Global Market Comments
February 17, 2021
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, FEBRUARY 19 OPTIONS EXPIRATION),
(TSLA), (MS), (BA), (BLK), (GS), (AMD), (KO), (BAC), (NFLX), (AMZN), (AAPL), (INTU), (QCOM), (CRWD), (AZN), (GILD)
Tag Archive for: (MS)
Followers of the Mad Hedge Fund Trader Alert Services have the good fortune to own no less than 16 deep in-the-money options positions, all of which are profitable. All but one of these expire in two trading days on Friday, February 19, and I just want to explain to the newbies how to best maximize their profits.
It was time to be aggressive. I was aggressive beyond the pale.
These involve the:
Global Trading Dispatch
- (TSLA) 2/$650-$700 call spread 20.00%
- (TSLA) 3/$600-$650 call spread
- (MS) 2/$55-$60 call spread 10.00%
- (BA) 2/$150-$160 call spread 10.00%
- (BLK) 2/$640-$660 call spread 10.00%
- (GS) 2/$240-$260 call spread 10.00%
- (AMD) 2/$75-$80 call spread 10.00%
- (BAC) 2/$28-$30 call spread 10.00%
- (KO) 2/$44-$47 call spread 10.00%
Mad Hedge Technology Letter
- NFLX 2/ $510- $515 call spread 10.00%
- AMZN 2/ $3,095- $3,100 call spread 10.00%
- AAPL 2/ $126-$129 call spread 10.00%
- INTU 2/ $340-$345 call spread 10.00%
- QCOM 2/ $135-$140 call spread 10.00%
Mad Hedge Biotech & Healthcare Letter
- (AZN) 2/$46.50-$49.50 call spread 10.00%
- GILD 2/ $57-$60 call spread 10.00%
Provided that we don’t have a huge selloff in the markets or monster rallies in bonds, all 15 of these positions will expire at their maximum profit point.
So far, so good.
I’ll do the math for you on our oldest and least liquid position, the Tesla February 19 $650-$700 vertical bull call spread, which I initiated on January 25, 2021 and will definitely run into expiration. At the Friday high, Tesla shares were at a lowly $816, some $53 lower than the $869.70 that prevailed when I strapped on this trade.
Provided that Tesla doesn’t trade below $700 in two days, we will capture the maximum potential profit in the trade. That’s why I love call spreads. They pay you even when you are wrong on the direction of the stock. All of the money we made was due to time decay and the decline in volatility in Tesla stock.
Your profit can be calculated as follows:
Profit: $50.00 expiration value - $44.00 cost = $6.00 net profit
(4 contracts X 100 contracts per option X $6.00 profit per options)
= $2,400 or 20% in 18 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning February 22 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when security has only hours, or minutes until expiration on Friday, February 19. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
If for some reason, your short position in your spread gets “called away,” don’t worry. Just call your broker and instruct them to exercise your long option position to cover your short option position. That gets you out of your position a few days early at your maximum profit point.
If your broker tells you to sell your remaining long and cover your short separately in the market, don’t. That makes money for your broker, but not you. Do what I say, and then fire your broker and close your account because they are giving you terrible advice. I’ve seen this happen many times among my followers.
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next month-end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
Global Market Comments
February 2, 2021
Fiat Lux
Featured Trade:
(MY NEWLY UPDATED LONG-TERM PORTFOLIO),
(PFE), (BMY), (AMGN), (CELG), (CRSP), (FB), (PYPL), (GOOGL), (AAPL), (AMZN), (SQ), (JPM), (BAC), (MS), (GS), (BABA), (EEM), (FXA), (FCX), (GLD), (SLV), (TLT)
I am really happy with the performance of the Mad Hedge Long Term Portfolio since the last update on July 21, 2020. In fact, not only did we nail the best sectors to go heavily overweight, we also completely dodged the bullets in the worst-performing ones.
For new subscribers, the Mad Hedge Long Term Portfolio is a “buy and forget” portfolio of stocks and ETFs. If trading is not your thing, these are the investments you can make, and then not touch until you start drawing down your retirement funds at age 72.
For some of you, that is not for another 50 years. For others, it was yesterday.
There is only one thing you need to do now and that is to rebalance. Buy or sell what you need to reweight every position to its appropriate 5% or 10% weighting. Rebalancing is one of the only free lunches out there and always adds performance over time. You should follow the rules assiduously.
Despite the seismic changes that have taken place in the global economy over the past nine months, I only need to make minor changes to the portfolio, which I have highlighted below.
To download the entire new portfolio in an excel spreadsheet, please go to www.madhedgefundtrader.com, log in, go “My Account”, then “Global Trading Dispatch”, then click on the “Long Term Portfolio” button.
Changes
I am cutting back my weighting in biotech from 25% to 20% because Celgene (CELG) was taken over by Bristol Myers (BMY) at a 110% profit compared to our original cost. We also earned a spectacular 145% gain on Crisper Therapeutics (CRSP). I’m keeping it because I believe it has more to run.
My 30% weighting in technology also gets pared back to 20% because virtually all of my names have doubled or more. These have been in a sideways correction for the past six months but are still an important part of any barbell portfolio. So, take out Facebook (FB) and PayPal (PYPL) and keep the rest.
I am increasing my weighting in banks from 10% to 20%. Interest rates are finally starting to rise, setting up a perfect storm in favor of bank earnings. Loan default rates are falling. Banks are overcapitalized, thanks to Dodd-Frank. And because of the trillions in government stimulus loans they are disbursing, they are now the most subsidized sector of the economy. So, add in Morgan Stanley (MS) and Goldman Sachs (GS), which will profit enormously from a continuing bull market in stocks.
Along the same vein, I am committing 10% of my portfolio to a short position in the United States Treasury Bond Fund (TLT) as I think bonds are about to go to hell in a handbasket. I rant on this sector on an almost daily basis, so go read Global Trading Dispatch.
I am keeping my 10% international exposure in Chinese Internet giant Alibaba (BABA) and the iShares MSCI Emerging Market ETF (EEM). The Biden administration will most likely dial back the recent vociferous anti-Chinese stance, setting these names on fire.
I am also keeping my foreign currency exposure unchanged, maintaining a double long in the Australian dollar (FXA). The Aussie has been the best performing currency against the US dollar and that should continue.
Australia will be a leveraged beneficiary of the synchronized global economic recovery, both through strong commodity prices and gold which has already started to rise, and the post-pandemic return of Chinese tourism and investment. I argue that the Aussie will eventually make it to parity with the US dollar, or 1:1.
As for precious metals, I’m baling on my 10% holding in gold (GLD), which delivered a nice 20% gain in 2020. From here, it is having trouble keeping up with other alternative assets, like Bitcoin, and there are better fish to fry.
Yes, in this liquidity-driven global bull market, a 20% return is just not enough to keep my interest. Instead, I add a 5% weighting in the higher beta and more volatile iShares Silver Trust (SLV), which has far wider industrial uses in solar panels and electric vehicles.
As for energy, I will keep my weighting at zero. Never confuse “gone down a lot” with “cheap”. I think the bankruptcies have only just started and will stretch on for a decade. Thanks to hyper-accelerating technology, the adoption of electric cars, and less movement overall in the new economy, energy is about to become free. You are looking at the next buggy whip industry.
My ten-year assumption for the US and the global economy remains the same. I’m looking at 3%-5% a year growth for the next decade.
When we come out 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 cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient, productive, and profitable than the old.
You won’t believe what’s coming your way!
I hope you find this useful and I’ll be sending out another update in six months so you can rebalance once again.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 1, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GAMBLERS HAVE ENTERED THE MARKET),
($INDU), (TSLA), (TLT), (BA), (JPM), (MS), (GME), (STBX), (GE), (MRNA)
At long last, the 10% correction I have been predicting is happening. No, it wasn’t caused by the usual reasons, like a bad economic data point, an earnings disappointment, or a geopolitical event.
The market delivered the worst week since October because gamblers have entered the stock market. Perish the thought!
It turns out that if a million kids buy ten shares each of a $4 stock, they can wipe out even the largest hedge funds on their short positions. It also turns out they can wipe out their brokers, with infinite capital calls triggered by massive order flows.
If Chicago’s Citadel had not stepped in with a $1 billion bailout, Robin Hood would have gone under last week. Citadel buys Robin Hood’s order flow and is their largest customer. That’s where systemic risk enters the picture.
And it’s not like there was really any systemic risk. Markets have an inordinate fear of the unknown, and no one has ever seen a bunch of kids in a chat room like Redditt wipe out major hedge funds.
Fortunately, there are only a dozen small illiquid stocks that could be subject to such ‘buyers raids”. So, the spillover to the main market is very limited, probably no more than a week or two.
And the regulations to reign in such a practice are already in place. Whenever a broker gets more business than it can handle, it will simply shut it down. Robin Hood did that on Friday when it has limited purchases in 20 stocks to a single share, including Starbucks (STBX), Moderna (MRNA), and General Electric (GE).
What all this does is set up an excellent buying opportunity for you and me, of which there have been precious few in recent months. By ramping up the Volatility Index to $38, it is almost impossible to lose money on front month call options spreads. We are the real winners of the (GME) squeeze.
Stocks would have to fall another 10%-20% on top of existing 10%-20% declines, and that is not going to happen in 13 trading days to the February 19 options expiration with $20 trillion about to hit the economy and the stock markets. That breaks down to $10 trillion in stimulus and $10 trillion worth of global quantitative easing.
My own long, hard-won experience is that a (VIX) at $38 earns you about 20% a month in profits. Options prices are so elevated that scoring winners now is like shooting fish in a barrel. So, join the party as fast as you can.
On Friday, I was taking profits on exiting positions and shipping out new trade alerts in the best quality names as fast as I could write them. Where is that easy, laid back retirement I was hoping for!
Keep at the barbell portfolio. The big tech names are finishing up a six-month sideways “time” corrections. Their earnings are catching up with valuations at a prolific rate. The domestic recovery names have just given back 10%-20% and are ripe for another leg up. All of these are good candidates for 2023 options LEAPS.
After all, if an insurrection and the sacking of the capitol can’t take the market down more than 1%, GameStop (GME) is certainly not going to take it down more than 10%.
GameStop (GME) posted record volatility, up from $4 a month ago to $483. Even the biggest hedge funds can’t stand up to a million kids buying ten shares each at market. All single name shorts in the market are getting covered by hedge funds in fear of getting “Gamestopped”, producing a 700-point Dow rally.
Several brokers banned trading in the name and the SEC is all over this like a wet blanket. Trading is halted due to an excess of sell orders. The problem is that funds are selling real stocks to cover the losses we own, like JP Morgan (JPM) and Tesla (TSLA) and short (TLT).
In the meantime, the action has moved over the American Airlines (AA), which has soared by 50%. AMC Entertainment Holdings (AMC) saw a 400% pop, but I haven’t seen anyone rushing back into theaters to watch Wonder Woman. Blame Jay Powell for flooding the financial system with mountains of cash seeking a home. There is so much money in circulation that traders are invented asset classes to put it into. This can’t last. Buy the dip.
Here are the best short squeeze targets with the greatest outstanding short interests. GameStop (GME) tops the list with an eye-popping 139% short interest, followed by Bed Bath & Beyond (BBBY) (67%) and Ligand Pharmaceutical (LGND) (64%). National Beverage (FIZZ), The Macerich Company (MAC), and Fubo TV (FUBO) bring up the rear. These are all failed companies in some form or another, which is why hedge funds had such large short positions.
New Home Sales disappointed in December, up only 1.6% to 842,000 units. This is on a signed contract basis only. Affordability is the big issue caused by high prices. Who buys a house at Christmas anyway?
Case Shiller soared by 9.5% in November, the fastest home price appreciation in history. Phoenix (13.8%), Seattle (12.7%), and San Diego (12.3) were the big movers. Blame a long-term structural housing shortage, a huge demographic push from Millennials, near-zero interest rates, and a flight from the cities to larger suburban homes. The Pandemic is keeping millions of homes off the market.
US GDP may reach pre-pandemic high by end of 2021, it the vaccine gets distributed to every corner of the nation and aggressive stimulus packages pass congress. Growth should come in at a minimum of 5% or higher this year, wiping out last year’s disaster. Keeping interest rates near zero will be a big help, as Treasury Secretary Yellen is determined to do. China and India are already there.
Share Buybacks have returned, the catnip of share prices. Q4 saw a jump to $116 billion from $102 billion in Q2, and this year, banks now have free reign to buy back their own shares. That’s still below the $182 billion seen in Q4 2019. It can only mean that share prices are rising further.
California lifts stay-at-home regulations, enabling restaurants to open after a nearly two-month shutdown. It’s the first ray of hope that the pandemic will end by summer. It will if Biden hits his 1.5 million vaccinations a day target.
Tesla posts sixth consecutive profit quarter, taking the stock down $60 in the aftermarket momentarily on a classic “buy the rumor, sell the news” move. The once cash-starved company now has an eye-popping $19.4 billion in reserves. Revenues reached a massive $10.7 billion, better than expected. Gross margins reached 19.2%. Looking for 50% annual growth for several years. Shanghai, Berlin, and Austin will make their first deliveries this year. Cash flow is at $19.4 billion, enough to build six more factories. No short sellers left here. It’s a perfect entry point for a LEAP. Buy the March 2023 $1,150-$1,200 call spread for a ten bagger.
Space X rocket carries 143 spacecraft into space. The Falcon 9 rocket set a new record with new satellites launched at once. Yes, you too can put 200kg into orbit for only $1 million. Many are from small tech startups selling various types of data. Elon Musk’s hobby, now worth $20 billion according to its government contracts, could be his next IPO. Don’t pass on this one!
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 earned a blockbuster 10.21% in January, versus a Dow Average that is now down in 2021. This is my third double-digit month in a row.
I used the market selloff to take substantial profits in my short (TLT) holdings and buy new longs in Boeing (BA) and Morgan Stanley (MS). I rolled the strikes down on my JP Morgan (JPM) long by $10.
That brings my eleven-year total return to 432.76%, some 2.15 times the S&P 500 over the same period. My 11-year average annualized return now stands at a nosebleed new high of 38.85%, a new high.
My trailing one-year return exploded to 75.28%, the highest in the 13-year history of the Mad Hedge Fund Trader. We have earned 91.43% since the March 20 2020 low.
We need to keep an eye on the number of US Coronavirus cases at 26 million and deaths at 440,000, which you can find here. We are now running at a staggering 3,800 deaths a day.
The coming week will be all about the monthly jobs data.
On Monday, February 1 at 9:45 AM EST, the Markit Manufacturing PMI for January is out. Caterpillar (CAT) announces earnings.
On Tuesday, February 2 at 7:00 AM, Total Vehicle Sales for January are published. Alphabet (GOOG) and Amgen (AMGN) report.
On Wednesday, February 3 at 8:15 AM, the ADP Private Employment Report is published. QUALCOMM (QCOM) reports.
On Thursday, February 4 at 9:30 AM, Weekly Jobless Claims are printed. Gilead Sciences (GILD) reports.
On Friday, February 5 at 9:30 AM, the January Nonfarm Payroll Report is announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I am often kept awake at night by painful arthritis and a collection of combat injuries and I usually spend this time thinking up new trade alerts.
However, the other night, I saw a war movie just before I went to bed, so of course, I thought about the war. This prompted me to remember the two happiest people I have met in my life.
My first job out of college was to go to Hiroshima Japan for the Atomic Energy Commission and interview survivors of the first atomic bomb 29 years after the event. There, I met Kazuko, a woman in her late forties who was attending college in Fresno, California in 1941 and spoke a quaint form of English from the period. Her parents saw the war and the internment coming, so they brought her back to Hiroshima to be safe.
Her entire family was gazing skyward when a sole B-29 bomber flew overhead. One second before the bomb exploded, a dog barked and Kazuko looked to the right. Her family was permanently blinded, and Kazuko suffered severe burns on the left side of her neck, face, and forearms. A white summer yukata protected the rest of her, reflecting the nuclear flash. Despite the horrible scarring, she was the most cheerful person I had ever met and even asked me how things were getting on in Fresno.
Then there was Frenchie, a man I played cards with at lunch at the Foreign Correspondents Club of Japan every day for ten years. A French Jew, he had been rounded up by the Gestapo and sent to the Bergen-Belson concentration camp late in the war. A faded serial number was still tattooed on his left forearm. Frenchie never won at cards. Usually, I did because I was working the probabilities in my mind all the time, but he never ceased to be cheerful no matter how much it cost him.
The happiest people I ever met were atomic bomb and holocaust survivors. I guess, if those things can’t kill, you nothing can, and you’ll never have a reason to be afraid again. That is immensely liberating.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
September 16, 2020
Fiat Lux
Featured Trade:
(THE BULL CASE FOR BANKS),
(JPM), (BAC), (C), (WFC), (GS), (MS)
Banks have certainly been the red-headed stepchild of equity investment in 2020.
While technology shares have rocketed by two, three, and four-fold, banks have remained mire in the muck, down 35% on the year while the S&P 500 is up 6%.
However, all that is about to change.
Banks have become the call option on a US economic recovery. When the economic data runs hot, banks rally. When it’s cold, they sell-off. So, in recent months bank share prices have been flat-lining.
You have to now ask the question of when the data stay hot, how high will banks run?
There also is a huge sector rotation issue staring you in the face. Where would you rather put new money, stocks at all-time highs trading at ridiculous multiples, or a quality sector in the bargain basement? Big institutions have already decided what to do and are buying every dip.
Banks certainly took it on the nose with the onset of the pandemic. Interest rates went to zero and loan default rates soared, demanding a massive increase in loan loss provisions.
Much more stringent accounting rules also kicked in during January known as “Current Expected Credit Losses.” That requires banks to write off 100% of their losses immediately, rather than spread them out over a period of years.
Then in June, the Federal Reserve banned bank share buybacks and froze dividends to preserve capital in expectation of more loan defaults.
So what happens next?
For a start, fall down on your knees and thank Dodd-Frank, the Obama era financial regulation bill.
Banks carped for years that it unnecessarily and unfairly tied their hands by limiting leverage ratios to only 10:1. Morgan Stanley reached 40:1 going into the Great Recession and barely made it out alive, while ill-fated Lehman Brothers reached a suicidal 100:1 and didn’t.
That meant the banks went into the pandemic with the strongest balance sheets in decades. No financial crisis here.
Thanks to government efforts to bring the current Great Depression to a quick end, generous fees have been raining down on the banks from the numerous loan programs they are helping to implement.
And trading profits? You may have noticed that options trading volume is up a monster 95% so far in 2020 and increased by a positively meteoric 120% in August. That falls straight to the banks’ bottom lines. If you’re wondering why your online trading platform keeps crashing, that’s why.
I list below my favorite bank investments using the logic that during depressions, you want to buy Rolls Royces, Teslas, and Cadillacs at deep discounts, not Volkswagens, Fiats, or Trabants.
JP Morgan (JPM) – Is the crown jewel of the sector, with the best balance sheet and the strongest customers. It has over reserved for losses that are probably never going to happen, stowing away some $25 billion in the last quarter alone.
Morgan Stanley (MS) - Brokerage-oriented ones like Morgan Stanley (MS) and Goldman Sachs (GS) are benefiting the most from the explosion in stock and options trading. I’ll pick my former employer (MS), where I once accounted for 80% of equity division profits, as (GS) is still mired in the aftermath of the $5 billion Malaysia scandal.
Bank of America (BAC) - is another quality play with a fortress balance sheet.
Citigroup (C) – Is the leveraged play in the sector with a slightly weaker balance sheet and more aggressive marketing strategy. It seems like they’re always trying to catch up with (JPM). This week’s revelation of a surprise $900 million “operational loss” and the penalties to follow knocked 13% of the share price. This is the high volatility play in the sector.
And what about Wells Fargo (WFC), you may ask, the cheapest bank of all? Unfortunately, it still has to wear a hair suit because of its many regulatory transgressions, before, during, and after the financial crisis so I’ll give it a miss. Oh, and Warren Buffet is selling too.
The One
Global Market Comments
June 5, 2020
Fiat Lux
Featured Trade:
(JUNE 3 BIWEEKLY STRATEGY WEBINAR Q&A),
(FB), (M), (UAL), (LVS) , (WYNN), (MS), (SPX), (TBT), (TLT), (AAPL), (FB), (MSFT), (SDS), (SPX), (AMZN) (LEN), (KBI), (PHM), (TSLA)
Below please find subscribers’ Q&A for the June 3 Mad Hedge Fund Trader 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: Domino's Pizza (DPZ) is at all-time highs? Would you buy this name right here, right now?
A: No, I would not even buy their pizza. You would be crazy to buy them right now up here this high. I prefer Round Table, the pizza not the stock. All of these “reopening” stocks are way overextended.
Q: Will the riots delay the recovery?
A: Yes, they will, it could take as much as another 1% off the current GDP growth rate. It’s hitting the already worst-hit sector—retailers. Many retailers will not come back from these, especially the small ones. These businesses were just returning from being closed for two months when they got burned down. But we won’t see it in the macro data for many months because its happening largely at the micro level. If you didn’t like Macy’s (M) before when it was headed for Chapter 11, you definitely won’t like it now that it is burning down.
Q: If airlines like United Airlines (UAL) can’t use the middle seat, do you see ticket prices going up 10%, 25%, or 50%?
A: Yes. In theory, to just cover the middle seat, they have to increase prices 33%. And there will be a whole lot of new costs that the airlines have to endure as part of this pandemic, such as extra cleaning, disinfecting, and temperature taking. So, they’re really going to need to increase prices by 50% or more just to break even. My guess is that the airline industry will shrink in half in the fall when all the government bailout money runs out. So, I've been telling people to take profits on the airlines, especially if you have a double or triple in them, or if you have the LEAPS.
Q: Is Facebook (FB) immune from any big selloff?
A: No, nobody is immune—look how much Facebook sold off in March, some 35%. Mark Zuckerberg seems to be making a deal with the devil, accommodating the president with unrestricted incendiary Facebook posts. And the consequences of a Democratic win for Facebook could be hugely negative, so I am not participating in that one. Mark doesn’t have a lot of friends in congress right now so regulation looms.
Q: What do you think about buying Las Vegas Sands (LVS) or Wynn Resorts (WYNN) on the expectation of reopening?
A: I’m a Nevada resident and get frequently updated on the casino news. They’re only going to be allowed half of peak casino visitors that they had in January, so they will generate huge losses. Almost all companies are being allowed to reopen back to half the level that guarantees bankruptcy in 3-6 months. But we won’t see that in the numbers for many months either. I’m negative on any industry that depends on packing people in, like airlines, cruise lines, and movie theaters.
Q: What are the chances of a mass student debt cancellation?
A: That is a possibility if the Democrats win in November, and it has already been proposed. It is about a $1.5 trillion ticket. If you’re bailing out large companies, small companies, airlines, and the oil industry, why not students? It would have the benefit of adding 10 million more consumers to the economy, who are not current participants because they have massive student debts that are appreciating at 10% a year and have terrible credit ratings. So that would be another great economic stimulus measure. By the way, I paid off my student loans 40 years ago in a lump sum payment with my first paycheck from Morgan Stanley (MS). How much did four years of college cost during the 1960s? $3,000. Such a deal.
Q: What’s the next resistance level on the S&P 500 (SPX)?
A: The target we’ve been looking for is $3,125. I’m looking for roughly $40 points above that level—it should be about $3,165. We’re in uncharted territory here because nobody’s ever seen a market rise 40% in two months, so any technical recommendation has to be bearish except for a very short term, like intra-day or daily views.
Q: Any correlation between the 1918 epidemic and now?
A: Here is your History of Virology Lesson 101 for today. There is some similarity, but the 1918 flu actually originated on a farm in Kansas, had a 2% death rate, took a trip to Europe, mutated, came back months later, and then had a death rate of 50%. We haven't seen that second wave yet, or major mutations. We have seen a couple of different DNA strands out there though, meaning we would need multiple different vaccines when we get them. By the way, it was called the “Spanish Flu” because during WWI, every country had censorship except Spain because it was not a combatant. So, the pandemic was only reported in the Spanish newspapers.
Q: Would you get out of any of the previously recommended LEAPS?
A: Yes, I would be taking profits on all of your LEAPS—whether tech, domestic, “recovery”, or whatever else—so if we do get a correction over the summer, you can get back in at better prices, with longer expirations. You can go two years out from say August for example. The risk/reward today is terrible.
Q: Would you hold on to the (SDS) right now, or wait for the pullback
A: No, we have offsetting profits on all of our (SDS) positions, until today—if the market keeps accelerating to the upside, SDS losses will start to offset our profits on the positions, so that’s why I would get out.
Q: Should I buy the ProShares Ultra-Short 20 + Year Treasury Bond Fund (TBT)? I don’t do options.
A: You don’t need to do options, (TBT) is an ETF; anybody can buy that, it’s just like buying a stock.
Q: What is happening with the Australian market?
A: It will trade with the US stock market tick for tick, which means they’ve had a fantastic rally, overdue for a selloff. Wait to buy the next dip.
Q: If markets are going to go down soon, why exit the (SDS)
A: It may go up first before it goes down. And in any case, I have a great profit on the combined position of long (SDS) and short bonds. These days, I like taking big profits rather than praying they become bigger. It’s about risk control and knowing what you can get away with in certain market conditions.
Q: Is now the time to sell the highflyers in tech?
A: Yes, I would be selling Apple (AAPL), Facebook (FB), Microsoft (MSFT), and Amazon (AMZN). Get dry powder, which is worth a lot after you’ve seen a move like this; especially if the economy gets worse, which is likely. My late mentor Barton Biggs taught me to always leave the last 10% of a move for the next guy.
Q: At what point do you buy the ProShares Ultra Short S&P 500 ETF (SDS) outright?
A: Only if there is an immediate collapse in the market, which I can’t foresee with any certainty. When you play these bear ETFs, the costs are very high. You are short double the (SPX) dividend, which is about 5% a year, plus hefty management fees. So, you really have to catch a quick, large move to the downside to make any real money.
Q: Real estate seems like the big winner of the pandemic. Will prices be up by the end of the year or is this just a temporary spike?
A: They will be up at the end of the year. I have been telling readers all year that their home will be their best investment in 2020 and that is coming true. Real estate has a massive tailwind behind it which has really been in place for a couple of years now, and that is the millennials upgrading and buying houses. The pandemic has really poured gasoline on the fire and triggered a stampede out of the city and into the suburbs. Having 85 millennials ready to upgrade their homes is a huge positive for the real estate market, and I’d be looking to buy the homebuilders on any dip. That’s probably the best domestic play out there. Buy Lennar Corp. (LEN) and Pulte Homes (PHM) on dips.
Q: Post pandemic, will manufacturing have any way of helping US economic growth, or is bringing back the supply chains fake news?
A: It is fake news because if companies bring back production, it will be machines and not people making things. Unless you want to pay $10,000 for an iPhone, or $5,000 for a low-end laptop. Oh yes, and the stocks which made these things would be 90% lower as well. That’s what those products cost in today’s dollars if they were made in the United States. I wouldn't count on any repatriation of US jobs unless people want to work for $3 a day like the Chinese do. Offshoring happened for a reason.
Q: How do I hedge a municipal bond portfolio?
A: You might think about taking profits in muni bonds. They’re yielding around 2% and change. And they could get hit with a nice little 20-point decline if the US Treasury bond market (TLT) falls apart, which it will. Then you can think about buying them back. If you really want to hedge, you sell short the (TLT) against your long muni bond portfolio. But that is an imperfect hedge because the default rate on munis is going to be much higher than it is now than it was in 2008-2009, and much higher than US Treasuries, which never defaults despite what the president has said.
Q: What is dry powder?
A: It means having cash to buy stocks at market bottom. In the 1800s before cartridges were invented, black powder got wet whenever it rained causing guns to fail to shoot. That is the historical analogy.
Q: What do we do now if we’re getting started?
A: It will require a lot of discipline on your part as coming in at market tops is always risky. Wait for the next trade alert. Every one of these is meant to work on a standalone basis. I would do nothing unless you see one of these things happen; any 2 or 3-point rally in bonds (TLT), you want to sell short. We’re just at the beginning of a multiyear trade here so it’s not too late to get back into that. Gold (GLD) is probably safe to buy on the dip here since we are at the very beginning of a historic expansion of the global money supply. I wouldn’t touch any stocks unless we get at least a 10% drop and then I'll start putting out call spread recommendations on single stocks. But right here, on top of the biggest bounceback in stocks in market history, don’t do anything. Just read the research and make lists of things to buy when they do dip—something I do for you anyway.
Q: What about Beyond Meat (BYND)?
A: The burgers are not that bad, but the stock is way overpriced and you don’t want to touch it. It's one of the fad stocks of the day.
Q: Can we access the slides after the webinar?
A: Yes, we post it on the website under your “Account” section about two hours after we’re done.
Q: Are you saying sell everything currently profitable?
A: Yes, I would be selling everything on a short term basis, keep tech and biotech on a long term basis. We are the most overbought in history and you don’t get asked twice to sell tops. But yes, it could go higher before the turn happens. From a risk-reward point of view, it’s terrible to do anything right now.
Q: Could we get a pullback to the $260-$270 area in the S&P 500 (SPY)?
A: Yes, especially if we get a second worse wave of corona and the stimulus takes much longer than we thought to get into the economy, or if the rioting continues.
Q: Should you sell CCI now?
A: Yes, I actually would. You have a 57% gain in the stock in ten weeks, so why not? Long term, it’s a hold.
Q: Are any retail stocks a buy?
A: No, they aren’t because a lot of them are going to go under but you don’t know which ones. After shutting down and losing 60% of their revenues, they’re now being burned down. The pros who do well in the sector are bankruptcy specialists who have massive research teams that analyze every lease in every mall and then cherry-pick. You and I don’t have the ability to do that so stay away.
Q: What is the best way to play real estate?
A: Buy a house. If not, then you buy (LEN), (KBI), and (PHM).
Q: Is it too late to get back in the stock market?
A: Yes, I'm afraid it is. Buying, because it has gone up, is a classic retail investor mistake. After this meltdown, maybe you will learn to buy stocks when everyone else is throwing up on their shoes. That's what I was doing in March and we got returns of 50% to 100% on everything and 500% to 1,000% on the LEAPS (TSLA).
Q: Are you buying puts?
A: No, I am not taking outright short positions any more than I have now because we have a Fed-driven melt-up underway with a stimulus that's 20x larger than that seen during the 2008-2009 Great Recession. When I don’t know what’s going to happen, I get out.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
