to over 24,000. We are likely trading at 25 X 2020 earnings, but that is just a guess at best. Nobody knows, with essentially all companies withdrawing guidance. On a valuation basis, stocks are now more expensive than at any time since 1929.
You can be excused for being confused, befuddled, and gob-sacked.
All of this adds up to a value of the Fed put of 9,000 in Dow Average terms, 17,000 in a worst-case scenario, and 27,000 if you want to go back to 1933 share valuations.
Stocks here are now priced for perfection. To buy shares here, you are making the following rosy assumptions:
1) The Corona epidemic is peaking and it is clear sailing from here.
2) Shelters-in-place ends in two weeks.
3) Critical shortages of medical supplies end.
4) US Deaths top out at 60,000 from the current 40,000, the most optimistic White House forecast.
4) Business will immediately bounce back to pre-epidemic levels
5) Domestic and international travel resume immediately
If all of the above take place, then at a stretch, shares are justified at maintaining current levels and will churn sideways from here.
Here is what is more likely:
1) We are nowhere close to a peak, especially in states that never sheltered-in-place, and there could be a secondary peak in the fall. At 2,000 a day, US deaths will easily top 100,000 in a month.
2) Shelters-in-place will extend to June in the most populous states.
3) Medical supply shortages will continue for the indefinite future, with 50 states bidding against each other to buy fake masks from China.
4) Dozens of large companies and perhaps a quarter of the country’s 30 million small businesses will go bankrupt before the recovery begins.
5) There is no sign that domestic and international travels are getting off the runway anytime soon.
If that is the case, then stocks here that are wildly overpriced are due for a retest of the Dow 18,000 and (SPX) 2,400 lows.
No matter what happens, traders should be cognizant of an enormous bifurcation of the market that has taken place.
Stay at Home stocks, like Zoom (ZM), Teladoc (TDOC), and Netflix (NFLX), have spectacularly outperformed the market. Many of these had already been recommended by the Mad Hedge Technology letter and the Mad Hedge Biotech & Healthcare letter because they were leaders in their own technologies (click here).
The problem with these companies is that they are all expensive, in some cases trading at hundreds of times their earnings.
Then there are the Reopening Stocks that will deliver outsized returns once we make it to the downslope of the epidemic. These include United Airlines (UAL), Wynn Hotels (WYNN), and Carnival Cruise Lines (CCL), which we heavily sold short near the market top, and led the recovery of the last three weeks.
The problem with these companies is that they may have to go bankrupt first, or at least accept a heavy government ownership and dilution of existing shareholders before they return to normal.
It’s a quandary that would vex Solomon.
I always tell people, if you want to make an easy, reliable, and safe living, get a job at the Post Office. Avoid the stock market.
OPEC cut oil production by 10 million barrels/day, for two months, and then 8 million barrels a day for the rest of the year. Oil prices plunged anyway to a 20-year low at $18.50 a barrel, as it only puts a small dent in the 34 million barrel a day oversupply. It only postpones the day when many energy companies go bankrupt.
The Economy could be turning on and off for 18 months, believes Fed governor Neil Kashkari. He may be partly right. I am expecting two Coronavirus waves to lead to two shutdowns in the spring and fall, and the stock market may reflect the same. If so, stocks are wildly overpriced here, and the bear market could last another year. Sell shorts, or at least add hedges, and buy the (SDS).
US Budget Deficit to top $3.8 trillion this year, the most since WWII. We were already headed for a monster $1.5 trillion in red ink before the virus hit. Now we are pouring gasoline on the fire. It'sis my worst-case scenario, I had the national debt rising from $23 trillion today to $30 trillion in a decade. It looks like that will happen by next year.
Only 90,000 cleared US airport security in one day, down from a typical 2.2 million, or down 95%. It appears that 90,000 people a day don’t care if they get Covid-19 or have already had it. Some 80% of all flights globally are grounded, with many countries now stranded. With massive debt loads, it is only a question of how soon the big US airlines go bankrupt and how much the government gets to own on the way back up. Don’t buy any airlines no matter how cheap they get.
US Retails Sales collapsed by 8.7% as the paycheck-free economics takes hold. The March Empire State Manufacturing Index crashed to a record low of 78% and March Industrial Production is off 5.4%, the lowest since 1946. The parade of the worst economic data in history has begun. And we go into this with stocks at record high valuations, more expensive than they were in January.
Goldman Sachs says this depression will be four times worse than the Great Recession of 2008-2009, likely falling 35% annualized in Q2. Unemployment will hit 15% or higher, but stocks will not retest the March lows. The bounce back in H2 will be bigger than any seen. It more or less corresponds to my view. They must have some smart people at (GS).
March Homebuilder Confidence brings the biggest crash in history, down 42 points to a reading of only 30. It's the greatest decline since the 35-year history of the index. The last time we were this low was in June 2012. Some 21% of builders are reporting virus disruption.
Housing Starts collapsed a stunning 22.3% in March, the worst one-month figure ever recorded. Social distancing makes open houses impossible. But this will be one sector that leads us out of the depression. There is still a chronic generational housing shortage.
Weekly Jobless Claims topped 5.1 million, taking the grim four-week tally to a staggering 21 million. Out of the frying pan, into the fire.
Gilead Sciences (GILD) drug sent stocks soaring, up 900 points overnight. Its Remdesivir brought rapid recovery in already infected patients at the University of Chicago in a phase three trial. The market is hypersensitive to any good Corona news. Sell into the rally.
China GDP took a 6.8% hit in Q1 as the Corona pandemic takes its toll. Services are recovering faster than manufacturing, which is why the smog has not come back yet. And international trade has ground down to zero. Public transit has been abandoned for private cars. It could be a preview to our own recovery.
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 $18 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 recovered nicely this week, thanks to some frenetic trading. I used the Monday 700-point dive in the market to cover most of my bearish positions and add short-dated longs in Apple (AAPL) and Facebook (FB).
Finally, I dove back into selling short the US bond market on the assumption that unprecedented borrowing will destroy prices.
My short volatility positions (VXX) were hammered again, even though volatility declined on the week. There seems to be heavy short selling of deep out-of-the-money puts on the assumption that the Volatility Index (VIX) won’t rise above $50 again.
We are now up +0.45% in April, taking my 2020 YTD return down to -7.97%. That compares to a loss for the Dow Average of -15% from the February top. My trailing one-year return returned to 33.88%. My ten-year average annualized profit returned to +33.67%.
This week, Q1 earnings reports continue, and so far, they are coming in much worse than the most dire forecasts. The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, April 20 at 7:30 AM, the Chicago Fed National Activity Index comes out.
On Tuesday, April 21 at 9:00 AM, the March Existing Homes Sales are released.
On Wednesday, April 22, at 9:30 AM, the Cushing Crude Oil Stocks are announced.
On Thursday, April 23 at 8:30 AM, Weekly Jobless Claims will announce another blockbuster number.
On Friday, April 24 at 7:30 AM, US Durable Goods for March are printed. The Baker Hughes Rig Count follows at 2:00 PM. Expect these figures to crash as well.
As for me, I am sitting here eating a pineapple upside-down cake that my daughter just whipped up. It's my favorite cake made by my mother, which I always got on my birthday.
Of course, I have to wash the dishes. If anyone wants to supplement their trading income, housekeeper and domestic and wants to live in mansions at Lake Tahoe and San Francisco, please contact customer support immediately.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“The worst advice I have received is to look in the rearview mirror and think that what led to success somehow can lead you to new success. Because it doesn’t. History will come back and bite you in the ass,” said Satya Nadella, CEO of Microsoft.
Global Market Comments
April 17, 2020
Fiat Lux
Featured Trade:
(REMEMBERING GUADALCANAL)
