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)
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)
Global Market Comments
April 17, 2020
Fiat Lux
Featured Trade:
(REMEMBERING GUADALCANAL)
When the Commandant of the Marine Corps asks for a favor, I say “Yes Sir” without hesitating.
So, when General David H. Berger called me and asked to represent him at the 78th annual memorial service for the 1942 Battle of Guadalcanal, I started booking my flight. It turned out to be one of the most amazing experiences of my life. It also may have saved my life.
He needed a Marine veteran who had family members on both sides of the battle and spoke fluent English and Japanese. It turns out that there is only one such individual in the United States, and that would be me.
Both my father and my uncle Mitch fought at the Canal, where he won a Medal of Honor. My late wife’s father was a Captain in the Japanese Army. His family had the government monopoly for supplying “sniper boots”, or “jikatabi.” That enabled me to sympathize with the Japanese families attending the service who lost loved ones.
I have acted as a diplomatic representative for the Marine Corps for many decades. Over the years, I have met presidents, most Medal of Honor winners, and Navaho code talkers.
Guadalcanal was the decisive battle of WWII. The Americans lost 7,000 men, 25 ships, and 175 planes. The Japanese lost 30,000 men, 25 ships, including a major battleship, and 450 planes.
Before Guadalcanal, the Japanese had never lost a battle. After Guadalcanal, they never won. If the US had lost the battle of Guadalcanal, WWII would have continued until 1948 or 1949.
Today, Guadalcanal is one of the poorest countries in the world, with a per capita income of about $3,000 a year, That’s just a guess from Australian aid workers. Less than 50% of the population participate in the modern economy. Some 70% of the modern economy is accounted for by Chinese logging of ancient tropical hardwood trees.
The rest live a more traditional lifestyle of fishing and growing jungle fruits and vegetables. There are countless barefoot kids running around everywhere. Most families have more than five kids and birth control is unknown. Not helpful to the island's poverty of course is the still present devastation by this military activity from WWII; you can read about it's impacts here.
I hired a local guide and translator of the local language of pigeon, a sturdy four-wheel drive SUV, and sought out the local WWII battlefields. It wasn’t easy, as there were only 20 miles of paved road in the entire country and no street signs.
I was not disappointed.
The first stop was Paige’s Ridge, also known as “Hennikan’s Ridge”, where my uncle won his Medal of Honor, fighting a heroic night battle where he mowed down 2,000 charging Japanese in a torrential rainstorm. For a more detailed description of Mitch, please click here.
Reading from his diary, I was able to locate his exact fighting position, where I used a shovel to dig out several Japanese 6.5mm Arisaka bullet that had been fired at him.
A mob of local kids huddled around me watching my every move. I finally told them to bring me their souvenirs so I might buy some.
What came back was amazing.
One boy around nine years old showed up with a tattered old Marine rucksack and spilled the contents on the ground. There were several live Japanese hand grenades, some unexploded mortar shells, and spent bullets of several kinds. I warned him, these could explode at any time and that he should be careful not to drop them.
My next stop was Hill 27, the subject of the 1998 movie Thin Red Line, and where my dad fought. I found my dad’s foxhole dug out of the coral and extracted out more Japanese bullets. It was moving to finally grasp the suffering he went through as a 19-year-old, starving, afraid, and suffering with malaria.
Scouring the hill, I managed to dig up some USMC dog tags still readable. I forwarded them to the US Marine Corps Historical division so that I might return them to the families. My dad gave me his dog tags right before he died 20 years ago.
In the village near the summit of Hill 27, everyone had huge collections of war relics; pieces of Japanese zero fighters, helmets, coke bottles, rusted-out machine guns, and prewar coins from both sides. One citizen had amassed at least a kilo of morphine in military sachets. I even found a bottle of Old Spice aftershave, my dad’s favorite.
Another offered me a Japanese skeleton in a plastic bag for $10. He said I could get as many as I wanted. There are in fact 23,000 Japanese missing in action on Guadalcanal. So, I emailed a friend in the Japanese government in Tokyo asking if he wanted any wartime remains.
He said not to worry. Once a year, the government sends a scouting party to pick up all the remains they can find. They then cremate them, take the ashes back to Japan, and inter them at Yasakuni Jinja, the country’s equivalent of Arlington National Cemetery.
Next, I drove deep into the jungle to find a graveyard of US fighter planes. They were all there, rusting away in all their glory; Wildcats, Corsairs, and Aircobras. On the way back, I managed to find a battered Sherman tank.
I was invited to explore an intact Boeing B-17 bomber discovered only two years ago. But it involved hiking four hours into the mountains. Since one of my companions hadn’t taken anti-malaria drugs and the mosquitoes were present in great clouds, I passed.
I went on to visit several other historic sites. I saw Red Beach, site of the initial Marine landing, where I found a nearly buried Japanese tank. I spent time at the Alligator Creek, where the Marines wiped out the Ichiki battalion.
With great difficulty, I found John Basilone’s machine gun bunker. John also won a Medal of Honor. I stopped by the soaring monuments of Bloody Ridge, where Edson’s raiders held off another Japanese onslaught. The original wartime tower for Henderson field can still be found at the airport.
Only recently did I realize that this trip commemorating the battle of Guadalcanal may have saved my life. To keep malaria at bay, I took Chloroquine for a week before, during, and after the trip. It is now being explored as a Coronavirus drug.
My original intention had been to make a 45-minute documentary video and give it to you and the Marine Corps. The stock market crashed the day I got back so everything is now on hold. Maybe if things quiet down this summer, I can get to it.
After all, I won’t be going anywhere.
Captain John Thomas
USMC, retired
Dad on Right
Mitchell Paige
A Crashed Marine F4F Wildcat
Dad’s Old Spice
A US Browning 30 Caliber Light Machine Gun
A Crashed US Carrier Plane
A Kilo of Morphine
Landing at Henderson Field
Global Market Comments
April 16, 2020
Fiat Lux
Featured Trade:
(MORE LONG-TERM LEAPS TO BUY AT THE BOTTOM),
(TSLA), (CRSP), (MU)
The final bottom in this bear market is fast approaching. It may come in weeks or months. After the cataclysmic meltdown in March, markets are becoming more orderly and tradable. What does this mean for LEAPs?
It means the next bid dip in share prices is the one you want to buy.
Readers have been besieging me with more ideas on long term LEAPS to buy at the next bottom. So, here is another generous serving of red meat.
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPS, allow plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this new portfolio using the following parameters. I set the strike prices just above the all-time highs set in February. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks based on our own intensive in-house research.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire-sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 400% profit from an average stock price increase of only 75%.
That is a staggering return 5.3 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why clever hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright. I expect the list below to rise by 50% or more over the next two years.
Enjoy.
Tesla (TSLA) - June 17 2022 $1,080-$1,100 vertical bull call spread at $4.00 delivers a 400% gain with the stock at $1,100, up 51% from the current level. The pandemic is vastly accelerating all trends. One big one is the migration from internal combustion engines to electric power where Tesla has a ten-year and expanding head start. Sales at its new Shanghai factory in the first country to recover from the Coronavirus are blowing away its most optimistic view. The Model Y small SUV at the end of this year is expected to be the company’s biggest-selling model ever.
CRISPR Therapeutics (CRSP) - January 15 2021 $85-$90 vertical bull call spread at $1.00 delivers a 400% gain with the stock at $85, up 77% from the current level. It’s shorter-dated than the others, but this was the longest maturity posted on my trading platform. CRISPR Therapeutics is the dominant player in gene-editing technology, which is key to many biotech developments going forward. That includes beating the Coronavirus. The stock is an incredible bargain at this level, off 36% from its all-time high.
Micron Technology (MU) – January 21 2021 $85-$90 vertical bull call spread at $1.00 delivers a 400% gain with the stock at $90, up 96% from the current level. Coming out on the other side of the pandemic, there will be a massive global shortage of the computer chips that Micron Technology makes with already huge profit margins. A total no-brainer and I love visiting their Boise, Idaho headquarters.
To review my last list of Ten Long-Term LEAPS to Buy at the Market Bottom, please click here.
Yup, I Think I See Another Great LEAPS Opportunity