Global Market Comments
June 28, 2021
Fiat Lux
Featured Trade:
(BACK FROM MY 50-MILE HIKE)
Tag Archive for: (GOOGL)
I received an email from a reader last week that I really had no idea what the stock market was going to do and that I was just guessing.
I answered that I couldn’t agree more. These are unprecedented times for the American economy. There is no playbook for what is going on, we’re just making it up.
“I’m guessing, Jay Powell is guessing, we’re all guessing.” I threw in an afterthought: “guessing and hoping.”
That is why the hottest inflation rate in 13 years sends interest rates into freefall when they should be soaring.
I have been one of the most bullish strategists in the market since the March 2009 low and have been richly rewarded as a result. (Even though being bearish sells more newsletters). You have been too.
I thought the market was overdue for a 7.8% correction. So, even I was flabbergasted when the latest market selloff amounted to only a meager 4.3%. There is still so much money trying to get into the market it is unable to go any lower.
Don’t get fooled again, to quote that eminent market guru, Peter Townsend.
Which raises an issue for investors. That 7.8% correction I thought was overdue is still ahead of us. That demands caution and prudence for shorter term investors. Long term investors can work on their golf swings or take that dreamed of round the world cruise.
What was especially encouraging last week was the leadership maintain by the big five tech stocks. I ran some numbers last week to see if there was more than meets the eye and came up with some eye-popping results.
The rocket fuel last week was provided by progress by an infrastructure bill that could unleash another $579 billion. That could be enough stimulus to keep the recovery on steroids powering well into 2022.
Big tech stocks saw this a month ago when they started discounting robust 2023 earnings reports much farther in advance than usual.
The top five big tech companies, Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Facebook (FB), and Microsoft (MSFT), earned a staggering $88 billion in profits in Q1, or an annualized $332 billion.
That amounts to an average 40% YOY growth rate. Some 16.7% of total US profits of $1,984 billion was generated by only 2% of the workforce. These are positively ballistic numbers. Tech was never going to be down for long. That’s why most went to new all-time highs last week.
Don’t get fooled again.
The Infrastructure Deal is done, at $579 billion in new spending, will provide a further boost to the economy. The climate had to be cut to get Republican support. Transportation is the big winner at $312 billion. Grid and broadband upgrades received major funding. I don’t think that Biden expected to get his whole $2 trillion. It was just a negotiating strategy. Still, something is better than nothing. Look for Infrastructure 2.0 after the 2022 midterms with lots of climate spending.
NASDAQ Hit New High. Prime day has catapulted Amazon (AMZN). Microsoft (MSFT) became the second $2 trillion company and Alphabet (GOOGL) will probably be next. Apple (AAPL) is bringing up the rear but could hit new highs in the coming months. The big question is whether this is a one-night stand or a long-term relationship with the bull. Me, being the stable guy that I am, vote for the latter.
Poof, Inflation is Gone! Almost all commodity prices have given up their 2021 gains after traumatic selloffs over the past weeks. Bad boy lumber has dropped by half, and bitcoin has been slaughtered. That puts interest rate hikes on hold. In the meantime, Tesla (TSLA) and the Ark stocks are recovering. Load the boat with big tech, we are going to new all-time highs across the board. Turns out the Fed was right after all.
Weekly Jobless Claims drop to 411,000, down from the pandemic peak of 900,000 in January. We’re headed to 100,000 by yearend.
$1.2 Trillion Poured into Equities in H1, more than double the previous 2007 record. Corporate share buybacks are also approaching new highs. That means the 150-day moving average for the (SPY) should hold well into 2022. As high as we are, equities are still the best game in town.
Bitcoin battles at $30,000, for the fourth time in two months, at one point falling to a $24,000 low. China miners, about 70% of the total, are facing a total ban. Many loaded their servers on planes over the weekend and moved to unregulated Maryland or Virginia. The charts are pointing towards a $20,000 bottom. The ultra bulls are targeting $100,000 by yearend.
Existing Home Sales down for the fourth month, down 0.9% to an annualized 5.8 million in May. Shortage of supply remains the big problem with inventories at an incredible 2.5 months. Some 89% of the homes sold were on the market for less than a month. Conditions will get a lot worse before they get better.
New Home Sales dive 5.9%, thanks to shortage of supply and high prices. Labor, land, and lumber are through the roof. The median price of a home sold in May is $374,400, up a staggering 18% YOY. Supplies rose to 5.1 months. The cure for high prices is high prices. This trend should last a decade.
Amazon Prime Day Sales top $11 billion, including the Havaheart 0754 single door humane rabbit trap I bought for only $27. That made Monday and Tuesday the biggest online sales days of the year. Use the recent profit-taking to load up on (AMZN) shares and LEAPS. It’s headed to $5,000. Oh, and I’ve caught three rabbits so far.
Intel to build huge German chip factory,to address the global shortage. Germany’s largest auto industry makes it a natural location. Buy (INTC) on dips.
NVIDIA is going ballistic, with Raymond James raising its target to $900 as the best-positioned chip company over the long term. I was early at $1,000. The explosion in crypto has been a big plus. A new generation of high-end gaming is coming where (NVDA) has a complete monopoly and supplies are short. I have bought six of their GeForce and RTX graphics cards in the past month. But artificial intelligence is the big grower over the long term, which is exploding everywhere, and their $5,000 Tesla M10 GPU is dominant. Buy (NVDA) now.
We may lose Christmas, as lack of containers and ships makes transport from China problematic. Home Depot (HD) has chartered its own ship to make up for the shortfall, and Target (TGT) is considering the same. Conditions are so bad there is also a fireworks shortage for the Fourth of July where China is a major supplier (they invented them).
My Ten Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 0.71% gain so far in June on the heels of a spectacular 8.13% profit in May. That leaves me 100% in cash.
My 2021 year-to-date performance appreciated to 68.60%. The Dow Average is up 12.62% so far in 2021.
I spent the week sitting in 100% cash, waiting for a better entry point on the long side. Up this much this year, there is no reason to reach for the marginal trade, the maybe instead of the certainty. I’ll leave that for the Millennials.
That brings my 11-year total return to 491.15%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.70%, easily the highest in the industry.
My trailing one-year return exploded to positively eye-popping 123.54%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 600,000, which you can find here. Some 33.1 million Americans have contracted Covid-19.
The coming week will be a weak one on the data front.
On Monday, June 28 at 10:30 AM, the Dallas Fed Manufacturing Index for June is out.
On Tuesday, June 29 at 9:00 AM, the S&P Case Shiller National Home Price Index is published.
On Wednesday, June 30 at 8:15 AM, the ADP Private Employment Report is released.
On Thursday, July 1 at 8:30 AM, the Weekly Jobless Claims are published.
On Friday, July 2 at 8:30 AM, the all-important June Nonfarm Payroll Report is announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I’m in Los Angeles this week visiting old friends, and I am reminded of one of the weirdest chapters of my life.
There were not a lot of jobs in the summer of 1971, but Thomas Noguchi, the LA County Coroner, was hiring. The famed USC student jobs board had delivered! Better yet, the job included free housing at the coroner's department.
I got the graveyard shift, from midnight to 8:00 AM. All I had to do was buy a black suit from Robert Halls for $25.
Noguchi was known as the “coroner to the stars” having famously done the autopsies on Marlin Mansfield and Jane Mansfield. He did not disappoint.
For three months, whenever there was a death from unnatural causes, I was there to pick up the bodies. If there was a suicide, gangland shooting, or horrific car accident, I was your man.
Charles Manson had recently been arrested and I was tasked with digging up the victims. One, cowboy stuntman Shorty Shay, had his head cut off and neatly placed in between his ankles.
The first time I ever saw a full set of women’s underclothing, a girdle and pantyhose, was when I excavated a desert roadside grave that the coyotes had dug up. She was pretty far gone.
Once, I and another driver were sent to pick up a teenaged boy who had committed suicide in Beverly Hills. The father came out and asked us to take the mattress as well. I regretted that we were not allowed to do favors on city time. He then said, “Can you take it for $200”, then an astronomical sum.
A few minutes later found a hearse driving down the Santa Monica freeway on the way to the dump with a double mattress expertly tied on the roof with Boy Scout knots with a giant blood spot in the middle.
Once, I was sent to a cheap motel where a drug deal gone bad had produced several shootings. I found $10,000 in a brown paper bag under the bed. The other driver found another ten grand and a bag of drugs and kept them. He went to jail. Eventually, I figured out that handling dead bodies could be hazardous to your health, so I asked for rubber gloves. I was fired.
Still, I ended up with some of the best summer job stories ever.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
June 23, 2021
Fiat Lux
Featured Trade:
(IGNORE THE GOOGLE COMPLAINTS)
(GOOGL), (AAPL), (MSFT), (FB), (AMZN)
Another part of the tech bull case that gets overlooked is the more than $700 billion in buyback authorizations that could manifest itself in tech shares in the near term.
Right now, that buyback authorization is holding steady at $500 billion but primed to grow.
This powerful combination of shareholder returns and continuous strong earnings are likely meaningful catalysts that could take us to higher highs in technology stocks later in the year.
Certainly, we have seen a massive rotation back into growth stocks the last few weeks that have buoyed tech shares.
The likes of PayPal (PYPL) are bouncing off technical weakness.
Just take a look at Apple which is the buyback alpha male of the S&P this year and trailing 12-months.
When you consider that apart from the dividends and buybacks, they generate over $110 billion in free cash flow, it’s hard not to like the stock.
Apple itself has authorized $90 billion in buybacks and the company is the biggest in the world.
Yes, the stock underperforms sometimes, but don’t overthink this name.
Apple is easily a $170 stock with no sweat.
The iPhone maker repurchased $19 billion of stock in the March quarter, bringing the total for the past fourth quarters to around $80 billion.
Luca Maestri, the company’s chief financial officer, said in a conference call that “we continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time.”
That is code for many buybacks in the near to medium term and investors must love it.
Apple had $83 billion of net cash at the end of the quarter.
Apple’s aggressive stock buyback plan is one reason that Berkshire Hathaway CEO Warren Buffett is so interested in the company.
Berkshire (BRK.A and BRK.B) holds a 5% stake in Apple and is one of its largest investors.
The same thing is happening at other tech firms.
Google repurchased a record $11.4 billion of stock in the quarter, up from $8.5 billion a year earlier, and Facebook (FB) bought back $3.9 billion, triple the total a year ago.
Apple’s share count declined by almost 4% year-over-year and by over 20% since the end of 2016.
With its elevated repurchase program, Alphabet is slicing into its share count, which fell almost 2% year-over-year in the March quarter. The buybacks are comfortably exceeding Alphabet’s ample issuance of stock compensation to employees. Alphabet authorized an additional $50 billion of stock repurchases.
Facebook’s buyback program hasn’t dented its share count, which was little changed year-over-year at 2.85 billion.
Microsoft (MSFT) is making more headway, with its buyback reducing its share count by nearly 1% in the past year. Microsoft bought back about $7 billion of stock in the March quarter and $20 billion in the first nine months of its fiscal year ending in June.
Apple and Microsoft also return cash to holders through dividends, although both now have yields under 1%. Alphabet and Facebook don’t pay dividends.
Although buybacks have not yet reached pre-health crisis levels, the trend seems to be heading in that direction.
Tech firms are ratcheting up the buybacks, meaning they are comfortable expending that cash in the current economic climate as opposed to holding onto it as reserves or using it for R&D.
There is always unpredictability in the economic environment, but these tech stocks are saying, things are a lot better than 2020 and there are many CFOs out there pulling the trigger on dividends, buybacks, and reducing share count which is a highly bullish signal to the rest of the tech market.
Since 2009, asset inflation has gripped global equity funds everywhere and the most convincing winner in terms of asset classes has to be the Nasdaq index which has experienced a 900% return during that 12-year time span.
You must believe that buybacks are just another reason why this overperformance of 900% has happened.
Tech is still where almost all earnings’ growth resides and that capital flow is being recycled into shareholders’ pockets and catalyzing tech CFOs to execute financial gymnastics by reducing share count.
It’s hard to discount that strength which is why there are always buyers on the dips whether that buyer is a domestic pension fund, short-term speculator, a multibillion-dollar family office, or a foreign hedge fund.
Mad Hedge Technology Letter
June 23, 2021
Fiat Lux
Featured Trade:
(IGNORE THE GOOGLE COMPLAINTS)
(GOOGL), (AAPL), (MSFT), (FB), (AMZN)
The five largest tech companies last Fall 2020, Apple, Microsoft, Amazon, Alphabet, and Facebook, accounted for 23.8% of the S&P 500 and now that figure has surpassed 25%.
As much as we like to bring out the champagne and celebrate how well big tech has done, the euphoric times often lay the groundwork for the dramatic downfall.
A few warning signs have started to rear their ugly head.
These business models are rock-solid now, but that doesn’t mean the people who manage these business models are always rock-solid too.
Today, I would like to zone in on one of the architects of big tech that have taken one of these behemoths and juiced it up for shareholders — Alphabet CEO Sundar Pichai.
I am not arguing that returning capital to shareholders is bad, but when other critical elements are ignored, it sets the stage for toxicity to fester from the top down.
Don’t get me wrong, revenue and profits are charting new highs every three months for Alphabet.
They are now worth $1.67 trillion and rising. Google and its array of apps have made themselves indispensable in the lives of everyday Americans.
But an increasingly hostile workplace is taking hold that has been made worse by decisive leadership and improving the company has been shelved for a stultifying mindset of incrementalism and bureaucracy.
This is the 2021 version of Alphabet and attrition rates have soured at the management level.
Many of these key managers blame Pichai for leaving mentioning a bias toward inaction and a fixation on public perception as the real mantra inside Google headquarters.
This has created a workplace that has devolved into culture fights, and Pichai’s attempts to “wait out” the problems have an air of arrogance about it that employees don’t like.
Internal surveys are also hard to analyze as employees are indirectly encouraged not to speak out against positions of authority.
However, recently left employees do admit that Google is a more professionally run company than the one Pichai inherited six years ago.
During Pichai’s leadership, it has doubled its workforce to about 140,000 people, and Alphabet has tripled in value. It is not unusual for a company that has grown so quickly to get cautious.
At least 36 Google vice presidents have left the company since last year, according to profiles from LinkedIn.
Google executives proposed the idea of acquiring e-commerce firm Shopify as a way to challenge Amazon in online commerce a few years ago.
Rumor has it that Pichai was turned off by the high price of the asset even though SPOT has tripled in value since then.
As time goes by, Pichai is becoming known as the steward of what Google built before he got there and just a guy there to squeeze out the numbers.
Google was once known as the scruffy start-up and it’s only natural that it has become more conservative in its approaches. They simply have more to lose now.
The meteoric growth has also led to rising concerns about the U.S. stock market becoming increasingly concentrated in a just a few names.
The total market capitalization of U.S. tech stocks reached over $11 trillion, eclipsing that of the entire European market—including the UK and Switzerland, which is now valued at $9 trillion.
Although there are some flaws popping up in Google’s business model, and management appears to be getting worse, I don’t believe we are even close to any sort of in-house meaningful reckoning that would adversely affect its share price.
The external risks are currently far greater than the risk of Google blowing up from the inside.
And while I do acknowledge, it might not be the workplace it once was and much less than ideal, it still pumps out record earnings and the degree to which it outperforms earnings’ expectations is uncanny.
That’s why I would recommend trading this stock aggressively in the short-term while rumors of broken management model are unfounded, because fundamentally and technically, it’s hard to find a better business model and more beautiful chart.
While the golden goose is feeding you eggs, you eat as many eggs as you can and ride this trade until Google management finally runs into REAL problems and I am not talking about petty anti-trust fines by European regulators.
Simply put, even the best companies run into vanity problems that are storms in teacups. Artificially creating problems sure has to be a first world problem and until there is true evidence that Google’s ad tech is being dismantled, I don’t believe investors have anything to worry about with the ad dollars coming in.
Big tech is on the verge of breaking out after being range-bound, and it would be daft to overthink this move and not participate in the melt-up.
Short-term, I would be inclined to buy on any big or little dip in GOOGL, take profits, and wait for the next dip to get back into the same position.
Mad Hedge Technology Letter
June 21, 2021
Fiat Lux
Featured Trade:
(SOFTBANK’S EPIC COMEBACK)
(SOFTBANK), (CS), (CPNG), (GRAB), (AAPL), (GOOGL), (BABA)
I haven’t touched on the Softbank Vision Fund since pre-pandemic times, but it is time to take a barometer of the state of their fund because they also represent a snapshot of the state of emerging technology.
The Fund reported a massive loss of $18 billion during the nadir of the tech correction in 2020, and its clout in the tech world fell by epic proportions to almost pariah status.
Those were perilous times for Softbank Founder and CEO Masayoshi Son who held the distinction of losing the most wealth in the world before making it all back.
The ensuing flood of liquidity, accessible at the tech lows, catapulted most of Softbank’s investments in the U.S. tech market and they recently reported the highest-ever profit for a Japanese company.
Softbank Group reported profits of $48 billion for the fourth quarter, while Softbank Vision Fund, which invests in startups, reported a profit of $37 billion.
After massive weakness in assets including Airbnb, Oyo, and WeWork, we saw the value in these startups dip to an all-time low, then they were essentially bailed out by the Fed.
During that recapitalization process, Softbank Vision Fund fired 10% of its employees to cut costs.
When you combine that with big up moves from South Korean e-commerce company Coupang (CPNG) and ride-hailing firm Grab planning to go public via an SPAC, betting all his chips in emerging tech was the right thing to do and Son was handsomely rewarded for this outsized risk.
Son is quite famous for some of his speculative energy that he has channeled towards China’s Alibaba (BABA) before Alibaba became famous.
More than a decade later, that investment is worth $130 billion, becoming one of the most successful startup bets in history. He then aggressively invested in several startups around the world, including Snapdeal, Oyo, Ola, and Paytm in India.
For as many lemons in his basket, he’s had his fair share of 10-baggers and 433-baggers like Alibaba that validated his aggressive tech strategy.
Son got into many investments before venture capitalists in tech started being copied around the world and before the Arab sovereign funds and Chinese could get their house in order to partake as well.
He wasn’t the first, but the first group mover advantage made these deals possible, and by borrowing heavily against his Softbank equity, he was able to bet the ranch on many emerging techs by acquiring the proper financing and leverage.
However, the Softbank Vision Fund is a harbinger for what’s to come in tech and Son laughing all the way to the bank could also be loosely translated as the low hanging fruit in tech and its harvest has been plucked dry.
Venture capitalists are having a harder time in 2021 finding those 433-baggers or even 3-baggers.
An ominous sign that bodes ill for emerging tech is the financing hawks that have started to highlight the extreme risks involved in investing big in little-known business models with the propensity to fail.
Credit Suisse (CS) has put Son recently on notice by dissolving a longstanding personal lending relationship as the bank clamps down on transactions with his company, according to regulatory filings and people familiar with the situation.
The moves came after the collapse of SoftBank-backed Greensill Capital that caused turmoil for Credit Suisse forcing them to book a massive loss.
That was on the heels of Credit Suisse’s $5.5 billion loss originating from trading by family office Archegos Capital Management.
The bank is now avoiding business with big tech investors who are likely to reach further up the risk barometer and inflict heavy damage.
Does this mean the era of subsidized tech business models is over?
No, but it will become more difficult to originate financing from traditional methods like European banks to invest in these types of exotic tech projects.
Mr. Son had long used Credit Suisse and other banks to borrow money against the value of his substantial holdings in SoftBank.
As recently as February, Mr. Son had around $3 billion of his shares in the company pledged as collateral with Credit Suisse, one of the biggest amounts of any bank, according to Japanese securities filings.
The share pledge loan relationship stretched back almost 20 years. By May, that lending had gone to zero.
Bloomberg News reported in May that Credit Suisse refuses to do any new business with SoftBank, but the silver lining is that Softbank has $48 billion in new profits to theoretically spin into some new projects it likes.
Of course, it’s always easier when you use other people’s money, but these are then new rules of the game.
Its bounty from the liquidity surge will help them advance into this new post-pandemic tech ecosystem with substantial gunpowder.
So I can’t say it’s been all bad for everyone at the individual level because this pandemic divided the masses into tech winners and losers.
Notice that many Bay Area tech investors were taking profits from the tech pandemic stock surge and rolled the capital into $3-5 million Lake Tahoe Mountain chalets as a summer house or dinner party house.
And if they didn’t do that, they were rolling these profits into Hawaiian beachfront properties with views of Diamond Head in Oahu or even dabbling in villas on the Kauai Island.
This could partially explain why Apple (AAPL) has gone sideways for the past 11 months.
This year has instigated a tech reset and in the short term, the Nasdaq has been overwhelmed by external headlines like of perceived inflation fears, chip shortage, and a built-in assumption that earnings will be perfect.
These sky-high earnings expectations have created a “buy the rumor and sell the news” type of price action with only a handful of companies able to top these insane expectations like Google (GOOGL).
Global Market Comments
June 18, 2021
Fiat Lux
Featured Trade:
(JUNE 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(MS), (XOM), (FXI), (MSFT), (AMZN), (FB), (GOOGL), FCX), (CAT),
(GLD), (DIS), (GME), (AMC), (UBER), (LYFT), (TLT), (VIX)
Below please find subscribers’ Q&A for the June 16 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV.
Q: Does Copper (FCX) look like a buy now or wait for it to drop?
A: I would buy ⅓ now, ⅓ lower down, ⅓ lower down still. Worst case we get down to $30 in Freeport McMoRan (FCX) from $37 today. A new internal combustion engine requires 40 lbs. of copper for wiring, but new EVs require 200 lbs. per car, and the number of EV cars is about to go from 700,000 last year to 25 million in 10 years. So, you can do the math here. It's basically 24.3 million times 200 lbs., or 1.215 billion tons, and that's the annual increase in demand for copper over the next 10 years. There aren’t enough mines in the world to accommodate that, so the price has to go up. However, (FCX) has gone up 12 times from its 2020 low and was overdue for a major rest. So short term it's a sell, long term it's a double. That's why I put the LEAPS out on it.
Q: Lumber prices are dropping fast, should I bet the ranch that it’ll drop big?
A: No, I think the big drop has happened; we’re down 40% from the highs, the next move is probably up. And that is a commodity that will remain more or less permanently in short supply due to the structural impediments put into the lumber market by the Trump administration. They greatly increased import duties from Canada and all those Canadian mills shut down as a result. It’s going to take a long time to bring those back up to speed and get us the wood we need to build houses. Another interesting thing you’re seeing in the bay area for housing is people switching over to aluminum and steel for framing because it’s cheaper, and of course in an earthquake-prone fire zone, you’d much rather have steel or aluminum for framing than wood.
Q: I didn’t catch the (FCX) LEAP, can you reiterate?
A: With prices at today's level, you can buy the 35 calls in (FCX), sell short the 40 calls, and get nearly a 177% return by January 2022. That's an absolute screamer of a LEAPS.
Q: How do you see the working from home environment in the near future after Morgan Stanley (MS) asked everyone to return?
A: Well that’s just Morgan Stanley and that’s in New York. They have their own unique reasons to be in New York, mostly so they can meet and shake down all their customers in Manhattan—no offense to Morgan Stanley, but I used to work there. For the rest of the country, those in remote places already, a lot of companies prefer that people keep working from home because they are happier, more productive, and it’s cheaper. Who can beat that? That’s why a lot of these productivity gains from the pandemic are permanent.
Q: Is there a recording of the previous webinar?
A: Yes, all of the webinars for the last 13 years are on the website and can be accessed through your account.
Q: What makes Microsoft (MSFT) a perfect-looking chart?
A: Constant higher lows and higher highs. They also have a fabulous business which is trading relatively cheaply to the rest of tech and the rest of the main market. Of course, they were a huge pandemic winner with all the people rushing out to buy PCs and using Microsoft operating software. I expect those gains to improve. The new game now is the “wide moat” strategy, which is buying companies that have near monopolies and can’t be assailed by other companies trying to break into their businesses. The wide moat businesses are of course Microsoft (MSFT), Amazon (AMZN), Facebook (FB) and Alphabet (GOOGL). That's the new investment philosophy; that's why money has been pouring back into the FANGs for a month now.
Q: Do you have any concerns about Facebook’s (FB) advertising ability, given the recent reduction of tracking capabilities of IOS 4.5 users?
A: Well first of all, IOS 4.5 users, the Apple operating system, are only 15% of the market in desktops and 24% of mobile phones. Second, every time one of these roadblocks appears, Facebook finds a way around it, and they end up taking in even more advertising revenue. That’s been the 15-year trend and I'm sticking to it.
Q: Is Caterpillar (CAT) a LEAP candidate right now?
A: Not yet, but we’re getting there. Like many of these domestic recovery plays, it is up 200% from the March lows where we recommended it. The best time to do LEAPS is after these big capitulation selloffs, and all we’ve really seen in most sectors this year is a slow grind down because there's just too much money sitting under the market trying to get into these stocks. Let’s see if (CAT) drops to the 50-day moving average at $185 and then ask me again.
Q: If you have the (FCX) LEAPS, should you keep them?
A: I would keep them since I'm looking for the stock to double from here over the next year. If you have the existing $45-$50 LEAPS, I would expect that to expire at its max profit point in January. But you may need to take a little pain in the interim until it turns.
Q: Should I bet the ranch on meme stocks like (AMC) and GameStop GME)?
A: Absolutely not, I’m amazed you haven't lost everything already.
Q: Do you think Exxon-Mobile (XOM) could rise 30% from here?
A: Yes, if we get a 30% rise in oil. We are in a medium-term countertrend rally in oil which will eventually burn out and take us to new lows. Trade against the trend at your own peril.
Q: Disneyland (DIS) in Paris is set to open. Is Disneyland a buy here?
A: Yes, we’re getting simultaneous openings of Disneyland’s worldwide. I’ve been to all of them. So yes, that will be a huge shot in the arm. Their streaming business is also going from strength to strength.
Q: How long will the China (FXI) slowdown last?
A: Not long, the slowdown now is a reaction to the superheated growth they had last year once their epidemic ended. We should get normalized growth in China at around 6% a year, and I expect China to rally once that happens.
Q: Have you changed your outlook on inflation, real or imagined?
A: I don’t think we’re going to have inflation; I buy the Fed's argument that any hot inflation numbers are temporary because we’re coming off of a one-on-one comparisons from when the economy was closed and the prices of many things went to zero. If you look at that inflation number, it had trouble written all over it. Some one third of the increase was from rental cars. One of the hottest components was used cars. You’re not going to get 100% year on year increases next year in rental or used cars.
Q: When you issue a trade alert, it’s always in the form of a call spread like the Microsoft (MSFT) $340-$370 vertical bull call spread. What are the pros and cons of doing this trade on the put side, like shorting a vertical bear put spread?
A: It’s six of one, half a dozen of the other. There are algorithms that arbitrage between the two positions that make sure that they’re never out of line by more than a few cents. I put out call spreads because they’re easier for beginners to understand. People get buying something and watching it go up. They don’t get borrowing something, selling it short, and buying it back cheaper.
Q: Will gold (GLD) prices go up?
A: Yes, when inflation goes up for real.
Q: What is the future of the gig economy? How will that affect Uber (UBER) and Lyft (LYFT)?
A: I like both, because they just got a big exemption from California on part time workers, and that is very positive for their business models.
Q: Do you think the government doesn’t want to cancel student debt because it will unleash inflation?
A: It’s the exact opposite. The government wants to forgive student debt because it will unleash inflation. If you add 10 million new consumers to the economy, that is very positive. As long as former students have tons of debt, horrible credit ratings, and are unable to buy homes or get credit cards, they are shut out of the economy. They can’t participate in the main economy by buying homes, shopping, or getting credit. The fact that the US has so many college grads is why businesses succeed here and fail in every other country. That should be encouraged.
Q: Where is the United States US Treasury Bond Fund (TLT) headed?
A: Short term up, long term down.
Q: Options premiums are not melting away much today; I hope they start decaying after the Fed announcement.
A: In these elevated volatility periods—believe it or not, the (VIX) is still elevated compared to its historic levels—they hang on all the way to the very last day, before expiration, before they really melt the time value on options. It really does pay to run these into expiration now. When the VIX was down at like $9-$10, that was not the case.
Q: I bought a short term expiration going long the (TLT) to hedge my position; was this smart?
A: Yes, but only if you are a professional short-term trader. If you are in front of your screen all day and are able to catch these short term moves in (TLT), that is smart. My experience is that most individual investors don’t have the experience to do that, don’t want to sit in front of a screen all day, and would rather be playing golf. Such hedging strategies end up costing them money. Also, remember that half of the moves these days are at the opening; they’re overnight gap openings and you can’t catch that intraday trading—it’s not possible. So over time, the people who take the most risk make the most money. And that means the people who don’t hedge make the most money. But you have to be able to take the pain to do that. So that’s my philosophy talk on risk taking.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trade
