The U.S. Treasury bond market has suddenly ground to a halt, puzzling traders, investors, and hedge fund managers alike.
Today, the yield on the 10-year Treasury bond (TLT), (TBT) traded as low as 0.77%.
This is despite the U.S. economy delivering a horrific negative GDP growth during Q2. Growth is expected to rebound to 2-5% in Q3, depending on if there is another stimulus package from Washington, or not. 2021 could bring economic growth as high as an astronomical 10%.
If I blindfolded any professional money manager, told him the above and asked him where the 10-year Treasury yield should be, most would come in at around the 5% level.
So what gives?
I have put a great deal of thought into this and the answer can be distilled down to two letters: QE.
Global quantitative easing has created about $30 trillion in new money over the past 10 years. It has not been spent, it hasn’t disappeared, nor has it gone to money heaven. It is still around.
The U.S. Federal Reserve, the first to start QE in November 2008 during the Great Recession, ended it in October 2014. From start to finish, it created $4.5 trillion in new money. Over the past five years was wound down to $3.8 trillion by letting debt on its balance sheet mature.
Enter the pandemic. The expectation is that the new round of QE could exceed another $10 trillion or more.
Japan actually began its QE program in 2001, long before anyone else, to deal with the aftermath of the 1990 Japanese stock market crash and a massive demographic headwind (they’re not making Japanese anymore).
Some 20 years later, the Japanese government now owns virtually all of the debt in the country. When you hear about Japan’s prodigious 240% debt to GDP ratio, it’s all nonsense. Net out government holdings and there is no national debt in Japan at all. That’s why the Japanese yen is consistently strong.
After the 2008 crash, the Japanese government expended its QE to include equities as well. As a result, the government is now the largest single buyer of stocks in the Land of the Rising Sun. The Nikkei Average has risen by 234% since the 2009 bottom despite a miserable economic performance, and the yield on 10-year JGBs stand at a lowly 0.03%.
The European Central Bank got into the QE game very late, not until 2015, and its program continues anew, although at half its peak rate. The ECB has just renewed its plan to print a ton of new money.
Part of the problem is that the ECB is running out of bonds to buy, as it already owns most of the paper issued by European entities. That’s why 10-year German bunds are yielding a paltry -0.50%.
As a result, there is excess liquidity everywhere and this has broad implications for your investment or retirement portfolio. It could take as long as a decade before all of this artificial cash is removed from the global financial system.
For a start, bonds may not fall much from here, even if the Fed continues its near-zero interest rate policy for three more years, as promised.
Stocks can’t fall either with this much cash underpinning the market, at least not for a while and not by much. While company share buybacks have virtually disappeared this year, foreign investors have stepped in to pick up the slack.
It also means you can’t have a global contagion leading to a financial crisis. There is ample money available to refinance your way out of any problem when 70% of the world’s debt is still yielding close to zero.
The bottom line here is that global excess liquidity can cover up a multitude of sins. It means the price of everything has to go up, or at least stay level until that liquidity runs out. That includes stocks, bonds, your home, classic cars, and even that rare coin collection of yours gathering dust in a safe deposit box somewhere.
Yes, when the excess free cash runs out in a decade, there will be hell to pay. Until then, make hay while the sun shines.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/08/hay.png387622MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2020-10-08 09:04:122020-10-08 09:38:44If Bonds Can’t Go Down, Stocks Can’t Either
Below please find subscribers’ Q&A for the September 30 Mad Hedge Fund TraderGlobal 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: Which is a better buy, NVIDIA (NVDA) or Advanced Micro Devices (AMD)?
A: NVIDIA is clearly the larger, stronger company in the semiconductor area, but AMD has more growth ahead of it. You’re not going to get a ten-bagger from NVIDIA from here, but you might get one from Advanced Micro Devices, especially if a global chip shortage develops once we’re out the other side of the pandemic. So, I vote for (AMD), and did a lot of research on that company last week. You can find the report at www.madhedgefundtrader.com but you have to be logged in to see it.
Q: Do you have any thoughts on the JP Morgan Chase Bank (JPM) spoofing cases, where they had to pay about a billion in fines? Is this a terrible time to invest in banks?
A: No, this is a great time to invest in banks because this is the friendly administration to banks now; the next one will be less than friendly. On the other hand, an awful lot of bad news is already in the price; buying these companies at book value or discount of book like JP Morgan, it's a once in a lifetime opportunity. All the bad behavior they’re being fined on now happened many years ago. So yes, I still like banks, but you really have to be careful to buy them on the dip, just in case they stay in a range. If you stay in a range, you’re buying them call spread, you always make money. The bigger drag on share prices will be the Fed ban on bank share buybacks but that may end after Q4.
Q: Is it time to buy Disney (DIS) after they laid off 28,000?
A: This is a company that practically every fund manager in the company wants to have in their portfolio. However, it could be at least a year before they get back to normal capacity in the theme parks, meaning customers packing in shoulder-to-shoulder. So, it could be another wait-for-a-turnaround, buy-on-the dip situation for sure. This company is so well managed that you’re always going to have to pay up to get into the Mouse House. By the way, my dad did business with Disney during the 1950s so we got Disneyland opening day tickets and I got to shake Walt Disney’s hand.
Q: How desperate is General Motors (GM) in buying the fake Tesla (TSLA) company, Nikola (NKLA), who've been exposed as giant frauds? Is GM hopeless?
A: Yes, the future is happening too fast for a giant bureaucracy like General Motors to get ahead of the curve. The fact that they’re trying to buy in outside technologies shows how weak their position is, and of course, it’s a great way to get stuck with a loser, as Tesla selling out to anyone. The Detroit companies are all stuck with these multibillion-dollar engine factories so they can’t afford to go electric even if they wanted to. So, I expect all the major Detroit car companies to go under in the next 5 years or so. Electric cars are already beating conventional internal combustion engines on a lifetime cost basis and will soon be beating them, within 3 years, on an up-front cost basis as well.
Q: Will Netflix (NFLX) pass $600 before the year's end?
A: I’m expecting a monster after-election rally to new all-time highs in the market and Netflix will be one of the leaders, so easy to tack on another hundred bucks to Netflix. That’s one of my targets for a call spread if we can get in at a lower price. And if you really want to be conservative, buy 2-year LEAPS, two-year call options spreads on Netflix, and you’ll get an easy 100% return on those.
Q: Who will win, Trump or Biden?
A: Neither. You will win. I am not a member of any political party as I would never join any club that would stoop to have me as a member. Groucho Marx told me that just before he died in the early 70s. Don’t ask me, ask the polls. Suffice it to say that the London betting polls are 60%-40% in favor of Biden, having just added another 5% for Biden after the debate. My expectation is that Biden picks up another point in the opinion polls in all the battleground states this weekend. So, Biden will be up anywhere from 6-10% in the 6 states that really count.
Q: What will the market impact be?
A: It makes no difference who wins. The mere fact that the election is out of the way is worth a 10% move up in the stock market.
Q: Should we keep the January 2022 (TLT) 140/143 bear put spread?
A: Absolutely, yes. That’ll be a chip shot and we in fact should go in the money on those number sometime next year. A huge cyclical recovery will create an enormous demand for funds and crowding out by the government will crush the bond market.
Q: Do you think it would be better to wait a week or two to lock in refis on home loans?
A: I think we are at the low in interest rates in the refi market. Even if the Fed lowers interest rates, banks aren’t going to lower their lending rates anymore because there's no money in it for them. It’s also taking anywhere from 2-4 months to close on a loan, as the backlogs are so enormous. If you can even get a loan officer to return a phone call, you’re lucky. So, I wouldn't be too fancy here trying to pick absolute bottoms; I would just refi now and whatever you get is going to be close to a century low.
Q: Why so few trade alerts?
A: Well, very simple. We only do trade alerts when we see really good sweet spots in the market. There aren’t sweet spots in the market every day; you’re lucky if you get 1 or 2 in a month. Then we tend to pour in and out of the market very quickly with a lot of alerts. There is no law that says you have to have a position every day of the year. That buys the broker’s yacht, not yours. You should only have positions when the risk reward is overwhelmingly in your favor. That is not now when our market timing index is hugging the 50 level. At 50, you actually have the worst possible entry point for new trades, long or short, so I’d rather wait for it to get away from that level before we get aggressive again. We have gone 100% invested multiple times in the last two months and made a ton of money. So, you just have to wait for your turn to get a sweet spot, and then you’ll make a very quick 10% or 15% in the market. Patience is rewarded in this business.
Q: Would you wait for the election because of the high implied volatility?
A: No, I would not wait. The game is to get in at the lowest price before the election. When the implied volatilities drop after the election, the profits you can make on these deep out of the money LEAPs drop by about half. Thank the volatility while it’s here because it’s creating great trading opportunities now, not in two months after the volatility Index (VIX) has collapsed.
Q: What about Zoom (ZM)?
A: As much as Zoom has had a 10-fold return since we recommended it a year ago, it looks like it wants to go higher. The Robinhood traders just love this stock; it’s a stay at home stock, stay at home is lasting a lot longer than anyone thought. Zoom is just coining it on that.
Q: Is the best outcome a Biden presidency and a Republican Senate?
A: No, that is the worst outcome. When you have a global pandemic going on, you don’t want gridlock in Washington. You want a very active Washington, controlled by a single party that can get things done very quickly. That is not now, which is possibly a major reason that we have the highest Covid-19 death rate in the world. It’s because Washington is doing absolutely nothing to stop the virus; the president won’t even wear a mask, so yes, you need one party to control everything so they can push stuff through. If it works, great, and if not then you kick them out of office next time and let the other guys have a try.
Q: Will property markets be up 20% by the end of the year?
A: If you live in a suburb of New York or San Francisco, then yes it will be up that much. For the whole rest of the country, the average is more like 5% gains year on year. In the burbs of these big money-making cities, prices are going absolutely nuts. My neighbor put his house up and it sold in a week for a $1 million over asking. So, the answer to that is yes, hell yes.
Q: Can you explain why the IPO market is suddenly booming now?
A: A lot of these companies like Palantir (PLTR) have been in development for 20 years, and prices are high. On valuation terms, we are at dot com bubble peaks now. That is the very best time to take your company public and get a huge premium for your stock. When the world is baying for paper assets, you print more of them.
Q: What is the best way to play real estate?
A: Buying the single home building companies like Pulte Homes (PHM), Lennar Homes (LEN), and KB Homes (KBH).
Q: What is your Tesla overview in China?
A: Tesla’s already announced that they’re doubling production of the Shanghai factory, from 250,000 units a year to 500,000. They built the last one in 18 months. It would take (GM) like 5 years to build something like that.
Q: Why has gold (GLD) lost its risk-off status?
A: It’s now a quantitative easing asset—like tech stocks, like bitcoin, and the stay at home stocks. It is being driven much more by QE-driven speculators flush with free cash than anyone looking for a flight to safety bid. When this group sells off, gold drops as well. The only risk-off asset right now is cash. That is the only “no risk” trade.
Q: What does reversal in lumber prices tell you?
A: Lumber was another one of those QE assets—it tripled. But you have this monster increase in new home building, huge demand for new homes in the suburbs, huge import duties leveled by the Trump administration on lumber coming from Canada. Also, a lot of people are getting COVID-19 in the lumber mills. So, they’re having huge problems on the production side in lumber, as a result of the pandemic.
Q: Are there any alternative ways to buy the Australian dollar besides (FXA)?
A: You go into the futures market and buy the Australian dollar futures. That is an entirely new regulatory regime so can be a huge headache. It requires you to register with the Commodities Futures Trading Commission, which is the worst of all the major regulators, but that is an alternative. If you’re an individual and not regulated instead of being a professional money manager, then it’s much easier.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Listening to 27 presentations during the Mad Hedge Traders & Investors Summit last week (click here for the replays), I couldn’t help but notice something very interesting, if not alarming.
All the charts are starting to look the same.
You would expect all the technology charts to be similar on top of the historic run we have seen since the March 23 bottom.
But I wasn’t only looking at technology stocks.
Analyzing the long-term charts for stock indexes, bonds, real estate, and gold, it is clear that they ALL entered identical parabolic moves that began during the notorious Christmas bottom in December 2018.
With the exception of the pandemic induced February-March hiccup this year, it has been straight up ever since.
The best strategy of all for the past three years has been to simply close your eyes and buy EVERYTHING and then forget about it. It really has been the perfect idiot’s market.
This isn’t supposed to happen.
Stocks, bonds, real estate, and gold are NEVER supposed to be going all in the same direction at the same time. The only time you see this is when the government is flooding the financial system with liquidity to artificially boost asset prices.
This latest liquidity wave started when the 2017 Trump tax bill initiated enormous government budget deficits from the get-go. It accelerated when the Federal Reserve backed off of quantitative tightening in mid-2019.
Then it really blew up to tidal wave proportions with the Fed liquidity explosion simultaneously on all fronts with the onset of the US Corona epidemic.
Asset classes have been going ballistic ever since.
From the March 23 bottom, NASDAQ is up an astounding 78%, bonds have gained an unprecedented 30%, the US Homebuilders ETF has rocketed a stagging 187%, and gold has picked up an eye-popping 26%.
That’s all well and good if you happen to be long these asset classes, as we have been advising clients for the past several months.
So, what happens next? After all, we are in the “What happens next?” business.
What if one of the charts starts to go the other way? Is gold a good hedge? Do bonds offer downside protection? Is there safety in home ownership?
Nope.
They all go down in unison, probably much faster than they went up. If fact, such a reversal may be only weeks or months away. If you live by the sword you die, by the sword.
Assets are now so dependent on excess liquidity that any threat to that liquidity could trigger a selloff of Biblical proportion, possibly worse than what we saw during February-March this year.
And you wouldn’t need simply a sudden tightening of liquidity to prompt such a debacle. A mere slowdown in the addition of new liquidity could bring Armageddon. The Fed in effect has turned all financial markets into a giant Ponzi scheme. The second they quit buying, they all crash.
The Fed and the US Treasury have already started executing this retreat surreptitiously through the back door. Some Treasury emergency loan programs were announced with a lot of fanfare but have yet to be drawn down in size because the standards are too tight.
The Fed has similarly shouted from the rooftops that they would be buying equity convertible bonds and ETFs but have yet to do so in any meaningful way.
If there is one saving grace for this bull market, it's that it may get a second lease on life with a new Biden administration. Now that the precedent for unlimited deficit spending has been set by Trump, it isn’t going to slow down anytime soon under the Democrats. It will simply get redirected.
One of the amazing things about the current administration is that they never launched a massive CCC type jobs program to employ millions in public works as Roosevelt did during the 1930s to end that Great Depression. Instead, they simply mailed out checks. Even my kids got checks, as they file their own tax returns to get a lower tax rate than mine.
I think you can count on Biden to move ahead with these kinds of bold, expansionist ideas to the benefit of the nation. We are still enjoying enormously the last round of such spending 85 years ago, the High Sierra trails I hiked weeks ago among them.
Stocks soared on plasma hopes. Trumps cited “political” reasons at the FDA for the extended delay. Scientists were holding back approval for fears plasma was either completely useless and would waste huge amounts of money or would kill off thousands of people. At best, plasma marginally reduces death rates for those already infected, but you’re that one it’s worth it. Anything that kills Covid-19 is great for stocks.
Existing Home Sales were up the most in history in July, gaining a staggering 24.7% to 5.86 million units. Bidding wars are rampant in the suburbs. Investors are back in too, accounting for 15% of sales. Inventories drop 21% to only 3.1 months. These are bubble type statistics. Can’t hold those Millennials back! This will be a lead sector in the market for the next decade. Buy homebuilders on dips. Goldman said a quarter of job losses are permanent, as the economy is evolving so fast. Many of these jobs were on their way out before the pandemic. That could be good news for investors as those cost cuts are permanent, boosting profits. At least, that’s what stocks believe. Hedge funds still love big tech, even though they are now at the 99th percentile of historic valuation ranges. Online financials, banks, and credit card processors also rank highly. Live by the sword, die by the sword.
Massive Zoom crash brought the world to a halt for two hours on Monday morning. It looked like a Chinese hack attack intended to delay online school opening of the new academic year. Unfortunately, it also delayed the start of the Mad Hedge Traders & Investors Summit.
The Dow Rebalancing is huge. Dow Jones rarely rejiggers the makeup of its famed but outdated index. But changing three names at once is unprecedented. One, Amgen (AMGN) I helped found, working on the team the discovered its original DNA sequencing. All of the founding investors departed yonks ago. The departure of Exxon (XOM) is a recognition that oil is a dying business and that the future is with Salesforce (CRM), whose management I know well. One big victim is Apple (AAPL) whose weighting in the index has shrunk. The end of the airline industry has begun, with American (AAL) announcing 19,000 layoffs in October. That will bring to 40,000 job losses since the pandemic began. The industry will eventually shrink to a handful of government subsidized firms and some niche players. Avoid like a plat in a spiral dive. 30 million to be evicted in the coming months, as an additional stimulus bill stalls in Congress. It will no doubt be rolling evictions that stretch out over the next year. This will be the true cost of failing to deal with the virus.
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 still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.
My Global Trading Dispatch suffered one of the worst weeks of the year, giving up most of its substantial August performance. If you trade for 50 years, occasionally you get a week like this. The good news is that it only takes us back to unchanged on the month.
Longs in banks (JPM) and gold (GLD) and shorts in Facebook (FB) and bonds (TLT) held up fine, but we paid through the nose with shorts in Apple (AAPL), Amazon (AMZN), and Tesla (TSLA).
That takes our 2020 year to date down to 26.56%, versus +0.05% for the Dow Average. That takes my eleven-year average annualized performance back to 35.58%. My 11-year total return retreated to 382.47%.
It is jobs week so we can expect a lot of fireworks on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, August 31 at 10:30 AM EST, the Dallas Fed Manufacturing Index for August is released.
On Tuesday, September 1 at 9:45 AM EST, the Markit Manufacturing Index for August is published.
On Wednesday, September 2, at 8:13 AM EST, the August ADP Employment Change Index for private-sector job is printed.
At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, September 3 at 8:30 AM EST, the Weekly Jobless Claims are announced.
On Friday, September 4, at 8:30 AM EST, The August Nonfarm Payroll Report is released.
At 2:00 PM The Bakers Hughes Rig Count is released.
As for me, I’ll be catching up on my sleep after hosting 27 speakers from seven countries and entertaining a global audience of 10,000 from over 50 countries and all 50 US states. We managed to max out Zoom’s global conferencing software, and I am now one of their largest clients.
It was great catching up with old trading buddies from decades past to connect with the up-and-coming stars.
Questions were coming in hot and heavy from South Africa, Singapore, all five Australian states, the Persian Gulf States, Saudi Arabia, East Africa, and every corner of the United Kingdom. And I was handling it all from my simple $2,000 Apple laptop from nearby Silicon Valley.
It is so amazing to have lived to see the future!
To selectively listen to videos of any of the many talented speakers, you can click here.
See you there.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2020/08/john-thomas-mask.png306408Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-08-31 09:02:232020-08-31 09:37:40The Market Outlook for the Week Ahead, or a Tale of Four Charts
I often review the portfolios of new subscribers looking for fundamental flaws in their investment approach and it is not unusual for me to find some real disasters.
The Armageddon scenario was quite popular a decade ago. You know, the philosophy that said that the Dow ($INDU) was plunging to 3,000, the US government would default on its debt (TLT), and gold (GLD) was rocketing to $50,000 an ounce?
Those who stuck with the deeply flawed analysis that justified those conclusions saw their retirement funds turn to ashes.
Traditional value investors also fell into a trap. By focusing only on stocks with bargain-basement earnings multiples, low price to book values, and high visible cash flows, they shut themselves out of technology stocks, far and away the fastest growing sector of the economy.
If they are lucky, they picked up shares in Apple a few years ago when the earnings multiple was still down at ten. But even the Giant of Cupertino hasn’t been that cheap for years.
And here is the problem. Tech stocks defy analysis because traditional valuation measures don’t apply to them.
Let’s start with the easiest metric of all, that of sales. How do you measure the value of sales when a company gives away most of its services for free?
Take Google (GOOG) for example. I bet you all use it. How many of you have actually paid money to Google to use their search function? I would venture none.
What would you pay Google for search if you had to? What is it worth to you to have an instant global search function? Probably at least $100 a year. With 70% of the global search market comprising 2 billion users that means $140 billion a year of potential Google revenues are invisible.
Yes, the company makes a chunk of this back by charging advertisers access to these search users, generating some $38.94 Billion in revenues and $9.95 billion in net income in the most recent quarter. It would have been an $8.2 billion profit without the outrageous $5 billion fine from the European Community.
But much of the increased value of this company is passed on to shareholders not through rising profits or dividend payments but through an ever-rising share price. If you’re looking for dividends, Google doesn’t exist. It is also very convenient that unrealized capital gains are tax-free until the shares are sold.
I’ll tell you another valuation measure that investors have completely missed, that of community. The most successful companies don’t have just customers who buy stuff, they have a community of members who actively participate in a common vision, which is then monetized. There are countless communities out there now making fortunes, you just have to know how to spot them.
Facebook (FB) has created the largest community of people who are willing to share personal information. This permits the creation of affinity groups centered around specific interests, from your local kids’ school activities to municipality emergency alerts, to your preferred political party.
This creates a gigantic network effect that increases the value of Facebook. Each person who joins (FB) makes it worth more, raising the value of the shares, even though they haven’t paid it a penny. Again, it’s advertisers who are footing your tab.
Tesla (TSLA) has 400,000 customers willing to lend it $400 billion for free in the form of deposits on future car purchases because they also share in the vision of a carbon-free economy. When you add together the costs of initial purchase, fuel, and maintenance savings, a new Tesla Model 3 is now cheaper than a conventional gasoline-powered car over its entire life.
REI, a privately held company, actively cultivates buyers of outdoor equipment, teaches them how to use it, then organizes trips. It will then pursue you to the ends of the earth with seasonal discount sales. Whole Foods (WFC), now owned by Amazon (AMZN), does the same in the healthy eating field.
If you spend a lot of your free time in these two stores, as I do, The United States is composed entirely of healthy, athletic, good looking, and long-lived people.
There is another company you know well that has grown mightily thanks to the community effect. That would be the Diary of a Mad Hedge Fund Trader, one of the fastest growing online financial services firms of the past decade.
We have succeeded not because we are good at selling newsletters, but because we have built a global community of like-minded investors with a common shared vision around the world, that of making money through astute trading and investment.
We produce daily research services covering global financial markets, like Global Trading Dispatch and the Mad Hedge Technology Letter. We teach you how to monetize this information with our books like Stocks to Buy for the Coming Roaring Twenties and the Mad Hedge Options Training Course.
We then urge you to action with our Trade Alerts. If you want more hands-on support, you can upgrade to the Concierge Service. You can also meet me in person to discuss your personal portfolios at my Global Strategy Luncheons.
The luncheons are great because long term Mad Hedge veterans trade notes on how best to use the service and inform me on where to make improvements. It’s a blast.
The letter is self-correcting. When we make a mistake, readers let us know in 60 seconds and we can shoot out a correction immediately. The services evolve on a daily basis.
It all comes together to enable customers to make up to 50% to 60% a year on their retirement funds. And guess what? The more money they make, the more products and services they buy from me. This is why I have so many followers who have been with me for a decade or more. And some of my best ideas come from my own subscribers.
So, if you missed technology now, what should you do about it? Recognize what the new game is and get involved. Microsoft (MSFT) with the fastest-growing cloud business offers good value here. Amazon looks like it will eventually hit my $3,000 target. You want to be buying graphics card and AI company NVIDIA (NVDA) on every 10% dip.
You can buy the breakouts now to get involved, or patiently wait until the 10% selloff that usually follows blowout quarterly earnings.
My guess is that tech stocks still have to double in value before their market capitalization of 26% matches their 50% share of US profits. And the technologies are ever hyper-accelerating. That leaves a lot of upside even for the new entrants.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/07/John-Thomas.png566392MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2020-08-27 12:02:072020-08-27 12:23:30Why You Missed the Technology Boom and What to Do About It Now
It’s just a question of how long it takes for Moore’s law-type efficiencies to reach exponential growth in the solar industry.
Accounting for 4% of the country’s electrical power supply today, we are only five doublings away from 100% when energy essentially becomes free.
California, alone, has over one million homes with solar installations, changing the grid beyond all recognition. As a result, mid-day peak electricity demand times when the sun is the brightest have become low demand times, while sunsets bring on the new peak demand times.
The next question beyond the immediate trading implications is, “What’s in it for me?”
I should caution you that after listening to more than 20 pitches, almost all of the information you get from fly-by-night solar installation salesmen is inaccurate. Most don’t know the difference when it comes to a watt, an ohm, or a volt.
I think they were mostly psychology or philosophy majors, if they went to college at all.
The promised 25-year guarantees are only as good as long as the installing firms stay in business, which for some will not be long.
Talking to these guys reminded me of the aluminum siding salesmen of yore. It was all high pressure, exaggerated benefits, and relentless emailing.
I come to this issue with some qualifications of my own, as I have been designing and building my own solar systems for the past 50 years.
During the early 1960s, when solar cells first became available to the public through Radio Shack (RIP), I used to create from scratch my own simple sun-powered devices. But when I measured the output, I would cry, finding barely enough power to illuminate a tiny flashlight bulb.
We have come a long way since then. For years I watched my organic beansprout-eating, Birkenstock-wearing neighbors install expensive, inefficient solar arrays because it was good for the environment, politically correct, and saved the whales.
However, when I worked out the breakeven point compared to conventional power sources, it stretched out into decades.
So, I held off.
It wasn’t until 2015 when solar price/performance hit the breakeven sweet spot acceptable for me, about six years. Five years in, and I already earned my original investment back.
You see, a funny thing happened on the way to the future. First, our local power utility, PG&E (PGE) went bankrupt. That paved the way for several back-to-back 7.5% rate increases to bail the company out, making solar much cheaper by comparison.
Don’t get complacent because you don’t live in the Golden State and have not been subject to PGE’s travails. The public utility business model is 120 years old everywhere and is about to disappear nationally.
You may have noticed that it has been very hot for the last several years. Thanks to global warming, my solar system is becoming much more efficient, not less as I expected. The length of the days is the same, but they seem to operate more efficiently at high temperatures.
Solar technologies have been improving about 10% a year since I installed my last system in 2015, including higher silicon efficiency rates, improved microinverters, and better software management. They are now 40% cheaper than when I installed my last system.
The numbers are now so compelling, that even a number-crunching, blue state-hating Texas oilman should be installing silicon on his roof.
A lot are.
As for me, I have just tripled up my own system, moving from 19 SunPower (SPWR) panels to 59. That will take my total output from 8 watts to 23watts. My total electricity output is 54,000 kWh a day worth $1,000 a month. After charging my energy-hungry Tesla Model X, I am left with $400 a month worth of excess power, which I sell back to (PGE). The checks arrive once a year.
For the icing on the cake this time, I installed three of the newest 15,000 kWh Tesla Powerwall’s, which store enough electricity to run my home indefinitely, since they are recharged daily by the sun.
With (PGE) averaging six days a year in rolling power blackouts a year, that is a handy thing to have. That gives me true grid independence AND net earnings of $3,000 a year.
If you need a push from behind, consider this. If you go to contract, by the end of the year the US government will pay for 26% of your entire system through a federal “alternative energy” tax credit. That incentive will almost certainly go up next year. Some states, like California, pile additional subsidies on top of this. And Mosaic will finance 100% of your project with a bargain basement 2.99% loan.
Here are my conclusions upfront: Learn about “tier shaving” from your local utility, and buy, don’t lease. All electrical utility plans are local.
First, about the former.
Every utility has a tiered system of charging customers on a prorated basis. A minimal amount of power for a low-income family of four living in a home with less than 1,500 square feet, about 20% of the U.S. population, costs about 10 cents a kilowatt-hour.
This is a function of the high level of public power utility regulation in the U.S., where companies are granted local monopolies. There are a lot of trade-offs, local politics, and quid pro quos that are involved in setting electric power rates.
For example, PG&E (PGE) has five graduated billing tiers, with the top rate at 55 cents a kWh for mansion dwelling energy hogs like me (one Tesla in the garage and another on the way).
In order to minimize your up-front capital cost, you want to buy all the power you can at the poor person rate, and then eliminate the top four tiers entirely. Do this, and you can cut the cost of your new solar system by half.
Your solar provider will ask for your recent power bills and will help you design a system of the right size.
Warning! They will try to sell you more than you need. After all, they are in the solar panel selling business, not the customer-value-for-money delivery business.
Don’t focus too much on the panels themselves, as they are only 25% of a system’s costs. The big installers constantly play a myriad of panel manufacturers off against each other to get the cheapest bulk supplies.
I picked SunPower because they have the most advanced technology, best solar conversion rate, and are American-made. That’s me, Mr. first class all the way!
The majority of the expense is for labor and local permitting.
Buzzkill warning!
PG&E has to pay me only its lowest marginal cost of power, or 4 cents/kWh. That is why it pays to under build your system, which for me cost $2.49/kWh to install, net of the tax credit.
This was the quid pro quo that enabled PG&E to agree to the whole plan in the first place. So, you won’t get rich off your solar system.
However, I am now protected against any price increasefor electricity for the next 25 years!
Oh, and my $100,000 investment has increased the value of my home by $200,000, according to my real estate friend.
Now for the lease or buy question. If you don’t have $100,000 for a cutting-edge, state-of-the-art solar installation, (or $16,000 for a normal size house with no Teslas), or you want to preserve your capital for your trading account, you may want to lease from a company.
The company will design and install an entire system for you for no money down and lease it to you for 20 years. But after your monthly lease payment, it will end up keeping half the benefit, and raise your cost of electricity annually. However, this is still cheaper than continuing to buy conventional power.
So if you can possibly afford it, buy, don’t rent.
This being Silicon Valley, niche custom financing firms have emerged to let you have your cake and eat it, too.
Dividend Solar (click here for their site) will lend you the money to buy your entire system yourself, thus qualifying you for the investment tax credit.
As long as you use the tax credit to repay 30% of your loan principal within 15 months, the interest rate stays at 6.49% for the 20-year life of the loan. Otherwise, the interest rate then rises to a credit card like 9.99%. A FICO score of only 690 gets you in the door.
There are a few provisos to add.
You can’t install solar panels on clay or mission tile roofs popular in the U.S. Southwest (where the sun is), or tar and gravel roofs, as the breakage or fire risk is too great. The racks that hold the panels down in hurricane-force winds simply won’t fit.
If you want to maintain your aesthetics, you can take the mission tiles off, install a simple composite shingle roof, bolt your solar panels on top, then put back the clay tiles around the edges. That way it still looks like you have a mission tile roof.
Also, it is best to install your system in the run-up to the summer solstice, when the days are longest and the sunshine brightest. Solar systems produce 400% more power on the longest day of the year compared to the shortest, because of the lower angle of the sun’s rays hitting the Northern Hemisphere.
Yes, a total American solar energy supply in 25 years sounds outrageous, insane, and even ludicrous (to use some of Elon Musk’s favorite words).
But, so did the idea of a 3-gigahertz laptop microprocessor for a mere $1,000 50 years ago, when Moore’s law first applied.
The graphics for my own upgraded solar power supply bill are below:
https://www.madhedgefundtrader.com/wp-content/uploads/2018/06/On-the-roof-image-7-e1528240516704.jpg258300MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2020-08-26 09:02:022020-08-26 10:13:29How to Buy a Solar System
I am really happy with the performance of the Mad Hedge Long Term Portfolio since the last update on October 17, 2019. In fact, not only did we nail the best sectors to go heavily overweight, we completely dodged the bullets in the worst-performing ones, especially in energy.
For new subscribers, the Mad Hedge Long Term Portfolio is a “buy and forget” portfolio of stocks and ETFs. If trading is not your thing, these are the investments you can make, and then not touch until you start drawing down your retirement funds at age 70 ½.
For some of you, that is not for another 50 years. For others, it was yesterday.
There is only one thing you need to do now and that is to rebalance. Buy or sell what you need to reweight every position to its appropriate 5% or 10% weighting. Rebalancing is one of the only free lunches out there and always adds performance over time. You should follow the rules assiduously.
Despite the seismic changes that have taken place in the global economy over the past nine months, I only need to make minor changes to the portfolio, which I have highlighted in red.
To download the entire portfolio in an excel spreadsheet, please go to www.madhedgefundtrader.com, log in, go to “My Account”, then “Global Trading Dispatch”, then click on the “Long Term Portfolio” button.
My 5% holding in Biogen (BIIB) was taken over by Bristol Myers (BMY) at a hefty premium at an all-time high, so I’ll take the win. I am replacing it with Covid-19 vaccine frontrunner Bristol Myers (BMY) itself.
I am also taking out healthcare provider Cigna (CI), whose profits have been hammered by the pandemic. A future Biden administration might also move to a national healthcare system that will cap profits. I am replacing it with another Covid-19 vaccine leader Pfizer (PFE).
My 30% weighting in technology remains the same. Even though these stocks are 30% more expensive than they were three years ago, I believe they will lead the charge into the 2020s. It’s where the big growth is. These have doubled or more over the past nine months.
I am sticking with a 10% weighting in banking. Thanks to trillions in stimulus loans, they are now the most government-subsidized sector of the economy. I also believe that massive bond issuance by the US Treasury will deliver a sharply steepening yield curve, another pro bank development.
With my 10% international exposure, I am taking out a 5% weight in slow-growth Japan and replacing it with Chinese Internet giant Alibaba (BABA). The US will most likely dial back its vociferous anti-Chinese stance next year and (BABA) will soar.
I am executing another switch in my foreign currency exposure, taking out a long in the Japanese yen (FXY) and a short in the Euro (EUO) and substituting in a double long in the Australian dollar (FXA).
Australia will be a leveraged beneficiary of a recovery in the global economy, both through a recovery on commodity prices and gold which has already started, and the post-pandemic return of Chinese tourism and investment. I argue that the Aussie will eventually make it to parity with the US dollar, or 1:1.
I’m quite happy with my 10% holding in gold (GLD), which should move to new all-time highs imminently….and then go ballistic.
As for energy, I will keep my weighting at zero, no matter how cheap it has gotten. Never confuse “gone down a lot” with “cheap”. I think the bankruptcies have only just started and will stretch on for a decade. Thanks to hyper-accelerating technology, the adoption of electric cars, and less movement overall in the new economy, energy is about to become free.
My ten-year assumption for the US and the global economy remains the same.
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 still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.
I hope you find this useful and I’ll be sending out another update in six months so you can rebalance once again.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
$1 trillion is about to hit the stock market if another government stimulus package passes in July. So far, most stimulus has ended up in the stock market, one way or the other.
Perhaps that is why we saw a golden cross in the S&P 500 weeks ago, where the 50-day moving average rose sharply through the 200-day moving average. That is usually a bullish signal.
The problem is that everyone knows this, and there are more important issues to consider.
The stock market is now more overpriced than it has been over the last 20 years when the Dotcom Bubble exploded. The (SPY) has risen and an unprecedented 40% in four months.
And the pandemic is triggering a secondary shutdown of much of the economy, trashing the most optimistic “V” shaped recovery scenarios.
We are also solidly into the high risk, low return time of the year from May to November. Historically, the total return for stocks this time of year for the past 70 years is precisely zero.
I, therefore, think it is timely to review how to make money when prices are falling. I call it Short Selling School 101.
I don’t think we are going to crash to new lows from here, maybe drop only 10%-20%. So, some of the most aggressive bearish strategies described below won’t be appropriate.
If you are long stocks in general a low-risk hedge for you might be to sell short the August S&P 500 August 21, 2020, $340 call options for $1.40. If stocks plunge, you have some downside cushion ($1.40 X 100) = $140 in cash. Sell short one call option for every 100 shares of (SPY) you own. If stocks rise and your stock gets called away 6% higher you will think you died and went to heaven. Just buy them back on the next dip.
If the bear move extends you can simply repeat this gesture every month until the cows come home.
If you have big positions in single stocks, like Tesla (TSLA) or Apple (AAPL), you can execute the same kind of strategy. Selling short the Tesla August 21, 2020 $2,000 call option for $70.00 to hedge an existing long in the stock look like the no brainer here. You should sell one option contract for every 100 shares you own to bring in ($70.00 X 100) = $7,000 in cash.
There is nothing worse than closing the barn door after the horses have bolted or hedging after markets have crashed.
No doubt, you will receive a wealth of short selling and hedging ideas from your other research sources and the media right at the next market bottom.
That is always how it seems to play out, great closing the barn doors after the horses have bolted.
So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now, while stock prices are still rich.
I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so.
Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:
Bear ETFs
Of course, the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non-leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain in the (SH).
In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses, which can be substantial. After all, nobody works for free.
There is also the “cost of carry,” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.
Still, individuals can protect themselves from downside exposure in their core portfolios through buying the (SH) against it (click here for the prospectus). Short selling is not cheap. But it’s better than watching your gains of the past seven years go up in smoke.
Virtual all equity indexes now have bear ETFs. Some of the favorites include the (PSQ), a short play on the NASDAQ (click herefor the prospectus), and the (DOG), which profits from a plunging Dow Average (click herefor the prospectus).
My favorite is the (RWM) a short play on the Russell 2000, which falls 1.5X faster than the big cap indexes in bear markets (click herefor the prospectus).
Leveraged Bear ETFs
My favorite is the ProShares UltraShort S&P 500 (SDS), a 2X leveraged ETF (click herefor the prospectus). A 10% decline in the (SPY) generates a 20% profit, maybe.
Keep in mind that by shorting double the market, you are liable for double the cost of shorting, which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry this ETF, or you might be disappointed.
3X Leveraged Bear ETF
The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus).
First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.
Eventually, they all go to zero and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further added to costs.
Yes, I know the charts can be tempting. Leave these for the professional hedge fund intraday traders for which they are meant.
Buying Put Options
For a small amount of capital, you can buy a ton of downside protection. For example, the April (SPY) $182 puts I bought for $4,872 on Thursday allows me to sell short $145,600 worth of large-cap stocks at $182 (8 X 100 X $6.09).
Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better is good with these because when the market goes against you, put options can go poof and disappear pretty quickly.
That’s why you read this newsletter.
Selling Call Options
One of the lowest risk ways to coin it in a market heading south is to engage in “buy writes.” This involves selling short call options against stock you already own but may not want to sell for tax or other reasons.
If the market goes sideways or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially they get called away, but at a higher price so you make more money. Then you just buy them back on the next dip. It is a win-win-win.
Selling Futures
This is what the pros do, as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risks for an entire portfolio of shares by simply selling short futures contracts for a stock index.
For example, let’s say you have a portfolio of predominantly large-cap stocks worth $100,000. If you sell short 1 June 2016 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.
The margin requirement for one contract is only $5,000. However, if you are short the futures and the market rises, then you have a big problem, and the losses can prove ruinous.
But most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom-and-pop investing for their retirement fund.
Most 401Ks and IRAs don’t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.
That said, get the futures markets right, and it is the quickest way to make a fortune if your market direction is correct.
Buying Volatility
Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it through buying the iPath S&P 500 VIX Short-Term Futures ETN (VXX) or buying call and put options on the (VIX) itself.
If markets fall, volatility rises, and if markets rise, then volatility falls. You can, therefore, protect a stock portfolio from losses through buying the (VIX).
I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read “Buy Flood Insurance With the (VIX)” by clicking here.
Selling Short IPOs
Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That’s because many are held by hot hands, known as “flippers,” don’t have a broad institutional shareholder base.
Many of the recent ones don’t make money and are based on an, as yet, unproven business model. These are the ones that take the biggest hits.
Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus at http://www.renaissancecapital.com/ipoinvesting/ipoetf/ipoetf.aspx ). As you can tell from the chart below, (IPO) was warning that trouble was headed out way since the beginning of March. So far, a 6% drop in the main indexes has generated a 20% fall in (IPO).
Buying Momentum
This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum while falling markets produce falling momentum.
So, selling short momentum produces additional protection during the early stages of a bear market. Blackrock has issued a tailor-made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here.
Buying Beta
Beta, or the magnitude of share price movements, also declines in down markets. So, selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.
The Index is compiled, maintained and calculated by Standard & Poor's and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.
The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November. To learn more, read the prospectus by clicking here.
Buying Bearish Hedge Funds
Another subsector that does well in plunging markets is publicly listed bearish hedge funds. There is a couple of these that are publicly listed and have already started to move.
One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.
This was the week that the Coronavirus came back with a vengeance.
The market had been backing out the pandemic for the past three months. Now it is abruptly pricing it back in.
Hospitalizations soared in 16 states to new all-time highs, as the first wave continues to grow exponentially. Deaths have topped 125,000. The good news is that only 5,000 died last week. That is nearly two 9/11’s, or 12 Boeing 747’s crashes worth of victims.
Apple has closed eight stores in Texas and another 14 stores in Florida. Arizona is on the verge of running out of hospital beds. This is going to weigh heavily on the market until we see another interim peak. It looks like the last one was certainly a false summit, in climber’s lingo.
What was really interesting last week is what DIDN’T happen. While the “reopening” stock LIKE banks (BAC), energy (XOM), cruise lines (CCL), hotels (MGM), casinos (WYNN), airlines (UAL) were absolutely slaughtered, gold, technology, and biotech barely moved. It says volumes about what happens next. You want to use selloffs to buy quality at a discount, not garbage that is going to zero.
Technology and biotech are where you want to focus your buying of stock, futures, and LEAPS. The next big dip is the one you buy.
You can count on the government stepping in and announcing more stimulus on the next down 1,000-point day. Thursday mornings seem to be a favorite time, right before the next horrific Weekly Jobless Claims are announced, which also seem to be reaccelerating.
The Fed can do this for free, without spending any money, simply by expanding the asset classes eligible for quantitative easing. Some $8 trillion in QE certainly buys a lot of friends in the market. I believe that any run in the S&P 500 (SPX) down to 2,700 will be met by government action. Treasury Secretary Steve Mnuchin expects another stimulus package in July, but only if he gives away the store to Nancy Pelosi. Just what the market needs, more stimulus. Most of the 40 million out of work are still jobless. It could be $1 trillion worth of stimulus checks and other giveaways headed for the stock market, like the last lot. My kids still haven’t spent their first checks! We’re going broke anyway, so why not?
The stock market is clearly running out of gas, at a 26 multiple, the highest since the Dotcom bubble top. Any more stimulus may simply go into bank deposits. The risk/reward for new positions here is terrible. It sits nicely into my sideways range scenario for the rest of the year.
Existing Home Sales are down 9.7% in May, the worst in ten years. They are off 26.6% YOY, the worst figure since 1982 when home mortgage rates were at 18%. Inventories are down an eye-popping 18.8% to 4.8 months as sellers pulled listing to avoid virus-infested buyers. The first-time buyers live, but the action is shifting out of condos and into single family homes in the burbs.
Weekly Jobless Claims jump 1.5 million, far worse than forecast. It looks like we are getting a second wave of jobless as Corona ravages the south and business hangers-on throw in the towel. Some 20 million Americans remain on state unemployment benefits, which will start to run out shortly. Will stocks look through this?
Banks are banned from paying dividends and buying back shares, orders the US Treasury. The Fed estimates that pandemic-related loan losses could reach $700 billion, wiping out their capital. Every bailout comes with a pound of flesh. The banks have made billions off of stimulus loans, like the PPP. The banks rallied because the news wasn’t worse, like a mandatory 5% share giveaway, which happened last time. Buy banks like (JPM), (BAC), and (C) on an expected yield curve steepening.
Tesla (TSLA) is now the world’s most valuable car company, with a market capitalization of over $180 billion. It just passed Toyota Motors (TM). (TSLA) is now worth more than the entire US car industry combined. That could double very quickly. The upcoming model Y is expected to be its biggest seller and a third production plant will be announced imminently. The rush out of public transit and into private cars simply accelerated a pre-existing trend or the company.
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 cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch enjoyed another respectable week, taking in a welcome 3.87%, bringing June in at +2.56%. Despite the market diving nearly 10%, we pulled in big profits from our short positions and captured accelerated time decay on our longs. My eleven-year performance stands at a new all-time high of 368.75%.
That takes my 2020 YTD return up to a more robust +12.88%. This compares to a loss for the Dow Average of -12.3%, up from -37% on March 23. My trailing one-year return popped back up to 53.27%. My eleven-year average annualized profit recovered to +34.91%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here. It’s jobs week and we should see an onslaught of truly awful numbers.
On Monday, June 29 at 11:00 AM EST, US Pending Home Sales for May are out.
On Tuesday, June 30 at 10:00 AM EST, the April Case-Shiller National Home Price Index is published.
On Wednesday, July 1, at 9:15 AM EST, the ADP Private EmploymentReport is released. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are published.
On Thursday, June 2 at 8:30 AM EST, Weekly Jobless Claims are announced.
On Friday, June 3, at 8:30 AM EST, the June Nonfarm Payroll Report is printed. Since last month was a large overstatement, June could be positively diabolical. The Baker Hughes Rig Count is out at 2:00 PM EST.
As for me, I am rushing out and doing errands, like a trip to the barber, haircut, hardware store, dry cleaners, the dentist, and the doctor in case the California economy shuts down once again. We’ve been slightly open for a few weeks.
That may be all we get this year.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2020/06/john-thomas-tesla.png204360Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-06-29 09:02:112020-06-29 09:38:37The Market Outlook for the Week Ahead, or Covid-19 is Back!
Below please find subscribers’ Q&A for the June 17 Mad Hedge Fund TraderGlobal 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 is the best way to buy long term LEAPS for unlimited profits?
A: There is no such thing as unlimited profits on LEAPS; they are specifically limited to about 500% or 1,000%. Most people will take that. The answer is to wait for crash day. That’s when you dive into LEAPS, or during very prolonged sell-offs like we had in February or March. That’s where you get the bang per buck. On a capitulation day, you can pick up these things for pennies.
Q: How do you explain that all the cities and states that had major COVID-19 outbreaks and deaths are controlled by Democrats?
A: That’s like asking why you don’t get foot and mouth disease in New York City. The majority of US cities are Democratic, while the rural areas tend towards Republicans and the suburbs that flip back and forth. So, you will always get these big hotspots in cities where the population density is highest and there is a lot of crowding because that’s where the people are. Covid-19 is a disease that relies on within six-foot transmission. You are not going to get these big outbreaks in rural places because there are few people. Horse, cow, and pig diseases are another story. That is one reason the disease has become so politicized by the president.
Q: What is the time horizon for your picks?
A: It’s really a price function rather than a time horizon. Sometimes, a trade works in a day, other times it’s a month. I try to send out a large number of trade alerts because we have new subscribers coming in every day and the first thing they want is a trade alert. Occasionally, I’ll make 10% in a day and I take that immediately.
Q: I’m a new investor; trading in a pandemic is one thing, but what about other risks like volcanic eruptions, major solar flares, or global war? How do I prepare for one of three of these things in the next 25 years?
A: I’m actually worried about all three of those happening this year. If you lived through 1968, everything bad tends to happen in one year, and bad things tend to happen in threes. This is a year where we’re kind of making it up as we go along because there is no precedent. The playbook has been thrown out. Those who always relied on trading stocks and securities predictable ranges got wiped out.
Q: Beijing has quarantined its population again and canceled flights; is this going to cause the Chinese government to ramp up the blame game with the US?
A: Absolutely, the US is the number one Corona incubator in the world by far. We have 120,000 deaths—China had 4,000 deaths with four times the population. Many countries are blaming us for keeping this pandemic alive and spreading it further. But I don’t think foreign relations are a high priority right now with our current government. That said, it is easier for a dictatorship to control an epidemic than a democracy. In China, they were welding people’s doors shut who had the disease.
Q: Do you think taking away the $600 or $1200 stipend for the unemployed is going to crush the chances for many trying to get back to work?
A: It will. A lot of the stimulus measures only delay collapse by a couple of months. The PPP money was only for 2 months; I know a lot of companies are counting on that to stay in business. Some state unemployment benefits run out soon. Either you’re going to have to start forking up $3 trillion every other month, or you’re going to get another sharp downturn in the economy. Cities are bracing themselves for the worst eviction onslaught ever. Mass starvation among the poor is a possibility.
Q: Where do you place stops on vertical spreads?
A: Since vertical spreads don’t lend themselves to technical analysis, you have to draw a line in the sand—for me, it’s 2%. If I lose 2% of my total capital, or 20% on the total position, then I get the heck out of there and go look for another trade. That’s easy for me to do because I know that 90% of the time my next trade is a winner.
Q: Why did you sell your S&P 500 (SPY) July $330/$320 put spread at absolutely the worst moment?
A: The market broke my lower strike price, which is always a benchmark for getting out of a losing trade. When you go out-of-the-money on these spreads, the leverage works against you dramatically. This market isn’t lending itself to any kind of conventional historic analysis. The market went higher than it ever should have based on any kind of indicator you’re using. When the market delivers once in 100 year moves like we had off the March 23 bottom, you are going to be wrong. However, we immediately made the money back by putting on a (SPY) July $335/$340 put spread with a shorter maturity, and a (SPY) July $260-$$270 call spread. If you’re in this business, you’re going to take losses and be made to look like a perfect idiot, like I did twice last week.
Q: Who is getting involved down 10%?
A: I would say you’re getting both institutions and individuals involved down 10%. You keep hearing about $5 trillion in cash on the sidelines, and that’s how it’s coming to work. Plus, we have 13 million new day traders gambling away their stimulus checks.
Q: Why have you not put on a currency trade this year?
A: With the incredible volatility of the stock market, there were always better fish to fry. Currencies haven’t moved that much, and you want stocks that are dropping by 80% in two months and gapping up 200% the next two months. So, in terms of trading opportunities, currencies are number three on that list. Would you rather buy Apple (AAPL) for a 75% move, or the Euro (FXE) for a 6% move? My favorite has been the Aussie (FXA) and it has only gone up 20%.
Q: Do you issue trade alerts on LEAPS?
A: I don’t; most trade alerts are short term trades in the next month or two because we have to generate a large number of them. However, in February, March, and April, we started sending out lists of LEAPS. We sent out about 25 LEAPS recommendations. We did ten for Global Trading Dispatch (BA), (UAL), (DAL), ten for the Mad Hedge Technology Letter (AAPL), (MSFT), and five for the Mad Hedge Biotech & Health Care Letter (BIIB), (PFE). Even if you got just one or two of these, you got a massive impact on your performance because they did go up 500% to 1,000% in 2 months, which is normally the kind of return you see in two years. So, getting people to buy all those LEAPS was probably the greatest call in the 13-year history of this letter. I know subscribers who made many millions of dollars.
Q: I am new to trading; other than placing a trade, what do you recommend I get a handle on in the learning process?
A: We do have two services for sale. We have “Options for the Beginner,” and that I would highly recommend, and I’ll make sure that’s posted in the store. You can’t read or study enough. If you really want to go back to basics, read the 1948 edition of Graham and Dodd, where Warren Buffet got his education actually working for Benjamin Graham in the ’40s.
Q: Will Occidental Petroleum (OXY) go bankrupt?
A: No, they have the strongest balance sheet of any of the oil majors, so I would bet they would hang around for some time. They also have no offshore oil, which is the highest cost source of oil. But it’s going to be a volatile time for a while.
Q: Usually the selling is telling me to go away. With this market, the amount of money on the sidelines, is it going to be a stock picker’s market?
A: Yes, like I said the playbook is out the window. Normally, you get a month’s worth of trading in a month, now you get a month's worth in a day or two. So, we’re on fast forward, Corona is the principal driver of the market and no one knows what it’s going to do. The teens were a great index play. The coming Roaring Twenties will be a stock picker’s market because half of the companies will go out of business, while many will rise tenfold. You want to be in the latter, not the former. And index gets you the wheat AND the chaff.
Q: Will there be another opportunity to buy LEAPS?
A: Yes, especially if we get a second corona wave and it slaps the market down to new lows again. There’s a 50/50 chance of that happening. The rate of Corona cases is now increasing exponentially. We had 4,000 new cases in California yesterday.
Q: How do you see Main Street two years from now? Will the battered middle class ever recover?
They will if they move online. I think main street will be empty in two years. Only the largest companies are surviving because they have the cash reserve to do so. And they seem to be able to get government bailout money far better than the local nail salon or dry cleaner. Again, this was a trend that had been in place for decades but was greatly accelerated by the pandemic. I was in Napa, CA yesterday and half of the storefront shops had gone out of business.
Q: What are your thoughts on the spacecraft company Virgin Galactic (SPCE)?
A: Great for day traders, great for newbies, but not real investment material here. I don’t think the company will ever make money. It was just part of the temporary space had. Better to read about it in the papers and have a laugh than risk your own hard-earned money. Elon Musk’s Space X though is a completely different story.
Q: Which is the better buy now: Walmart (WMT), Costco (CSCO), or Target (TGT)?
A: I’d probably go for Target because they have been the fastest to move to the new online order and curb pickup universe. But Costco is also a great play.
Q: When should I buy Tesla?
A: On the next meltdown or down 30% from here, if and whenever we get that. It’s going to $2,500, then $5,000.
Q: With QE infinity, it doesn’t sound like we’ll get to LEAPS country. Do you agree?
A: No, I wouldn’t agree because at some point, the government might run out of money, the bond market won’t let them borrow anymore, and the money that gets approved doesn’t actually get spent because the works are so gummed up. Plus, Corona is in the driver's seat now. What if we’re wrong and we don’t get 250,000 cases by August, but 500,000 cases? 20 million? There are 100 things that could go wrong and get us back down to lows and only one that can go right and that is a Covid-19 vaccine. We’ve essentially been on nonstop QEs for the last 10 years already and the market has managed many 20% selloffs during that time. If we pursue a Japanese monetary policy, we will get a Japanese result, near-zero growth for 30 years.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
I knew I was on the right track when the salesman told me that the customer who just preceded me for a Tesla Model X 90D SUV was the Golden Bay Warriors star basketball player, Steph Currie.
Well, if it’s good enough for Steph, then it’s good enough for me.
Last week, I received a call from Elon Musk’s office to test the company’s self-driving technology embedded in their new vehicles for readers of the Diary of a Mad Hedge Fund Trader.
I did, and prepare to have your mind blown!
I was driving at 80 MPH on CA-24, a windy eight-lane freeway that snakes its way through the East San Francisco Bay Area mountains. Suddenly the salesman reached over a flicked a lever on the left side of the driving column.
The car took over!
There it was, winding and turning along every curve, perfectly centered in the lane. As much as I hated to admit it, the car drove better than I ever could. It does especially well at night or in fog, a valuable asset for senior citizens whose night vision is fading fast.
All that was required was for me to touch the steering wheel every two minutes to prove that I was not sleeping.
The cars do especially well in rush hour driving, as it is adept at stop and go traffic. You can just sit there and work on your laptop, read a book, or watch a movie on the built in 4G WIFI HD TV.
When we returned to the garage, the car really showed off. When we passed a parking space, another button was pushed, and we perfectly backed 90 degrees into a parking space, measuring and calculating all the way.
The range is 290 miles, which I can recharge at home at night from a standard 220-volt socket in my garage in seven hours. When driving to Lake Tahoe, I can stop half way at get a full charge in 30 minutes. The new chargers operate at a blazing 400 miles per hour.
The chassis can rise as high as eight inches off the ground so it can function as a true SUV.
The “ludicrous mode,” a $10,000 option, takes you from 0 to 60 mph in 2.9 seconds. However, even a standard Tesla can accelerate so fast that it will make the average passenger carsick.
Here’s the buzzkill.
Tesla absolutely charges through the nose for extras.
The 22-inch wheels, the third row of seats to get you to seven passengers, the premium sound, the leather seats, and the self-driving software can easily run you $30,000-$40,000.
A $750 tow hitch will accommodate a ski or back rack. There is a $1,000 delivery charge, even if you pick it up at the Fremont factory.
It’s easy to see how you can jump from an $84,990 base price to a total cost of $162,500, including taxes, for the ultra-luxury Performance model, as I did.
My company will be purchasing the car under Section 179 of the International Revenue Code. The car qualifies because it weighs over 6,000 pounds and is therefore a truck under the new tax law.
This allows me to deduct the entire $162,500 cost of the vehicle upfront, plus the maintenance and insurance costs for the entire life of the car. However, I will have to maintain a mileage log as a hedge against any future IRS audits.
Ironically, Section 179 was enacted as a subsidy for consumer purchases of the eight mile per gallon Hummer, which was originally built by AM General and owned by General Motors (GM).
After several attempts to sell, the division failed, production was permanently shut down. However, the tax subsidies live on for any like designed vehicle.
It looks like I’ll have to buy two Teslas this year.
As for “drop dead’ curb appeal, nothing beats the Model X. Buy the stock on every 20% dip. My original cost is $16.50 a share and it topped $1,000 last week.
It’s another way of saying “buy the shares and you get the car for free.”
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
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