Global Market Comments
May 4, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE NEXT BOTTOM IS THE ONE YOU BUY),
(SPY), (SDS), (TLT), (TBT), (F), (GM), (TSLA), (S), (JCP), (M)
Tag Archive for: (SDS)
It was only a year ago that I was driving around New Zealand with my kids, admiring the bucolic mountainous scenery, with Herb Albert and the Tijuana brass blasting out over the radio. Believe me, the tunes are not the first choice of a 15-year-old.
Today, it is all a distant memory, with any kind of international travel now unthinkable. For me, that is like a jail sentence. It is all a reminder of how well we had it before and how bleak is the immediate future.
Stock traders have certainly been put through a meat grinder. The best and worst months in market history were packed back to back, down 39% and then up 37%. At the March 23 low, the Dow average had fallen by 11,400 in a mere six weeks. Those who lived through the 1929 crash have lost their bragging rights, if there are any left.
However, like my college professor used to say, “Statistics are like a bikini bathing suit. What they reveal is fascinating, but what they conceal is essential.”
Most of the index gains were achieved by just five FANG stocks. Virtually all of the gains were from “stay at home” companies taking in windfalls from cutting-edge online business models. The “recovery” had a good week, and that was about it.
The other obvious development is that if any business was in trouble before the health crisis, you can safely write them off now. That includes retailers like Sears (S), JC Penny’s (JCP), Macy’s (M), almost all brick-and-mortar clothing sellers, and the small and medium-sized energy industry.
The worst economic data points since the black plague are about to hit the tape. Some 30 million in newly unemployed is nothing to dismiss, and that number grows to 40 million if you include discouraged workers.
That is 25% of the workforce, the same as peak joblessness during the great depression. But $14 trillion in QE and fiscal stimulus is about to hit the market too.
Which brings us to the urgent question of the day: What to do now?
It’s a vexing issue because this is not your father’s stock market. This is not even the market we’d grown used to only six months ago. All I can say is that the virology course I took 50 years ago today is worth its weight in gold.
I think you would be mad not to count a second Covid-19 wave into your calculations. This could occur in weeks, or in months, after the summer respite. This makes a second run at the lows a sure thing. I don’t think we’ll make it, but a loss of half the recent gains is entirely possible.
That takes us back down to a Dow Average of 21,000, or an S&P 500 (SPX) of 2,400.
If you are a long term investor looking to rebuild your retirement nest egg, there are only two sectors left in the market, Tech and Biotech & Healthcare. Looking at anything else is both risky and speculative. So, if we do get another meltdown, these are the only areas you should target.
If I am wrong, the market will probably bounce along sideways in a narrow range for months. That is a dream scenario if you pursue a vertical bull and bear call and put option spread strategy that I have been offering up to followers for the past decade.
Pending Home Sales Were Down a Staggering 20.8% in March and off 16.3% YOY. The worst is yet to come. The West, the first into shelter-in-place, was down a monster 26.8%. Prices still aren’t moving because nobody can buy or sell. The way homebuilder stocks like (LEN) and (KBH) are trading, I’d say your home will be worth a lot more in a year when the huge demographic push resumes. I’m not selling.
The 60,000 peak in deaths proposed by the administration only weeks ago is now looking wildly optimistic. Their worst-case scenario of 200,000 deaths, the announcement of which set the March 23 bottom of the Dow Average at 18,200, is now likely.
It will take place when the epidemic peaks in the southern and midwestern states that never sheltered in place or went in late and are coming out early. That second wave may well create a second bottom in stock prices, and that is the one you jump into and buy with both hands.
US Corona Deaths topped 66,000 last week, more than we lost after a decade of the Vietnam War. Total cases exceed one million.
Bank of America sees negative 30% GDP this quarter annualized, so says CEO Brian Moynihan. His economists expect negative 9% in Q3 and plus 30% in Q4. Suffice it to say, this is the ultra-optimistic case. Q4 doesn’t include the millions of businesses that will disappear because the Paycheck Protection Plan is failing so badly. Most government aid will take three to six months to hit the economy.
US GDP crashed 4.8% in Q1, the worst quarter since the depths of the 2008 Great Recession. Q2 will be far worse. We are now officially in recession, which should last 3-4 quarters. But is it already in the price? Next week’s April Nonfarm Payroll report should be a real humdinger.
Ford (F) lost $5 billion in Q2, and there is no guidance about the future. Avoid (F) on pain of death. Late to electric, they may not make it this time. They’re still in the buggy whip business.
Weekly Jobless Claims topped 3.8 million, bringing the six-week total to a staggering 30 million, more than those lost at the peak of the Great Depression. Florida, California, and Georgia led with applications. This implies a U-6 Unemployment rate of 25% with next week’s April Nonfarm Payroll Report. And the Dow Average is up 37% since March 23?
The Bond Market crashed on a Trump threat to default on US Treasury bonds, of which China owns $900 billion. It’s Trump’s retaliation for the Middle Kingdom spawning the Coronavirus, which he calls the “Chinese virus.” The (TLT) dropped three points on the news. Good thing I am triple short a market that is about to get crushed by massive government borrowing.
A glut of imported autos is parked at sea, steaming in circles, awaiting a recovery in the US economy. They are no doubt finding company with imported oil tankers. So many unwanted cars coming in the land-based storage areas were overflowing. It’s tough to see (F) and (GM) recovering from this. Keep buying made in the USA (TSLA) on dips, which is headed to $2,500 a share.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $0 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance had one of the best weeks in years, up a blistering +8.05%. We are now only 6.67% short of a new all-time high. The 100 new subscribers who came in the previous week are sitting pretty and must think I’m some sort of guru.
My aggressive triple weighting in short bond positions came in big time when Trump threatened to default on US debt. My shorts in the S&P 500 (SPY) helped. I took profits on my last long there the previous week. (SDS), another short play, clawed back some losses.
We closed out up a blockbuster +4.55% in April and May is up +2.11%, taking my 2020 YTD return up to only -1.75%. That compares to a loss for the Dow Average of -18.20% from the February top. My trailing one-year return returned to 38.91%. My ten-year average annualized profit returned to +34.00%.
This week, Q1 earnings reports continue and so far, they are coming in much worse than the most dire forecasts. We also get the monthly payroll data, which should be heart-stopping to say the list.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, May 4 at 9:00 AM, the US Factories Orders for March are out and are expected to be disastrous. Berkshire Hathaway (BRK/B) and Eli Lilly (LLY) report.
On Tuesday, May 5 at 11:00 AM, the US Crude Oil Stocks are published and will be another bomb. Netflix (NFLX) and Coca-Cola (KO) report.
On Wednesday, May 6, at 7:15 AM, API Private Sector Employment Report is released. Lan Research (LRCX) and Electronic Arts (EA) announce earnings.
On Thursday, May 7 at 8:30 AM, another horrible Weekly Jobless Claims are out. Bristol Myers Squibb (BMY) reports.
On Friday, May 8, the April Nonfarm Payroll Report is printed, the worst unemployment rate since the Great Depression. AbbVie (ABBV) reports.
As for me, to battle cabin fever, I am setting up a tent in my back yard and staying there tonight, just to change the scenery. The girls need one more campout to qualify for camping merit badge, an important Eagle Scout one, and this will qualify.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 8 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: Is it premature to be buying long-term LEAPS?
A: Absolutely not—a long-term leap is a bet that your stock will recover beyond your strike prices in two years, which I certainly believe is the case with all of the quality tech and biotech names. These are pretty illiquid so the only way to get a good price is to have a bid in place on one of those absolute puke out days. You will never buy these at the bottom.
Q: Do you see a rally in the stock market in the fourth quarter of this year after the election?
A: For sure—we should be well clear of the pandemic by then, and all of the $6 trillion stimulus will be hitting at the same time.
Q: With the rally in the S&P 500, would you double up on the (SPY) put spread—the May $300-$310?
A: No, keeping your leveraged positions small is crucial in this kind of environment, and the big short play is basically behind us. Better to add the 2X ProShares Ultra Short S&P 500 (SDS) to catch a smaller move down.
Q: Will gold work if the market sells off as a safety trade?
A: Yes, it will. Gold (GLD) had that big 15% selloff a couple of weeks ago when it looked like all financial markets worldwide were going to completely freeze up, and everyone got margin calls all at the same time. We are clear of that now and I expect gold and other traditional hedges like shorting volatility, for example, to also work as a hedge. Gold is going to a new all-time high soon. Buy (GLD), (GDX), (GOLD), and (NEM).
Q: When do you think international borders will open up again, and will that have a positive effect on the economy?
A: Absolutely. You can expect the market to rally 10% into the opening of borders, and then another 10% afterwards depending on where the starting point for the market is in that. As for timing, they may open up in June, and then close up in again in the fall when a second Corona wave hits.
Q: Will you teach us how to buy LEAPS?
A: Just go to my website, type in LEAPS in all caps, and everything you need to know about leaps is there. I will also be following up soon with more individual stock LEAPS ideas, but I don’t want to put them out now because we have just had a $5,000-point rally on the Dow.
Q: Please talk about 5G.
A: The best play is Qualcomm (QCOM). They have a near-monopoly on a 5G chip which virtually the entire world has to buy. The stock has also held up incredibly well. Buy two-year LEAPS on Qualcomm with probably a $90 or $100 strike price.
Q: What level in the S&P do you think this will fail?
A: I think it will fail right around here, so that's why I have been adding on the short positions on every rally. We are exactly at halfway point between the February high and the March low, which is a perfect bear market rally.
Q: What’s the definition of the next big dip?
A: You give up the 5000-point rally we just had, and whether we give up 4000 or 6000 of it, at these kinds of conditions, 1000 points in the Dow (INDU) is a round lot, like the daily move. So, looking at the charts and these lows, it could be a $19,000, $18,000, or $17,000.
Q: Fundamentals may tell you the virus may be peaking, but the worst of the economy is yet to come.
A: True. Do all the markets follow fundamentals now? No, they will look at the virus numbers. Economic numbers are utterly meaningless and out of date here. I wouldn’t depend on them at all, just look at the new cases every day from the Johns Hopkins website, and that gives you a better buy signal than any economic indicator can.
Q: Are all the good shorts are over?
A: When I say shorts are over, from here you’re not going to get the 80% and 90% down moves that we have seen so far; those are gone. The reason I bought the 2X ProShares Ultra Short S&P 500 (SDS) is to play for the bottom end of the range, which could be down 2000 to 4000 points from here, and also to hedge the short volatility (VXX) puts that I already have. A rising market should make the (VXX) go down, and a falling market will make the (VXX) and the (SDS) go up. So, it's both a hedge and a view on a range of a market.
Q: Could the Federal Reserve buy shares?
A: Yes, they have done that already in Japan, with no success whatsoever in helping the economy, but I doubt the Fed will buy shares here. The government will take minority share ownerships in the troubled industries like the airlines, much like they did with (GM) and the top 20 banks during the 2008-09 crash and sell them later at huge profits. I don't expect them to go beyond that. The Fed here has too many other things to buy, like all of our different bond and money markets; those don't exist in other countries like Japan or Europe. Stocks are often the only thing they can buy, and in Japan’s case, they already own the entire government bond market, so they had nothing else left to buy besides stocks.
Q: How about buying Boeing (BA)?
A: I would buy Boeing LEAPS here, something like a $170-$180. If you’re going to make a 1,000% return on LEAPS on any one stock, it's going to be Boeing. That company will be around somehow, and you could get literally a 10-fold return just by going 50% out of the money on two-year LEAPS.
Q: How is liquidity on 2-year 30% out of the money LEAPS?
A: It is practically nonexistent. You have to put in a limit order and then wait for a dump in the market to get filled. That’s how all the people who have been doing LEAPS have been getting them. Put in a bid and when you get these cataclysmic, down-1,000-point days, they hit any bid. The algos go in there and they just say hit any bid, and you can get done at incredible prices in those situations.
Q: Are the fees on (SDS) a problem?
A: No, your standard equity commission is all you should be paying. They trade like water.
Q: Would you short junk bonds short-term?
A: No, because you short the (HYG) or the (JNK), you are shorting a 7.5% yield which you have to pay if you’re short, so the great short in junk bond play was in February when it was yielding 4.5%. It’s too late now.
Q: Will treasuries go to zero?
A: They could, but we’re close enough to zero where you might as well think of them at zero.
Stay healthy all.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 12, 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
June 19, 2019
Fiat Lux
Featured Trade:
(TUESDAY, JULY 2 NEW DELHI, INDIA STRATEGY LUNCHEON)
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
Global Market Comments
March 8, 2019
Fiat Lux
Featured Trade:
(MARCH 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (SDS), (TLT), (TBT), (GE), (IYM),
(MSFT), (IWM), (AAPL), (ITB), (FCX), (FXE)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 3 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Are you sticking to your market top (SPY), (SDS) by mid-May?
A: Yes, at the rate that economic data is deteriorating, and earnings are falling, there’s no prospect of more economic stimulation here, my May top in the market is looking better than ever. Europe going into recession will be the gasoline on the fire.
Q: Where do you see interest rates (TLT) in 1-2 years?
A: Interest rates in 2 years could be at zero. If interest rates peaked at 3.25% last year, then the next move could be to zero, or negative numbers. The world is awash in cash, and without any economic growth to support that, you could have massive cuts in interest rates.
Q: Will (TLT) be going higher when a market panic sets in?
A: It will, which is why I’m being cautious on my short positions and why I’m only using tops to sell. You can be wrong in this market but still make money on every put spread, as long as you’re going far enough in the money. That said, when the stock market starts to roll over big time, you want to go long bonds, not short, and we may do that someday.
Q: Do you see a selloff to stocks similar to last December?
A: As long as the Fed does not raise interest rates, I don’t expect to get a selloff of more than 5% or 6% initially. If we do get a dramatic worsening of economic data and it looks like we’re headed in that direction, the Fed will start cutting interest rates, the recession signal will be on and only then will we drop to the December lows—and possibly as low as 18,000 in the Dow.
Q: General Electric has gone from $6 to $10; what would you do now?
A: Short term, sell with a 66% gain in a stock. Long term, you probably want to hold on. However, their problems are massive and will take years to sort out, probably not until the other side of the next recession.
Q: Microsoft (MSFT): long term hold or sell?
A: Absolutely long-term hold; look for another double in this company over the next 3 years. This is the gold standard in technology stocks today. Short term, you’re looking at no more than $15 of downside to the December low.
Q: Would you short banks (IYF) here since interest rates have failed to push them higher?
A: I would not; they’ve been one of the worst performing sectors of the market and they’re all very low, historically. You want to short highs like I’m doing now in the (SPY), the (IWM), and Apple (AAPL), not lows.
Q: Is the China trade deal (FXI) a ‘sell the news’ event?
A: Absolutely; there’s not a hedge fund out there that isn’t waiting to go short on a China trade deal. The weakness this week is them front-running that news.
Q: Do you see emerging markets (EEM) pushing higher from the 42 level, or will a global recession bring it back to earth?
A: First of all, (EEM) will go higher as long as interest rates in the U.S. are flatlining, so I expect a rally to last until the spring; however, when a real recession does become apparent, that sector will roll over along with everything else.
Q: Would you buy homebuilders (ITB) if this lower interest rate environment persists?
A: I wouldn’t. First of all, they’ve already had a big 28% run since the beginning of the year— like everything else—and second, low-interest rates don’t help if you can’t afford the house in the first place.
Q: Would you short corporate bonds if you think there’s going to be a recession next year?
A: I’m glad you asked. Absolutely not, not even on pain of death. I would buy bonds because interest rates going to zero takes bond prices up hugely.
Q: Should you buy stocks in front of a blackout period on corporate buybacks?
A: Absolutely not. Corporate buybacks are the number one buyers of shares this year, possibly exceeding $1 trillion. Companies are not allowed to buy their own stocks anywhere from a couple of weeks to a month ahead of their earnings release. By removing the principal buyer of a share, you want to sell, not buy.
Q: What are the chances the China trade deal (FXI) breaks down this month and no signing takes place?
A: I have a feeling Trump is desperate to sign anything these days, and I think the Chinese know that as well, especially in the wake of the North Korean diplomatic disaster. He has to sign the deal or we’ll go to recession, and that would be tough to run on for reelection.
Q: Which stock or ETF would you short on real estate?
A: If you short the iShares US Home Construction ETF (ITB), you short the basket. Shorting individual stocks is always risky—you really have to know what’s going on there.
Q: What’s the best commodity play out there?
A: Copper. If China is the only country that’s stimulating its economy right now, and China is the largest consumer of copper, then you want to buy copper. The electric car boom feeds into copper because every new vehicle needs 20 pounds of copper for wiring and rotors. Copper is also cheap as it is coming off of a seven-year bear market. What do you buy at market tops? Only cheap stuff.
Q: Why did you go so far in the money in the Freeport-McMoRan (FCX) call spread with only a 10% profit on the trade in five weeks?
A: In this kind of market, I’ll take 10% in 5 weeks all day long. But additionally, when prices are this high, I want to be as conservative as possible. Going deep in the money on that is a very low-risk trade. It’s a bet that copper doesn’t go back to the December lows in five weeks, and that’s a bet I’m willing to make.
Q: Will a new round of QE in Europe affect our stock market?
A: Yes, it’s terrible news. It will weaken the Euro (FXE), strengthen the dollar (UUP), and force US companies to lower earnings guidance even further. That is bad for the market and is a reason why I have been selling short.
Sending You Trade Alerts from Africa
Global Market Comments
February 21, 2019
Fiat Lux
Featured Trade:
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE),
Global Market Comments
January 15, 2019
Fiat Lux
SPECIAL ARMAGEDDON ISSUE
Featured Trade:
(HERE’S THE WORST-CASE SCENARIO),
($INDU), (SPY), (SDS), (TLT), (TBT), (FXE), (FXY),
(UUP), (DDP), (USO), (SCO), (GLD), (DGZ), (ITB)
Yesterday, I listed my Five Surprises of 2019 which will play out during the first half of the year prompting stocks to take another run at the highs, and then fail.
What if I’m wrong? I’ve always been a glass half full kind of guy. What if instead, we get the opposite of my five surprises? This is what they would look like. And better yet, this is how financial markets would perform.
*The government shutdown goes on indefinitely throwing the US economy into recession.
*The Chinese trade war escalates, deepening the recession both here and in the Middle Kingdom.
*The House moves to impeach the president, ignoring domestic issues, driven by the younger winners of the last election.
*A hard Brexit goes through completely cutting Britain off from Europe.
*The Mueller investigation concludes that Trump is a Russian agent and is guilty of 20 felonies including capital treason.
*All of the above are HUGELY risk negative and will trigger a MONSTER STOCK SELLOFF.
It’s really difficult to quantify how badly markets will behave given that this scenario amounts to five black swans landing simultaneously. However, we do have a recent benchmark with which to make comparisons, the 2008-2009 stock market crash and great recession. I’ll list off the damage report by asset class. I also include the exchange-traded fund you need to hedge yourself against Armageddon in each asset class.
*Stocks – Depending on how fast the above rolls out, you will see a stock market (SPY) collapse of Biblical proportions. You’ll easily unwind the Trump rally that started at a Dow Average of 18,000, down 25% from the current level, and off a gut-churning 9,000 points or 33% from the September top. The next support below is the 2015 low at 15,500, down 11,500 points, or 43% from the top. By comparison, during the 2008-2009 crash, we fell 52%. Everything falls and there is no safe place to hide. Buy the ProShares UltraShort S&P 500 bear ETF (SDS).
*Bonds – With the ten-year US Treasury yield peaking at 3.25% last summer, a buying panic would spill into the bond market. Inflation is nonexistent, we are running at only a 2.2% YOY rate now, so widespread deflation would rapidly swallow up the entire economy. In that case, all interest rates go to zero very quickly. The Fed cuts rates as fast as it can. Eventually, the ten-year yield drops to -0.40%, the bottom seen in Japanese and German debt three years ago. Buy the 2X short bond ETF (TBT) which will rocket to from $35 to $200.
*Foreign Exchange – With US interest rates going to zero, the US Dollar (UUP) gets the stuffing knocked out of it. The Euro soars from $1.10 to $1.60 last seen in 2010, and the Japanese yen (FXY) revisits Y80. Strong currencies then crush the economies of our largest trading partners. Their governments take their interest rates back to negative numbers to cool their own currencies. Cash becomes trash….globally.
*Commodities
Here’s the really ugly part about commodities. They are only just starting to crawl OUT of a seven-year bear market. To hit them with another price collapse now would devastate the industry. Producer bankruptcies would be widespread. The ags would get especially hard hit as they have already been pummeled by the trade war with China. Midwestern regional banks would get wiped out. Buy the DB Commodity Short ETN (DDP).
*Energy
The price of oil (USO) is also just crawling back from a correction for the ages, down from $77 to $42 a barrel in only three months. Hit the sector with a recession now in the face of global overproduction and the 2009 low of $25 becomes a chip shot, and possibly much lower. Those who chased for yield with energy master limited partnerships will get flushed. Several smaller exploration and production companies will get destroyed. And gasoline drops to $1 a gallon. The Middle East collapses into a geopolitical nightmare and much of Texas files chapter 11. Buy the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).
*Precious metals
Gold (GLD) initially rallies on the flight to safety bid that we have seen since September. However, if things get really bad, EVERYTHING gets sold, even the barbarous relic, as margin clerks are in the driver’s seat. You sell what you can, not what you want to, as liquidity becomes paramount. This is what took the yellow metal down to $900 an ounce in 2009. Buy the DB Gold Short ETN (DGZ).
*Real Estate
Believe it or not, real estate doesn’t do all that bad in a worst-case scenario. It is perhaps the safest asset class around if a new crisis financial unfolds. For a start, interest rates at zero would provide a huge cushion. The Dodd-Frank financial regulation bill successfully prevented lenders returning to even a fraction of the leverage they used in the run-up to the last recession. We are about to enter a major demographic tailwind in housing as the Millennial generation become the predominant home buyers. I’ve never seen a housing slump in the face of a structural shortage. And homebuilder stocks (ITB) have already been discounting the next recession for the past year. A lot is already baked in the price.
Conclusion
Of course, it is highly unlikely that any of the above happens. Think of it all as what Albert Einstein called a “thought experiment.” But it is better to do the thinking now so you can do the trading later. There may not be time to do otherwise.
