Global Market Comments
March 24, 2020
(TEN SIGNS THE MARKET IS BOTTOMING),
(FXI), (BRK/A), (BA), (DAL), (SPX),
(INDU), (UUP), (VIX), (VXX), (AAPL)
Global Market Comments
March 24, 2020
(TEN SIGNS THE MARKET IS BOTTOMING),
(FXI), (BRK/A), (BA), (DAL), (SPX),
(INDU), (UUP), (VIX), (VXX), (AAPL)
I spent the morning calling some big hedge fund friends asking what they are looking for to indicate the market may be bottoming. I’ll give you a warning right now. None of the traditional fundamental or technical measures have any validity in this market.
Markets will need to see at least one, and maybe all of these before they launch into a sustainable recovery. The good news is that several have already happened and are flashing green.
1) Watch New Corona Cases in China
The pandemic started in China and it will end in China (FXI). The president of China, Xi Jinping, has already announced that the epidemic is over and that the country is returning to normal. The country is donating thousands of respirators and millions of masks to Europe and poor countries all over the world. China was able to enforce a quarantine far more severe than possible in the West, such as using the army to surround 60 million people for a month. So, the results in the Middle Kingdom may not be immediately transferable to the US.
If we do get an actual fall in the number of cases in China, that could indicate the end is near. To keep track, click here.
2) Watch Corona Cases in Italy
Italy quarantined two weeks before California so we should get an earlier answer there. The numbers are reliable, but we don’t know the true extent of their quarantine. After all, this is Italy. Also, Italy has a much older population than the US (that Mediterranean diet keeps Italians alive forever), so they will naturally suffer a higher death rate. However, a decline in cases there will be proof that a western-style shelter-in-place order will work. To keep track, click here.
3) Watch Corona Cases in California
The Golden State was the first to quarantine ten days ago, so it will be the first American state to see cases top out. On Monday, we were at 1,733 cases and 27 deaths, or one in 1.5 million. However, it is a partial quarantine at best, with maybe half of the 20 million workforce staying home. When our cases top out, which should be the week of April 13, it could be an indication that the epidemic is flagging. To keep track, click here.
4) Watch Washington
Passage of a Corona Economic Recovery Bill could take place as early as Friday and could be worth $2 trillion. Add in the massive stimulus provided by the Federal Reserve, a large multiple of the 2008-2009 efforts, and $10 trillion is about to hit the economy. Warning: don’t be short an economy that is about to be hit with $10 trillion worth of stimulus.
5) Watch the Technicals.
Yes, technicals may be worthless now but someday in the future, they won’t be. The stock market has traded 20% below the 200-day moving average only four times in the last century. The Dow Average (INDU) was 32% below the 200-day moving average at the Monday low. The next rip-your-face off short-covering rally is imminent and may initially target that down 20% level at $21,496, or 18% above the Monday low.
6) Watch for the Big Buy
Value players are back in the market for the first time in six years, the last time the S&P 500 (SPX) traded at a discount to its historical 15.5X earnings multiple and are circling targets like hungry sharks. Watch for Warren Buffet of Berkshire Hathaway (BRK/A) to buy a large part of a trophy property, like a major bank or airline. He’s already stepped up his ownership in Delta Airlines (DAL). I’m sure he’s going over the books of Boeing (BA). Warren might even buy back his own stock at a discount to net asset value, down 31.4% in a month. Any move by Warren will signal confidence to the rest of the markets.
7) Watch the US Dollar
With US overnight interest rates having crashed by 1.5% in recent weeks, the US dollar (UUP) should be the weakest currency in the world. The greenback overnight became a zero-yielding currency. Instead, it has been the strongest, rocketing on a gigantic global flight to safety bid. When the foreign exchange rates return to rationality, the buck should weaken, as it has already started to do after last week’s super spike. A weak dollar will be good for American companies and their stocks.
8) Watch the (VIX)
We now know that the Volatility Index (VIX), (VXX) was artificially boosted last week by hundreds of short players covering positions with gigantic losses and going bust. Now that this is washed out, I expect volatility to decline for the rest of 2020. It has already fallen from $80 to $49 in days. This is a precursor to a strong stock market.
9) Watch the Absolute Value of the Market
There could be a magic number beyond which prices can’t fall anymore. That could be yesterday’s 18,000, 17,000, or 15,000. Some 80% of all US stocks are owned by long term holders who never sell, like pension funds, corporate crossholdings, or individuals who have owned them for decades and don’t want to pay the capital gains tax. When the ownership of that 20% is shifted to the 80%, the market runs out of sellers and stocks can’t fall anymore. That may have already happened. Similarly, a final capitulation selloff of market leaders, like Apple (AAPL) may also be a sign that the bear market is ending. (AAPL) is off 34.40% since February.
10) Watch John Thomas
I am watching all of the above 24/7. So rather than chase down all these data points every day, just watch for my next trade alert. I am confined to my home office for the duration, probably for months, so I have nothing else to do. No trips to Switzerland, the Taj Mahal, or the Great Pyramids of Egypt for me this year. It will just be nose to the grindstone.
Stay Healthy and we’ll back a killing on the back nine.
I almost got to take a shower today.
However, whenever I got close to the bathroom, I’d get an urgent call from a concierge member, Marine buddy, Morgan Stanley retiree, fraternity brother from 50 years ago, or one of my kids asking me which stocks to buy at the bottom.
It’s been that kind of market.
I refer them to the research piece I sent out last week, “Ten Long Term LEAPs to Buy at the Bottom” for a quick and dirty way to get into the best names in a hurry (click here for the link).
I have been doing the same, and as a result, I have one of the largest trading portfolios in recent memory. When the Volatility Index is above $50, it is almost impossible to lose money as long as you remember to buy the 1,000 dips and sell the 1,000 point rallies.
In the run-up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
If that happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position. Whenever you have sold short an option, you run an assignment risk.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.
Let’s say you get an email from your broker saying that your call options have been assigned away. I’ll use the example of the Microsoft (MSFT) December 2019 $134-$137 in-the-money vertical BULL CALL spread.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 8 days before the December 20 expiration date. In other words, what you bought for $4.50 last week is now with $5.00!
All have to do is call your broker and instruct them to exercise your long position in your (MSFT) December 134 calls to close out your short position in the (MSFT) December $137 calls.
This is a perfectly hedged position, with both options having the same expiration date, the same amount of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.
To say it another way, you bought the (MSFT) at $134 and sold it at $137, paid $2.60 for the right to do so, so your profit is 40 cents, or ($0.40 X 100 shares X 38 contracts) = $1,520. Not bad for an 18-day limited risk play.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (MSFT) position after the close, and exercising his long December $134 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it. They’ll tell you to take delivery of your long stock and then most additional margin to cover the risk.
Either that, or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates a ton of commission for the brokers but impoverishes you.
There may not even be and evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. It doesn’t pay. In fact, I think I’m the last one they really did train.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many legal ways to steal money that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Like it or not, we have a trade alert drought on our hands.
I just ran the numbers on 200 potential trades in stocks, bonds, foreign exchange, commodities, precious metals, and real estate, and there was not a single one that was worth executing.
They all had one thing in common: for taking huge risks, there were only paltry profits on offer. Even with a 90% success rate, I would still lose money.
And here is the problem. Massive quantitative easing from the US Federal Reserve is keeping the prices of all assets artificially high. But fears of a global Coronavirus pandemic are keeping all prices capped. The spread between the bid and the offer is only 3%. That is not enough to make an honest living, nor even a dishonest one.
I’ve seen all this before. The US in 1974, Tokyo in 1989, NASDAQ in 1999 presented similar trading dilemmas. The outcome is always the same. Prices always go up much longer than expected and then are followed by horrific crashes. Only when the last dollar is sucked in do trends change.
So, for right now, I would rather do nothing than something. We are in a contest to see who can make the most money with the fewest drawdowns, not to see who can strap on the most trades. The latter makes your broker rich, not you.
Cash is a position, it is an opinion, and it has option value. A dollar at a market top is worth $10 at a market bottom. Opportunity cost is not to be underestimated.
For the time being, everything depends on the Coronavirus. It is universally believed that the Chinese data is wildly inaccurate, possible by tenfold. The risks to the markets are similarly underestimated by US investors.
That became screamingly clear to me after returning from a trip halfway around the world where my temperature was taken every time I crossed a border and planes had to be sterilized before boarding
So, the smart game here is to be patient and learn some discipline. Wait for the market to come to you. This is a year when it will be incredibly difficult to make money and extremely easy to lose it.
All trade alert droughts end. Whether it will be sooner or later is anyone’s guess.
China is planning massive stimulus, to get the economy back on track. GDP could drop from 6% to 0% and maybe -6% thanks to the Coronavirus. A borrowing stampede is underway as shut down companies seek to address hemorrhaging cash flow.
Tesla (TSLA) exploded again to the upside, up 10% at the opening. The company has become a good news factory. The German government stepped in to subsidize a massive Gigafactory there. I won’t touch the stock here, but my long terms target is still $2,500.
Tesla finally took my advice and launched a $2 billion common stock offering at these lofty prices. It should be $5 billion. They can retire all their debt, including the convertible bonds, and with no dividend they can operate at a zero cost of capital. Elon Musk is taking $10 million of the deal. He took $100 million of the last offering. Buy (TSLA) on dips. Losses pile up for the short-sellers. Tesla always does the right thing after trying everything else out first.
The Fed’s Jay Powell cheers the economy but warned that the Coronavirus could become a factor. He also cautioned about a federal deficit that will top $1 trillion this year.
With the economy growing at a 2.2% annual rate, it’s below the Obama era growth. Did anyone notice that he said he would trim back QE by reigning in the repo program initiated last fall? Risk in the stock market is now extremely high.
Apple (AAPL) and Microsoft (MSFT) are now 10% of the entire stock market and are wildly overbought. Such incredible concentration is a typical sign of a topping market. Virtually all the stocks Mad Hedge has been recommending for the last decade are at new all-time highs. Be careful what you wish for.
Household Debt soared hitting a 12-year high. It’s up $601 billion to $14 trillion. It’s pedal to the metal for consumer spending, another classic market-topping indicator. What happens when the bill comes due and interest rates rise?
MGM (MGM) canceled guidance as the Coronavirus upends their business. High-end Chinese gamblers won’t show up to lose gobs of money at the gaming tables if they can’t get here. The epidemic has put the whole gaming industry into turmoil. Call me after new virus cases peak in China. Avoid (MGM).
Boeing had no net deliveries of aircraft in January, the first time since 1962, but the stock rose anyway. That tells me the bottom is firmly in. Buy (BA) on dips. When will the suffering of one of America’s best-run companies, accounting for 3% of GDP, end?
Despite the fact that we may be facing the end of the world, the Mad Hedge Trader Alert Service managed to maintain new all-time highs. I came out of my last position in Boeing (BA) to beat the ex-dividend day and a possible call on my short February $280 calls.
My Global Trading Dispatch performance rose to a new high at +359.00% for the past ten years. February stands at -0.04%. My trailing one-year return is stable at 47.39%. My ten-year average annualized profit ground back up to +35.31%.
All eyes will be focused on the Coronavirus still, with deaths over 1,800. The weekly economic data are virtually irrelevant now. However, some important housing numbers will be released.
On Tuesday, February 18 at 8:30 AM, the NY State Manufacturing Index for February is released.
On Wednesday, February 19, at 9:30 PM, January Housing Starts are out.
On Thursday, February 20 at 8:30 AM, Weekly Jobless Claims come out. The February Philadelphia Fed Manufacturing Index is announced.
On Friday, February 21 at 10:30 AM, January Existing Home Sales are printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be driving back from Lake Tahoe, where I spent the long weekend catching up on the markets. There was virtually no snow, amazing for February, but great hiking.
Since I will be dropping 7,200 feet from Donner Pass and I have the new expended range Model X, I will be able to make it the 220 miles home on a single charge.
In two years, I’ll be able to make the 440-mile round trip on a single charge when the new Tesla Cyber truck comes out. Of course, people will think I’m nuts and my kids have refused to be seen in the cutting edge vehicle, but when did that ever stop me?
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 12 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: What do you think about Facebook (FB) here? We’ve just had a big dip.
A: We got the dip because of a double downgrade in the stock from a couple of brokers, and people are kind of nervous that some sort of antitrust action may be taken against Facebook as we go into the election. I still like the stock long term. You can’t beat the FANGs!
Q: If Bernie Sanders gets the nomination, will that be negative for the market?
A: Absolutely, yes. It seems like after 3 years of a radical president, voters want a radical response. That said, I don’t think Bernie will get the nomination. He is not as popular in California, where we have a primary in a couple of weeks and account for 20% of total delegates. I think more of the moderate candidates will come through in California. That’s where we see if any of the new billionaire outliers like Michael Bloom or Tom Steyer have any traction. My attitude in all of this is to wait for the last guy to get voted off the island—then ask me what’s going to happen in October.
Q: When should we come back in on Tesla (TSLA)?
A: It’s tough with Tesla because although my long-term target is $2,500, watching it go up 500% in seven months on just a small increase in earnings is pretty scary. It’s really more of a cult stock than anything else and I want to wait for a bigger pullback, maybe down to $500, before I get in again. That said, the volatility on the stock is now so high that—with the short interest going from 36% down to 20%—if we get the last of the bears to really give up, then we lose that whole 20% because it all turns into buying; and that could get us easily over $1,000. The announcement of a new $2 billion share offering is a huge positive because it means they can pay off debt and operate with free capital as they don’t pay a dividend.
Q: Is Square (SQ) a good buy on the next 5% drop?
A: I would really wait 10%—you don’t want to chase trades with the market at an all-time high. I would wait for a bigger drop in the main market before I go aggressive on anything.
Q: What about CRISPR Technology (CRSP) after the 120% move?
A: We’ve had a modest pullback—really more of a sideways move— since it peaked a couple of months ago; and again, I think the stock either goes much higher or gets taken over by somebody. That makes it a no-lose trade. The long sideways move we’re having is actually a very bullish indication for the stock.
Q: If Bernie is the candidate and gets elected, would that be negative for the market?
A: It would be extremely negative for the market. Worth at least a 20% downturn. That said, according to all the polling I have seen, Bernie Sanders is the only candidate that could not win against Donald Trump—the other 15 candidates would all beat Trump in a 1 to 1 contest. He’s also had one heart attack and might not even be alive in 6 months, so who knows?
Q: I just closed the Boeing (BA) trade to avoid the dividend hit tomorrow. What do you think?
A: I’m probably going to do the same, that way you can avoid the random assignments that will stick you with the dividend and eat up your entire profit on the trade.
Q: When do you update the long-term portfolio?
A: Every six months; and the reason for that is to show you how to rebalance your portfolio. Rebalancing is one of the best free lunches out there. Everyone should be doing it after big moves like we’ve seen. It’s just a question of whether you rebalance every six months or every year. With stocks up so much a big rebalancing is due.
Q: I have held onto Gilead Sciences (GILD) for a long time and am hoping they’ll spend their big cash hoard. What do you think?
A: It’s true, they haven’t been spending their cash hoard. The trouble with these biotech stocks, and why it’s so hard to send out trade alerts on them, is that you’ll get essentially no movement on them for years and then they rise 30% in one day. Gilead actually does have some drugs that may work on the coronavirus but until they make another acquisition, don’t expect much movement in the stock. It’s a question of how long you are willing to wait until that movement.
Q: Is it time to get back into the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?
A: No, you need to maintain discipline here, not chase the last trade that worked. It’s crucial to only buy the bottoms and sell the tops when trading volatility. Otherwise, time decay and contango will kill you. We’re actually close to the middle of the range in the (VXX) so if we see another revisit to the lows, which we could get in the next week, then you want to buy it. No middle-of-range trades in this kind of market, you’re either trading at one extreme or the other.
Q: Could you please explain how the Fed involvement in the overnight repo market affects the general market?
A: The overnight repo market intervention was a form of backdoor quantitative easing, and as we all know quantitative easing makes stocks go up hugely. So even though the Fed said this wasn’t quantitative easing, they were in fact expanding their balance sheet to facilitate liquidity in the bond market because government borrowing has gotten so extreme that the public markets weren’t big enough to handle all the debt; that’s why they stepped into the repo market. But the market said this is simply more QE and took stocks up 10% since they said it wasn’t QE.
Q: What about Cisco Systems (CSCO)?
A: It’s probably a decent buy down here, very tempting. And it hasn’t participated in the FANG rally, so yes, I would give that one a really hard look. The current dip on earnings is probably a good entry point.
Q: Should we buy the Volatility Index (VIX) on dips?
A: Yes. At bottoms would be better, like the $12 handle.
Q: When is the best time to exit Boeing?
A: In the next 15 minutes. They go ex-dividend tomorrow and if you get assigned on those short calls then you are liable for the dividend—that will eat up your whole profit on the trade.
Q: Do you like Fire Eye (FEYE)?
A: Yes. Hacking is one of the few permanent growth industries out there and there are only a half dozen listed companies that are cutting edge on security software.
Q: What are your thoughts on the timing of the next recession?
A: Clearly the recession has been pushed back a year by the 2019 round of QE, and stock prices are getting so high now that even the Fed has to be concerned. Moreover, economic growth is slowing. In fact, the economy has been growing at a substantially slower rate since Trump became president, and 100% of all the economic growth we have now is borrowed. If the government were running a balanced budget now, our growth would be zero. So, certainly QE has pushed off the recession—whether it’s a one-year event or a 2-year event, we’ll see. The answer, however, is that it will come out of nowhere and hit you when you least expect it, as recessions tend to do.
Q: Would you buy gold (GLD) rather than staying in cash?
A: I would buy some gold here, and I would do deep in the money call spreads like I have been doing. I’ve been running the numbers every day waiting for a good entry point. We’re now at a sort of in between point here on call spreads because it’s 7 days to the next February expiration and about 27 days to the March one after that, so it’s not a good entry point this week. Next week will look more interesting because you’ll start getting accelerated time decay for March working for you.
Q: When are you going to have lunch in Texas or Oklahoma?
A: Nothing planned currently. Because of my long-term energy views (USO), I have to bring a bodyguard whenever I visit these states. Or I hold the events at a Marine Corps Club, which is the same thing.
Q: Would you use the dip here to buy Lyft (LYFT)? It’s down 10%.
A: No, it’s a horrible business. It’s one of those companies masquerading as a tech stock but it isn’t. They’re dependent on ultra-low wages for the drivers who are essentially netting $5 an hour driving after they cover all their car costs. Moreover, treating them as part-time temporary workers has just been made illegal in California, so it’s very bad news for the stocks—stay away from (LYFT) and (UBER) too.
Q: Is the Fed going to cut interest rates based on the coronavirus?
A: No, interest rates are low enough—too low given the rising levels of the stock market. Even at the current rate, low-interest rates are creating a bubble which will come back to bite us one day.
Q: Household debt exceeded $14 trillion for the first time—is this a warning sign?
A: It is absolutely a warning sign because it means the consumer is closer to running out of money. Consumers make up 70% of the economy, so when 70% of the economy runs out of money, it leads to a certain recession. We saw it happen in ‘08 and we’ll see it happen again.
Good Luck and Good Trading
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 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: Are you concerned about a kitchen sink earnings report on Boeing (BA) next week?
A: No, every DAY has been a kitchen sink for Boeing for the past year! Everyone is expecting the worst, and I think we’re probably going to try to hold around the $300 level. You can’t imagine a company with more bad news than Boeing and it’s actually acting as a serious drag on the entire economy since Boeing accounts for about 3% of US GDP. If (BA) doesn’t break $300, you should buy it with both hands as all the bad news will be priced in. That’s why I am long Boeing.
Q: Do you think IBM is turning around with its latest earnings report?
A: They may be—They could have finally figured out the cloud, which they are only 20 years late getting into. They’ve been a lagging technology stock for years. If they can figure out the cloud, then they may have a future. They obviously poured a lot into AI but have been unable to make any money off of it. Lots of PR but no profits. People are looking for cheap stuff with the market this high and (IBM) certainly qualifies.
Q: Will the travel stocks like airlines and cruise companies get hurt by the coronavirus?
A: Absolutely, yes; and you’re seeing some pretty terrible stock performance in these companies, like Delta (DAL), the cruise companies like Royal Caribbean Cruises (RCL), and the transports, which have all suffered major hits.
Q: Will the Wells Fargo (WFC) shares ever rebound? They are the cheapest of the major banks.
A: Someday, but they still have major management problems to deal with, and it seems like they’re getting $100 million fines every other month. I would stay away. There are better fish to fry, even in this sector, like JP Morgan (JPM).
Q: Will a decrease in foreign direct investment hurt global growth this year?
A: For sure. The total CEO loss of confidence in the economy triggered by the trade war brought capital investment worldwide to a complete halt last year. That will likely continue this year and will keep economic growth slow. We’re right around a 2% level right now and will probably see lower this quarter once we get the next set of numbers. To see the stock market rise in the face of falling capital spending is nothing short of amazing.
Q: Do you think regulation is getting too cumbersome for corporations?
A: No, regulation is at a 20-year low for corporations, especially if you’re an oil (USO), gas (UNG) or coal producer (KOL), or in the financial industry (XLF). That’s one of the reasons that these stocks are rising as quickly as they have been. What follows a huge round of deregulation? A financial crisis, a crashing stock market, and a huge number of bankruptcies.
Global Market Comments
January 10, 2020
(FRIDAY, FEBRUARY 7 PERTH, AUSTRALIA STRATEGY LUNCHEON)
(JANUARY 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(VIX), (VXX), (TSLA), (SIL), (SLV),
(WPM), (RTN), (NOC), (LMT), (BA), (EEM)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 8 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: If the market is doing so well, why is the Fed flooding the market with liquidity?
A: It’s election year, so their primary focus is to get the president reelected and do everything they can to make sure that happens. If we continue at the current rate, the Fed will have zero ability to get us out of the next recession which will make it much deeper than it would be otherwise. Doing this level of borrowing and keeping interest rates near zero with the stock market going up 30% a year is insane, and we will be severely punished for it in the future.
Q: With the Volatility Index (VIX) near a 12-month low and the Mad Hedge Market Timing Index near an all-time high, is this a good time to put on LEAPs for the (VXX)?
A: Yes, in fact, a (VXX) LEAP (Long Term Equity Participation Security, or one-year-plus option spread), is the only LEAP I would put on right now. I get asked about LEAPs every day because returns on them are so huge, but I am holding back on a trade alert on a (VXX) leap because it seems like in January they really want to run this market high and run volatility down low. On the next move to a (VIX) in the $11 handle, you want to put out a one-year LEAP with a $16 strike. And that is essentially a guarantee that you will make money sometime in the coming year on a big down move in the stock market. (VXX) LEAPs are coming, just not yet.
Q: Do you think Iran is done with their attacks against the US or will there be more?
A: The belief there will be no more attacks is to call the end of a 40-year trend. There will be more attacks, and those are going to be your long side entry points. Every geopolitical crisis for the last 10 years has been a great entry point on the long side and the next one will be no different. Just hope you are not one of the victims.
Q: What would a war with Iran mean for the US economy and should I buy defense stocks?
A: You can take the Iraq war, which cost us about $4 trillion, and multiply that by three times to $12 trillion because Iran’s economy is three times the size of Iraq and has a much more sophisticated military. The Iranians are really in a good position because they know the US has no appetite for another Iraq, Afghanistan, or Vietnam. They just want us out of their neighborhood. As far as defense stocks, those really move on very long-term investments and production for government contracts. When you get an attack like this, you get a one-day pop of 5% and then they usually give it all back. So, I wouldn’t be chasing defense stocks like Lockheed Martin (LMT), Northrop Grumman (NOC), and Raytheon (RTN) at these high levels—it’s a very high-risk trade.
Q: Will Boeing (BA) take heat from the Ukrainian crash in Tehran?
A: Yes. It’s down about $5, and you might even consider running the numbers on a February call spread. This may be the last chance to get into Boeing at those low levels. The 737 MAX will fly this year, their most important product.
Q: What’s your opinion on Thai Baht?
A: This really is the home here for opinion on all asset classes, large and small. The Thai Baht will rise. It’s a weak dollar play. Money is pouring into all the emerging currencies because of the massive overborrowing that’s going on in the U.S. Countries that overborrow and print money like crazy always debase their currencies over the long term. That makes emerging markets (EEM) a great buy, which are trading at half the valuation levels of US ones.
Q: U.S. hog farmers missed the opportunity of a lifetime last year because of African Swine Flu. Any thoughts on the price of pork and commodities for 2020?
A: They should do better now that we’re at least getting relief from an escalation of the trade war. However, I gave up covering agriculture because the American farmer is just too efficient; every year they just produce more and more crops with fewer and fewer inputs—it’s a loser’s game. They occasionally get bad weather and get a big price spike, but that Is totally unpredictable. I’m staying away from ag stocks. In terms of buying soybeans or Apple, or Google, or Amazon, I’ll take the tech stocks any day over ag’s. Plus, the insiders have a big advantage in ag’s.
Q: What is the ticker symbol for the Silver ETFs?
A: The Silver metal ETF is (SLV), Silver miners is (SIL), and the Silver Royalty Trust, Wheaton Precious Metals, is (WPM).
Q: Why has volatility been so minimal even with massive geopolitical risk going up?
A: Liquidity trumps all. This month, the fed is pumping a record $160 billion into the financial system, and all that money is going into stocks, making them go up and making volatility go down. Until that changes, this trend will continue.
Q: Apple just passed $300, is the next stop $400?
A: Yes, and we could get that this year in the run up to 5G in September. By the way, my average cost on my Apple shares split adjusted is 50 cents. I bought it in the late 1990s when the company was weeks away from bankruptcy.
Q: Any thoughts on Tesla (TSLA)?
A: Yes, go out and buy the car, not the stock. Wait for some kind of pullback. We have just had a fantastic run of good news kicking the stock from $180 up to $490. I think we will make it up to $550 on this run. But you don’t want to get involved unless you’re a day trader because now the risk is very high. The next big move for Tesla is going to be the announcement of a production factory in Berlin, where they will try to take on Mercedes, BMW, VW, and Audi on their home turf. Then, they will own Europe.
Good Luck and Good Trading
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
December 20, 2019
(DECEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(BA), (CRSP), (BABA), (GLD), (PANW), (VIX), (VXX)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader December 18 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: What is the status of Boeing (BA) and when should I buy it?
A: Their 737 production was shut down because they literally ran out of space to park completed planes. They have something like 400 of them now sitting around on tarmacs all around northern Washington state. This is the worst-case scenario so it is a very tempting place to buy; I would do something like a February 2020 $250-$270 vertical bull call spread, make 10% in a month, and be conservative. If it weren’t year-end, and I didn’t already have my year in the bag, I would probably buy Boeing right here.
Q: Do you recommend CRISPR (CRSP) therapeutics as a buy?
A: Yes, but on a dip. I always hate buying stocks after they doubled. At some point in 2020, we will see correction in biotech stocks, and then you want to load the boat again. Here, I’m buying nothing.
Q: Is Palo Alto Networks (PANW) a buy at these levels?
A: Yes, it’s already had its correction—it’s one of the few stocks that are buyable at these levels. But I would do something like a call spread, which is limited risk. As far as a pairs trade with Palo Alto vs Nvidia…I would not touch that with a ten-foot pole, because you can’t know the internal nature of two companies like that well enough to buy one and sell short the other against it. You could really get destroyed on that pairs trade, so don’t make that mistake.
Q: Do you think the US dollar (UUP) will head higher or lower next year?
A: It will go a lot lower, as the chickens from all the government borrowing come home to roost. More borrowing brings a lower dollar, which brings lower everything in the US; all US dollar-denominated assets will get hurt, and this may be what eventually kills off the bull market in stocks. Start buying the Euro (FXE) on dips.
Q: What do you think about Boris Johnson winning the UK election?
A: It is a disaster and will lead to the end of Great Britain. Scotland will go independent, Northern Ireland will join the Republic of Ireland, and even Wales may break off and form its own country. So, England will be reduced to a tiny rump of a country with a much lower standard of living. It may take 10 years to happen, but that’s where it’s going.
Q: Does the recent positive housing data mean we aren’t having a recession in 2020?
A: Yes, in fact the market has been backing out of a 2020 recession for the last three months; and the leading sector in the recovery has been housing, caused partly by extremely low-interest rates but also partly by millions of new millennials pouring into the housing market for the first time. Finally, my basement is empty. That explains why the entry-level and middle level of the market are strong, and the high end is still decreasing in price.
Q: Back in August, the global economy looked to be stalling, yet it was a great time to buy stocks.
A: That is exactly when to buy stocks—when the economy is terrible. If you get used to buying on the bad news and selling on the good news you will do very well as a trader. Most people do the opposite—people were dumping stocks in August. And that of course was when we went with one of our rare 100% longs. By the way, this happens every August, which is why I take my vacations in July.
Q: Do you see a global slowdown during the melt-up?
A: Well, the economy is still slowing down. It never stopped slowing down—we’re probably looking at a 1.5% GDP this quarter. However, in liquidity-driven markets, you don’t look at fundamentals; you look at the amount of cash that is available to buy equities, that’s why you buy equities. That said, if we ever do get a real economic recovery, you might actually have stocks going down because a price-earnings multiple of 20X is not an ideal place to buy stocks.
Q: What do you prefer for a Volatility Index (VIX) trade?
A: An option on the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) is one. Go long dates, like a year, and deep out-of-the-money, like the $18 strike price, to minimize the hot from Time decay. If your (VIX) goes back up to $25 the (VXX) will soar to $27 and you will make a fortune.
However, if you have the facility to trade futures, then options on the futures in the VIX is how most professionals will trade that.
Q: Should we be worried about the Repo crisis as we approach the end of the quarter?
A: Absolutely, you should be worried—the Fed might have to come through with another round of quantitative easing in order to prevent a surprise overnight pop in interest rates to 5%. That’s what happened last quarter; it could certainly happen again. The basic problem is that the structure of the US debt markets aren’t built to handle the volume of borrowing that’s coming through from the US government, so with debt at an all-time high, we’re kind of in new territory here in terms of whether or not markets can actually handle that amount of borrowing. Total government borrowing next year will probably be $1.75 trillion dollars.
Q: What do you make of gold (GLD) at these levels?
A: Cheap but getting cheaper. You want to buy it the day the stock market peaks out in Q1 2020.
Q: Are Chinese equities a buy after the phase one trade deal?
A: Yes, and Alibaba (BABA) is probably your first pick in the Chinese area. During the whole trade war, the Chinese took significant action to stimulate their economy in order to offset the drag on trade. That stimulus is still out there, so we could see a reacceleration in the economy now that the trade war is no longer worsening.