Global Market Comments
September 4, 2020
Fiat Lux
Featured Trade:
Below please find subscribers’ Q&A for the September 2 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: Tesla (TSLA) is down 25% today from the Monday high. What are your thoughts?
A: Yes, I've been recommending to people all last week that they dump their big leverage positions, like their one- and two-year LEAPS in Tesla and quite a few people got out at the absolute highs near $2,500 just before the new stock issue was announced. People who bought the Tesla convertible bonds ten years ago got an incredible tenfold return, plus interest!
Q: Are we at-the-money at the bear put spread in (SPY)?
A: Yes, and if we go any higher, you are going to get a stop loss in your inbox because I have good performance this year to protect. I do this automatically without thinking about it. In this kind of crazy market, you cannot run shorts indefinitely. Hope is not a strategy. And it’s easy to stop out of a loser when 90% of the time you know the next one is going to be a winner.
Q: Doesn’t gold (GLD) normally go up in falling stock markets?
A: Yes, in a normal market that’s what it does. The problem is that all asset classes have produced identical charts in the last 2.5 years, and when they all go up in unison, they all go down in unison. This time around, gold will sell off with the stock market and gold miners (GDX) will go down three times as fast. Remember gold miners are stocks first and gold plays second, so when a big stock dive hits, will see big dives in gold miners as well, as we saw in February and March.
Q: Why is JP Morgan (JPM) a good buy?
A: JP Morgan is the quality play in the banks. And once inflation starts to kick in and interest rates rise, and you get a positive yield curve and a strengthening economy—that is fantastic news for banks. They are also one of the few underperforming sectors left in the market, so in any stock market selloff banks will rise. And that’s JP Morgan (JPM), Bank of America (BAC), Citigroup (C) that will lead the charge. Avoid Wells Fargo (WFC). It’s still broken.
Q: I see iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) starting to move up. Should we buy it?
A: Only on dips and only if you expect a dramatic selloff in the stock market very soon, which I do. The (VXX) trade is very high risk. The contango is huge. I tried making money on it a couple of times this year and failed both times; this really is for professional intraday traders in Chicago with an inside look at customer order flows. Retail traders rarely make money on the (VXX) trade—usually, they get killed.
Q: Will gold hold up as interest rates rise?
A: No, it won’t. Rising interest rates are death for gold and other precious metals. Your gold theory is that interest rates stay lower for longer, which the Fed has essentially already promised us.
Q: What do you think of the United States Treasury Bond Fund (TLT)?
A: I’m looking to sell shorts in big size as I did in the spring and I’m looking for five-point rallies to sell into. I missed the last one last week because it just rolled over so fast on an opening gap down that you couldn’t get any trade alerts out, and that’s happening more and more. So, if we get going up to $166-$167, that will be a decent short and then you want to be doing something like the $175-$178 vertical bear put spread in October. I don’t think bonds are going to go to 0% interest rates, I think the real range is 50-95 basis points in a 10-year treasury yield. That is your trading range.
Q: Do you think big oil (USO) will transform into a low carbon energy industry if Biden wins?
A: I’ve been telling big oil that that’s what they’re going to have to do for 20 years. They all read Mad Hedge Fund Trader. And, they always laugh, saying oil will be dominant at least until 2050. Since then, they have become the worst-performing sector of the S&P 500 on a 20-year view, and my thought is that eventually, big oil takes over and buys the entire alternative energy industry, and slowly pulls out of oil. They have the engineering talent to pull it off and they have the cash to make the acquisitions. They will have to reinvent themselves or go out of business, just like everybody else.
Q: What could trigger the stock market pullback you mention in your slides? Because the bullish Fed quantitative easing trade is hard to stop.
A: It’s like the 2000 top, there was no one thing or even a couple things, that could trigger the top. It’s just the sheer weight of prices and exhaustion of new buyers, and that is impossible to see in advance, so all you can do is watch your charts. One down out of the blue the Dow Average ($INDU) will suddenly drop 1,000 points for no reason.
Q: When you say Europe is recovering, which data indicates this?
A: Well, when you look at Q2 GDP growth in Europe, they were only down 10% while the US was down 26%. That is purely a result of Europe having a much more aggressive COVID-19 response than the United States. There is no mask debate in Europe, it’s like 100% compliance. Here you have blue states wearing masks and red states not. The result of that, of course, is that the death rate in the red states is about five times higher than it is in blue states, on a per capita basis. That is why the US has the highest infection rate in the world, the highest death rate, and is why we lost an extra 16% of GDP growth in Q2.
Q: Will you trade a short Tesla again?
A: No, I’ve been hit twice on Tesla shorts in the last six months and we are now in La La land—it’s essentially untradable. I got a lot of people out of Tesla earlier this week, and then they announced their share new $5 billion issue, which they should have done a while ago
Q: Is there any way to play the home mortgage refi boom in the stock market with the 30-year mortgages at a record low 2.88%?
A: You buy the banks. If you call your bank and ask for a refi quote, it might be a week before they get back to you, they are so busy. Banks are also getting enormous subsidies from all these various lending and stimulus type programs, so money is raining down on them right now. Banks are now the cheapest sector in the market, selling at 6x earnings. It is probably the single greatest sector in the stock market right now to buy.
Q: I’ve been holding the ProShares UltraShort 20 year Plus Treasury fund (TBT) and it is moving up and down in the short-range. Should I sell?
A: No, I think we have more room to go on the (TBT), I think we could get to $18, which is about a 0.90% yield in the US Treasury bond market.
Q: Do you have a target on Tesla?
A: Well, my downside target would be its old breakout level. So, divide by five and you get $300. That equates to $1450 in the pre-split price. So, we could have a real monster selloff, like 40%, once this market loses momentum. It’s safe to say don’t buy Tesla up here.
Q: Is the ProShares UltraShort S&P 500 ETF (SDS) offering a good entry point here?
A: It is as soon as we rollover. In these momentum-driven markets, it’s best to wait for proof of a top before you start getting fancy with short plays. You can see how I got hammered several times in the last month by being too early on my shorts; and fortunately, I was able to hedge out most of those losses. You might not be able to do so.
Q: Are you planning on keeping your Fortinet spread?
A: Yes, to expiration, which is only 11 days off, unless we get an out-of-the-blue meltdown.
Q: Do you like Ali Baba (BABA)?
A: Yes; that is essentially a play on a Biden win in the election. If he wins, our war with China will cease and all of the China plays will go ballistic as we return to international trade, which has been powering our economy for the last 70 years.
Q: What about cruise lines like Carnival (CCL)?
A: I know they’re cheap. They’re selling out their 2021 summer cruises with customers betting that there will be a corona vaccine by then, or simply not caring whether there is a pandemic or not. The dedicated cruisers are desperate to cruise. That’s one reason why these stocks are holding up, but I don’t want to touch them. I think the recovery will take much longer than people realize.
Q: When do you buy gold?
A: Wait for a bigger dip.
Q: Should I be holding gold for the long term?
A: Yes; if you don’t want to trade it, just sitting on your position is fine. I think gold eventually goes to 3,000 after hitting an initial target of 2,200.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
July 21, 2020
Fiat Lux
Featured Trade:
(A REFRESHER COURSE AT SHORT SELLING SCHOOL),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL), (TSLA),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
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
Global Market Comments
June 4, 2020
Fiat Lux
Featured Trade:
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
Global Market Comments
May 21, 2020
Fiat Lux
Featured Trade:
(MAY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (SDS), (TSLA), (VIX), (ROM), (SPY),
(TLT), (TBT), (DRI), (CCI), (BOTZ)
(TESTIMONIAL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 20 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: Do you believe chairman Powell when he says no negative rates?
A: I do believe that he does not want negative rates—that would be hugely detrimental to the economy. Europe and Japan have been trying them for the last ten years and they absolutely do not work. When it costs something to deposit money in the bank, people take it out of the financial system and hide it under their mattresses or buy gold (GLD). Although Powell doesn’t want negative rates, he may not have a choice; the market’s already taking them there in the futures market one year out. If we do get a big second wave of corona in the fall, and we do go to new lows in the stock market, and unemployment goes to new highs, negative rates will happen on their own whether Powell wants them or not.
Q: What is your best metric for determining when this bounce is over?
A: We passed those metrics on when a normal bounce is over weeks and weeks ago, and it just keeps going up. If you’ll notice, I have no stocks right now. I have some balanced long and short stock indexes but that’s it. My big trade is short bonds. When an asset class is no longer attractive, avoid it like Covid-19.
Q: What range should I wait for to buy the Proshares Ultra Short S&P 500 ETF (SDS)?
A: I’m really only using (SDS) as a hedge to limit the risk on much bigger long positions that I may have. (SDS) doesn’t lend itself to normal technical analysis because it is an artificial construct.
Q: What price to get into Tesla (TSLA)?
A: If you look at the Tesla chart, it's almost exactly the same as all of the other FANGS, as it’s essentially becoming the next FANG. So, they will trade with the FANGS for that reason, at least in the short term. Don’t buy it here, wait for the next major selloff to $600 or so. We actually had a bunch of concierge customers to buy long term leaps under $500 dollars in March, and they got 500% returns in 3 weeks.
Q: Why didn’t we just buy the ProShares Ultra Technology ETF (ROM) and go to sleep for five years?
A: If you recall, I was actually recommending just that in March when (ROM) was trading in the $80s, and we actually had a (ROM) position that we got stopped out of. The (ROM) is the 2x long technology ETF that's gone from $80 to $160 since the market bottomed almost 2 months ago.
Q: Why do you keep using deep in the money put spreads and call spreads?
A: You use them when volatility is very high like it is now—right now the Volatility Index (VIX) is at $28. The normal price is at $14 or $15, and we’ve just come down from $80. Even in the high $20s, you still get huge payoffs (like 10% a month) per call and put spread. As long as (VIX) is that high, we’ll keep doing them. They are also the perfect trade to have in range trading markets like we’ve had for the past month. They give you a nice extra kicker on your P&L.
Q: What is the worst-case scenario?
A: We get a second wave of the virus, another couple hundred thousand Americans die, the stock market goes to new lows, and we have a presidential election. How’s that for a worst-case scenario? Other than that, how is your day going?
Q: Do you trade pre and post market?
A: No; I used to when I ran my hedge fund, but I don’t do anything now if it’s beyond the capability of most individuals. I only want to put out trade alerts that people can get done. So, I'm only trading US hours. The reason you trade overseas is that you always get the highest highs and lowest lows in the Asian markets. During the late 1990s, I was the number one or two volume trader in the Singapore futures market.
Q: Do you think the 200-day moving average will be substantial resistance to the market?
A: I think absolutely yes, and I also believe that the only downside trigger for a major breakdown in the market is a second corona wave.
Q: If we get negative interest rates, would (SDS) fall?
A: No, (SDS) is a 2X bear (SPY) ETF that would go through the roof because negative rates would only happen if the stock market was collapsing. You might get a double on (SDS) on a second corona wave and negative interest rates. That’s why I’m keeping my position.
Q: Could the market just keep going up with no major pullbacks if the Fed keeps stimulating the economy?
A: Yes, and that’s what has been happening. Jerome Powell has said that the Fed’s ability to borrow is unlimited, therefore the amount of stimulus they can keep throwing is also unlimited, and if that’s what happens, all of that money will go into financial assets, even if the real economy is in utter freefall (which it has been). You can’t rule out anything these days. You always have to trade with the belief that anything can happen at any time.
Q: I need help setting up Long term Equity Participation Securities (LEAPS). Is there a video on that?
A: You can take all the educational videos we have on call spreads and put spreads, and everything applies exactly the same, except that instead of doing a one-month maturity, you do a two-year maturity. If you play around with the maturity tab on your platform, you can find the longest dated maturity on each option series. Sometimes, it’s only a year, sometimes all the way up to 2.5 years.
Q: Are there any other options besides the United States Treasury Bond Fund (TLT) to short the bond market?
A: Yes, there’s the ProShares Ultra Short 20 Year Treasury ETF (TBT); that’s a 2x short bond market ETF. But you don’t get anywhere near the leverage that we have in the (TLT) put options spreads.
Q: Do you expect a return in inflation with all the stimulus going on?
A: Absolutely yes; food prices have already increased 20%—that will be a big inflationary push. Another $14 trillion in government QE and spending hitting the economy is also highly inflationary. And a lot of the price cuts which fueled deflation are ending as global supply chains are cut and the US food distribution system breaks down.
Q: Is the Great Depression on the table?
A: We are in a Great Depression now that is already far worse than the last one, except that this one will be shorter than the decade seen in the 1930s.
Q: How long will it take for unemployment to recover to the December 2019 3.5% unemployment lows?
A: We will never get back to those lows. A lot of that was over employment (artificial employment), with a lot of temporary marginal workers being picked up. And the net effect of the epidemic will be to make businesses forcibly more efficient; that means getting a lot more done with a lot fewer workers. So, I don't think we’ll ever see that 3.5% rate again. Economists are predicting that the next new low in unemployment may be 5% or 6%, and even that could take 2 or 3 years to get there.
Q: Will the market soar on vaccine news?
A: Well probably not; I would bet that two-thirds of any real vaccines are already in the price. We are getting vaccine announcements every day and the market is immediately discounting it, so when we actually do get the real thing, we may get a rally of only a few days and that’s it. We also won’t know for many months if it is real and is moved to mass production.
Q: If you would buy one restaurant, what would it be?
A: None; I would not touch the restaurants here with a 10-foot pole. None of the restaurant chains have any prospect of making a profit, except for maybe the ones that already had takeout models like Subway or Chipotle Mexican Grill (CMG). Some hedge funds are buying Darden (DRI), but with their money, not mine.
Q: Should I double my short position in volatility (VIX)?
A: No, not down here, especially after a huge run in the stock market like we had—a 40% rise off the bottom. If we do get above $50 though, I will be shorting volatility then.
Q: I bought the (BOTZ) AI and robotics ETF, on your recommendation—it’s now almost double off the lows. What should I do with it now?
A: Short term, take profits, long term keep it. I think the (BOTZ) doubles again from these levels, and I know some of you out there bought LEAPS on the (BOTZ) at the lows and you’re up 1,000% on those. If you have a 1,000% profit take it, you probably won’t get another one in your lifetime.
Q: Time to refi the house?
A: No, I think refi rates are artificially high now (and totally out of line with the bond market) because the default rate is so high—8%. Once that default rate starts to drop, the interest rate on mortgages should also fall, and I think you could see 2.5% on the 30-year fixed rate mortgage. Europe has had 0% rates for almost 10 years, and their home mortgages are at 2%, so that’s ultimately how low we could go.
Q: Are you worried about the debt related to Crown Castle International (CCI)?
A: No because they’re putting all the debt to good use and they can always refi at lower rates. There is no question that the demand for cell phone towers is going to be enormous—epidemic or not, because of the roll-out of 5G phones.
Good Luck and 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
