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
April 13, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or THE BEAR MARKET RALLY IS OVER),
(INDU), (SPX), (TLT), (VIX, (VXX), (GLD), (JPM), (AMZN), (MSFT)
The Bear market rally is over, or at least that’s what Asian stock futures are screaming at us, and the shorts are piling back on….again.
For the first time in 16 years, I did not have to get up at 6:00 AM to hide Easter eggs. It’s not because my kids don’t believe in the Easter Bunny anymore. They’ll believe in anything that delivers them a free chocolate bunny. It’s because I couldn’t get any eggs. Much of the country’s egg production is being diverted into vaccine production for testing, of which, along with antivirals, there are more than 300 worldwide.
Enough of the happy talk.
It was a classic bear market rally we saw over the past two weeks in every way, retracing 50% of the loss this year. Junk stocks, like hotels, airlines, and cruise lines led, while quality big tech lagged. That’s the exact opposite of what you want to see for a new bull market.
At the Friday high, the Dow (IND) was down only 17% from the February all-time high at a two-decade 20X valuation high.
The US is now losing 2,000 citizens a day to the Coronavirus. That’s how many we lost at the peak of the Vietnam War in a month. We are suffering another 9/11 every day of the week.
More than 16.8 million have lost jobs in three weeks, more than all those gained in six years. Of all American companies with fewer than 500 employees, 54% have closed! JP Morgan (JPM) has just cut its forecast for Q2 GDP from a 25% loss to an end of world 40% decline on an annualized bases.
New York is losing 800 people a day and is burying many of them in mass graves. Bread lines have formed in countless major cities. And you think 17% is enough for a discount for stocks, given that a near-total shutdown will continue for another five weeks?
Are you out of your freaking mind?
Which leads me to believe that another retest in the lows is in the work, no matter how much government money is headed our way.
For a start, it will be three months before the Fed handouts show any meaningful impact on the economy. Second, we are due for a second wave of the virus in the fall, once the initial shelter-in-place ends. Markets will likely behave the same.
In the meantime, long term analysts of the global economic structure are going dizzy with possible permanent changes. I am in the process of writing a couple of pieces on this if I can only get away from the market long enough to do so.
It seems like half the country has lost their jobs, while the other half are now working double time without pay, like myself.
The market was stunned by 6.1 million in Weekly Jobless Claims, taking the implied Unemployment Rate to over 14%, more than seen during the 2008-2009 Great Recession. One out of four Americans will lose their jobs or suffer a serious pay cut in the next two months. At this rate, we will top the Great Depression peak of 25 million in two weeks.
The Fed launched a second $2.3 trillion rescue program, this time lending to states, local municipalities, and buying oil industry junk bonds. More money was made available to small businesses. Jay Powell is redefining what it means to be a central bank, but no one is complaining. It was worth one 500-point rally in the Dow Average, which we have already given back. At this point, almost the entire country is living on welfare.
Stocks soared firefly on falling death rates. Chinese cases are falling after the border closed, Italy and Madrid are going flat, and San Francisco is looking good. There is still a massive, but extremely nervous bid under the market. I’m selling into this rally. We will continue to chop in a (SPX) $2180-$2800 range for the foreseeable future.
Trump says there’s a light at the end of the tunnel, but he doesn’t tell you that the light is an oncoming express train. At the very least, the number of deaths will rise at least tenfold from here. That’s how many we lost in the Korean War. It hasn’t even hit the unsheltered states in the Midwest yet.
Gold (GLD) is making a run another all-time highs, topping $1,700. Expect everyone’s favorite hedge to go ballistic. QE infinity and zero interest rates will eventually bring hyperinflation and render the US dollar worthless. Gold production is falling due to the virus. Anything else you need to know?
Mortgage defaults are up 18-fold. People can’t even get through to their banks to tell them they are not going to pay. This is the next financial crisis. Fannie Mae and Freddie Mac are going to go broke….again.
Can the US government spend money fast enough, given that it has been shrinking for three years? I’m not getting my check until September. It’s not easy to spend $2 trillion in a hurry. I can’t even spend a billion in a hurry. It’s darn hard and I’ve tried. It suggests any recovery will be slower and lasts longer.
Here’s the bearish view on the economy, with Barclay’s Bank looking for an “L” shaped recovery, which means no recovery at all. I’m looking more for a square root type recovery, which means a sharp bounce back to a lower rate of growth. And there may be two “square roots” back to back.
Bond giant PIMCO predicts 30% GDP loss in Q2 on an annualized basis. Everyone staying home doing jigsaw puzzles isn’t doing much for our economic growth. This may end up becoming the most positive forecast out there.
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 $20 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 a tough week, destroying my performance back to positive numbers for the year. That is thanks to my piling on the shorts in a steadily rising market. This brings short term pain, but medium-term ecstasy.
We are now down -3.99% in April, taking my 2020 YTD return down to -12.41%. That compares to an incredible loss for the Dow Average of -17% from the February top. My trailing one-year return sank to 30.02%. My ten-year average annualized profit was pared back to +33.51%.
My short volatility positions (VXX) were hammered even in a rising market, which means no one believes the rally, including me.
I took nice profits on two very deep in-the-money, very short dated call spreads in Amazon (AMZN) and Microsoft (MSFT), the two safest companies in the entire market, betting that we don’t go to new lows in the next nine trading days. As the market rose, I continued to add to my short position with the 2X ProShares Ultra Short S&P 500 (SDS).
This week, we get the first look at Q1 earnings. All economic data points will be out of date and utterly meaningless this week. 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 13 Citigroup (C) and JP Morgan (JPM) report earnings.
On Tuesday, April 14 at 11:30 AM, the API Crude Oil Stocks are announced.
On Wednesday, April 15, at 2:00 PM, the New York State Manufacturing Index is released.
On Thursday, April 16 at 8:30 AM, Weekly Jobless Claims are announced. The number could top 6,000,000 again. At 7:30 AM, US Housing Starts for March are published.
On Friday, April 17 at 7:30 AM, the Baker Hughes Rig Count is released at 2:00 PM. Expect these figures to crash as well.
As for me, before the market carnage of the coming week ensues, I shall be sitting down with my kids and touring the National Gallery of Art in Washington DC. Many art museums have now opened up their collections online, for free. There is a special exhibition of “Degas at the Opera.” Please enjoy by clicking here.
Next to come will be the Louvre in Paris (click here), and the National Museum of the Marine Corps in Triangle, VA (click here). I have them tracing the dog tags I brought back from Guadalcanal. I bet some of my old weapons are in there.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“This is not a time to go to the grocery store or the pharmacy,” said Dr. Deborah Birx, coordinator of the White House Coronavirus task force.
Mad Hedge Biotech & Healthcare Letter
April 9, 2020
Fiat Lux
Featured Trade:
(A SLIVER OF HOPE FOR CORONAVIRUS)
(MYL), (NVS), (BAYRY), (PFE)
To this day, there’s still no solid proof that any drug can treat or prevent infection with the deadly coronavirus. Faced with an exploding pandemic that brings an alarming death toll, the public is eager -- desperate -- for a sliver of hope and some news regarding discoveries of COVID-19 treatment.
Lately, the drug that has been gaining so much attention is hydroxychloroquine. This is primarily thanks to Trump’s endorsement, with the president going as far as labeling it a “miracle” drug.
By now, we’ve become all too familiar with the story behind this “miracle” drug.
Trump was watching TV the night before and saw a feature about a Michigan woman who was suffering from COVID-19 for 12 to 14 days. Her suffering was so intense that she felt she would die anytime soon. One night, she asked her husband to find hydroxychloroquine.
Four hours after taking it, she felt better and eventually recovered.
While health experts are still waiting for conclusive evidence on the drug’s efficacy, this story inspired Trump to urge the public to try it as well.
Aside from describing it as a potential cure, Trump is also recommending hydroxychloroquine as a preventive measure for health workers. His point is that there’s really nothing to lose here. After all, the drug has been used for decades so “it’s not going to kill anybody” compared to completely novel treatments.
In fact, he has been so intent in using hydroxychloroquine to cure COVID-19 patients that he ordered 29 million doses added to the government’s cache of medical supplies.
Just what is hydroxychloroquine?
This is a prescription drug approved to treat malaria decades ago. It can also be prescribed to treat autoimmune diseases such as lupus and rheumatoid arthritis. It’s called by its brand name Plaquenil as well.
Is it really effective to treat COVID-19?
The answer remains unclear. However, there are a couple of studies that point to promising results.
One is a laboratory study using cultured cells. In this research, it was found that chloroquine has the ability to prevent the coronavirus from invading the cells. Obviously, blocking the virus means protecting the body from the illness.
However, scientists issued a word of caution about this.
They reminded us that the drugs that work well in killing off viruses in petri dishes or test tubes do not necessarily translate to the same results in the human body.
As for hydroxychloroquine, studies showed that it can’t prevent or cure influenza and other viral diseases.
This doesn’t mean that hydroxychloroquine is useless as a COVID-19 treatment.
It just shows that more trials are needed to determine its actual effect. Several studies have been launched to figure out the answer to this.
In Detroit alone, there will be 3,000 patients set to participate in the trial to come up with a formal and conclusive study on hydroxychloroquine.
In a nutshell, what the health experts are saying is that the celebration might be a tad premature.
So this leads to a lot of investors to wonder which companies stand to benefit if hydroxychloroquine gets approved as a COVID-19 treatment.
Probably no one.
Keep in mind that this is an old drug, which came to the market sometime in the 1940s. Hence, it’s highly unlikely for it to become a blockbuster drug for any company.
Right now, several companies are already making it, including Novartis (NVS) and Bayer (BAYRY).
However, investors interested in buying cheap biotech stocks might be interested in generic drug maker and Mylan (MYL) are also in the running.
When Trump started touting the effects of hydroxychloroquine on COVID-19 patients, Mylan immediately restarted its production of the tablets.
The company aims to have the drug available in the market by mid-April, targeting up to 50 million tablets for over 1.5 million people.
Like I said, hydroxychloroquine isn’t going to be a high-selling drug for any company.
Nonetheless, this could provide the much-needed momentum for Mylan as its investors start to lose confidence in the company.
With the company back in the spotlight, it can easily redirect everyone’s attention to its upcoming merger with Pfizer’s (PFE) Upjohn unit to form a new company called Viatris.
This combined company will hit the ground running as it buys two assets from Pfizer.
One will be Meridian, which is the maker of EpiPen along with other auto-injectible treatments. The second is Mylan-Japan, which has been the generics collaboration unit of Pfizer and Mylan since 2012.
Both units recorded $598 million in annual revenue in 2019.
Viatris’ portfolio will also include a number of top-selling products like erectile dysfunction and pulmonary arterial hypertension Viagra and arthritis Celebrex.
The lineup will even feature the blockbuster cholesterol drug Lipitor, which generated more than 2 billion in sales last year alone.
According to the terms of the deal, Pfizer shareholders will own 57% of Viatris while Mylan shareholders get 43%.
Due to the upcoming merger, Pfizer went ahead and upped the 2020 guidance for Upjohn’s revenue from the $7.5 billion and $8 billion range to $8 billion and $8.5 billion.
The Viatris spin-off is expected to be completed by mid-2020.
For years, Mylan has been plagued with numerous issues like pricing concerns and even lawsuits.
Hence, this merger with Upjohn is considered a crucial turning point for Mylan. It represents a fresh beginning from this previously embattled stock.
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
As you know, the markets are closed tomorrow for Good Friday, so I would like to make a suggestion on a covered call in order to capture the time decay over the long holiday weekend.
My suggestion is to buy Frontline Ltd.(FRO), which is trading at $8.58 as I write this.
Then sell to open (1) April 17th - $9 call for every 100 share you buy.
You should be able to sell them for $0.50.
Limit the stock buy in to 500 shares, which works out to 4.3% of the portfolio.
Assuming you buy 500 shares, it will mean you will sell 5 of the April 17th - $9 calls.
I am limiting the trade to less than 5% of the portfolio based on the extreme market conditions at the moment.
If the calls are assigned next Friday, the return will be 10.7% for just over a week.
Because the markets are closed tomorrow, there will not be a daily update.
Enjoy your Easter or Passover.
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
