Global Market Comments
May 8, 2020
Fiat Lux
Featured Trade:
(MAY 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(UNG), (UAL), (DAL), (INDU), (SPY), (SDS),
(P), (BA), (TWTR), (GLD), (TLT), (TBT)
Tag Archive for: (GLD)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 6 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 broker do you use? The last four bond trades I couldn’t get done.
A: That is purely a function of selling into a falling market. The bond market started to collapse 2 weeks ago. We got into the very beginning of that. We put out seven trade alerts to sell bonds, we’re out of five of them now. And whenever you hit the market with a sell, everyone just automatically drops their bids among the market makers. It’s hard to get an accurate, executable price when a market is falling that fast. The important point is that you were given the right asset class with a ticker symbol and the right direction and that is golden. People who have been with my service for a long time learn how to work around these trade alerts.
Q: Is there any specific catalyst apart from the second wave that will trigger the expected selloff?
A: First of all, if corona deaths go from 2 to 3, 4, 5 thousand a day, that could take us back down to the lows. Also, the market is currently expecting a V-shaped recovery in the economy which is not going to happen. The best we can get is a U-shape and the worst is an L-shape, which is no recovery at all. What if everything opens up and no customers show? This is almost certain to happen in the beginning.
Q: How long will the depression last?
A: Initially, I thought we could get out of this in 3-6 months. As more data comes in and the damage to the economy becomes known, I would say more like 6-9, or even 9-12 months.
Q: In natural gas, the (UNG) chart looks like a bullish breakout. Does it seem like a good trade?
A: No, the energy disaster is far from over. We still have a massive supply/demand gap. And with (UNG), you want to be especially careful because there is an enormous contango—up to 50 or 100% a year—between the spot price and the one-year contract price, which (UNG) owns. Once I saw the spot price of natural gas rise by 40% and the (UNG) fell by 40%. So, you could have a chart on the (UNG) which looks bullish, but the actual spot prices in front month could be bearish. That's almost certainly what’s going to happen. In fact, a lot of people are predicting negative prices again on the June oil contract futures expiration, which comes in a couple of weeks.
Q: What about LEAPS on United (UAL) and Delta (DAL)?
A: I am withdrawing all of my recommendations for LEAPS on the airlines. When Warren Buffet sells a sector for an enormous loss, I'm not inclined to argue with him. It’s really hard to visualize the airlines coming out of this without a complete government takeover and wipeout of all existing equity investors. Airlines have only enough cash to survive, at best, 6-8 months of zero sales, and when they do start up, they will have more virus-related costs, so I would just rather invest in tech stocks. If you’re in, I would get out even if it means taking a loss. They don’t call him the Oracle of Omaha for nothing.
Q: Any reason not to do bullish LEAPS on a selloff?
A: None at all, that is the best thing you can do. And I’m not doing LEAPS right now, I’m putting out lists of LEAPS to buy on a selloff, but I wouldn't be buying any right now. You’d be much better off waiting. Firstly, you get a longer expiration, and secondly, you get a much better price if you could buy a LEAP on a 2,000 or 3,000 point selloff in the Dow Average (INDU).
Q: Would you add the 2X ProShares Ultra Short S&P 500 (SDS) position here if you did not get on the original alert?
A: I would, I would just do a single 10% weighting. But don’t expect too much out of it, maybe you'll get a couple of points. And it’s also a good hedge for any longs you have.
Q: What happens if the second wave in the epidemic is smaller?
A: Second waves are always bigger because they’re starting off with a much larger base. There isn't a scientist out there expecting a smaller second wave than the first one. So, I wouldn't be making any investment bets on that.
Q: Pfizer (P) and others seem close to having a vaccine, moving on to human trials. Does that play into your view?
A: No, because no one has a vaccine that works yet. They may be getting tons of P.R. from the administration about potential vaccines, but the actual fact is that these are much more difficult to develop than most people understand. They have been trying to find an AIDS vaccine for 40 years and a cancer vaccine for 100 years. And it takes a year of testing just to see if they work at all. A bad vaccine could kill off a sizeable chunk of the US population. We’ve been taking flu shots for 30 years and they haven’t eliminated the flu because it keeps evolving, and it looks like coronavirus may be one of those. You may get better antivirals for treatment once you get the disease, but a vaccine is a good time off, if ever.
Q: Is this a good time to buy Boeing (BA)?
A: No, it’s too risky. The administration keeps pushing off the approval date for the 737 MAX because the planes are made in a blue state, Washington. The main customers of (BA), the airlines, are all going broke. I would imagine that their 1,000-plane order book has shrunk considerably. Go buy more tech instead, or a hotel or a home builder if you really want to roll the dice.
Q: How can the market actually drop to the lows, taking massive support from the Fed and further injections into account?
A: I don’t think we will get to new lows, I think we may test the lows. And my argument has been that we give half of the recent gains, which would take us down to 21,000 in the Dow and 2400 in the (SPX). But I've been waiting for a month for that to happen and it's not happening, which is why I've also developed my sideways scenario. That said, a lot of single stocks will go to new all-time lows, such as in retailers (RTF) and airlines (JETS).
Q: Would you stay in a Twitter (TWTR) LEAP?
A: If you have a profit, I would take it.
Q: What about Walt Disney (DIS)?
A: There are so many things wrong with Disney right now. Even though it's a great company for the long term, I'm waiting for more of a selloff, at least another $10. It’s actually rallying today on the earnings report. Around the low $90s I would really love to get into LEAPS on this. I think more bad news has to hit the stock for it to get lower.
Q: Are you continuing to play the (TLT)?
A: Absolutely yes, however, we’re at a level now where I want to take a break, let the market digest its recent fall, see if we can get any kind of a rally to sell into. I’ll sell into the next five-point rally.
Q: Any reason not to do calls outright versus spreads on LEAPS?
A: With LEAPS, because you are long and short, you could take a much larger position and therefore get a much bigger profit on a rise in the stock. Outright calls right now are some of the most expensive they’ve ever been. So, you really need to get something like a $10 or $15 rise in the stock just to break even on the premium that you’re paying. Calls are only good if you expect a very immediate short term move up in the stop in a matter of days. LEAPS you can run for two years.
Q: Is gold (GLD) still a buy?
A: Yes, the fundamental argument for gold is stronger than ever. However, it has been tracking one for one with the stock market lately. That's why I'm staying out of gold—I’d rather wait for a selloff in stocks to take gold down; then I’ll be in there as a buyer.
Q: Should I take profits on what I bought in April and reestablish on a correction?
A: Absolutely. If you have monster profits on a lot of these tech LEAPS you bought in the March/early April lows, then yes, I would take them. I think you will get another shot to buy these cheaper, and by coming out now and coming in later, you get to extend your maturity, which is always good in the LEAPS world.
Q: Would you buy casinos, or is it the same risk as the airlines?
A: I would buy casinos and hotels—they have a greater probability of survival than the airlines and a lot less debt, although they’re going to be losing money for years. I don’t know exactly how the casinos plan on getting out of this.
Q: Should we exit ProShares ultra short 20+ year Treasury Bond Fund (TBT) now?
A: No, that’s more of a longer-term trade. I would hang on to that—you could get from $16 to $20 or $25 in the foreseeable future if our down move in bond continues.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 14, 2020
Fiat Lux
Featured Trade:
(APRIL 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (SPY), (SDS), (BA), (VIX), (VXX), (GLD), (GDX),
(GOLD), (NEM), (QCOM), (HYG), (JNK)
(WHY SENIORS NEVER CHANGE THEIR PASSWORDS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 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: Is it premature to be buying long-term LEAPS?
A: Absolutely not—a long-term leap is a bet that your stock will recover beyond your strike prices in two years, which I certainly believe is the case with all of the quality tech and biotech names. These are pretty illiquid so the only way to get a good price is to have a bid in place on one of those absolute puke out days. You will never buy these at the bottom.
Q: Do you see a rally in the stock market in the fourth quarter of this year after the election?
A: For sure—we should be well clear of the pandemic by then, and all of the $6 trillion stimulus will be hitting at the same time.
Q: With the rally in the S&P 500, would you double up on the (SPY) put spread—the May $300-$310?
A: No, keeping your leveraged positions small is crucial in this kind of environment, and the big short play is basically behind us. Better to add the 2X ProShares Ultra Short S&P 500 (SDS) to catch a smaller move down.
Q: Will gold work if the market sells off as a safety trade?
A: Yes, it will. Gold (GLD) had that big 15% selloff a couple of weeks ago when it looked like all financial markets worldwide were going to completely freeze up, and everyone got margin calls all at the same time. We are clear of that now and I expect gold and other traditional hedges like shorting volatility, for example, to also work as a hedge. Gold is going to a new all-time high soon. Buy (GLD), (GDX), (GOLD), and (NEM).
Q: When do you think international borders will open up again, and will that have a positive effect on the economy?
A: Absolutely. You can expect the market to rally 10% into the opening of borders, and then another 10% afterwards depending on where the starting point for the market is in that. As for timing, they may open up in June, and then close up in again in the fall when a second Corona wave hits.
Q: Will you teach us how to buy LEAPS?
A: Just go to my website, type in LEAPS in all caps, and everything you need to know about leaps is there. I will also be following up soon with more individual stock LEAPS ideas, but I don’t want to put them out now because we have just had a $5,000-point rally on the Dow.
Q: Please talk about 5G.
A: The best play is Qualcomm (QCOM). They have a near-monopoly on a 5G chip which virtually the entire world has to buy. The stock has also held up incredibly well. Buy two-year LEAPS on Qualcomm with probably a $90 or $100 strike price.
Q: What level in the S&P do you think this will fail?
A: I think it will fail right around here, so that's why I have been adding on the short positions on every rally. We are exactly at halfway point between the February high and the March low, which is a perfect bear market rally.
Q: What’s the definition of the next big dip?
A: You give up the 5000-point rally we just had, and whether we give up 4000 or 6000 of it, at these kinds of conditions, 1000 points in the Dow (INDU) is a round lot, like the daily move. So, looking at the charts and these lows, it could be a $19,000, $18,000, or $17,000.
Q: Fundamentals may tell you the virus may be peaking, but the worst of the economy is yet to come.
A: True. Do all the markets follow fundamentals now? No, they will look at the virus numbers. Economic numbers are utterly meaningless and out of date here. I wouldn’t depend on them at all, just look at the new cases every day from the Johns Hopkins website, and that gives you a better buy signal than any economic indicator can.
Q: Are all the good shorts are over?
A: When I say shorts are over, from here you’re not going to get the 80% and 90% down moves that we have seen so far; those are gone. The reason I bought the 2X ProShares Ultra Short S&P 500 (SDS) is to play for the bottom end of the range, which could be down 2000 to 4000 points from here, and also to hedge the short volatility (VXX) puts that I already have. A rising market should make the (VXX) go down, and a falling market will make the (VXX) and the (SDS) go up. So, it's both a hedge and a view on a range of a market.
Q: Could the Federal Reserve buy shares?
A: Yes, they have done that already in Japan, with no success whatsoever in helping the economy, but I doubt the Fed will buy shares here. The government will take minority share ownerships in the troubled industries like the airlines, much like they did with (GM) and the top 20 banks during the 2008-09 crash and sell them later at huge profits. I don't expect them to go beyond that. The Fed here has too many other things to buy, like all of our different bond and money markets; those don't exist in other countries like Japan or Europe. Stocks are often the only thing they can buy, and in Japan’s case, they already own the entire government bond market, so they had nothing else left to buy besides stocks.
Q: How about buying Boeing (BA)?
A: I would buy Boeing LEAPS here, something like a $170-$180. If you’re going to make a 1,000% return on LEAPS on any one stock, it's going to be Boeing. That company will be around somehow, and you could get literally a 10-fold return just by going 50% out of the money on two-year LEAPS.
Q: How is liquidity on 2-year 30% out of the money LEAPS?
A: It is practically nonexistent. You have to put in a limit order and then wait for a dump in the market to get filled. That’s how all the people who have been doing LEAPS have been getting them. Put in a bid and when you get these cataclysmic, down-1,000-point days, they hit any bid. The algos go in there and they just say hit any bid, and you can get done at incredible prices in those situations.
Q: Are the fees on (SDS) a problem?
A: No, your standard equity commission is all you should be paying. They trade like water.
Q: Would you short junk bonds short-term?
A: No, because you short the (HYG) or the (JNK), you are shorting a 7.5% yield which you have to pay if you’re short, so the great short in junk bond play was in February when it was yielding 4.5%. It’s too late now.
Q: Will treasuries go to zero?
A: They could, but we’re close enough to zero where you might as well think of them at zero.
Stay healthy all.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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
Still Sheltering in Place
Global Market Comments
April 8, 2020
Fiat Lux
Featured Trade:
(THE ULTRA BULL ARGUMENT FOR GOLD),
(GLD), (GDX), (GOLD), (SLV), (PALL), (PPLT)
(TESTIMONIAL)
SPECIAL GOLD ISSUE
I have been bullish on gold (GLD) for the last three years and the payoff is finally here (click here).
How high could it really go?
The recent massive stimulus measures to fight the Coronavirus-induced depression is certainly bringing forward the rebirth of inflation. The Fed has just increased all of the $17 trillion quantitative easing created globally over the past decade by a staggering 50% in weeks!
This is hugely gold-friendly.
I was an unmitigated bear on the price of gold after it peaked in 2011. In recent years, the world has been obsessed with yields, chasing them down to historically low levels across all asset classes.
But now that much of the world already has, or is about to have negative interest rates, a bizarre new kind of mathematics applies to gold ownership.
Gold’s problem used to be that it yielded absolutely nothing, cost you money to store, and carried hefty transactions costs. That asset class didn’t fit anywhere in a yield-obsessed universe.
Now, we have a horse of a different color.
Europeans wishing to put money in a bank have to pay for the privilege to do so. Place €1 million on deposit on an overnight account, and you will have only 996,000 Euros in a year. You just lost 40 basis points on your -0.40% negative interest rate.
With gold, you still earn zero, an extravagant return in this upside-down world. All of a sudden, zero is a win.
For the first time in human history, that gives you a 40-basis point yield advantage over Euros. Similar numbers now apply to Japanese yen deposits as well.
As a result, the numbers are so compelling that it has sparked a new gold fever among hedge funds and European and Japanese individuals alike.
Websites purveying investment grade coins and bars crashed multiple times last week due to overwhelming demand (I occasionally have the same problem). Some retailers have run out of stock.
So I’ll take this opportunity to review a short history of the gold market (GLD) for the young and the uninformed.
Since it peaked in the summer of 2011, the barbarous relic was beaten like the proverbial red-headed stepchild, dragging silver (SLV) down with it. It faced a perfect storm.
Gold was traditionally sought after as an inflation hedge. But with economic growth weak, wages stagnant, and much work still being outsourced abroad, deflation became rampant (click here).
The biggest buyers of gold in the world, Indian investors, have seen their purchasing power drop by half, thanks to the collapse of the rupee against the US dollar. The government increased taxes on gold in order to staunch precious capital outflows.
You could also blame the China slowdown for the declining interest in the yellow metal, which is now in its sixth year of falling economic growth.
Chart gold against the Shanghai index, and the similarity is striking, until negative interest rates became widespread in 2016.
In the meantime, gold supply/demand balance was changing dramatically.
While no one was looking, the average price of gold production soared from $5 in 1920 to $1,300 today. Over the last 100 years, the price of producing gold has risen four times faster than the underlying metal.
It’s almost as if the gold mining industry is the only one in the world which sees real inflation, since costs soared at a 15% annual rate for the past five years.
This is a function of what I call “peak gold.” They’re not making it anymore. Miners are increasingly being driven to higher risk, more expensive parts of the world to find the stuff.
You know those giant six-foot high tires on heavy dump trucks? They now cost $200,000 each, and buyers face a three-year waiting list to buy one.
Barrick Gold (GOLD) didn’t try to mine gold at 15,000 feet in the Andes, where freezing water is a major problem, because they like the fresh air.
What this means is that when the spot price of gold fell below the cost of production, miners simply shut down their most marginal facilities, drying up supply.
Barrick Gold, a client of the Mad Hedge Fund Trader, can still operate as older mines carry costs that go all the way down to $600 an ounce.
I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD).
They claim the move in the yellow metal we are seeing now is only the beginning of a 30-fold rise in prices, similar to what we saw from 1972 to 1979, when it leapt from $32 to $950.
So, when the chart below popped up in my in-box showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using.
To match the gain seen since the 1936 monetary value peak of $35 an ounce when the money supply was collapsing during the Great Depression and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by 800% from the recent $1,050 low. That would take our barbarous relic friend up to $8,400 an ounce.
To match the move from the $35/ounce, 1972 low to the $950/ounce, 1979 top in absolute dollar terms, we need to see another 27.14 times move to $28,497/ounce.
Have I gotten you interested yet?
I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. These figures make my own $2,300/ounce long-term prediction positively wimp-like by comparison.
The seven-year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg, South Africa to unload my own Krugerrands in 1979, was triggered by a number of one-off events that will never be repeated.
Some 40 years of unrequited demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold.
South Africa, the world’s largest gold producer, was then a boycotted international pariah teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence, my more subdued forecast.
But then again, I could be wrong.
In the end, gold may have to wait for a return of real inflation to resume its push to new highs. The previous bear market in gold lasted 18 years, from 1980, to 1998, so don’t hold your breath.
What should we look for? The surprise that your friends get out of the blue pay increase, the largest component of the inflation calculation.
This is happening now in technology and healthcare, but nowhere else. When I visit open houses in my neighborhood in San Francisco, half the visitors are thirty somethings wearing hoodies offering to pay cash.
It could be a long wait for real inflation, possibly into the mid 2020s when shocking wage hikes spread elsewhere.
You’ll be the first to know when that happens.
As for the many investment advisor readers who have stayed long gold all along to hedge their clients other risk assets, good for you.
You’re finally learning!
Global Market Comments
March 27, 2020
Fiat Lux
Featured Trade:
(MARCH 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(ROM), (BA), (VIX), (UPRO), (SSO), (UBER), (LYFT), (MDT),
(GLD), (GOLD), (NEM), (GDX), (UGL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 25 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: Since we flipped the off button on the economy, I don’t see how we can simply flip the on button and have a V-shaped recovery. It seems much more unlikely that it will get back to pre-recession levels.
A: Actually, all we really need is confidence. Confident people can go outside and not get sick. Once we start seeing a dramatic decline in the number of new cases, the shelter-in-place orders may be cancelled, and we can go outside and go back to work. It’s really that simple. So, we will get an initial V-shaped recovery probably in the third quarter, and after that, it will be a slower return spread over several quarters to get back to normal. Everybody wants to get back to normal and let's face it, there's an enormous amount of deferred consumption going on. I have hardly spent any money myself other than what I’ve spent online. All of those purchases get deferred, so in the recovery, there's going to be a massive binge of entertainment, shopping, and travel that is all being pent up now—that will get unleashed once the airlines start flying again and the shelter-in-place orders are cancelled. We’re not losing so much of this growth, we’re just deferring it. Obviously, some of the growth is gone permanently; you can forget about any kind of vacation in the next couple of months. I would say, the great majority of consumption in the US—and thus growth and thus stock appreciation—is just being deferred, not cancelled outright.
Q: Other than the ProShares Ultra Technology ETF (ROM), do you have any other leveraged sectors coming into the recovery?
A: There is a 50/50 chance the Roaring 20s started 2 days ago, on Monday, March 23 at the afternoon lows. We may go back and test those lows one more time, which at this point is 3,700 points below here, but we are clocking 1,000 points a day. It doesn’t take much, like a bad non-farm payroll number, to go back and test those lows. The good news is out; they're not going to spend any more money other than the $10 trillion they're putting in now.
Q: Would you buy Boeing (BA) here? Is this the bottom?
A: The bottom was at $94 on Monday; we went up 100% in three days and now we’re at $180. Incredible moves, and a total lack of liquidity. One reason I haven't added any positions lately is that they have closed the New Yok Stock Exchange floor and its not clear that of I send out a trade alert, it could get done. We have gone totally online, so I just want to see what happens as a result of that. I don’t want to be putting out trade alerts that no one can get in or out of, heaven forbid.
Q: What do you mean by “The spike to $80 in the Volatility Index (VIX) was totally artificial?”
A: When you have a series of cascading shorts triggered by margin calls, that is artificial. I have seen this happen many times before, both on the upside and the downside. This happened twice in the (VIX) in the last two years. When you go from a (VIX) of $25 to $80 and back down to $39 in days, which is what we did, you know it was a one-time-only spike and we are not going to visit the $80 level again— at least not until the next financial crisis because those positions are gone and are never coming back. A (VIX) of $80 means we are going to have 1,000 point move in the Dow Average for the next 30 days.
Q: I bought some ProShares Ultra Pro ETF (UPRO) which is the 3x long the S&P 500 at $1,829. Do I take profits by selling calls or just hold longer?
A: I would just sell the whole position outright. The (UPRO) is so incredibly volatile that you are rewarded heavily for just coming out completely and then reopening fresh positions on these big meltdown days. We will probably be doing trade alerts on (UPRO) or its cousin, the 2x long ProShares Ultra S&P 500 (SSO) sometime in the near future.
Q: With 2-year LEAPs, would you go at the money or out of the money?
A: This is the golden opportunity to go way out of the money because the return goes from 100% to 500%, or even 1000% if you go, say, 30%-50% out of the money. A lot of these stocks are ripe for very quick 30% bouncebacks, especially the (ROM). So yes, you want to do out of the money 20% to 30%. It will easily recover those losses in weeks if you are picking the right stocks. Over a two-year view, a lot of these big tech stocks could double by the time your LEAP expires, and then you will get the full profit. The rule of thumb is: the farther out of the money you go, the bigger the profit is. But I wouldn’t go for more than a 1000% profit in 2 years; you don't want to get greedy, after all.
Q: You called the Dow to hit 15,000. Is that still possible? We got down to the 18 handle.
A: Yes, if the coronavirus data gets worse, which is certain, we could get another panic selloff. How will the market handle 100,000 US deaths, given the exponential rise in cases we are seeing? With cases doubling every three days that is entirely within range. So, I would say, there is a 50% chance we hit the bottom on Monday at 18,000, and 50% chance we go lower.
Q: Do you know anything about the coronavirus stocks like Regeneron (REGN)?
A: Actually, I do, it's covered by the Mad Hedge Biotech & Health Care Letter, click here for the link. If you get the Biotech Letter, you already know all about stocks like Regeneron. Regeneron literally has hundreds of drugs in testing right now to work as vaccines or antivirals, and some of them, like their arthritis drug, have already been proven to work. So, we just have to get through the accelerated trials and testing to unleash it on the market. But for anybody who has a drug, it's going to take a year to mass-produce enough to inoculate the entire country, let alone the world. So, don't make any big bets on getting a vaccine any time soon—it's a very long process. Even in normal times, some of these drugs take months to manufacture.
Q: Are there any ventilator stocks out there?
A: There are; a company called Medtronic (MDT), which the Mad Hedge Biotech & Healthcare Letter also covers. They are the largest ventilator company in the US. Their normal production is 100 machines a week. Now, they are increasing that to 500 a week as fast as they can, but it isn’t enough. We need about 100,000 ventilators. China is now selling ventilators to the US. Elon Musk from Tesla (TSLA) just bought 1,000 ventilators in China and had them shipped over to San Francisco at his own expense, and Virgin Atlantic just flew over a 747 full of ventilators and masks and other medical supplies from China. So yes, there are stocks out there to play these things, they have already had large moves. We liked them anyway, even before the pandemic, so those calls were quite good. And China thinks their epidemic is over, so they are happy to sell us all the medical supplies they can make.
Q: Why did 30-year mortgage rates just go up instead of down? I thought the Fed rate cuts were supposed to take them down; am I missing something?
A: In order to get 30-year mortgage rates down, you have to have buyers of 30-year loans, and right now there are buyers of nothing. The lending that is happening is from banks lending their own money, which is only a tiny percentage of the total loan market. When the Fed moves into the mortgage market, you will see those yields move to the 2% range. The other problem is how to get a loan if all the banks are closed. They are running skeletal staff now, and you can’t close on real estate deals because all the notaries and title offices are closed; so essentially the real estate industry is going to shut down right now and hopefully, we’ll finish that in a month.
Q: Do you think Uber (UBER) and Lyft (LYFT) will go bankrupt?
A: It is a possibility because one to one human contact inside a car is about the last situation you want to be in during a pandemic. Their traffic was down 25% according to a number I saw. It’s very heavily leveraged, very heavily indebted, and those are the companies that don’t survive long in this kind of crisis. So, I would say there is a chance they will go under. I never liked these companies anyway; they are under regulatory assault by everybody, depend on non-union drivers working for $5 an hour, and there are just too many other better things to do.
Q: Is this the end of corporate buybacks?
A: To some extent, yes. A future Congress may make it either illegal or highly tax corporate buybacks, in some fashion or another because twice in 12 years now, we have had companies load up on buying back their own stock, boosting CEO compensation to the hundreds of millions—if not billions—and then going broke and asking for government bailouts. Something will be done to address that. If you take buybacks out of the market (the last 10,000-point gain in the Dow were essentially all corporate buybacks), we may not see a 20X earnings multiple again for another generation. Individuals were net sellers of stock for those two years. We only reached those extreme highs because of buybacks, so you take those out of the equation and it's going to get a lot harder to get back to the super inflated share prices like we had in January.
Q: How long before an Italian bank collapses, and will they need a bailout?
A: I don’t think they will get a collapse; I think they will be bailed out inside Italy and won’t need all of Europe to do this. But the focus isn't on Europe right now, it's on the US.
Q: Do you think this virus is really subsiding in China based on their past history of dishonest reporting?
A: Yes, that is a risk, and that's why people aren’t betting the ranch right now—just because China is reporting a flattening of cases. And China could be hit with a second wave if they relax their quarantine too soon.
Q: What's your opinion on how the Fed is doing and Steve Mnuchin in this crisis?
A: I think the Fed is doing everything they possibly can. I agree with all of their moves—this is an all-hands-on-deck moment where you have to do everything you can to get the economy going. Notice it’s Steve Mnuchin doing all the negotiating, not the president, because nobody will talk to him. For a start, he may be a Corona carrier among other things, and you’re not seeing a lot of social distancing in these press conferences they are holding. About which 50% of the information they give out is incorrect, and that's the 50% coming from Donald Trump.
Q: What do you think about no debt and no pension liability?
A: That’s why Tech has been leading the upside for the last 10 years and will lead for the next 10. You can really narrow the market down to a dozen stocks and just focus on those and forget about everything else. They have no net debt or net pension fund liabilities.
Q: Why have we not heard from Warren Buffet?
A: I'm sure negotiations are going on all over the place regarding obtaining massive stakes in large trophy companies that he likes, such as airlines and banks. So that will be one of the market bottom indicators that I mentioned a couple of days ago in my letter on “Ten Signs of a Market is Bottoming.”
Q: What’s the outlook for gold?
A: Up. We just had to get the financial crisis element out of this before we could go back into gold, so I would be looking to buy SPDR Gold Shares ETF (GLD), the gold miners like Barrick Gold (GOLD) and Newmont Mining (NEM), the Van Eck Vectors Gold Miners ETF (GDX), and the 2X long ProShares Gold ETF (UGL).
Q: Does the Fed backstop give you any confidence in the bond market?
A: Yes, it does. I think we finally may be getting to the natural level of the market, which is around an 80-basis point yield. Let’s see how long we can go without any 50-point gyrations.
Q: Do you foresee a depression?
A: We are in a depression now. We could hit a 20% unemployment rate. The worst we saw during the Great Depression was 25%. But it will be a very short and sharp one, not a 12-year slog like we saw during the 1930s.
Good Luck and Good Trading and stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
