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)
Tag Archive for: ($SPX)
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 1, 2020
Fiat Lux
Featured Trade:
(JOIN THE JUNE 4 TRADERS & INVESTORS SUMMIT),
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE COUNTRY THAT IS FALLING APART),
(SPX), (INDU), (TLT), (TBT), (GLD),
(AAPL), (FB), (JPM), (BAC)
Out of quarantine, into curfew.
Yes, we here at Incline Village, Nevada have received a “stay at home” order because we are in Washoe County, the same county as Reno, where police tear-gassed rioters assaulting a police station yesterday.
I now have the challenge of commuting between two cities that are curfewed, Oakland, CA and Incline Village, NV.
I wonder if this is turning into another 1968, but with a pandemic? That is when casualties peaked from the Vietnam War and there were national race riots and political assassinations.
I hope not.
I’m really getting into this pandemic thing. That’s because people tell me that I am better looking with a mask on. But then I’ve grown a long grey beard since I was locked up three months ago, so maybe less is better.
The great American talent for creativity, which I always knew was lurking under the surface, and exploded into the open.
High-end restaurants are now placing dressed up dummies at every other table to enforce social distancing rules. At one table, a man is on his knee proposing marriage to his girlfriend. At another, an older couple is arguing. Click here for a laugh.
An enterprising dad has captured 2 million YouTube views describing how to perform tasks only dads can do, like jump-starting a car and fixing toilets. If you need his help ask “Dad, How Do I” by clicking here.
Only in America.
In the meantime, the stock market had one of the best weeks of the year in the face of the worst economic data in history. The (SPY) broke the 200-day moving average to the upside as the newly unemployed topped a staggering 41 million. Buyers rotated into recovery stocks as Covid-19 deaths exceeded 100,000.
All of the super smart traders I know who went into cash or strapped on short positions at the end of January are doing the same now. When markets detach from reality, I detach myself from risk. Almost all of my positions are now very low risk, have extremely small deltas, and expire in 14 trading days. The risk/reward for stocks now is terrible. The Mad Hedge Trade Alert Service delivered a stunning 27% profit off the March bottom.
By the way, in 1968 when the country was last falling apart, the Dow Average rose by 4.3% as part of one long 20-year sideways move. Brokers were forced to drive taxi cabs. I went to Tokyo for better fish to fry, and then Cambodia, Laos, and Burma. I came back 20 years later with an ample collection of lead stuck in various parts of my body.
Pending Home Sales fell down 21.8%, in April, and off 33.8% YOY on a signed contract basis. These are the worst numbers since the data series started. The West was hardest hit, down 50%. No wonder I’ve seen so many real estate agents at the beach. We already know that a sharp rebound is underway as Millennials move to the burbs and flee Corona-infested cities. Home prices will be up this year.
Easy In, Easy Out. The Fed pumped $3 trillion into the economy, and exactly $3 trillion has gone into stocks since the March bottom. There is a 90% correlation between stock prices and the direction of the Fed balance sheet. Stimulus checks went straight into day trading accounts as soaring online stock and option volumes show. In the meantime, Q2 GDP estimates have fallen to the -40%-50% range. What happens when the Fed stops buying? The M2 Money Supply (remember that?) is growing at an 80% annual rate. Buy gold (GLD).
Weekly Jobless Claims came in at 2.4 million, meaning that 41 million, or one out of four Americans out of work. That’s worse than seen during the Great Depression. Recent surveys show employers will hire back only 80% of those laid off, meaning that the Unemployment rate could stay above 10% for years. The future is being pulled forward fast and that means far fewer brick and mortar jobs. Only the large and the digital will survive.
The Market Has Flipped, from chasing big tech to chasing reopening stocks. It’s the only place where value is left. Out with (AAPL) and (FB) and in with (JPM) and (BAC). If it lasts, we’re going to new highs.
The China Trade War heats up, with 33 new companies banned from doing business with the US. You can cut global growth forecasts even more as international trade accelerates its decline. Where was Trump when tens of thousands demonstrated for democracy last fall? Wasn’t China’s President Xi Jinping his friend who did a great job controlling Covid-19?
Stocks are the most overbought in 20 years, since the top of the Dotcom bubble. Risk is extreme for new longs. Almost all S&P 500 stocks are trading above 50-day moving average.
Monster market short could force a short squeeze, with trend following commodity trading advisors boasting the biggest bearish bets in five years. The 200-day moving average at (SPX) $2,999.72 could be a real make or break, only 45 points away. The falling Volatility Index (VIX) is priming the pump for a downside collapse.
New Home Sales were up a stunning 0.6% in April versus an expected -21.9% loss, totaling 623,000 units on a signed contract basis only. The premium is now on new, clean, virus-free homes where you don’t die from a model home. Median home prices plunged from $339,000 to $309,000, down 8% YOY. It’s clear that a lot of speculative buying took place at the market bottom.
US Mortgage Applications up for 6th week, surging 54% since April. My forecast that your home will be your best performing asset of 2020 is coming true. I’m hearing stories of bidding wars again. It’s tough to beat a huge Millennial tailwind and record low-interest rates.
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 was unchanged on the week, my downside hedges costing me money in a steadily rising, but wildly overbought market. We stand at an eleven year all-time high of 366.23%. It has been one of the most heroic performance comebacks of all time. We have gained an eye-popping 27.03% since the market bottom despite being hedged all the way up.
My aggressive short bond positions are still delivering some nice profits even though we only have 14 days to expiration, despite the fact the bond market went almost nowhere. That’s because time decay is really starting to kick in.
That takes my 2020 YTD return up to +10.32%. That compares to a loss for the Dow Average of -10.93%. My trailing one-year return exploded to 51.09%, nearly an all-time high. My eleven-year average annualized profit exploded to +34.87%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, June 1 at 10:00 AM EST, The US Manufacturing PMI for May is published.
On Tuesday, June 2 at 10:30 AM EST, weekly EIA Crude Oil Stocks are released.
On Wednesday, June 3, at 8:15 AM EST, The ADP Private Employment Report is announced.
On Thursday, June 4 at 8:30 AM EST, Weekly Jobless Claims are announced. I’ll be busy all day with the Mad Hedge Traders & Investors Summit.
On Friday, June 5, at 8:30 AM EST, the May Nonfarm Payroll Report is out. It may be the worst on record.
The Baker Hughes Rig Count follows at 2:00 PM EST.
As for me, my original plan this summer was to take a one-week cruise in Tahiti, lead an expedition to excavate more dog tags from Marines missing in action on Guadalcanal, perform a one-week roadshow for clients in New Zealand and Australia, Fly to South Africa for a one-week safari with my kids, and then cool my heels climbing the Matterhorn and thinking great thoughts at my summer home in Zermatt, Switzerland.
This will be the first time in eight years I have not climbed the great mountain. Don’t worry, I have already emailed the Zermatt Mountain Rescue Service and told them I won’t be able to help out this year because the town is closed.
Covid-19 had other ideas.
Instead, I will be commuting back and forth between San Francisco and Lake Tahoe by Tesla Model X, writing four newsletters a day, issuing uncountable trade alerts, and then taking a daily ten-mile hike to the Tahoe Rim Trail with a 40-pound backpack. Safer and much cheaper.
There’s no rest for the wicked. There’s always next year.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Back Into Storage for Next Year
Global Market Comments
April 27, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GREAT LOOK THROUGH)
(INDU), (SPX), (MSFT), (AAPL), (FB), (VXX)
It was a week when traders and investors alike were confused, befuddled, and gob-smacked.
If you believed that the worst Great Depression in a hundred years was worth more than a 12% pullback in the market you were punished, quite severely so if you were short tech stocks.
April has turned out to be the best month for the stock market since 2011. Warning: it won’t last.
The largest buyers of the market for the past decade, corporations, are now a thing of the past. Worse yet, companies are about to become massive sellers of their own stock to cover burning cash flows. United Airlines has already tapped the market with a $1 billion share offering and there are many more to follow.
This means that the airline industry used its entire profit of the last ten years to buy their own shares, which are now virtually worthless. They are currently selling shares at a decade low. Buy high, sell low, it sounds like a perfect money destruction machine.
There are more than a dozen industries guilty of this practice. A decade’s worth of management value added is a negative number, just like the price of oil.
The only consolation is that it is worse in Europe, as is everything, except for the coffee.
The obvious explanation is that we are witnessing the greatest “Look Through” in history. A Barron’s Big Money poll points the finger this weekend. While only 38% of professional money managers are currently bullish, some 83% are bullish for 2021, and it is just not worth dumping your portfolio to avoid a few months’ worth of carnage.
I believe that we will see substantial new all-time highs in 2021. The pandemic is forcing enormous efficiencies, cost cuts productivity increases on every company just to survive. Look at me. My travel budget has plunged from $100,000 a year to $20,000, ad there will be no travel for the rest of this year. Most big companies have adopted the same policy.
Return to a normal economy and record profits will ensue. Get the uncertainty of the presidential election out of the way and you have another boost, although it is looking less uncertain by the day.
It all perfectly sets up my new “Golden Age” and “Roaring Twenties” scenario for the 2020s, as I have been predicting for years
If the bears have any hope, it is that the big tech stocks, the principal market divers since the bottom, usually peak when they report earnings, which is this week.
None of the long-term trends in the stock market have changed, they have only been accelerated. Growth stocks are beating value by miles, tech is outpacing non-tech, and US shares are vastly overshadowing international, and large companies are outperforming small ones.
The dividend futures market is telling us that a recovery to pre-pandemic conditions will take far longer than anyone expects. It is discounting 10 years to return to 2019 dividend payouts, compared to only three years after the 2008-2009 Great Recession.
The are many structural changes to the economy that are becoming apparent. Many of the people sent home to work are never coming back because they like it, avoiding horrendous commutes in the most crowded cities. That is great for all things digital, where demand is exploding. It is terrible for many REITS, where demand for commercial real estate is in free fall and prices have imploded.
Oil hit negative $37 a barrel in a futures market meltdown with the May contract expiration. This could be the first of several futures expiration meltdowns until the economy recovers. The supply/demand gap is now a staggering 35 million barrels a day. A large swath of the oil industry will go under at these prices. It’s all part of a global three-way oil war which the US lost. Buy (USO) when crude is at negative numbers for a trade.
Don’t expect a rapid recovery. Wuhan China is now free and clear and open for business, but restaurant visits are still down 50%. Same in South Korea, which had the best Corona response where theater attendance is still down 70%. Predictions of a “V” shaped recovery may be optimistic if we get hit with a second wave. Government pressure for a quick reopening guarantees that will happen. The problem is that the stock market doesn’t know this yet.
Leading economic indicators dove 6.7%. No kidding. Expect much worse to come as the economy implodes. The worst data in a century are coming, paling the great depression.
2.9 million homes are now in forbearance and the number is certainly going to rise from here. Laid off renters are defaulted on payments, depriving owners of meeting debt obligations. It’s just a matter of time before this creates a financial crisis. Avoid the banks for now, no matter how cheap they get.
US restaurants to lose $240 billion by yearend. It’s a problem even a government can’t fix. At least one out of four eateries will go under over the next two months. Boy, I’m glad I didn’t open a trophy restaurant as a hobby like so many of my wealthy friends did.
Another $484 billion bailout bill is passed, and the market could care less, plunging 631 points. It includes $310 billion for the troubled Paycheck Protection Plan, $75 billion for hospitals, and $25 billion for Corona testing. Notice how markets are getting less interested in announced rescue plans and more interested in result, so far of which there have been none? The free fall in the economy continues.
Existing Home Sales plunged by 8.5% in March. Realtors expect this figure to drop 40% in the coming months. Open houses are banned, sellers are pulling listings, and buyers low-balling offers. However, price declines in the few deals going through are minimal. When will the zero interest rates come through? Mortgage interest rates are higher now than before the pandemic because 6% of all home loans are now in default.
Weekly Jobless Claims hit a staggering 4.4 million. Total unemployed over the last five weeks has topped 26.4 million, more than seen at the peak of the Great Depression. All job gains since the 2008-09 Great Recession have been lost. Of course, the population back then was only 123 million compared to today’s 335 million. But then employment is still in freefall and we may reach the Fed’s final target of 52 million. Most of the SBA Paycheck Protection Program funding went to large national chains and virtually none to actual small businesses.
US Car Sales dove 50%, and they’re expected to drop 60% in May. Showrooms have gained “essential” exemptions to open, but the newly jobless don’t make great buyers. Why are the shares of traditional carmakers like Ford (F) and General Motors (GM) in free fall, while those of Tesla (TSLA) are soaring?
Gilead Science’s Remdesivir bombed, in a phase 1 trial conducted by the WHO, triggering an immediate 400-point market selloff. It was a small study in China that was leaked. The company says it still might work.
Existing Home Sales collapsed by 15.4%, in March. With open houses closed across the country, it’s no surprise. But with the market closed, no one is selling either. Defaulted mortgages rose by a half million this week. Buy big homebuilders on the next big dip, like (KBH) and (LEN). They will lead the recovery.
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 a tough week, with me getting squeezed out of a short position in Facebook (FB) and also losing my weekly longs in Microsoft (MSFT) and Apple (AAPL).
Everyone is expecting the market to roll over, but it’s not just happening. Risk control is the order of the day and that means stopping out of losers fast.
We are now down -2.12% in April, taking my 2020 YTD return down to -10.54%. That compares to a loss for the Dow Average of -12% from the February top. My trailing one-year return returned to 30.54%. My ten-year average annualized profit returned to +33.48%.
This week, Q1 earnings reports continue, and so far, they are coming in much worse than the most dire forecasts. This is the week that big tech reports. The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here at https://coronavirus.jhu.edu
On Monday, April 27 at 9:30 AM, the Dallas Fed Manufacturing Index is released.
On Tuesday, April 28 at 8:00 AM, the S&P Case Shiller National Home Price Index is published. Alphabet (GOOGL) reports.
On Wednesday, April 29, at 8:30 AM, an updated read on Q1 GDP is printed and the Cushing Crude Oil Stocks are announced. That one should be a thriller with zero interest rates. Apple (AAPL), Facebook (FB) and Microsoft (MSFT) report.
On Thursday, April 30 at 8:30 AM, Weekly Jobless Claims will announce another horrific number. Amazon (AMZN), McDonald’s (MCD), and Visa (V) report.
On Friday, May 1, the Baker Hughes Rig Count follows at 2:00 PM. Expect these figures to crash as well. Chevron (CVX) and Exxon (XOM) report.
As for me, tonight I’ll be attending the first-ever Boy Scout virtual camp out. Every member of the girls’ patrol will be setting up tents in their backyards and connecting up in a giant Zoom meeting. I bet they stay up all night.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 20, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHAT’S A FED PUT WORTH?),
(INDU), (SPX), (TLT), (ZM), (TDOC),
(NFLX), (UAL), (WYNN), (CCL)
What is a Fed put worth?
That the question that traders and investors alike are pondering.
If the government had taken no action whatsoever in the face of the Corona pandemic the Dow average would easily be at 15,000 today, if not 12,000.
After all, the economic collapse we have seen has been even greater than the Great Depression. More than 22 million unemployed in four weeks? Back then, the Dow Average fell by 90%.
Enter the Feds.
Throw in $6 trillion in expected fiscal spending and $8-$0 trillion in Federal Reserve stabilization of the money markets and quantitative easing, and it makes a heck of a difference. As a result, the national debt will rocket from $23 trillion to at least $32 trillion by next year, a far faster increase than seen after Pearl Harbor.
Stocks love this.
In the past three weeks, the Dow Average has jumped an eye-popping 35% from 18,000 to over 24,000. We are likely trading at 25 X 2020 earnings, but that is just a guess at best. Nobody knows, with essentially all companies withdrawing guidance. On a valuation basis, stocks are now more expensive than at any time since 1929.
You can be excused for being confused, befuddled, and gob-sacked.
All of this adds up to a value of the Fed put of 9,000 in Dow Average terms, 17,000 in a worst-case scenario, and 27,000 if you want to go back to 1933 share valuations.
Stocks here are now priced for perfection. To buy shares here, you are making the following rosy assumptions:
1) The Corona epidemic is peaking and it is clear sailing from here.
2) Shelters-in-place ends in two weeks.
3) Critical shortages of medical supplies end.
4) US Deaths top out at 60,000 from the current 40,000, the most optimistic White House forecast.
4) Business will immediately bounce back to pre-epidemic levels
5) Domestic and international travel resume immediately
If all of the above take place, then at a stretch, shares are justified at maintaining current levels and will churn sideways from here.
Here is what is more likely:
1) We are nowhere close to a peak, especially in states that never sheltered-in-place, and there could be a secondary peak in the fall. At 2,000 a day, US deaths will easily top 100,000 in a month.
2) Shelters-in-place will extend to June in the most populous states.
3) Medical supply shortages will continue for the indefinite future, with 50 states bidding against each other to buy fake masks from China.
4) Dozens of large companies and perhaps a quarter of the country’s 30 million small businesses will go bankrupt before the recovery begins.
5) There is no sign that domestic and international travels are getting off the runway anytime soon.
If that is the case, then stocks here that are wildly overpriced are due for a retest of the Dow 18,000 and (SPX) 2,400 lows.
No matter what happens, traders should be cognizant of an enormous bifurcation of the market that has taken place.
Stay at Home stocks, like Zoom (ZM), Teladoc (TDOC), and Netflix (NFLX), have spectacularly outperformed the market. Many of these had already been recommended by the Mad Hedge Technology letter and the Mad Hedge Biotech & Healthcare letter because they were leaders in their own technologies (click here).
The problem with these companies is that they are all expensive, in some cases trading at hundreds of times their earnings.
Then there are the Reopening Stocks that will deliver outsized returns once we make it to the downslope of the epidemic. These include United Airlines (UAL), Wynn Hotels (WYNN), and Carnival Cruise Lines (CCL), which we heavily sold short near the market top, and led the recovery of the last three weeks.
The problem with these companies is that they may have to go bankrupt first, or at least accept a heavy government ownership and dilution of existing shareholders before they return to normal.
It’s a quandary that would vex Solomon.
I always tell people, if you want to make an easy, reliable, and safe living, get a job at the Post Office. Avoid the stock market.
OPEC cut oil production by 10 million barrels/day, for two months, and then 8 million barrels a day for the rest of the year. Oil prices plunged anyway to a 20-year low at $18.50 a barrel, as it only puts a small dent in the 34 million barrel a day oversupply. It only postpones the day when many energy companies go bankrupt.
The Economy could be turning on and off for 18 months, believes Fed governor Neil Kashkari. He may be partly right. I am expecting two Coronavirus waves to lead to two shutdowns in the spring and fall, and the stock market may reflect the same. If so, stocks are wildly overpriced here, and the bear market could last another year. Sell shorts, or at least add hedges, and buy the (SDS).
US Budget Deficit to top $3.8 trillion this year, the most since WWII. We were already headed for a monster $1.5 trillion in red ink before the virus hit. Now we are pouring gasoline on the fire. It'sis my worst-case scenario, I had the national debt rising from $23 trillion today to $30 trillion in a decade. It looks like that will happen by next year.
Only 90,000 cleared US airport security in one day, down from a typical 2.2 million, or down 95%. It appears that 90,000 people a day don’t care if they get Covid-19 or have already had it. Some 80% of all flights globally are grounded, with many countries now stranded. With massive debt loads, it is only a question of how soon the big US airlines go bankrupt and how much the government gets to own on the way back up. Don’t buy any airlines no matter how cheap they get.
US Retails Sales collapsed by 8.7% as the paycheck-free economics takes hold. The March Empire State Manufacturing Index crashed to a record low of 78% and March Industrial Production is off 5.4%, the lowest since 1946. The parade of the worst economic data in history has begun. And we go into this with stocks at record high valuations, more expensive than they were in January.
Goldman Sachs says this depression will be four times worse than the Great Recession of 2008-2009, likely falling 35% annualized in Q2. Unemployment will hit 15% or higher, but stocks will not retest the March lows. The bounce back in H2 will be bigger than any seen. It more or less corresponds to my view. They must have some smart people at (GS).
March Homebuilder Confidence brings the biggest crash in history, down 42 points to a reading of only 30. It's the greatest decline since the 35-year history of the index. The last time we were this low was in June 2012. Some 21% of builders are reporting virus disruption.
Housing Starts collapsed a stunning 22.3% in March, the worst one-month figure ever recorded. Social distancing makes open houses impossible. But this will be one sector that leads us out of the depression. There is still a chronic generational housing shortage.
Weekly Jobless Claims topped 5.1 million, taking the grim four-week tally to a staggering 21 million. Out of the frying pan, into the fire.
Gilead Sciences (GILD) drug sent stocks soaring, up 900 points overnight. Its Remdesivir brought rapid recovery in already infected patients at the University of Chicago in a phase three trial. The market is hypersensitive to any good Corona news. Sell into the rally.
China GDP took a 6.8% hit in Q1 as the Corona pandemic takes its toll. Services are recovering faster than manufacturing, which is why the smog has not come back yet. And international trade has ground down to zero. Public transit has been abandoned for private cars. It could be a preview to our own recovery.
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 $18 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 recovered nicely this week, thanks to some frenetic trading. I used the Monday 700-point dive in the market to cover most of my bearish positions and add short-dated longs in Apple (AAPL) and Facebook (FB).
Finally, I dove back into selling short the US bond market on the assumption that unprecedented borrowing will destroy prices.
My short volatility positions (VXX) were hammered again, even though volatility declined on the week. There seems to be heavy short selling of deep out-of-the-money puts on the assumption that the Volatility Index (VIX) won’t rise above $50 again.
We are now up +0.45% in April, taking my 2020 YTD return down to -7.97%. That compares to a loss for the Dow Average of -15% from the February top. My trailing one-year return returned to 33.88%. My ten-year average annualized profit returned to +33.67%.
This week, Q1 earnings reports continue, and so far, they are coming in much worse than the most dire forecasts. The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, April 20 at 7:30 AM, the Chicago Fed National Activity Index comes out.
On Tuesday, April 21 at 9:00 AM, the March Existing Homes Sales are released.
On Wednesday, April 22, at 9:30 AM, the Cushing Crude Oil Stocks are announced.
On Thursday, April 23 at 8:30 AM, Weekly Jobless Claims will announce another blockbuster number.
On Friday, April 24 at 7:30 AM, US Durable Goods for March are printed. The Baker Hughes Rig Count follows at 2:00 PM. Expect these figures to crash as well.
As for me, I am sitting here eating a pineapple upside-down cake that my daughter just whipped up. It's my favorite cake made by my mother, which I always got on my birthday.
Of course, I have to wash the dishes. If anyone wants to supplement their trading income, housekeeper and domestic and wants to live in mansions at Lake Tahoe and San Francisco, please contact customer support immediately.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 14, 2020
Fiat Lux
Featured Trade:
(APRIL 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (SPY), (SDS), (BA), (VIX), (VXX), (GLD), (GDX),
(GOLD), (NEM), (QCOM), (HYG), (JNK)
(WHY SENIORS NEVER CHANGE THEIR PASSWORDS)
Global Market Comments
April 13, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or THE BEAR MARKET RALLY IS OVER),
(INDU), (SPX), (TLT), (VIX, (VXX), (GLD), (JPM), (AMZN), (MSFT)