(LYFT) Archives

Uber Back from Purgatory

The most impacted tech company in 2020 is most likely ridesharing company Uber and is highly likely to become the new “buy the dip” tech stock.

I’ll tell you why and how they managed to turn it around.

Foundationally, two important data points from their earnings report have to be total revenue declining 18% year-over-year and delivery revenue growing 125% year-over-year.

The good news is that delivering food is turning out to be a monumental growth engine and the bad news is that the core business is hamstrung by the current conditions stemming from the global health crisis.

Even with their core business declining, Uber benefits from a silver lining of the macroeconomy recovering from summer lows and this will follow through into its ride-sharing operations.

The initial recovery from terrible to bad is usually the greatest in terms of percentages similar to recent quarterly GDP numbers.

I am definitely observing positive movement in Uber’s direction, especially as consumers feel less comfortable taking mass transit during the pandemic.

This development is clearly much better than a mass lockdown where Uber is unable to deliver on any rideshare volume whatsoever.

Management has also indicated that the overall environment is starting to considerably improve over the coming quarters with Q2 marking a clear trough in volumes and fundamentals.

Another potential tailwind is that the consumer element is becoming commonplace across cities both in the US and internationally and their preference will steer them away from mass transportation given health concerns.

This could result in an incremental demand driver for ridesharing vendors over the next few quarters and beyond.

Structurally, Uber will get to the other end of the health crisis intact and as a healthy corporation.

That speaks volumes compared to corporates floundering in damaged industries like energy and retail.

But the elephant in the room was finally addressed with the passage of California’s Proposition 22, a measure that exempts it, along with rival Lyft (LYFT) and businesses like Instacart and GrubHub (GRUB), from having to pay drivers like in-house employees.

This is the feather in their cap they needed to become the newest buy the dip tech stock because it essentially means they won’t have to pay drivers much to drive for Uber instead of doling out proper employment contracts.

The passage of the proposition legitimizes Uber’s business model at a time where the global economic environment is precarious, and we could be walking straight into legislative gridlock and an inadequate fiscal stimulus package.

This obviously means putting less dollars in consumers’ pockets to pay for Uber Eats and Uber rideshares.

This was essentially an existential issue for Uber in the state of California and without a win, Uber and Lyft threatened to pull out of California entirely.

This has happened before like in Austin, Texas, which Uber deserted in 2016 after the city passed a measure calling for stricter background checks and fingerprinting for drivers.

Fortunately for Uber, Texas State Legislature overruled Austin, and Uber and Lyft returned to the city.

The current ballot count is 58.4% in favor of Prop 22 and 41.6% in opposition meaning Californian citizens overwhelmingly voted to pass this measure.

Californians, no doubt, were scared to lose their cheap way of getting around the suburban sprawl that is California.

Even if Uber’s company creates a traffic snarl of drivers meaninglessly idling around for more rides – that is a moot point right now.

Gig workers will continue to be classified as independent contractors in the state.

It also essentially makes these gig companies exempt from AB-5, the gig worker bill that went into law at the beginning of the year that forces gig companies to pay sub-contractors like regular workers.

That is off the table and a massive win for Uber.

On the back of this legislative success, Uber will now take this win and go after other states to pass similar types of legislation.

This political template for future anti-labor, corporate law-making is pro-capital to the extreme extent of the law for better or mostly worse in my eyes if you aren’t a corporate shareholder.

This perhaps could open up all corporations in California to never pay health or social security benefits in the future to employees.

If Uber doesn’t have to, then why does Google, Facebook, or Apple need to share the burden of paying for medical and social security benefits?

Labor groups are considering potentially lobbying the newly elected Biden administration’s Department of Labor for improved federal laws for worker classification.

Biden has pledged to narrow economic inequalities and Uber’s win could be in his crosshairs because the result is a massive setback for labor laws in California and potentially around the United States.

Intervention would take some balls by the Biden administration and the most likely scenario is him giving Uber a pass.

Gig Workers Rising, a campaign supporting and educating app and platform workers, had this to say, “Billionaire corporations just hijacked the ballot measure system in California by spending millions to mislead voters. The victory of Prop 22, the most expensive ballot measure in U.S. history, is a loss for our democracy that could open the door to other attempts by corporations to write their own laws.”

Yes, this is terrible for Uber drivers but highly positive for shareholders of Uber’s stock.

The cost of doing business is effectively passed on to the guy at the bottom – sub-contracted drivers.

Like it or not, it will be enshrined into Californian law and this makes serious inroads to Uber’s business model actually becoming profitable which has been the big knock on this company.

At the very minimum, this will give a stop-gap measure for the 10 or so years Uber needs to get to autonomous driving technology where they can just never pay the driver again.

Not only does the path to autonomous driving technology look optimistic, but the excess liquidity circulating in the market effectively means that zombie companies will be funded infinitely.

Although not a zombie company, Uber has really had a hard time making up the numbers to prove a viable path to sustainability and that basically doesn’t matter anymore.

The existential threat is now out of the window and with several structural tailwinds powering Uber, the stock and the company have never had a brighter future and any medium-sized pullback should be bought.

This one is going higher.

August 10, 2020

Tech Letter

Mad Hedge Technology Letter
August 10, 2020
Fiat Lux

Featured Trade:

(SCRAPING THE BOTTOM OF THE TECH BARREL WITH UBER)
(UBER), (LYFT), (FB), (AMZN), (GOOGL), (NFLX), (AAPL), (MSFT)

Scraping the Bottom of the Tech Barrel with Uber

Tech Letter

The coronavirus and the resulting effects from it have had the single most sway on tech companies since the 2001 tech bust.

Marginal tech companies or even quasi-fraudulent ones have been exposed for what they are, while the secondary effects from the virus have supercharged the behemoths of the industry.

The stock market has no earnings growth in the past 5 years without the earnings from Microsoft (MSFT), Facebook (FB), Apple (AAPL), Google (GOOGL), Amazon (AMZN), and Netflix (NFLX). That means that without the Republican corporate tax cut, there has been negative earnings growth in the past five years.

One of those tech companies at the bottom of the barrel has been chauffeur service company Uber (UBER) and their latest earnings report is a glaring indictment of a shoddy business model that operates in a gray area.

The only reason this stock is at $33 is because of the piles of easy money printed by the central bank.

Uber needs all the help they can get, and shares are still trading 20% below the IPO price.

Competitor chauffeur service Lyft (LYFT) is doing even worse registering a 50% decline since the IPO.

Let’s do a little snooping around to see why these companies are doing so poorly and why you shouldn’t even think about investing in these companies long-term.

No matter how you dice it up, Uber’s core business, the one where they refuse to properly compensate their drivers, had a disaster of a quarter with gross ride volumes down 73% year-over-year.

Before we go any further with this one, I would like to point out yes, other areas of the business grew substantially, the problem is that the “other” part of the business is only 30% of total revenue.

Therefore, when 70% of your business that relies on pure volume to scale out crashes by 73%, it doesn’t really matter what else is in the report.

The only sensible idea now is capturing a snapshot of the silver linings, of which there were a few.

Delivery volumes through Uber Eats were up 49%, but the problem here is that first, it’s not profitable per delivery and second, it’s still a small part of the business.

Uber acquired Postmates who is another loss-making delivery service and the idea behind this is to achieve significant cost savings by scaling out these powerful assets.

The problem here is that it is essentially throwing good money on top of bad money because it’s proven that deliveries don’t make money per ride and that won’t change in the near future.

CEO of Uber Dara Khosrowshahi is on record saying Uber will become “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”

This is almost like saying we won’t lose as much money as before and ironically, Dara Khosrowshahi has withdrawn this statement as the ride-sharing model has been repudiated by the consumer during the coronavirus.

Nowhere in the earnings report is the explanation of how Dara Khosrowshahi plans to attract people to share a car ride with a stranger during a global pandemic.

He didn’t share a solution because there isn’t one, hence the 73% decline in ride volumes.

If we assume this company is semi-fraudulent, then the silver lining would be that ride volumes didn’t decline by 100%.

That is where we are now with U.S. corporate companies such as the airlines that fired their employees but have subsidized them to stick around even though there is no work.

Instead of re-imagining itself through bankruptcies, the Fed has encouraged many marginal companies by breathing life into their finances through cheap loans.

This gives failing firms a last chance to enrich management with the capital and “cash out” before they hand the business off to someone who will essentially plan to do the same.

I will say that traders might have a trade or two in this one, because it’s hard to imagine Uber posting another 73% loss in ride volume and a dead cat bounce trade could be in the cards.

Long term investors should steer clear of this one and allow Uber to struggle on its own and just maybe in 5 or 10 years, it might just be “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”

With so many high-quality tech companies and even one that is about to add super growth elements like TikTok into its portfolio, there are so many superior names to deploy capital in the tech ecosphere.

Either you must be galvanized by a gambler’s mentality to invest in Uber, or losing money is something that is habitual in your routine.

uber

April 17, 2020

Tech Letter

Mad Hedge Technology Letter
April 17, 2020
Fiat Lux

Featured Trade:

(WHY YOU SHOULD SELL THE UBER RALLY)
(UBER), (LYFT)

Why You Should Sell the Uber Rally

Tech Letter

Nimble tech firms like online taxi company Lyft will be penalized in the coronavirus economy as it de-globalizes for a period of time.

If you read the Mad Hedge Technology Letter, you already know that I believe rideshare business models will never become profitable.

Fast forward to today and ask yourself how can these companies make profitability headway when the state mandates shelter in place policies?

The answer is they cannot.

It is not exactly the type of foundational policy that promotes more ride-sharing volume, so bad news for Uber and Lyft.

Uber CEO Dara Khosrowshahi told investors that ride volume has gone down by as much as 60%-70% in ground zero cities like Seattle, and that’s before you consider the pauses in some of its secondary services and the dubious distinction of becoming one of the earliest proof-of-concepts of just how fluid this virus really is.

But Khosrowshahi also told investors that Uber is “well-positioned” to ride the troubles out even in the worst-case scenario of rides down by 80% for the year. And even as ride volume crashes, it is also considering leveraging its network for delivering other things, such as medicine or basic goods.

Basically, Uber specializes in losing money and lots of it.

Then imagine how demoralizing it is for the inferior version of Uber, it’s little brother Lyft.

Lyft has no “other” businesses such as food delivery service Uber Eats, leading me to conclude that this massive retracement in shares must be a bear market rally that will run out of steam.

Finding entry points to short growth stocks is an imprecise endeavor but I do believe that poor revenue reports in the upcoming earnings season is going to cap this bear market rally in Lyft’s shares.

What do we know already?

A global and tech recession will be sharp and it will be worse than the global financial crisis possibly by a factor of 4.

Investors still cannot wrap their head around whether this contagion will spill over into being a depression.

Tech investors will need to respect the “new, new normal” following the pandemic, in which corporates make aggressive cuts to their spending side-- again, bad news for Uber and Lyft.

This type of scenario is especially problematic for Lyft who must spend illogically just to stay in business.

Lyft burned $463.5 million in the third quarter of 2019, which was almost twice the amount that the company lost over the same period of time the previous year.

The fourth quarter net loss includes $246.1 million of stock-based compensation and related payroll tax expenses as well as $86.6 million related to changes to the liabilities for insurance.

That translates into an adjusted net loss of $121.6 million, which is better than the adjusted loss of $245.3 million over the same period last year.

Considering the elevated amount of cash burn to Lyft’s model pre-virus and aware that nobody knows how long the cash burn will accelerate beyond Lyft’s earnings – investors are staring into a black hole of infinite losses moving forward as Lyft’s business model looks worse every day.

I must conclude that the post-coronavirus economy is highly likely to not be kind to marginal companies like Lyft who is a glorified taxi service.

Uber controls about 60% of the ride-sharing market in the US and managed to accomplish this by losing $5.2 billion in the Q2 2019.

Lyft has already slashed its R&D budget by deleting the autonomous vehicle development program.

Yes, the very program that was supposed to be the x-factor in its quest for real profits.

Laughably, Lyft’s executives emphasized that they believed the company will turn a profit in the fourth quarter of 2021, a year earlier than they had previously projected, but that forecasts looks foolish in hindsight.

The one miniscule silver lining for Lyft - fewer discounted rides than it did a year ago.

Lyft is also trying to boost the number of more-profitable rides, which are premium trips such as “airport” or “business” trips.

It’s a shame these premium trips have gone to zero.

The narrative has quickly pivoted to “grow at all costs” to “survive at all costs” and it’s not surprising to see Lyft grossly underperform the Nasdaq index in relative terms and most quality cloud stocks are in the midst of a v-shaped recovery.

Lyft is a sell on a rally type of stock.

March 27, 2020

Diary, Newsletter, Summary

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)

March 25, 2020 - Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

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

It’s Been a Tough Month

February 14, 2020

Diary, Newsletter

Global Market Comments
February 14, 2020
Fiat Lux

Featured Trade:

(FEBRUARY 12 BIWEEKLY STRATEGY WEBINAR Q&A)
(SQ), (TSLA), (FB), (GILD), (BA), (CRSP), (CSCO), (GLD)
(FEYE), (VIX), (VXX), (USO), (LYFT), (UBER)

February 12 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 12 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What do you think about Facebook (FB) here? We’ve just had a big dip.

A: We got the dip because of a double downgrade in the stock from a couple of brokers, and people are kind of nervous that some sort of antitrust action may be taken against Facebook as we go into the election. I still like the stock long term. You can’t beat the FANGs!

Q: If Bernie Sanders gets the nomination, will that be negative for the market?

A: Absolutely, yes. It seems like after 3 years of a radical president, voters want a radical response. That said, I don't think Bernie will get the nomination. He is not as popular in California, where we have a primary in a couple of weeks and account for 20% of total delegates. I think more of the moderate candidates will come through in California. That's where we see if any of the new billionaire outliers like Michael Bloom or Tom Steyer have any traction. My attitude in all of this is to wait for the last guy to get voted off the island—then ask me what's going to happen in October.

Q: When should we come back in on Tesla (TSLA)?

A: It’s tough with Tesla because although my long-term target is $2,500, watching it go up 500% in seven months on just a small increase in earnings is pretty scary. It’s really more of a cult stock than anything else and I want to wait for a bigger pullback, maybe down to $500, before I get in again. That said, the volatility on the stock is now so high that—with the short interest going from 36% down to 20%—if we get the last of the bears to really give up, then we lose that whole 20% because it all turns into buying; and that could get us easily over $1,000. The announcement of a new $2 billion share offering is a huge positive because it means they can pay off debt and operate with free capital as they don’t pay a dividend.

Q: Is Square (SQ) a good buy on the next 5% drop?

A: I would really wait 10%—you don't want to chase trades with the market at an all-time high. I would wait for a bigger drop in the main market before I go aggressive on anything.

Q: What about CRISPR Technology (CRSP) after the 120% move?

A: We’ve had a modest pullback—really more of a sideways move— since it peaked a couple of months ago; and again, I think the stock either goes much higher or gets taken over by somebody. That makes it a no-lose trade. The long sideways move we’re having is actually a very bullish indication for the stock.

Q: If Bernie is the candidate and gets elected, would that be negative for the market?

A: It would be extremely negative for the market. Worth at least a 20% downturn. That said, according to all the polling I have seen, Bernie Sanders is the only candidate that could not win against Donald Trump—the other 15 candidates would all beat Trump in a 1 to 1 contest. He's also had one heart attack and might not even be alive in 6 months, so who knows?

Q: I just closed the Boeing (BA) trade to avoid the dividend hit tomorrow. What do you think?

A: I’m probably going to do the same, that way you can avoid the random assignments that will stick you with the dividend and eat up your entire profit on the trade.

Q: When do you update the long-term portfolio?

A: Every six months; and the reason for that is to show you how to rebalance your portfolio. Rebalancing is one of the best free lunches out there. Everyone should be doing it after big moves like we’ve seen. It’s just a question of whether you rebalance every six months or every year. With stocks up so much a big rebalancing is due.

Q: I have held onto Gilead Sciences (GILD) for a long time and am hoping they’ll spend their big cash hoard. What do you think?

A: It’s true, they haven’t been spending their cash hoard. The trouble with these biotech stocks, and why it's so hard to send out trade alerts on them, is that you’ll get essentially no movement on them for years and then they rise 30% in one day. Gilead actually does have some drugs that may work on the coronavirus but until they make another acquisition, don’t expect much movement in the stock. It’s a question of how long you are willing to wait until that movement.

Q: Is it time to get back into the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?

A: No, you need to maintain discipline here, not chase the last trade that worked. It’s crucial to only buy the bottoms and sell the tops when trading volatility. Otherwise, time decay and contango will kill you. We’re actually close to the middle of the range in the (VXX) so if we see another revisit to the lows, which we could get in the next week, then you want to buy it. No middle-of-range trades in this kind of market, you’re either trading at one extreme or the other.

Q: Could you please explain how the Fed involvement in the overnight repo market affects the general market?

A: The overnight repo market intervention was a form of backdoor quantitative easing, and as we all know quantitative easing makes stocks go up hugely. So even though the Fed said this wasn't quantitative easing, they were in fact expanding their balance sheet to facilitate liquidity in the bond market because government borrowing has gotten so extreme that the public markets weren’t big enough to handle all the debt; that's why they stepped into the repo market. But the market said this is simply more QE and took stocks up 10% since they said it wasn't QE.

Q: What about Cisco Systems (CSCO)?

A: It’s probably a decent buy down here, very tempting. And it hasn't participated in the FANG rally, so yes, I would give that one a really hard look. The current dip on earnings is probably a good entry point.

Q: Should we buy the Volatility Index (VIX) on dips?

A: Yes. At bottoms would be better, like the $12 handle.

Q: When is the best time to exit Boeing?

A: In the next 15 minutes. They go ex-dividend tomorrow and if you get assigned on those short calls then you are liable for the dividend—that will eat up your whole profit on the trade.

Q: Do you like Fire Eye (FEYE)?

A: Yes. Hacking is one of the few permanent growth industries out there and there are only a half dozen listed companies that are cutting edge on security software.

Q: What are your thoughts on the timing of the next recession?

A: Clearly the recession has been pushed back a year by the 2019 round of QE, and stock prices are getting so high now that even the Fed has to be concerned. Moreover, economic growth is slowing. In fact, the economy has been growing at a substantially slower rate since Trump became president, and 100% of all the economic growth we have now is borrowed. If the government were running a balanced budget now, our growth would be zero. So, certainly QE has pushed off the recession—whether it's a one-year event or a 2-year event, we’ll see. The answer, however, is that it will come out of nowhere and hit you when you least expect it, as recessions tend to do.

Q: Would you buy gold (GLD) rather than staying in cash?

A: I would buy some gold here, and I would do deep in the money call spreads like I have been doing. I’ve been running the numbers every day waiting for a good entry point. We’re now at a sort of in between point here on call spreads because it’s 7 days to the next February expiration and about 27 days to the March one after that, so it's not a good entry point this week. Next week will look more interesting because you’ll start getting accelerated time decay for March working for you.

Q: When are you going to have lunch in Texas or Oklahoma?

A: Nothing planned currently. Because of my long-term energy views (USO), I have to bring a bodyguard whenever I visit these states. Or I hold the events at a Marine Corps Club, which is the same thing.

Q: Would you use the dip here to buy Lyft (LYFT)? It’s down 10%.

A: No, it’s a horrible business. It’s one of those companies masquerading as a tech stock but it isn’t. They’re dependent on ultra-low wages for the drivers who are essentially netting $5 an hour driving after they cover all their car costs. Moreover, treating them as part-time temporary workers has just been made illegal in California, so it’s very bad news for the stocks—stay away from (LYFT) and (UBER) too.

Q: Is the Fed going to cut interest rates based on the coronavirus?

A: No, interest rates are low enough—too low given the rising levels of the stock market. Even at the current rate, low-interest rates are creating a bubble which will come back to bite us one day.

Q: Household debt exceeded $14 trillion for the first time—is this a warning sign?

A: It is absolutely a warning sign because it means the consumer is closer to running out of money. Consumers make up 70% of the economy, so when 70% of the economy runs out of money, it leads to a certain recession. We saw it happen in ‘08 and we’ll see it happen again.

Good Luck and Good Trading

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader