Global Market Comments
February 18, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TRADE ALERT DROUGHT)
(SPY), (TLT), (MSFT), (BA), (TSLA), (MGM)
Tag Archive for: (TSLA)
Like it or not, we have a trade alert drought on our hands.
I just ran the numbers on 200 potential trades in stocks, bonds, foreign exchange, commodities, precious metals, and real estate, and there was not a single one that was worth executing.
They all had one thing in common: for taking huge risks, there were only paltry profits on offer. Even with a 90% success rate, I would still lose money.
And here is the problem. Massive quantitative easing from the US Federal Reserve is keeping the prices of all assets artificially high. But fears of a global Coronavirus pandemic are keeping all prices capped. The spread between the bid and the offer is only 3%. That is not enough to make an honest living, nor even a dishonest one.
I’ve seen all this before. The US in 1974, Tokyo in 1989, NASDAQ in 1999 presented similar trading dilemmas. The outcome is always the same. Prices always go up much longer than expected and then are followed by horrific crashes. Only when the last dollar is sucked in do trends change.
So, for right now, I would rather do nothing than something. We are in a contest to see who can make the most money with the fewest drawdowns, not to see who can strap on the most trades. The latter makes your broker rich, not you.
Cash is a position, it is an opinion, and it has option value. A dollar at a market top is worth $10 at a market bottom. Opportunity cost is not to be underestimated.
For the time being, everything depends on the Coronavirus. It is universally believed that the Chinese data is wildly inaccurate, possible by tenfold. The risks to the markets are similarly underestimated by US investors.
That became screamingly clear to me after returning from a trip halfway around the world where my temperature was taken every time I crossed a border and planes had to be sterilized before boarding
So, the smart game here is to be patient and learn some discipline. Wait for the market to come to you. This is a year when it will be incredibly difficult to make money and extremely easy to lose it.
All trade alert droughts end. Whether it will be sooner or later is anyone’s guess.
China is planning massive stimulus, to get the economy back on track. GDP could drop from 6% to 0% and maybe -6% thanks to the Coronavirus. A borrowing stampede is underway as shut down companies seek to address hemorrhaging cash flow.
Tesla (TSLA) exploded again to the upside, up 10% at the opening. The company has become a good news factory. The German government stepped in to subsidize a massive Gigafactory there. I won’t touch the stock here, but my long terms target is still $2,500.
Tesla finally took my advice and launched a $2 billion common stock offering at these lofty prices. It should be $5 billion. They can retire all their debt, including the convertible bonds, and with no dividend they can operate at a zero cost of capital. Elon Musk is taking $10 million of the deal. He took $100 million of the last offering. Buy (TSLA) on dips. Losses pile up for the short-sellers. Tesla always does the right thing after trying everything else out first.
The Fed’s Jay Powell cheers the economy but warned that the Coronavirus could become a factor. He also cautioned about a federal deficit that will top $1 trillion this year.
With the economy growing at a 2.2% annual rate, it’s below the Obama era growth. Did anyone notice that he said he would trim back QE by reigning in the repo program initiated last fall? Risk in the stock market is now extremely high.
Apple (AAPL) and Microsoft (MSFT) are now 10% of the entire stock market and are wildly overbought. Such incredible concentration is a typical sign of a topping market. Virtually all the stocks Mad Hedge has been recommending for the last decade are at new all-time highs. Be careful what you wish for.
Household Debt soared hitting a 12-year high. It’s up $601 billion to $14 trillion. It’s pedal to the metal for consumer spending, another classic market-topping indicator. What happens when the bill comes due and interest rates rise?
MGM (MGM) canceled guidance as the Coronavirus upends their business. High-end Chinese gamblers won’t show up to lose gobs of money at the gaming tables if they can’t get here. The epidemic has put the whole gaming industry into turmoil. Call me after new virus cases peak in China. Avoid (MGM).
Boeing had no net deliveries of aircraft in January, the first time since 1962, but the stock rose anyway. That tells me the bottom is firmly in. Buy (BA) on dips. When will the suffering of one of America’s best-run companies, accounting for 3% of GDP, end?
Despite the fact that we may be facing the end of the world, the Mad Hedge Trader Alert Service managed to maintain new all-time highs. I came out of my last position in Boeing (BA) to beat the ex-dividend day and a possible call on my short February $280 calls.
My Global Trading Dispatch performance rose to a new high at +359.00% for the past ten years. February stands at -0.04%. My trailing one-year return is stable at 47.39%. My ten-year average annualized profit ground back up to +35.31%.
All eyes will be focused on the Coronavirus still, with deaths over 1,800. The weekly economic data are virtually irrelevant now. However, some important housing numbers will be released.
On Tuesday, February 18 at 8:30 AM, the NY State Manufacturing Index for February is released.
On Wednesday, February 19, at 9:30 PM, January Housing Starts are out.
On Thursday, February 20 at 8:30 AM, Weekly Jobless Claims come out. The February Philadelphia Fed Manufacturing Index is announced.
On Friday, February 21 at 10:30 AM, January Existing Home Sales are printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be driving back from Lake Tahoe, where I spent the long weekend catching up on the markets. There was virtually no snow, amazing for February, but great hiking.
Since I will be dropping 7,200 feet from Donner Pass and I have the new expended range Model X, I will be able to make it the 220 miles home on a single charge.
In two years, I’ll be able to make the 440-mile round trip on a single charge when the new Tesla Cyber truck comes out. Of course, people will think I’m nuts and my kids have refused to be seen in the cutting edge vehicle, but when did that ever stop me?
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 14, 2020
Fiat Lux
Featured Trade:
(FEBRUARY 12 BIWEEKLY STRATEGY WEBINAR Q&A)
(SQ), (TSLA), (FB), (GILD), (BA), (CRSP), (CSCO), (GLD)
(FEYE), (VIX), (VXX), (USO), (LYFT), (UBER)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 12 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 do you think about Facebook (FB) here? We’ve just had a big dip.
A: We got the dip because of a double downgrade in the stock from a couple of brokers, and people are kind of nervous that some sort of antitrust action may be taken against Facebook as we go into the election. I still like the stock long term. You can’t beat the FANGs!
Q: If Bernie Sanders gets the nomination, will that be negative for the market?
A: Absolutely, yes. It seems like after 3 years of a radical president, voters want a radical response. That said, I don't think Bernie will get the nomination. He is not as popular in California, where we have a primary in a couple of weeks and account for 20% of total delegates. I think more of the moderate candidates will come through in California. That's where we see if any of the new billionaire outliers like Michael Bloom or Tom Steyer have any traction. My attitude in all of this is to wait for the last guy to get voted off the island—then ask me what's going to happen in October.
Q: When should we come back in on Tesla (TSLA)?
A: It’s tough with Tesla because although my long-term target is $2,500, watching it go up 500% in seven months on just a small increase in earnings is pretty scary. It’s really more of a cult stock than anything else and I want to wait for a bigger pullback, maybe down to $500, before I get in again. That said, the volatility on the stock is now so high that—with the short interest going from 36% down to 20%—if we get the last of the bears to really give up, then we lose that whole 20% because it all turns into buying; and that could get us easily over $1,000. The announcement of a new $2 billion share offering is a huge positive because it means they can pay off debt and operate with free capital as they don’t pay a dividend.
Q: Is Square (SQ) a good buy on the next 5% drop?
A: I would really wait 10%—you don't want to chase trades with the market at an all-time high. I would wait for a bigger drop in the main market before I go aggressive on anything.
Q: What about CRISPR Technology (CRSP) after the 120% move?
A: We’ve had a modest pullback—really more of a sideways move— since it peaked a couple of months ago; and again, I think the stock either goes much higher or gets taken over by somebody. That makes it a no-lose trade. The long sideways move we’re having is actually a very bullish indication for the stock.
Q: If Bernie is the candidate and gets elected, would that be negative for the market?
A: It would be extremely negative for the market. Worth at least a 20% downturn. That said, according to all the polling I have seen, Bernie Sanders is the only candidate that could not win against Donald Trump—the other 15 candidates would all beat Trump in a 1 to 1 contest. He's also had one heart attack and might not even be alive in 6 months, so who knows?
Q: I just closed the Boeing (BA) trade to avoid the dividend hit tomorrow. What do you think?
A: I’m probably going to do the same, that way you can avoid the random assignments that will stick you with the dividend and eat up your entire profit on the trade.
Q: When do you update the long-term portfolio?
A: Every six months; and the reason for that is to show you how to rebalance your portfolio. Rebalancing is one of the best free lunches out there. Everyone should be doing it after big moves like we’ve seen. It’s just a question of whether you rebalance every six months or every year. With stocks up so much a big rebalancing is due.
Q: I have held onto Gilead Sciences (GILD) for a long time and am hoping they’ll spend their big cash hoard. What do you think?
A: It’s true, they haven’t been spending their cash hoard. The trouble with these biotech stocks, and why it's so hard to send out trade alerts on them, is that you’ll get essentially no movement on them for years and then they rise 30% in one day. Gilead actually does have some drugs that may work on the coronavirus but until they make another acquisition, don’t expect much movement in the stock. It’s a question of how long you are willing to wait until that movement.
Q: Is it time to get back into the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?
A: No, you need to maintain discipline here, not chase the last trade that worked. It’s crucial to only buy the bottoms and sell the tops when trading volatility. Otherwise, time decay and contango will kill you. We’re actually close to the middle of the range in the (VXX) so if we see another revisit to the lows, which we could get in the next week, then you want to buy it. No middle-of-range trades in this kind of market, you’re either trading at one extreme or the other.
Q: Could you please explain how the Fed involvement in the overnight repo market affects the general market?
A: The overnight repo market intervention was a form of backdoor quantitative easing, and as we all know quantitative easing makes stocks go up hugely. So even though the Fed said this wasn't quantitative easing, they were in fact expanding their balance sheet to facilitate liquidity in the bond market because government borrowing has gotten so extreme that the public markets weren’t big enough to handle all the debt; that's why they stepped into the repo market. But the market said this is simply more QE and took stocks up 10% since they said it wasn't QE.
Q: What about Cisco Systems (CSCO)?
A: It’s probably a decent buy down here, very tempting. And it hasn't participated in the FANG rally, so yes, I would give that one a really hard look. The current dip on earnings is probably a good entry point.
Q: Should we buy the Volatility Index (VIX) on dips?
A: Yes. At bottoms would be better, like the $12 handle.
Q: When is the best time to exit Boeing?
A: In the next 15 minutes. They go ex-dividend tomorrow and if you get assigned on those short calls then you are liable for the dividend—that will eat up your whole profit on the trade.
Q: Do you like Fire Eye (FEYE)?
A: Yes. Hacking is one of the few permanent growth industries out there and there are only a half dozen listed companies that are cutting edge on security software.
Q: What are your thoughts on the timing of the next recession?
A: Clearly the recession has been pushed back a year by the 2019 round of QE, and stock prices are getting so high now that even the Fed has to be concerned. Moreover, economic growth is slowing. In fact, the economy has been growing at a substantially slower rate since Trump became president, and 100% of all the economic growth we have now is borrowed. If the government were running a balanced budget now, our growth would be zero. So, certainly QE has pushed off the recession—whether it's a one-year event or a 2-year event, we’ll see. The answer, however, is that it will come out of nowhere and hit you when you least expect it, as recessions tend to do.
Q: Would you buy gold (GLD) rather than staying in cash?
A: I would buy some gold here, and I would do deep in the money call spreads like I have been doing. I’ve been running the numbers every day waiting for a good entry point. We’re now at a sort of in between point here on call spreads because it’s 7 days to the next February expiration and about 27 days to the March one after that, so it's not a good entry point this week. Next week will look more interesting because you’ll start getting accelerated time decay for March working for you.
Q: When are you going to have lunch in Texas or Oklahoma?
A: Nothing planned currently. Because of my long-term energy views (USO), I have to bring a bodyguard whenever I visit these states. Or I hold the events at a Marine Corps Club, which is the same thing.
Q: Would you use the dip here to buy Lyft (LYFT)? It’s down 10%.
A: No, it’s a horrible business. It’s one of those companies masquerading as a tech stock but it isn’t. They’re dependent on ultra-low wages for the drivers who are essentially netting $5 an hour driving after they cover all their car costs. Moreover, treating them as part-time temporary workers has just been made illegal in California, so it’s very bad news for the stocks—stay away from (LYFT) and (UBER) too.
Q: Is the Fed going to cut interest rates based on the coronavirus?
A: No, interest rates are low enough—too low given the rising levels of the stock market. Even at the current rate, low-interest rates are creating a bubble which will come back to bite us one day.
Q: Household debt exceeded $14 trillion for the first time—is this a warning sign?
A: It is absolutely a warning sign because it means the consumer is closer to running out of money. Consumers make up 70% of the economy, so when 70% of the economy runs out of money, it leads to a certain recession. We saw it happen in ‘08 and we’ll see it happen again.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
February 5, 2020
Fiat Lux
Featured Trade:
(HOW TO TRADE THE CORONAVIRUS)
(APPL), (MSFT), (TSLA), (MU), (WDC), (ZM)
Like a powerful mule, I believe the American tech sector will muscle through the shock of the China coronavirus.
The tech sector will do what it does best, take the lead and put the entire American economy on its back and carry it through when doubts of decelerating global growth are asked of it.
I quantify this as an opportunity for the American tech sector.
Let’s look at some of the short-term contagion American tech companies are absorbing, as well as some opportunities in tech delivered by this sad pandemic.
Apple (AAPL) has made the decision to shutter all Apple stores in mainland China.
Their corporate offices have also gone into sleep mode and that means 10,000 people will need to make do with work stoppages which also include the component makers that supply Apple.
The stoppage is until February 9th, but only if the coronavirus has been effectively thwarted.
The Chinese populace isn’t willing to go out on the street and have barricaded themselves inside their apartments to avoid catching the virus.
Quarantining large areas is an unprecedented move from the Chinese communist party highlighting the poor handling of the situation in the early stages.
China is a critical revenue driver for Apple constituting 15% of revenue.
The delay in manufacturing will result in 3% of iPhone unit shipments being pushed out from March to June.
However, if the lockdown spills into late February or March, then there will be a major hit to the Chinese consumer which could muddy Apple’s bottom line.
Apple’s supply chain could get up-and-running if the shutdown lasts a few weeks but if we are talking months then project dates could get put on the permanent back burner.
Apple is arguably the most prominent American tech company to be affected deeply by the coronavirus but there are others.
The Chinese communist party has put the operation of the new Shanghai Tesla (TSLA) factory on ice which will delay the company’s production of the Model 3 there.
The ramp-up of the Model 3 production will be delayed by a week and a half and the shutdown may “slightly” impact the company’s profitability in the first quarter of 2020, said Tesla’s finance chief Zach Kirkhorn.
As of now Tesla has estimated a 10-day delay to the Shanghai-built Model 3s due to a government-required factory shutdown and the facility will remain locked until February 9th.
Tesla have been churning out cars at its Shanghai factory only since the end of 2019.
The deliveries are an emerging revenue driver as Tesla hopes to gain a foothold in China, the world’s largest market for electric vehicles.
Fortunately, Shanghai-produced Teslas only make up a tiny part of Tesla’s overall revenue, meaning there will be minimal impact to the financials.
The outbreak could have a positive effect for some domestic semiconductor companies.
The chaos resulting from the virus will likely upset operations at Wuhan-based Yangtze Memory Technologies Co. and Wuhan Xinxin Semiconductor Manufacturing Corp., who have been stealing market share from their American competitors.
Yangtze Memory Technologies is China’s leading NAND flash memory producer.
NAND chips are the flash memory chips used in USB drives and smaller devices such as digital cameras as opposed to DRAM, or dynamic random access memory, the type of memory commonly used in PCs and servers.
Micron (MU) and Western Digital (WFC) could swoop in to meet the extra demand.
Another company that could seize a great opportunity because of the coronavirus is Zoom Video Communications (ZM).
The CEO of Zoom Video said, “If you cannot travel ... you need to have a very reliable secure tool like Zoom” and product usage “is very, very high since the last of the month, last week. Almost every day - that’s a record usage.”
Since Chinese tech workers are barricading themselves indoors, Zoom has been the tool of choice to collaborate with coworkers who are in the same situation.
Not that the video conferencing software company needed help, I have recommended this company as a solid buy and hold since the stock dipped to $62.
This new boost will pour gas on the flames and the stock price reacted in lockstep by rocketing 15% in just one trading day.
When the likes of Alphabet’s Google, Facebook, Apple, Microsoft, and Ford Motor are ordered to work from home, videoconferencing, online meetings, chat and mobile collaboration services shoot through the roof.
Video conferencing will become a $43 billion total addressable market in the coming years, and I believe Zoom is easily a $150 stock.
In short, the coronavirus will hurt some tech companies short-term, benefits others, and have no effect on tech firms with negligible China exposure.
Facebook is a stock that I recently executed a call spread on, and they are blocked from operating in the mainland and will feel no difference from this virus outbreak.
Looking even deeper into the matter, the short-term hit to revenues will only be temporary unless this virus wipes out most of China.
The most likely scenario is that less than 1,000 people will eventually die from this and 99.9% of that will be deaths in mainland China.
Investors should look at buying on any substantial dip – the tech narrative is still unbroken.
Global Market Comments
January 17, 2020
Fiat Lux
Featured Trade:
(BETTER BATTERIES HAVE BECOME BIG DISRUPTERS)
(TSLA), (XOM), (USO)
Global Market Comments
January 16, 2019
Fiat Lux
Featured Trade:
(WHAT THE HECK IS ESG INVESTING?),
(TSLA), (MO)
(WILL UNICORNS KILL THE BULL MARKET?),
(TSLA), (NFLX), (DB), (DOCU), (EB), (SVMK), (ZUO), (SQ),
I am always watching for market-topping indicators and I have found a whopper. The number of new IPOs from technology mega unicorns is about to explode. And not by a little bit but a large multiple, possibly tenfold.
Some 220 San Francisco Bay Area private tech companies valued by investors at more than $700 billion are likely to thunder into the public market next year, raising buckets of cash for themselves and minting new wealth for their investors, executives, and employees on a once-unimaginable scale.
Will it kill the goose that laid the golden egg?
Newly minted hoody-wearing millionaires are about to stampede through my neighborhood once again, buying up everything in sight.
That will make 2020 the biggest year for tech debuts since Facebook’s gargantuan $104 billion initial public offering in 2012. The difference this time: It’s not just one company but hundreds that are based in San Francisco, which could see a concentrated injection of wealth as the nouveaux riches buy homes, cars and other big-ticket items.
If this is not ringing a bell with you, remember back to 2000. This is exactly the sort of new issuance tidal wave that popped the notorious Dotcom Bubble.
And here is the big problem for you. If too much money gets sucked up into the new issue market, there is nothing left for the secondary market, and the major indexes can fall by a lot. Granted, probably only $100 billion worth of stock will be actually sold, but that is still a big nut to cover.
The onslaught of IPOs includes home-sharing company Airbnb at $31 billion, data analytics firm Palantir at $20 billion, and FinTech company Stripe at $20 billion.
The fear of an imminent recession starting sometime in 2020 or 2021 is the principal factor causing the unicorn stampede. Once the economy slows and the markets fall, the new issue market slams shut, sometimes for years as they did after 2000. That starves rapidly growing companies of capital and can drive them under.
For many of these companies, it is now or never. They have to go public and raise new money or go under. The initial venture capital firms that have had their money tied up here for a decade or more want to cash out now and roll the proceeds into the “next big thing,” such as blockchain, healthcare, or artificial intelligence. The founders may also want to raise some pocket money to buy that mansion or mega yacht.
Or, perhaps they just want to start another company after a well-earned rest. Serial entrepreneurs like Tesla’s Elon Musk (TSLA) and Netflix’s Reed Hastings (NFLX) are already on their second, third, or fourth startups.
And while a sudden increase in new issues is often terrible for the market, getting multiple IPOs from within the same industry, as is the case with ride-sharing Uber and Lyft, is even worse. Remember the five pet companies that went public in 1999? None survived.
Some 80% of all IPOs lost money last year. This was definitely NOT the year to be a golfing partner or fraternity brother with a broker.
What is so unusual in this cycle is that so many firms have left going public to the last possible minute. The desire has been to milk the firms for all they are worth during their high growth phase and then unload them just as they go ex-growth.
Also holding back some firms from launching IPOs is the fear that public markets will assign a lower valuation than the last private valuation. That’s an unwelcome circumstance that can trigger protective clauses that reward early investors and punish employees and founders. That happened to Square (SQ) in its 2015 IPO.
That’s happening less and less frequently: In 2019, one-third of IPOs cut companies’ valuations as they went from private to public. In 2019, that ratio has dropped to one in six.
Also unusual this time around is an effort to bring in more of the “little people” in the IPO. Gig economy companies like Uber and Lyft have lobbied the SEC for changes in new issue rules that enabled their drivers to participate even though they may be financially unqualified. They were all hit with losses of a third once the companies went public.
As a result, when the end comes, this could come as the cruelest bubble top of all.
Global Market Comments
January 10, 2020
Fiat Lux
Featured Trade:
(FRIDAY, FEBRUARY 7 PERTH, AUSTRALIA STRATEGY LUNCHEON)
(JANUARY 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(VIX), (VXX), (TSLA), (SIL), (SLV),
(WPM), (RTN), (NOC), (LMT), (BA), (EEM)
