Global Market Comments
May 11, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE NEXT GOLDEN AGE HAS ALREADY STARTED)
(TLT), (TBT), (SPY), (INDU), (VIX),
(DAL), (BRK/A), (LUV), (AA), (UAL)
Tag Archive for: (SPY)
I always get my best ideas when hiking up a steep mountain carrying a heavy backpack.
Yesterday, I was just passing through the 9,000-foot level on the Tahoe Rim Trail when suddenly, the fog lifted and the skies cleared. I was hit with an epiphany.
It was my “AHA” moment.
The next American Golden Age, the next Roaring Twenties, started on March 23.
However, you have to dive deep into investor psychology to reach that astonishing conclusion.
The conundrum of the day is why stocks are trading at a plus 30X multiple two months into a Great Depression. The economic data has been so horrific that the mainstream news has been reporting them.
Some 30 million unemployed on the way to 51 million? Those are Fed numbers, not mine (click here for the link ). Over 52% of small businesses going bankrupt in the next six months? A GDP that is shrinking at an amazing -40% annualized rate?
Yet, we have a Dow Average that has risen a breathtaking 38% in six weeks. The market has essentially dropped 38% and risen 38% over three months, with the Volatility Index (VIX) making a brief visit to the $80 handle.
To understand these massive contradictions, you have to understand what investors think they are buying. They are not hoovering up stocks that are cheap, offer value, or at the bottom of an economic cycle.
Instead, they are investing in a hope, a vision, an expectation that the coming decade will bring a major economic boom. Yes, they are buying my coming American Golden Age.
Only 10% of the value of a stock is reflected in current year earnings, according to Dr. Jeremy Siegal at the Wharton School of Economics (click here to go to the site). The other 90% is in the following nine years. Investors have written off this year’s earnings and are paying up for the following nine.
Long term followers of this newsletter are well aware of my approaching forecast of the next Roaring Twenties (click here for the link).
Except that this time we have a catapult, the pump-priming effects of the pandemic. The government has stepped in with $14 trillion worth of fiscal and monetary stimulus. Creative destruction is taking place at an exponential rate. Companies have to become hyper-efficient overnight or die.
It’s not rocket science. More than 85 million millennials are aging into their peak spending years, buying homes, cars, and all the luxuries of life. Every time this has happened for the past century, US economic growth leaped to 4%.
It happened in the 1920s, the 1960s, the 1990s, and is about to take place in the 2020s. And with each pop in growth, the stock market rises about 400%. Look at your long-term charts and you’ll see I’m dead right.
That takes us from the March 23 Dow Average low at 18,000 up to 72,000 by 2030, except that it’s a low number. Throw in the hyper-acceleration of innovation by the technology and biotech sectors, a Dow 120,000 is within reach.
You may recall that number from my marketing pitches, except that this time it’s happening. In a decade you are going to look like an absolute genius by following the recommendation of the Mad Hedge Fund Trader.
It also means that we may not see market corrections of any more than 10% this year. That would take us down to a Dow Average of 22,500, and an (SPX) of 2,600 in the coming months. That’s where you should jump in and buy with both hands. The only way I would be wrong is if the US epidemic explodes to unimaginable levels, which is not impossible.
Last week, U-6 unemployment rates exploding to a stratospheric 22.8%. The rate was far higher among high school graduates, but only 8% for college grads. Some 20.2 million lost jobs, ten times the previous record, and more than seen during the Great Depression. The BLS (click here) said the true figure was probably 5% higher due to counting anomalies and a huge backlog of data. And this is just the beginning. The good news is that next month, only 10 million jobs will be lost.
NASDAQ (QQQ) turned positive for 2020, and the followers who piled into tech LEAPS at the March bottom are eternally grateful. Tech and biotech are the only places to be. Everywhere else is a waste of time and money. The entire country is turning into a tech economy or going out of business. Buy tech on dips.
Warren Buffet sold all his airline shares, taking a major loss, including Delta (DAL), Southwest (LUV), American (AA) and United (UAL). The Fed’s $50 billion airline bailout blocked him from making a real killing. His Berkshire Hathaway (BRK/A) (click here) owned close to 10% of all of them. The complete collapse of tourism and business travel are the issues. He sees no recovery in the foreseeable future. They don’t call him the “Oracle of Omaha” for nothing.
US Auto Sales are down a mind-blowing -48% in April, the worst on record. Only 8.6 million cars were sold in the US against last year’s annual rate of 17 million. Toyota and Honda saw the biggest falls as their ships can’t unload due to lack of storage space.
The US Treasury will borrow $3 Trillion this Quarter to fund the massive bailout programs. Announced programs amount to 20 times the $789 billion 2009 rescue package, which Republicans opposed. I’m increasing my bond shorts. Sell short (TLT) again, even if we don’t get a decent rally. Oh, and Trump is threatening a default too. He doesn’t see the connection.
Bonds crashed on massive issuance, with the Treasury announcing a record 20-year bond floatation. Yields hit a one-month high. With the (TLT) down $18 from its recent high, I am taking profits on my bond shorts. I’ll be selling the next rally….again. This could be my core trade for the next decade.
Consumer Debt soared to $14.3 trillion in Q1, a new all-time high. A lot of people are living on their credit cards right now.
Trump threatens to cancel China trade deal, blaming them for Covid-19, sending stocks into a 400-point dive. The last time he did this, shares plunged 20%. It’s all part of an effort to divert attention from the administration’s disastrous handling of the pandemic. America’s Corona deaths are now 20 times China’s, and they are still an emerging nation. Just what we needed, a renewed trade war on top of a pandemic-caused Great Depression, as if the market needed more uncertainty. Sell rallies in the (SPY)
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 again, up a gob-smacking +6.46%. We are now only 0.65% short of a new all-time high.
My aggressive short bond positions came in big time on the back of theannounced $3 trillion in new debt issuance in Q2. Short bonds are far and away the better quality trade of buying stocks at these elevated levels.
May is up +6.46%, taking my 2020 YTD return up to 2.59%. That compares to a loss for the Dow Average of -13.43% from the February top. My trailing one-year return exploded to 43.77%. My ten-year average annualized profit returned to +34.14%.
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 11 at 10:00 AM, the April US Inflation Expectations are out. Caesar’s Entertainment (CZR) and Marriot International (MAR) report earnings.
On Tuesday, May 12 at 5:00 PM, the NFIB Small Business Optimism Index for April is released. Toyota Motors (TM) reports earnings.
On Wednesday, May 13 at 9:30 AM, the ever fascinating weekly Cushing Crude Oil Stocks is announced. Cisco Systems (CSCO) reports earnings.
On Thursday, May 14 at 8:30 AM, we get another blockbuster Weekly Jobless Claims. Advanced Micro Devices (AMD) reports earnings.
On Friday, May 15 at 7:30, AM the Empire State Manufacturing Index is published. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll continue my solo circumlocution of the 160 mile Tahoe Rim Trail every afternoon in ten-mile segments. Why solo? Do you know anyone else who wants to hike 160 miles at 10,000 feet in two weeks?
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
We Had a 3 Month Warning of the Pandemic and Did Nothing
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
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)
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
Global Market Comments
April 24, 2020
Fiat Lux
Featured Trade:
(APRIL 22 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (INDU), (GILD), (NEM), (GOLD), (USO),
(SOYB), (CORN), (SHOP), (PALL), (AMZN)
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
April 6, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or MAD HEDGE GOES POSITIVE ON THE YEAR)
(INDU), (SPY), (VIX), (VXX), (AMZN), (MSFT), (BAC), (JPM)
There is no doubt that the Corona pandemic will be the WWII challenge of our generation. Since we are Americans, we will rise to the task. We all have our jobs to do, being it working as a front-line medical professional, or simply staying at home.
We will get through this.
I was standing in front of a Reno gun store yesterday waiting my turn to enter. Under Nevada’s strict shelter-in-place rules, only one person is allowed to enter a store at a time. I needed some ammo and black powder for my 1860 Army Colt revolver, which is hard to find in California.
I struck up a casual conversion about the pandemic with other waiting customers on a clear, brisk Nevada morning. A blue-collar worker with an AR-15 said he really wasn’t paying attention to it. A latino gang member with a heavily tattooed neck and fingers looking for a box of 9mm Glock shells confessed he hadn’t heard about it. A white nationalist with a heavily militarized SUV argued that the whole thing was a left-wing conspiracy meant to discredit Donald Trump.
Which can only mean one thing.
The worst days of the of the pandemic are ahead of us, as are the consequences for the stock market. Remember, 40% of the country don’t read newspapers or watch the news and are only barely aware of the seriousness of the disease.
The White House us currently forecasting 12 million cases and 250,000 deaths. That’s just an optimistic guess. Only one third of the country started their shutdowns early, one third were late, and the last third not at all. This means that the highest death rates will be in southern and midwestern states that are following the presidents advance and dismissing the pandemic out of hand, refusing to wear face masks.
So, we are really looking at a potential US 120 million cases and 2.4 million deaths. On that scale the food distribution system will start to break down for shear lack of workers. No one really knows how effective shelter-in-place will be, although the early data is encouraging. We are all living in one giant experimental petri dish right now.
And we will be the lucky country. Deaths in the Southern Hemisphere, which is just going into the winter, will be much higher.
Anytime I consider adding a long position, I first ask myself how it will stand up against a picture on the front page of the New York Times showing a pile of a thousand bodies outside a local hospital. I saw that sort of thing in Asia a half century ago. Markets will crash.
The game we are now in for the coming weeks is to trade an $18,000 to $22,000 range in the Dow Average. The sharp selloff in the Volatility Index (VIX) last week, which we caught with both hands, suggests that the next retest of the $18,000 low will be successful.
Further down the road, I’m not so sure. Any prediction beyond tomorrow in this environment is dubious at best. The world is moving on fast-forward now and the unbelievable is happening every day.
But here’s a shot. If the $18,000 to $22,000 range doesn’t hold, then we are moving to a $15,000 to $18,000 range. If that fails, then we are looking at $12,000 to $15,000 range. Then we will be looking at Great Depression levels of stock market sell-off, with a total corporate capitalization loss of an eye-popping $17 trillion.
The great challenge here is to buy your best stocks and LEAPs as low as possible before an unprecedented $6 trillion in federal stimulus that is coming our way. There will be the $2 trillion in jobs and corporate bailout money already passed, a $2 trillion infrastructure bill coming, and a second jobs and bailout bill that will be needed. On top of that, the Federal Reserve has committed to $8 trillion backstopping of the financial.
And here is the problem. Trump has spent the last three years shrinking the government. The pandemic is a very large government event. So, the Feds may simply not have enough bodies in place to spend, or to lend, all the money that has already been authorized.
That is your economic and market risk.
There is no doubt that the next month will be grim. The U-6 Unemployment Rate published on Friday was 8.9%, indicating the total number of jobless is already at 14.4 million. If the Fed is right and we soon hit 32%, total joblessness will soar to 52 million. During the Great Depression, that unemployment rate peaked at only 25%, throwing 20 million out of work. We could exceed those levels in the coming week!
Dr. Fauci predicts 200,000 US deaths. I think that’s a low number, given that 100 million Americans are still not sheltering-in-place. Corona is starting to take its toll on Wall Street, claiming the life of the Jeffries CFO, Peg Broadbent. Every state and city should prepare for a New York-style spike in cases.
The Fed is expecting 47 million unlucky individuals to lose jobs. This week, Macy’s (M) chopped 150,000, while Tillman Fertitta laid off 40,000 restaurant workers in place like Morton’s Steakhouse and the Bubba Gump Shrimp Company. Many more are to come. Weekly Jobless Claims have already exploded to 6.64 Million. That is three full recessions worth of job losses in two weeks.
The March Nonfarm Payroll Report was a disaster. Here is another number to put in your record book of awful numbers, the report showing 701,000 job losses in March. It’s the first negative number since 2010. Leisure & Hospitality fell by a staggering 459,000.
A second Corona wave might arrive in the fall, warns JP Morgan (JPM). We may not have visited the Volatility Index at $80 for the last time. I’m setting up more (VXX) shorts if we do revisit there. Sell all substantial stock market rallies.
It’s worse than you think. Brace yourself. Bank of America (BAC) has come out with the first GDP forecast I’ve seen that factors in a second wave of Coronavirus cases in the fall. It is not a pretty picture. They see every quarter of 2020 as coming in negative. These easily takes US GDP back to levels not seen since the Obama administration. The only consolation is that (BAC) has never been that great at forecasting the economy, basically leaving it to a bunch of kids. Here they are:
2020 Q1 -7%
2020 Q2 -30%
2020 Q3 -1%
2020 Q4 -30%
Oil rich countries will have to dump $225 billion in stocks, thanks to the collapse of oil to a once impossible $20 a barrel. An 80% plunge in national revenues is forcing asset sales at fire sale prices to avoid a brewing revolutions. They don’t retire former heads of states to golf clubs in the Middle East, they stand them up in front of a firing squads.
Oil Hit an 18-year low at $19.30 a barrel and it could get a lot worse. All of the world’s storage is full, so producers might have to PAY wholesalers to take Texas tea off their hands. Yes, negative oil prices are possible. Otherwise, producing wells will be permanently damaged with a total shutdown. Most of the industry has a negative net worth, save the majors. I told you to stay away!
China PMIs turn positive, coming in at 52 versus an expected 45 indicating a recovering economy. Watch the Middle Kingdom’s economic data more than usual. US PMIs are still in free fall. However, consumers still are staying at home. Their economy went first into the pandemic and will be the first out. There’s hope for us all the quarantine is working.
A $2 trillion infrastructure budget is in the works, and the Democrats will support it because the money won’t be spent until they get control of government in 2021. With most of the construction industry closed, the government’s cumbersome bidding process can’t even start until the summer.
You wonder how that last $2 trillion rescue package got done in five days? This will take us to Great Depression levels of bailout spending. The Fed balance sheet has exploded from $3.5 trillion to $5 trillion in weeks. I know 10,000 bridges that need to be fixed.
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $20 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 spectacular week, blasting my performance back to positive numbers for the year. That is thanks to the ten-point collapse in the Volatility Index (VIX) on Thursday and Friday, which had a hugely positive effect on all our positions.
We are now up an amazing +11.02% for the first three days of April, taking my 2020 YTD return up to +2.60%. We are a mere 68 basis points short of an all-time high. That compares to an incredible loss for the Dow Average of -28.8%, with more to go. My trailing one-year return was recovered to 46.74%. My ten-year average annualized profit recovered to +34.85%.
My short volatility positions (VXX) are almost back to cost. I used every rally in the Dow Average to increase my short positions in the (SPY) to almost obscene levels. Now we have time decay working big time in our favor. These will all come good well before their ten-month expiration.
I bought two very deep in-the-money, very short-dated call spreads in Amazon (AMZN) and Microsoft (MSFT), the two safest companies in the entire market, betting that we don’t go to new lows in the next nine trading days.
At the slightest sign of a break in the pandemic, the economy and shares should come roaring back. Right now, I have a 30% cash position.
All economic data points will be out of date and utterly meaningless this week. 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 6 at 6:00 AM, the Consumer Inflation Expectations for March are out.
On Tuesday, April 7 at 9:00 AM, the US JOLTS Job Openings Report is published.
On Wednesday, April 8, at 2:00 PM, the Fed Minutes for the previous meeting six weeks ago are released.
On Thursday, April 9 at 8:30 AM, Weekly Jobless Claims are announced. The number could top 3,000,000 again.
On Friday, April 10 at 7:30 AM, the US Core Inflation is released. The Baker Hughes Rig Count follows at 2:00 PM. Expect these figures to crash as well.
As for me, I have temporarily moved back to Oakland to retrieve my printer. As I left, my Tahoe neighbors told me I was nuts to go back to a big city. I then drove across an almost totally vacated Golden State, emptied by a pandemic.
With my free time, I have planted a victory garden. I managed to obtain tomatoes, eggplants, chili peppers, strawberries, lettuce, and bell peppers from the nearest Home Depot (HD) garden center. In two weeks, I should have something new to eat.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Still Sheltering in Place