Global Market Comments
July 13, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE COME HERD IMMUNITY),
(INDU), (TSLA), (SPY), (GLD), (JPM), (IBB), (QQQ), (AAPL), (MSFT), (DCUE), (NVDA)
Global Market Comments
July 13, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE COME HERD IMMUNITY),
(INDU), (TSLA), (SPY), (GLD), (JPM), (IBB), (QQQ), (AAPL), (MSFT), (DCUE), (NVDA)
Global Market Comments
June 15, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WAITING FOR MY SUGAR CUBE),
(SPY), (INDU), (UUP), (GLD), (TLT), (HTZ), (TSLA)
I was born in the middle of a pandemic.
It was polio, and in the early 1950s, it was claiming 150,000 kids a year just in the US. You know polio. You’ve seen the pictures of the kids with withered legs or living in iron lungs, the ventilators of their day.
My mom contracted polio in the 1930s and spent a year in quarantine. They didn’t understand then that the virus was in the drinking water.
She lost the use of her legs for a time. My grandfather’s cure was to take her hiking in the High Sierras every weekend to rebuild her muscles. During WWII, he had to buy gas coupons on the black market to make the round trip from LA to Yosemite.
It worked well enough for mom to earn a scholarship to USC where she met my dad, a varsity football player. By the time I came along, Jonas Salk discovered a vaccine, which was infused into a sugar cube and given to me at the Santa Anita Racetrack along with tens of thousands of others. It was one of the big events of American history.
Some 70 years later, I am maintaining the family tradition, forcing my kids out on backpacks a couple of times a week, they're moaning and complaining all the way.
It looks like the first wave of the Corona pandemic isn’t even over yet. That’s why the Dow Average managed to puke out some 10% in days.
So, here is the conundrum: How much can we take the market down in the face of the greatest monetary and fiscal stimulus in history. Some $9 trillion has already been spent and there is at least another $5 trillion behind it.
My bet is a few more thousand points down to 24,000 but not much more than that. If this turns into a rout and a retest of the lows, the Fed will simply turn on the presses and print more money. After all, the marching orders from the top are to keep stocks high into the election, whatever the cost.
One of the reasons we are seeing such wild swings in the market is that the market itself doesn’t know what it’s worth. That’s because this is the most artificially manipulated market in history, thanks to the government stimulus, 20 times what we saw in 2008-2009.
Stocks can’t figure out if they are worthless, or worth infinity, and we are wildly whipsawing back and forth between two extremes.
Take that stimulus away and the Dow Average would be worth 14,000 or less. Stimulus will go away someday, and when it goes away, there will be a big hit to the market. It’s anyone’s guess as to timing. Ask the Covid-19 virus.
We have seen countless market gurus being wrong about this market, many of whom are old friends of mine. That’s because they, like I, see the long-term damage being wrought to the economy. Recovering 80% of what we lost will be easy. The last 20% will be a struggle.
That alone amounts to one of the worst recessions we have ever seen. This is going to be a loooong recovery. Some forecasters don’t expect US GDP to recover to the 2019 level of $21.43 trillion until 2025.
In the meantime, the national debt is soaring, now at $26 trillion, and will soon become a major drag on the economy. The budget deficit alone this year is now pegged at an eye-popping $3 trillion, the largest in history.
The S&P 500 turned positive on the year for a whole day. It’s been an amazing move, the largest in history in the shortest time, some 47% in ten weeks. NASDAQ hit my year-end target of $10,000, then immediately gave back 10%.
The problem now is that stocks are still the most overbought in history and risk is the highest since January. Much trading is now dominated by newly minted day traders chasing bankrupt stocks like Hertz (HTZ) with their $1,200 stimulus check. Far and away, the better trade is to sell short bonds. After that, buy gold (GLD) and sell short the US Dollar (UUP).
Stocks then dove 7.4% on second wave fears as US cases top 2 million and deaths exceeded 114,000. Jay Powell says he won’t raise interest rates until 2023 at the earliest. The “reopening” stocks of airlines, hotels, and cruise lines are leading the downturn from crazy overbought levels.
Houston may have to close down again, in the wake of soaring Corona cases after a too early reopening. Other cities will follow. Cases in Arizona are also hitting new highs. It’s not what the market wanted to hear.
Weekly Jobless Claims hit 1.54 million, at a falling rate, but still at horrendous absolute levels. That’s better than last week’s 1.9 million. Some 20.9 million are still receiving state unemployment benefits, or 13.1% or the total workforce. These numbers certainly don’t justify a stock market near an all-time high.
The Fed expects Unemployment to remain stubbornly high, not falling to 9.3% by yearend. I think that’s highly optimistic. Some 20% of the 43 million lost jobs are never coming back, giving you an embedded U-6 rate of over 10%. It is easier and faster to fire people than to hire them back.
Election Poll numbers are starting to affect the market. Polls showing Trump 10%-14% points behind Joe Biden in the November presidential election opened stocks down 400 points on Monday. The betting polls in London are confirming these numbers.
The Republican leadership is jumping ship. A Biden win will bring higher corporate taxes, balanced budgets, less liquidity for the stock market, fewer Tweets, and clipped wings for the top 1%. Is this a trigger for the next market correction? We’ll find out in five months. When will stocks notice that?
Bond King Jeffrey Gundlach absolutely hates stocks, predicting we could take out the March lows. He believes the monster rally in big tech is unsustainable. The better trades are to sell short the US dollar (UUP) and to buy gold (GLD). I agree with much of this, but Geoff’s calls can take 6-12 months to come true, so don’t hold your breath, or bet the ranch.
Tesla hit a new all-time high, as I expected, ticking at $1,220. An 11% price cut is boosting sales and market share, while (GM) and (F) are dying. The Model Y, which looks like the love child of a Model X and Tesla 3, is expected to be their biggest seller ever. This is one bubble stock that IS worth chasing. Buy (TSLA) dips up to $2,500. No kidding!
New Zealand became the first Corona-free country, with zero cases, so it can be done. An island country with all international flights grounded, aggressive social distancing restrictions, and an ambitious contract tracing, the land of kiwis had everything going for it. Most importantly, they had the right leadership that listened to scientists, which the worst-hit countries of Sweden, Brazil, and the US are sadly lacking.
The Mad Hedge June 4 Traders & Investors Summit recording is up. For those who missed it, I have posted all 9:15 hours of recordings of every speaker. This is a collection of some of the best traders and investors I have stumbled across over the past five decades. To find it please click here.
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 still at zero, oil at a cheap $34 a barrel, 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 took it on the nose last week. I got stopped out of my shorts at the market top, then took a hit on my bonds shorts. My 11-year performance stands at 360.61%.
That takes my 2020 YTD return up to a more modest +4.70%. This compares to a loss for the Dow Average of -12.2%, up from -37%. My trailing one-year return retreated to 44.88%. My eleven-year average annualized profit backed off to +34.34%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, June 15 at 12:00 PM EST, the June New York State Manufacturing Index is out.
On Tuesday, June 16 at 12:30 PM EST, US Retail Sales for May are released.
On Wednesday, June 17 at 8:15 AM EST, Housing Starts for May are announced.
At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are published.
On Thursday, June 18 at 8:30 AM EST, Weekly Jobless Claims are announced.
On Friday, June 19 at 2:00 PM EST, the Baker Hughes Rig Count is out.
As for me, I am waiting for my sugar cube.
In the meantime, I will spend the weekend carefully researching the recreational vehicle market. If everything goes perfectly, a Covid-19 vaccine will be not available to the general public for at least two years.
Until then, my travel will be limited to the distance I can drive. Travel while social distancing with my own three-man “quaranteam” will be the only safe way to go.
When the New York Times highlights it, as they did this weekend, it’s got to be a major new thing.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
June 8, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HISTORY IS REPEATING),
(SPY), (INDU), (TLT), (TBT) (TSLA), (DAL), (BA)
When I was 13 years old in 1965, the week-long Watts Riots broke out in impoverished South Los Angles, killing 34. It was sparked by a police arrest for reckless driving.
While the ruins were still smoking, my dad drove me downtown to view the wreckage. Prudently, he kept his loaded Marine 1911 Browning .45 caliber automatic under a newspaper on the front seat. It looked like a war zone, with some 256 buildings burned to the ground and another 200 looted.
I have been running towards the sound of guns ever since.
Some 55 years later, we are seeing history repeat itself. However, instead of seeing the riots occur in major cities one at a time, as they did in the 1960s, we saw demonstrations and riots in 356 US cities all at the same time!
The impact on the economy, and eventually the stock market, will be immense.
As a long term follower of the structure of the US economy, what is going on now is utterly fascinating. A million connections within the economy have been severed forever and a million new ones created, which few understand.
The end result will be a far more efficient and profitable form of American capitalism. Companies are rebuilding time-tested business models in weeks. Those who can discern these new connections early will make fortunes. Those who don’t will dry up and blow away like so much dust into the ashcan of history.
Of course, the defining announcement of the week came on Friday morning with the Headline Unemployment Rate, which delivered a blockbuster FALL, from 14.7% to 13.3%, sending stock up 1,000 points. It’s proof that the stimulus is largely going into the stock market.
Economist forecasts were off by a whopping 10 million jobs, delivering the biggest miss in history. Leisure and Hospitality accounted for 1.2 million job gains, half the total.
Something doesn’t smell right here. How do you miss 10 million jobs? The streets and traffic levels tell me the real jobless rate is more like 20%. I can’t even get into my bank to deposit a check.
I believe the streets.
Look for big downward revisions, which may pose another threat to the market, and possibly a secondary crash, but not for another month.
A client told me last week that he wishes there were major market crashes more often where he could load the boat with deep out-of-the-money LEAPS which then double or triple in weeks.
He may get his wish. The faster we rise now, the greater the risk of a secondary crash which could wipe out half the recent gains.
I managed to catch the bottom of the biggest stock market rally of all time with dozens of LEAPS like with (TSLA), (DAL), (UAL), (BRKB), and (BA). I took profits all the way up and went into last week modestly “Risk On.” But the 1,000-point rally on Friday caught me totally by surprise, as it did everyone else.
I’m sorry, but I guess I’m lousy at trading those once in hundred-year events.
My saving grace has been the most aggressive, in-your-face short positions in the bond market (TLT), (TBT) in the 13-year history of this letter at the same time. It’s still a great trade. Selling short US Treasury bonds now with a 0.90% yield is the same as buying the Dow Average at 20,000….again.
Pending Home Sales collapsed 21.8% in April and off 33.8% YOY on a signed contract basis. These are the worst numbers since the data series started. The West was hardest hit, down 50%. No wonder I’ve seen so many real estate agents at the beach. We already know that a sharp rebound is underway as Millennials move to the burbs and flee Corona-infested cities. Home prices will be up this year.
Mortgage Demand is soaring as ultra-low rates spur demand. Housing will lead the recovery of the bricks and mortar economy. It will take another year before jumbo loan rates start to decline as banks avoid risk like the plague. Buy (LEN) and (KHB) on dips.
Stocks are the most overbought in 20 years since the top of the Dotcom bubble. Risk is extreme for new longs. Almost all S&P 500 stocks are trading above 50 day moving average. The technical indicators are screaming “SELL”.
Consumer Confidence is recovering as even the slightest bit of reopening looks like a lot coming off of zero. The Conference Board’s consumer confidence index rose to 86.6 this month from 85.7 in April, well up from an expected 82. Call it “green shoots”.
Used Car Prices have crashed with Hertz going bankrupt and defaults on new car loans reaching record levels. Surviving rental companies have cancelled all new car orders. Vacation travel has vaporized. Wells Fargo has ceased lending to car dealers. Time to upgrade that second car?
The greatest 50-day rally in the S&P 500 is now over, up 40% since March 23. Buyers are getting nervous and exhausted and are overdue for a pullback. But the historical six-month gain after a move like this is another 10.2% up, followed by a one-year gain of 17.3%. Over $14 Trillion in Fed and fiscal stimulus can go a long way.
US Factory Orders collapsed further, down 13% in May after a 14% crash in April. Don’t expect these numbers to decline any time soon. The stock market will never notice.
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 still at zero, oil at a cheap $34 a barrel, 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 was up modestly on the week, my downside hedges costing me money in a steadily rising but wildly overbought market. We stand at an eleven-year performance all-time high of 366.68%.
My huge short bond positions, which I have been adding to all the way down, are still delivering big profits. That’s because time decay is really starting to kick in with nine trading days left until the June expiration.
That takes my 2020 YTD return up to a lofty +10.77%. This compares to a loss for the Dow Average of -4.9%, up from -37%. My trailing one-year return exploded to a near-record 52.27%. My eleven-year average annualized profit ballooned to +34.92%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, June 8 at 8:00 AM EST, Consumer Inflation Expectations for May are announced.
On Tuesday, June 9 at 10:30 AM EST, we learn the NFIB Small Business Optimism Index for May.
On Wednesday, June 10 at 8:15 AM EST, the US Core Inflation Rate for May is printed. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are published.
On Thursday, June 11 at 8:30 AM EST, Weekly Jobless Claims are announced.
On Friday, June 5, at 10:00 AM EST, the University of Michigan Consumer Sentiment figures are out. The Baker Hughes Rig Count follows at 2:00 PM EST.
As for me, I traveled to the local shopping mall to see how real this 2.5 million gain in jobs really exists. More than 50% of the shops were closed, several had already gone bankrupt and traffic was easily below 10% of pre-pandemic levels. Restaurants had maybe 5% of peak traffic sitting at outside tables. Mall police were there to enforce facemask rules.
Nope, not seeing any recovery here. Caveat Emptor.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
June 1, 2020
Fiat Lux
Featured Trade:
(JOIN THE JUNE 4 TRADERS & INVESTORS SUMMIT),
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE COUNTRY THAT IS FALLING APART),
(SPX), (INDU), (TLT), (TBT), (GLD),
(AAPL), (FB), (JPM), (BAC)
Global Market Comments
May 11, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE NEXT GOLDEN AGE HAS ALREADY STARTED)
(TLT), (TBT), (SPY), (INDU), (VIX),
(DAL), (BRK/A), (LUV), (AA), (UAL)
I always get my best ideas when hiking up a steep mountain carrying a heavy backpack.
Yesterday, I was just passing through the 9,000-foot level on the Tahoe Rim Trail when suddenly, the fog lifted and the skies cleared. I was hit with an epiphany.
It was my “AHA” moment.
The next American Golden Age, the next Roaring Twenties, started on March 23.
However, you have to dive deep into investor psychology to reach that astonishing conclusion.
The conundrum of the day is why stocks are trading at a plus 30X multiple two months into a Great Depression. The economic data has been so horrific that the mainstream news has been reporting them.
Some 30 million unemployed on the way to 51 million? Those are Fed numbers, not mine (click here for the link ). Over 52% of small businesses going bankrupt in the next six months? A GDP that is shrinking at an amazing -40% annualized rate?
Yet, we have a Dow Average that has risen a breathtaking 38% in six weeks. The market has essentially dropped 38% and risen 38% over three months, with the Volatility Index (VIX) making a brief visit to the $80 handle.
To understand these massive contradictions, you have to understand what investors think they are buying. They are not hoovering up stocks that are cheap, offer value, or at the bottom of an economic cycle.
Instead, they are investing in a hope, a vision, an expectation that the coming decade will bring a major economic boom. Yes, they are buying my coming American Golden Age.
Only 10% of the value of a stock is reflected in current year earnings, according to Dr. Jeremy Siegal at the Wharton School of Economics (click here to go to the site). The other 90% is in the following nine years. Investors have written off this year’s earnings and are paying up for the following nine.
Long term followers of this newsletter are well aware of my approaching forecast of the next Roaring Twenties (click here for the link).
Except that this time we have a catapult, the pump-priming effects of the pandemic. The government has stepped in with $14 trillion worth of fiscal and monetary stimulus. Creative destruction is taking place at an exponential rate. Companies have to become hyper-efficient overnight or die.
It’s not rocket science. More than 85 million millennials are aging into their peak spending years, buying homes, cars, and all the luxuries of life. Every time this has happened for the past century, US economic growth leaped to 4%.
It happened in the 1920s, the 1960s, the 1990s, and is about to take place in the 2020s. And with each pop in growth, the stock market rises about 400%. Look at your long-term charts and you’ll see I’m dead right.
That takes us from the March 23 Dow Average low at 18,000 up to 72,000 by 2030, except that it’s a low number. Throw in the hyper-acceleration of innovation by the technology and biotech sectors, a Dow 120,000 is within reach.
You may recall that number from my marketing pitches, except that this time it’s happening. In a decade you are going to look like an absolute genius by following the recommendation of the Mad Hedge Fund Trader.
It also means that we may not see market corrections of any more than 10% this year. That would take us down to a Dow Average of 22,500, and an (SPX) of 2,600 in the coming months. That’s where you should jump in and buy with both hands. The only way I would be wrong is if the US epidemic explodes to unimaginable levels, which is not impossible.
Last week, U-6 unemployment rates exploding to a stratospheric 22.8%. The rate was far higher among high school graduates, but only 8% for college grads. Some 20.2 million lost jobs, ten times the previous record, and more than seen during the Great Depression. The BLS (click here) said the true figure was probably 5% higher due to counting anomalies and a huge backlog of data. And this is just the beginning. The good news is that next month, only 10 million jobs will be lost.
NASDAQ (QQQ) turned positive for 2020, and the followers who piled into tech LEAPS at the March bottom are eternally grateful. Tech and biotech are the only places to be. Everywhere else is a waste of time and money. The entire country is turning into a tech economy or going out of business. Buy tech on dips.
Warren Buffet sold all his airline shares, taking a major loss, including Delta (DAL), Southwest (LUV), American (AA) and United (UAL). The Fed’s $50 billion airline bailout blocked him from making a real killing. His Berkshire Hathaway (BRK/A) (click here) owned close to 10% of all of them. The complete collapse of tourism and business travel are the issues. He sees no recovery in the foreseeable future. They don’t call him the “Oracle of Omaha” for nothing.
US Auto Sales are down a mind-blowing -48% in April, the worst on record. Only 8.6 million cars were sold in the US against last year’s annual rate of 17 million. Toyota and Honda saw the biggest falls as their ships can’t unload due to lack of storage space.
The US Treasury will borrow $3 Trillion this Quarter to fund the massive bailout programs. Announced programs amount to 20 times the $789 billion 2009 rescue package, which Republicans opposed. I’m increasing my bond shorts. Sell short (TLT) again, even if we don’t get a decent rally. Oh, and Trump is threatening a default too. He doesn’t see the connection.
Bonds crashed on massive issuance, with the Treasury announcing a record 20-year bond floatation. Yields hit a one-month high. With the (TLT) down $18 from its recent high, I am taking profits on my bond shorts. I’ll be selling the next rally….again. This could be my core trade for the next decade.
Consumer Debt soared to $14.3 trillion in Q1, a new all-time high. A lot of people are living on their credit cards right now.
Trump threatens to cancel China trade deal, blaming them for Covid-19, sending stocks into a 400-point dive. The last time he did this, shares plunged 20%. It’s all part of an effort to divert attention from the administration’s disastrous handling of the pandemic. America’s Corona deaths are now 20 times China’s, and they are still an emerging nation. Just what we needed, a renewed trade war on top of a pandemic-caused Great Depression, as if the market needed more uncertainty. Sell rallies in the (SPY)
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 $0 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 one of the best weeks in years again, up a gob-smacking +6.46%. We are now only 0.65% short of a new all-time high.
My aggressive short bond positions came in big time on the back of theannounced $3 trillion in new debt issuance in Q2. Short bonds are far and away the better quality trade of buying stocks at these elevated levels.
May is up +6.46%, taking my 2020 YTD return up to 2.59%. That compares to a loss for the Dow Average of -13.43% from the February top. My trailing one-year return exploded to 43.77%. My ten-year average annualized profit returned to +34.14%.
This week, Q1 earnings reports continue, and so far, they are coming in much worse than the most dire forecasts. We also get the monthly payroll data, which should be heart-stopping to say the list.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, May 11 at 10:00 AM, the April US Inflation Expectations are out. Caesar’s Entertainment (CZR) and Marriot International (MAR) report earnings.
On Tuesday, May 12 at 5:00 PM, the NFIB Small Business Optimism Index for April is released. Toyota Motors (TM) reports earnings.
On Wednesday, May 13 at 9:30 AM, the ever fascinating weekly Cushing Crude Oil Stocks is announced. Cisco Systems (CSCO) reports earnings.
On Thursday, May 14 at 8:30 AM, we get another blockbuster Weekly Jobless Claims. Advanced Micro Devices (AMD) reports earnings.
On Friday, May 15 at 7:30, AM the Empire State Manufacturing Index is published. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll continue my solo circumlocution of the 160 mile Tahoe Rim Trail every afternoon in ten-mile segments. Why solo? Do you know anyone else who wants to hike 160 miles at 10,000 feet in two weeks?
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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)
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
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