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The Market Outlook for the Week Ahead, or Waiting for My Sugar Cube

I was born in the middle of a pandemic.

It was polio, and in the early 1950s, it was claiming 150,000 kids a year just in the US. You know polio. You’ve seen the pictures of the kids with withered legs or living in iron lungs, the ventilators of their day.

My mom contracted polio in the 1930s and spent a year in quarantine. They didn’t understand then that the virus was in the drinking water.

She lost the use of her legs for a time. My grandfather’s cure was to take her hiking in the High Sierras every weekend to rebuild her muscles. During WWII, he had to buy gas coupons on the black market to make the round trip from LA to Yosemite.

It worked well enough for mom to earn a scholarship to USC where she met my dad, a varsity football player. By the time I came along, Jonas Salk discovered a vaccine, which was infused into a sugar cube and given to me at the Santa Anita Racetrack along with tens of thousands of others. It was one of the big events of American history.

Some 70 years later, I am maintaining the family tradition, forcing my kids out on backpacks a couple of times a week, they're moaning and complaining all the way.

It looks like the first wave of the Corona pandemic isn’t even over yet. That’s why the Dow Average managed to puke out some 10% in days.

So, here is the conundrum: How much can we take the market down in the face of the greatest monetary and fiscal stimulus in history. Some $9 trillion has already been spent and there is at least another $5 trillion behind it.

My bet is a few more thousand points down to 24,000 but not much more than that. If this turns into a rout and a retest of the lows, the Fed will simply turn on the presses and print more money. After all, the marching orders from the top are to keep stocks high into the election, whatever the cost.

One of the reasons we are seeing such wild swings in the market is that the market itself doesn’t know what it’s worth. That’s because this is the most artificially manipulated market in history, thanks to the government stimulus, 20 times what we saw in 2008-2009.

Stocks can’t figure out if they are worthless, or worth infinity, and we are wildly whipsawing back and forth between two extremes.

Take that stimulus away and the Dow Average would be worth 14,000 or less. Stimulus will go away someday, and when it goes away, there will be a big hit to the market. It’s anyone’s guess as to timing. Ask the Covid-19 virus.

We have seen countless market gurus being wrong about this market, many of whom are old friends of mine. That’s because they, like I, see the long-term damage being wrought to the economy. Recovering 80% of what we lost will be easy. The last 20% will be a struggle.

That alone amounts to one of the worst recessions we have ever seen. This is going to be a loooong recovery. Some forecasters don’t expect US GDP to recover to the 2019 level of $21.43 trillion until 2025.

In the meantime, the national debt is soaring, now at $26 trillion, and will soon become a major drag on the economy. The budget deficit alone this year is now pegged at an eye-popping $3 trillion, the largest in history.

The S&P 500 turned positive on the year for a whole day. It’s been an amazing move, the largest in history in the shortest time, some 47% in ten weeks. NASDAQ hit my year-end target of $10,000, then immediately gave back 10%.

The problem now is that stocks are still the most overbought in history and risk is the highest since January. Much trading is now dominated by newly minted day traders chasing bankrupt stocks like Hertz (HTZ) with their $1,200 stimulus check. Far and away, the better trade is to sell short bonds. After that, buy gold (GLD) and sell short the US Dollar (UUP).

Stocks then dove 7.4% on second wave fears as US cases top 2 million and deaths exceeded 114,000. Jay Powell says he won’t raise interest rates until 2023 at the earliest. The “reopening” stocks of airlines, hotels, and cruise lines are leading the downturn from crazy overbought levels.

Houston may have to close down again, in the wake of soaring Corona cases after a too early reopening. Other cities will follow. Cases in Arizona are also hitting new highs. It’s not what the market wanted to hear.

Weekly Jobless Claims hit 1.54 million, at a falling rate, but still at horrendous absolute levels. That’s better than last week’s 1.9 million. Some 20.9 million are still receiving state unemployment benefits, or 13.1% or the total workforce. These numbers certainly don’t justify a stock market near an all-time high.

The Fed expects Unemployment to remain stubbornly high, not falling to 9.3% by yearend. I think that’s highly optimistic. Some 20% of the 43 million lost jobs are never coming back, giving you an embedded U-6 rate of over 10%. It is easier and faster to fire people than to hire them back.

Election Poll numbers are starting to affect the market. Polls showing Trump 10%-14% points behind Joe Biden in the November presidential election opened stocks down 400 points on Monday. The betting polls in London are confirming these numbers.

The Republican leadership is jumping ship. A Biden win will bring higher corporate taxes, balanced budgets, less liquidity for the stock market, fewer Tweets, and clipped wings for the top 1%. Is this a trigger for the next market correction? We’ll find out in five months. When will stocks notice that?

Bond King Jeffrey Gundlach absolutely hates stocks, predicting we could take out the March lows. He believes the monster rally in big tech is unsustainable. The better trades are to sell short the US dollar (UUP) and to buy gold (GLD). I agree with much of this, but Geoff’s calls can take 6-12 months to come true, so don’t hold your breath, or bet the ranch.

Tesla hit a new all-time high, as I expected, ticking at $1,220. An 11% price cut is boosting sales and market share, while (GM) and (F) are dying. The Model Y, which looks like the love child of a Model X and Tesla 3, is expected to be their biggest seller ever. This is one bubble stock that IS worth chasing. Buy (TSLA) dips up to $2,500. No kidding!

New Zealand became the first Corona-free country, with zero cases, so it can be done. An island country with all international flights grounded, aggressive social distancing restrictions, and an ambitious contract tracing, the land of kiwis had everything going for it. Most importantly, they had the right leadership that listened to scientists, which the worst-hit countries of Sweden, Brazil, and the US are sadly lacking.

The Mad Hedge June 4 Traders & Investors Summit recording is up. For those who missed it, I have posted all 9:15 hours of recordings of every speaker. This is a collection of some of the best traders and investors I have stumbled across over the past five decades. To find it please click here.

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 still at zero, oil at a cheap $34 a barrel, 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 took it on the nose last week. I got stopped out of my shorts at the market top, then took a hit on my bonds shorts. My 11-year performance stands at 360.61%.

That takes my 2020 YTD return up to a more modest +4.70%. This compares to a loss for the Dow Average of -12.2%, up from -37%. My trailing one-year return retreated to 44.88%. My eleven-year average annualized profit backed off to +34.34%.

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 15 at 12:00 PM EST, the June New York State Manufacturing Index is out.

On Tuesday, June 16 at 12:30 PM EST, US Retail Sales for May are released.

On Wednesday, June 17 at 8:15 AM EST, Housing Starts for May are announced.
At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are published.

On Thursday, June 18 at 8:30 AM EST, Weekly Jobless Claims are announced.

On Friday, June 19 at 2:00 PM EST, the Baker Hughes Rig Count is out.

As for me, I am waiting for my sugar cube.

In the meantime, I will spend the weekend carefully researching the recreational vehicle market. If everything goes perfectly, a Covid-19 vaccine will be not available to the general public for at least two years.

Until then, my travel will be limited to the distance I can drive. Travel while social distancing with my own three-man “quaranteam” will be the only safe way to go.

When the New York Times highlights it, as they did this weekend, it’s got to be a major new thing.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Yosemite in 1942

June 12, 2020

Tech Letter

Mad Hedge Technology Letter
June 12, 2020
Fiat Lux

Featured Trade:

(TESLA’S EXPANDING LEAD IN EVS),
(TSLA)

Tesla's Expanding Lead in EVs

Tech Letter

As Tesla (TSLA) pushes above and beyond $1,000, let’s remind readers why this tech stock is so brilliant and why it outperforms even amid a backdrop of haters that taint the stock on a daily basis.

No doubt that Tesla has benefited from the “re-open trade” with risk-on sentiment mesmerizing equity markets amid positive data points that reignited Tesla with vehicle sales in China.

Then there is the rampant speculation taking place buoyed by the Fed pouring trillions into the capital markets.

The outcome is tech stocks leading the way with many reaching all-time highs.

Specifically, for Tesla, a sanguine optimism is coalescing around the popularity of Teslas in China.

Tesla seems to have triumphed over the pandemic with a momentous “snapback” in demand for Model 3s in China.

Tesla delivered 11,000 Model 3 vehicles to Chinese customers in May, which is 7,000 more Teslas sold in China than April.

The telltale signs are there hinting this is the beginning of a voracious ramp-up in Tesla sales not only in China but throughout the Asian regions, including Southeast Asia.

The bumper sales seen in Tesla’s China numbers coincide with the building of their monster battery factory in Shanghai, coined Giga 3.

The news in China dovetails nicely with Tesla’s commitment to deliver more than half a million vehicles this year, which has raised some eyebrows on Wall Street.

One persisting issue remains – margins.

Musk has slashed prices on Models S, X, and 3, decreasing the marginal profit on these models ahead of the Model Y cannibalizing them.

Tesla’s bestselling car Model Y avoided a price cut.

Some of the premium add-ons have been upped in price to compensate price cuts such as Full Self Driving (FSD) increasing by $1,000 to penalize customers who desire more personalization.

An unfortunate headwind caused by the pandemic is that Tesla ended Q1 with bloated inventory because the supply chain was crippled by a delivery bottleneck and factory stoppages.

When Tesla drops prices, it harms legacy car companies far more because it raises the competition bar in EVs creating an environment where it will be awfully hard for legacy car companies to ever outdo Tesla with an inferior product.

For example, GM burns through $7,000 per Chevy Bolt sold at a time when the industry is forced to go all-electric as the pandemic effectively pulls forward EV demand to today.

Tesla’s headstart on the traditional car circuit is giving them ample time to turn the screws on them hoping a few of them drop like flies before they can ever get close to becoming competitive.

Eventually, gas guzzlers will be banned by governments and EVs will be universal.

Tesla is in a golden position to produce the optimal EV while tirelessly working to make them cost-effective for buyers in a lower income bracket.

I believe that Tesla will mix and match premium and basic models to cater to every price point so that every buyer will gravitate towards Tesla.

Musk keeps pushing the envelope with new divisions as well.

He continues his vision uninterrupted by proclaiming that the company's Nevada factory would likely produce the new semi-truck's battery and powertrain, with the remaining work done in other locations around the country.

“It's time to go all out and bring the Tesla Semi to volume production," Musk said.

The semi-truck is planned to price at around $150,000 for the 300-mile model and around $180,000 for the longer 500-mile model.

This division could grow into a $3-5 billion revenue driver in the next few years.

This is yet another example of Musk staying one step ahead of the traditional carmakers.

To understand more about the Tesla semi-truck, click here.

Another project Musk is working on is the Blade Runner influenced cyber-truck.

The cyber-truck is a consumer truck that Musk is working on that he tested out with TV comedian Jay Leno.

To watch that clip, click here.

The future has never looked brighter for Musk and Tesla as the demand of the future has repurposed itself to today and only Musk can deliver on such high expectations.

Do not day trade this stock because the volatility will blow investors up. This is a buy and hold long term story.

June 5, 2020

Diary, Newsletter, Summary

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)

June 3 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

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

May 26, 2020

Diary, Newsletter, Summary

Global Market Comments
May 26, 2020
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or LOOKING FOR THE NEW AMERICA),
(FB), (AAPL), (NFLX), (GOOGL), (MSFT), (TSLA), (VIX)

Market Outlook for the Week Ahead, or Looking for the New America

Diary, Newsletter, Summary

We are getting some tantalizing tastes of the new America that will soon arise from the wreckage of the pandemic.

Companies are evolving their business models at an astonishing rate, digitizing what’s left and abandoning the rest, and taking a meat cleaver to costs.

The corporate America that makes it through to the other side of the Great Depression will earn far more money on far fewer sales. That has been the pattern of every recession for the past 100 years.

While the pandemic may take earnings down from $162 per S&P 500 share in 2019 to only $50 in 2020, it sets up a run at a staggering $500 a share during the coming Roaring Twenties and Golden Age. All surprises will be to the upside and anything you touch will make you look like a genius.

For example, Target’s online sales have exploded 153%, allowing customers to order their groceries online and pick them up at curbside. (TGT) pulled this off in a mere three weeks. Without a pandemic, it would have taken three years to implement such a radical idea, if ever.

Survival is a great motivator.

The (SPY) has been greatly exaggerating the public’s understanding of the stock market. Five FANGs and Tesla (TSLA) with 50%-200% moves off the bottom have made the index look irrationally strong.

The fact is that the majority who have shares have not even made a 50% retracement of this year’s losses. A lot of stocks, especially the reopening ones, are still crawling back of subterranean bottoms.

Investors now have the choice of chasing wildly expensive stocks that have already had spectacular runs, or cheap ones that will go bankrupt by the end of the year. It is a Hobson’s choice for the ages. I expect 10% of the S&P 500 to go under by the end of 2020.

I am spending a lot of time on the ground talking to businesses in California and Nevada and have come to two conclusions. They cannot fathom the true depth of the Depression we are now in and are greatly underestimating the length of time it may take to recover. We may not see the headline unemployment rate under 10% for years unless the government redefines the statistics, which they always do.

The S&P 500 is not the economy. It only employs 25% of America’s private sector labor force accounting for 20% of its total costs. Real estate accounts for another 15%. That leaves 35% of costs that can be completely eliminated or reengineered. This creates enormous share price upside possibilities.

The concentration of the market is the most extreme I have ever seen, with five stocks getting most of the action, (FB), (AAPL), (NFLX), (GOOGL), and (MSFT).

There is a staggering $3.6 trillion in equity allocations sitting on the sidelines in cash. All those who got out at the March bottom are now desperately trying to get back in at the May top. Algorithms are making sure you get out cheap and get back expensive.

It will all end in tears.

One of the stunning developments of the crash has been the near doubling of retail stock trading. Options trading has increased even more. Millions of stimulus check recipients have poured their newfound wealth into the stock market instead of spending it on consumer goods, like they were supposed to.

This explains the over-concentration on the five FANG stocks, (FB), (AAPL), (NFLX), (GOOGL), and (MSFT), the greatest momentum stocks are out age, but in high speculative ones like Tesla (TSLA). The lowest cost online platforms like Robin Hood (click here).

All of this is completely irrevocably changing the character of the stock market, perhaps permanently. This may also explain why the Volatility Index remains stuck above$26.

Fed Governor Jerome Powell said no recovery without vaccine, and that’s without a second wave. It could be a long wait. In the meantime, the Atlanta Fed said Q2 US GDP will be down -42%, the weakest quarter in American history. We find out mid-July.

Housing Starts collapsed by 30.2% in April, in the sharpest drop on record. But prices aren’t falling. There is still a massive bid under the market from still-employed millennials. Your home could be you best performing asset this year. The 30-year fixed rate mortgage at 3.0% is a big help.

Weekly Jobless Claims topped 2.4 million, taking the two-month total to a breathtaking 39 million. One out of four Americans is now unemployed, matching the Great Depression peak. US deaths just topped 98,000, 21 times China’s fatality rate where the disease originated and with four times our population. People will keep losing jobs until the death rate peaks, which could be many months, or years.

Leading Economic Indicators crashed by 4.4% for April, showing the economy is still in free fall. So, how much more stock do you want to buy here?

Up to 60% of mall tenants aren’t paying rent, with $7.4 billion skipped in April alone. See my earlier “Death of the Mall” piece. It’s another harsh example of the epidemic accelerating all existing trends.

The market is not reflecting the long-term damage to the economy, says my old buddy and Morgan Stanley colleague David Gerstenhaber. When the bailouts run out, the economy could go into free fall. It could take years to get below 10% unemployment rate again, as many of the layoffs and furloughs are permanent. Keep positions small. Anything could happen. I spent the 1987 crash with David.

Existing Home Sales cratered an incredible 17.8% in April to an annualized 4.88 million units, the largest one-month drop since 2010. Inventory dropped to an all-time low of only 1.7 million, down 19.7%, presenting a 4.1-month supply. Sellers failed to list and those who had a home took them off. Unbelievably, this pushed median home prices to a new all-time high of 286,000, up 7.4% YOY. The biggest sales fall in the west, where the US epidemic started.

China took over Hong Kong, suspending most civil liberties in response to Trump’s multiple attacks. And you know what? There is nothing we can do about it that hasn’t already been done. Talk about going into battle with no dry powder. I’m sure the US 7^th Fleet will be out there soon to provoke an attack. Anything to distract attention from the 100,000 Americans who died from Covid-19 on Trump’s watch. As if markets didn’t already have enough to worry about.

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 another fabulous week, up an awesome +4.97%, and blasting us up to a new eleven-year all-time high of 77%. It has been one of the most heroic performance comebacks of all time.

My aggressive short bond positions really delivered some nice profits, despite the fact the bond market went almost nowhere. That’s because time decay for the June 19 expiration is really starting to kick in. I also got away with a small long in the bond market for the second time in two weeks.

That takes my 2020 YTD return up to +10.86%. That compares to a loss for the Dow Average of -12.6%. My trailing one-year return exploded to 50.85%, nearly an all-time high. My eleven-year average annualized profit exploded to +35.21%.

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, May 25, I’ll be leading the neighborhood veterans parade for Memorial Day. Markets are closed.

On Tuesday, May 26 at 9:00 AM, the S&P Case Shiller National Home Price Index is released.

On Wednesday, May 27, at 4:30 PM, weekly EIA Crude Oil Stocks are published.

On Thursday, May 28 at 8:30 AM, Weekly Jobless Claims are announced. We also get the second estimate for the Q1 GDP is printed. At 10:00 AM, April Pending Home Sales are announced.

On Friday, May 29, at 2:00 PM, the Baker Hughes Rig Count follows at 2:00 PM.

As for me, I will be hitting the town beaches at Lake Tahoe for the first time this spring, mask in hand, where waitresses serve you mixed drinks on order. Outdoors will be the only safe place this year.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

May 21, 2020

Diary, Newsletter, Summary

Global Market Comments
May 21, 2020
Fiat Lux

Featured Trade:

(MAY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (SDS), (TSLA), (VIX), (ROM), (SPY),
(TLT), (TBT), (DRI), (CCI), (BOTZ)
(TESTIMONIAL)

May 20 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 20 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Do you believe chairman Powell when he says no negative rates?

A: I do believe that he does not want negative rates—that would be hugely detrimental to the economy. Europe and Japan have been trying them for the last ten years and they absolutely do not work. When it costs something to deposit money in the bank, people take it out of the financial system and hide it under their mattresses or buy gold (GLD). Although Powell doesn’t want negative rates, he may not have a choice; the market’s already taking them there in the futures market one year out. If we do get a big second wave of corona in the fall, and we do go to new lows in the stock market, and unemployment goes to new highs, negative rates will happen on their own whether Powell wants them or not.

Q: What is your best metric for determining when this bounce is over?

A: We passed those metrics on when a normal bounce is over weeks and weeks ago, and it just keeps going up. If you’ll notice, I have no stocks right now. I have some balanced long and short stock indexes but that’s it. My big trade is short bonds. When an asset class is no longer attractive, avoid it like Covid-19.

Q: What range should I wait for to buy the Proshares Ultra Short S&P 500 ETF (SDS)?

A: I’m really only using (SDS) as a hedge to limit the risk on much bigger long positions that I may have. (SDS) doesn’t lend itself to normal technical analysis because it is an artificial construct.

Q: What price to get into Tesla (TSLA)?

A: If you look at the Tesla chart, it's almost exactly the same as all of the other FANGS, as it’s essentially becoming the next FANG. So, they will trade with the FANGS for that reason, at least in the short term. Don’t buy it here, wait for the next major selloff to $600 or so. We actually had a bunch of concierge customers to buy long term leaps under $500 dollars in March, and they got 500% returns in 3 weeks.

Q: Why didn’t we just buy the ProShares Ultra Technology ETF (ROM) and go to sleep for five years?

A: If you recall, I was actually recommending just that in March when (ROM) was trading in the $80s, and we actually had a (ROM) position that we got stopped out of. The (ROM) is the 2x long technology ETF that's gone from $80 to $160 since the market bottomed almost 2 months ago.

Q: Why do you keep using deep in the money put spreads and call spreads?

A: You use them when volatility is very high like it is now—right now the Volatility Index (VIX) is at $28. The normal price is at $14 or $15, and we’ve just come down from $80. Even in the high $20s, you still get huge payoffs (like 10% a month) per call and put spread. As long as (VIX) is that high, we’ll keep doing them. They are also the perfect trade to have in range trading markets like we’ve had for the past month. They give you a nice extra kicker on your P&L.

Q: What is the worst-case scenario?

A: We get a second wave of the virus, another couple hundred thousand Americans die, the stock market goes to new lows, and we have a presidential election. How’s that for a worst-case scenario? Other than that, how is your day going?

Q: Do you trade pre and post market?

A: No; I used to when I ran my hedge fund, but I don’t do anything now if it’s beyond the capability of most individuals. I only want to put out trade alerts that people can get done. So, I'm only trading US hours. The reason you trade overseas is that you always get the highest highs and lowest lows in the Asian markets. During the late 1990s, I was the number one or two volume trader in the Singapore futures market.

Q: Do you think the 200-day moving average will be substantial resistance to the market?

A: I think absolutely yes, and I also believe that the only downside trigger for a major breakdown in the market is a second corona wave.

Q: If we get negative interest rates, would (SDS) fall?

A: No, (SDS) is a 2X bear (SPY) ETF that would go through the roof because negative rates would only happen if the stock market was collapsing. You might get a double on (SDS) on a second corona wave and negative interest rates. That’s why I’m keeping my position.

Q: Could the market just keep going up with no major pullbacks if the Fed keeps stimulating the economy?

A: Yes, and that’s what has been happening. Jerome Powell has said that the Fed’s ability to borrow is unlimited, therefore the amount of stimulus they can keep throwing is also unlimited, and if that’s what happens, all of that money will go into financial assets, even if the real economy is in utter freefall (which it has been). You can’t rule out anything these days. You always have to trade with the belief that anything can happen at any time.

Q: I need help setting up Long term Equity Participation Securities (LEAPS). Is there a video on that?

A: You can take all the educational videos we have on call spreads and put spreads, and everything applies exactly the same, except that instead of doing a one-month maturity, you do a two-year maturity. If you play around with the maturity tab on your platform, you can find the longest dated maturity on each option series. Sometimes, it’s only a year, sometimes all the way up to 2.5 years.

Q: Are there any other options besides the United States Treasury Bond Fund (TLT) to short the bond market?

A: Yes, there’s the ProShares Ultra Short 20 Year Treasury ETF (TBT); that’s a 2x short bond market ETF. But you don’t get anywhere near the leverage that we have in the (TLT) put options spreads.

Q: Do you expect a return in inflation with all the stimulus going on?

A: Absolutely yes; food prices have already increased 20%—that will be a big inflationary push. Another $14 trillion in government QE and spending hitting the economy is also highly inflationary. And a lot of the price cuts which fueled deflation are ending as global supply chains are cut and the US food distribution system breaks down.

Q: Is the Great Depression on the table?

A: We are in a Great Depression now that is already far worse than the last one, except that this one will be shorter than the decade seen in the 1930s.

Q: How long will it take for unemployment to recover to the December 2019 3.5% unemployment lows?

A: We will never get back to those lows. A lot of that was over employment (artificial employment), with a lot of temporary marginal workers being picked up. And the net effect of the epidemic will be to make businesses forcibly more efficient; that means getting a lot more done with a lot fewer workers. So, I don't think we’ll ever see that 3.5% rate again. Economists are predicting that the next new low in unemployment may be 5% or 6%, and even that could take 2 or 3 years to get there.

Q: Will the market soar on vaccine news?

A: Well probably not; I would bet that two-thirds of any real vaccines are already in the price. We are getting vaccine announcements every day and the market is immediately discounting it, so when we actually do get the real thing, we may get a rally of only a few days and that’s it. We also won’t know for many months if it is real and is moved to mass production.

Q: If you would buy one restaurant, what would it be?

A: None; I would not touch the restaurants here with a 10-foot pole. None of the restaurant chains have any prospect of making a profit, except for maybe the ones that already had takeout models like Subway or Chipotle Mexican Grill (CMG). Some hedge funds are buying Darden (DRI), but with their money, not mine.

Q: Should I double my short position in volatility (VIX)?

A: No, not down here, especially after a huge run in the stock market like we had—a 40% rise off the bottom. If we do get above $50 though, I will be shorting volatility then.

Q: I bought the (BOTZ) AI and robotics ETF, on your recommendation—it’s now almost double off the lows. What should I do with it now?

A: Short term, take profits, long term keep it. I think the (BOTZ) doubles again from these levels, and I know some of you out there bought LEAPS on the (BOTZ) at the lows and you’re up 1,000% on those. If you have a 1,000% profit take it, you probably won’t get another one in your lifetime.

Q: Time to refi the house?

A: No, I think refi rates are artificially high now (and totally out of line with the bond market) because the default rate is so high—8%. Once that default rate starts to drop, the interest rate on mortgages should also fall, and I think you could see 2.5% on the 30-year fixed rate mortgage. Europe has had 0% rates for almost 10 years, and their home mortgages are at 2%, so that’s ultimately how low we could go.

Q: Are you worried about the debt related to Crown Castle International (CCI)?

A: No because they’re putting all the debt to good use and they can always refi at lower rates. There is no question that the demand for cell phone towers is going to be enormous—epidemic or not, because of the roll-out of 5G phones.

Good Luck and Stay Healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader