“The Marines I have seen around the world have the cleanest bodies, the filthiest minds, the highest morale, and the lowest morals of any group of animals I have ever seen. Thank God for the United States Marine Corps!” said Eleanor Roosevelt, First Lady of the United States, 1945.
Global Market Comments
April 16, 2020
Fiat Lux
Featured Trade:
(MORE LONG-TERM LEAPS TO BUY AT THE BOTTOM),
(TSLA), (CRSP), (MU)
The final bottom in this bear market is fast approaching. It may come in weeks or months. After the cataclysmic meltdown in March, markets are becoming more orderly and tradable. What does this mean for LEAPs?
It means the next bid dip in share prices is the one you want to buy.
Readers have been besieging me with more ideas on long term LEAPS to buy at the next bottom. So, here is another generous serving of red meat.
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPS, allow plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this new portfolio using the following parameters. I set the strike prices just above the all-time highs set in February. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks based on our own intensive in-house research.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire-sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 400% profit from an average stock price increase of only 75%.
That is a staggering return 5.3 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why clever hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright. I expect the list below to rise by 50% or more over the next two years.
Enjoy.
Tesla (TSLA) - June 17 2022 $1,080-$1,100 vertical bull call spread at $4.00 delivers a 400% gain with the stock at $1,100, up 51% from the current level. The pandemic is vastly accelerating all trends. One big one is the migration from internal combustion engines to electric power where Tesla has a ten-year and expanding head start. Sales at its new Shanghai factory in the first country to recover from the Coronavirus are blowing away its most optimistic view. The Model Y small SUV at the end of this year is expected to be the company’s biggest-selling model ever.
CRISPR Therapeutics (CRSP) - January 15 2021 $85-$90 vertical bull call spread at $1.00 delivers a 400% gain with the stock at $85, up 77% from the current level. It’s shorter-dated than the others, but this was the longest maturity posted on my trading platform. CRISPR Therapeutics is the dominant player in gene-editing technology, which is key to many biotech developments going forward. That includes beating the Coronavirus. The stock is an incredible bargain at this level, off 36% from its all-time high.
Micron Technology (MU) – January 21 2021 $85-$90 vertical bull call spread at $1.00 delivers a 400% gain with the stock at $90, up 96% from the current level. Coming out on the other side of the pandemic, there will be a massive global shortage of the computer chips that Micron Technology makes with already huge profit margins. A total no-brainer and I love visiting their Boise, Idaho headquarters.
To review my last list of Ten Long-Term LEAPS to Buy at the Market Bottom, please click here.
Yup, I Think I See Another Great LEAPS Opportunity
Global Market Comments
April 15, 2020
Fiat Lux
Featured Trade:
(GOODBYE TO THE OLD WORLD, HELLO TO THE NEW)
(TGT), (WMT), (ZM), (NFLX), (PYPL), (SQ), (AMZN), (MSFT)
With the ongoing impacts of coronavirus, our world is suddenly changing beyond all recognition.
The WWII comparisons here are valid. Just as technological innovation accelerated tenfold from 1941-1945, bringing us computers, penicillin, jet engines, and the atomic bomb, the same kind of great leaps forward are happening now.
The end result will be a faster rate of innovation and economic growth, greater corporate profits in the right industries, and a hugely performing stock market. It perfectly sets up my coming Golden Age and the next Roaring Twenties.
Living in Silicon Valley for the last 25 years, I have gotten pretty used to change. But what is happening now is mind-boggling.
The bottom line for the impacts of the coronavirus pandemic has been to greatly accelerate all existing trends. The biggest one of these has been the movement of the economy online, which has been taking place since the eighties. Except that it is now happening lightning fast. Business models are hyper-evolving.
Legacy brick and mortar companies must move online or perish, as much of the restaurant business is now doing. Target (TGT) and Walmart (WMT) have accomplished this. Those with feet in both worlds are closing down their physical presence and going entirely digital. Pure digital companies, like Zoom (ZM), Netflix (NFLX), PayPal (PYPL), and Square (SQ) are booming.
The side effect of the virus may be to move an even greater share of America’s business activity to the San Francisco Bay area and Seattle. Almost all tech companies here are hiring like crazy. Amazon has announced plans for hiring a staggering 175,000 since the epidemic started, as millions shift to home delivery of everything.
The productivity of tech is also growing by leaps and bounds. Since everyone is working at home, no one wastes two hours a day commuting. Meetings in person are a thing of the past. Everything now happens on Zoom.
The whole mental health industry is now conducted on Zoom. So is much of non-Corona related medicine. And I haven’t seen my accountant in years. I think he died, replaced by a younger, cheaper clone.
Even my own Boy Scout troop has gone virtual. The National Council is offering 58 online merit badges, including Railroading, Stamp Collecting, and Genealogy (click here for the full list).
The stock market has noticed and several tech companies like Microsoft (MSFT) and Amazon are showing positive gains for 2020. Many legacy companies see share prices still down 80% or more. Sector selection for portfolio mangers has essentially shrunk from 100 to only 2: tech/biotech and healthcare.
Business models are evolving at an astonishing rate. Who knew the yoga instructor in Chicago was much better than the one down the street, thanks to Skype.
Education is now entirely online and much of it may never go back to school. My kids are totally comfortable in this new world. They have been social distancing since I bought them their own iPhones five years ago.
Now, if I can only figure out how to do my own haircut, the third most searched term on Google. It’s longer than at any time since the summer of love in 1967.
These are just a few of the practical impacts of coronavirus. The social changes are equally eye-popping.
While death rates are soaring, crime has fallen by up to 75%. So have deaths from car accidents. Alcohol and domestic abuse have gone through the roof. Drug addiction is plummeting because dealers are afraid to go out on the street.
There are many lessons to be learned from this crash. Too many companies drank the Kool-Aid and assumed business conditions would remain perfect forever.
Let's call a spade a spade. The year 2019 and the first two months of 2020 were the bubble top. All the growth in stock prices then were pure fluff.
That means you didn’t need costly reserves ran on thin margins, borrowed like crazy at artificially low-interest rates, and kept endlessly buying back your own stock and paying generous dividends.
Manufacturers didn’t need inventories, counting on a seamless, global supply chain to keep assembly lines running. “Just in time” has switched to “just-in-case.” Companies are going to have to keep enough inventories in the warehouse to guard against future disease-driven disruptions. This will raise costs and shrink profits.
It’s really hard to see how entire industries are going to come back. Cruise ships were packing guests onboard like sardines in a can to make money. I bet it will be a while before you sit at a crowded casino blackjack table. Want to stand in line at a popular chain restaurant?
Airlines have become the poster boy for the evils of bubblicious management. They flew full most of the time, seating their customers shoulder to shoulder, yet their net profit per fight depended on selling that last economy class seat.
The industry spent $50 billion in dividends and the buyback of shares that are now largely worthless, while senior management laughed all the way to the bank. They were the only industry to actually list a global pandemic as a major risk to their business in their SEC filings.
Now they want a government bailout at your expense.
As for me, I am looking forward to this brave new world. Until then, I’ll be spending my afternoons getting in shape hiking in the High Sierras, long hair and all. I’m the only one up here. Maybe it will scare the mountain lions away.
Global Market Comments
April 14, 2020
Fiat Lux
Featured Trade:
(APRIL 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (SPY), (SDS), (BA), (VIX), (VXX), (GLD), (GDX),
(GOLD), (NEM), (QCOM), (HYG), (JNK)
(WHY SENIORS NEVER CHANGE THEIR PASSWORDS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 8 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Is it premature to be buying long-term LEAPS?
A: Absolutely not—a long-term leap is a bet that your stock will recover beyond your strike prices in two years, which I certainly believe is the case with all of the quality tech and biotech names. These are pretty illiquid so the only way to get a good price is to have a bid in place on one of those absolute puke out days. You will never buy these at the bottom.
Q: Do you see a rally in the stock market in the fourth quarter of this year after the election?
A: For sure—we should be well clear of the pandemic by then, and all of the $6 trillion stimulus will be hitting at the same time.
Q: With the rally in the S&P 500, would you double up on the (SPY) put spread—the May $300-$310?
A: No, keeping your leveraged positions small is crucial in this kind of environment, and the big short play is basically behind us. Better to add the 2X ProShares Ultra Short S&P 500 (SDS) to catch a smaller move down.
Q: Will gold work if the market sells off as a safety trade?
A: Yes, it will. Gold (GLD) had that big 15% selloff a couple of weeks ago when it looked like all financial markets worldwide were going to completely freeze up, and everyone got margin calls all at the same time. We are clear of that now and I expect gold and other traditional hedges like shorting volatility, for example, to also work as a hedge. Gold is going to a new all-time high soon. Buy (GLD), (GDX), (GOLD), and (NEM).
Q: When do you think international borders will open up again, and will that have a positive effect on the economy?
A: Absolutely. You can expect the market to rally 10% into the opening of borders, and then another 10% afterwards depending on where the starting point for the market is in that. As for timing, they may open up in June, and then close up in again in the fall when a second Corona wave hits.
Q: Will you teach us how to buy LEAPS?
A: Just go to my website, type in LEAPS in all caps, and everything you need to know about leaps is there. I will also be following up soon with more individual stock LEAPS ideas, but I don’t want to put them out now because we have just had a $5,000-point rally on the Dow.
Q: Please talk about 5G.
A: The best play is Qualcomm (QCOM). They have a near-monopoly on a 5G chip which virtually the entire world has to buy. The stock has also held up incredibly well. Buy two-year LEAPS on Qualcomm with probably a $90 or $100 strike price.
Q: What level in the S&P do you think this will fail?
A: I think it will fail right around here, so that's why I have been adding on the short positions on every rally. We are exactly at halfway point between the February high and the March low, which is a perfect bear market rally.
Q: What’s the definition of the next big dip?
A: You give up the 5000-point rally we just had, and whether we give up 4000 or 6000 of it, at these kinds of conditions, 1000 points in the Dow (INDU) is a round lot, like the daily move. So, looking at the charts and these lows, it could be a $19,000, $18,000, or $17,000.
Q: Fundamentals may tell you the virus may be peaking, but the worst of the economy is yet to come.
A: True. Do all the markets follow fundamentals now? No, they will look at the virus numbers. Economic numbers are utterly meaningless and out of date here. I wouldn’t depend on them at all, just look at the new cases every day from the Johns Hopkins website, and that gives you a better buy signal than any economic indicator can.
Q: Are all the good shorts are over?
A: When I say shorts are over, from here you’re not going to get the 80% and 90% down moves that we have seen so far; those are gone. The reason I bought the 2X ProShares Ultra Short S&P 500 (SDS) is to play for the bottom end of the range, which could be down 2000 to 4000 points from here, and also to hedge the short volatility (VXX) puts that I already have. A rising market should make the (VXX) go down, and a falling market will make the (VXX) and the (SDS) go up. So, it's both a hedge and a view on a range of a market.
Q: Could the Federal Reserve buy shares?
A: Yes, they have done that already in Japan, with no success whatsoever in helping the economy, but I doubt the Fed will buy shares here. The government will take minority share ownerships in the troubled industries like the airlines, much like they did with (GM) and the top 20 banks during the 2008-09 crash and sell them later at huge profits. I don't expect them to go beyond that. The Fed here has too many other things to buy, like all of our different bond and money markets; those don't exist in other countries like Japan or Europe. Stocks are often the only thing they can buy, and in Japan’s case, they already own the entire government bond market, so they had nothing else left to buy besides stocks.
Q: How about buying Boeing (BA)?
A: I would buy Boeing LEAPS here, something like a $170-$180. If you’re going to make a 1,000% return on LEAPS on any one stock, it's going to be Boeing. That company will be around somehow, and you could get literally a 10-fold return just by going 50% out of the money on two-year LEAPS.
Q: How is liquidity on 2-year 30% out of the money LEAPS?
A: It is practically nonexistent. You have to put in a limit order and then wait for a dump in the market to get filled. That’s how all the people who have been doing LEAPS have been getting them. Put in a bid and when you get these cataclysmic, down-1,000-point days, they hit any bid. The algos go in there and they just say hit any bid, and you can get done at incredible prices in those situations.
Q: Are the fees on (SDS) a problem?
A: No, your standard equity commission is all you should be paying. They trade like water.
Q: Would you short junk bonds short-term?
A: No, because you short the (HYG) or the (JNK), you are shorting a 7.5% yield which you have to pay if you’re short, so the great short in junk bond play was in February when it was yielding 4.5%. It’s too late now.
Q: Will treasuries go to zero?
A: They could, but we’re close enough to zero where you might as well think of them at zero.
Stay healthy all.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
"If the product is free, then you are the product," said a technology company CEO to me the other day.
Global Market Comments
April 13, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or THE BEAR MARKET RALLY IS OVER),
(INDU), (SPX), (TLT), (VIX, (VXX), (GLD), (JPM), (AMZN), (MSFT)
The Bear market rally is over, or at least that’s what Asian stock futures are screaming at us, and the shorts are piling back on….again.
For the first time in 16 years, I did not have to get up at 6:00 AM to hide Easter eggs. It’s not because my kids don’t believe in the Easter Bunny anymore. They’ll believe in anything that delivers them a free chocolate bunny. It’s because I couldn’t get any eggs. Much of the country’s egg production is being diverted into vaccine production for testing, of which, along with antivirals, there are more than 300 worldwide.
Enough of the happy talk.
It was a classic bear market rally we saw over the past two weeks in every way, retracing 50% of the loss this year. Junk stocks, like hotels, airlines, and cruise lines led, while quality big tech lagged. That’s the exact opposite of what you want to see for a new bull market.
At the Friday high, the Dow (IND) was down only 17% from the February all-time high at a two-decade 20X valuation high.
The US is now losing 2,000 citizens a day to the Coronavirus. That’s how many we lost at the peak of the Vietnam War in a month. We are suffering another 9/11 every day of the week.
More than 16.8 million have lost jobs in three weeks, more than all those gained in six years. Of all American companies with fewer than 500 employees, 54% have closed! JP Morgan (JPM) has just cut its forecast for Q2 GDP from a 25% loss to an end of world 40% decline on an annualized bases.
New York is losing 800 people a day and is burying many of them in mass graves. Bread lines have formed in countless major cities. And you think 17% is enough for a discount for stocks, given that a near-total shutdown will continue for another five weeks?
Are you out of your freaking mind?
Which leads me to believe that another retest in the lows is in the work, no matter how much government money is headed our way.
For a start, it will be three months before the Fed handouts show any meaningful impact on the economy. Second, we are due for a second wave of the virus in the fall, once the initial shelter-in-place ends. Markets will likely behave the same.
In the meantime, long term analysts of the global economic structure are going dizzy with possible permanent changes. I am in the process of writing a couple of pieces on this if I can only get away from the market long enough to do so.
It seems like half the country has lost their jobs, while the other half are now working double time without pay, like myself.
The market was stunned by 6.1 million in Weekly Jobless Claims, taking the implied Unemployment Rate to over 14%, more than seen during the 2008-2009 Great Recession. One out of four Americans will lose their jobs or suffer a serious pay cut in the next two months. At this rate, we will top the Great Depression peak of 25 million in two weeks.
The Fed launched a second $2.3 trillion rescue program, this time lending to states, local municipalities, and buying oil industry junk bonds. More money was made available to small businesses. Jay Powell is redefining what it means to be a central bank, but no one is complaining. It was worth one 500-point rally in the Dow Average, which we have already given back. At this point, almost the entire country is living on welfare.
Stocks soared firefly on falling death rates. Chinese cases are falling after the border closed, Italy and Madrid are going flat, and San Francisco is looking good. There is still a massive, but extremely nervous bid under the market. I’m selling into this rally. We will continue to chop in a (SPX) $2180-$2800 range for the foreseeable future.
Trump says there’s a light at the end of the tunnel, but he doesn’t tell you that the light is an oncoming express train. At the very least, the number of deaths will rise at least tenfold from here. That’s how many we lost in the Korean War. It hasn’t even hit the unsheltered states in the Midwest yet.
Gold (GLD) is making a run another all-time highs, topping $1,700. Expect everyone’s favorite hedge to go ballistic. QE infinity and zero interest rates will eventually bring hyperinflation and render the US dollar worthless. Gold production is falling due to the virus. Anything else you need to know?
Mortgage defaults are up 18-fold. People can’t even get through to their banks to tell them they are not going to pay. This is the next financial crisis. Fannie Mae and Freddie Mac are going to go broke….again.
Can the US government spend money fast enough, given that it has been shrinking for three years? I’m not getting my check until September. It’s not easy to spend $2 trillion in a hurry. I can’t even spend a billion in a hurry. It’s darn hard and I’ve tried. It suggests any recovery will be slower and lasts longer.
Here’s the bearish view on the economy, with Barclay’s Bank looking for an “L” shaped recovery, which means no recovery at all. I’m looking more for a square root type recovery, which means a sharp bounce back to a lower rate of growth. And there may be two “square roots” back to back.
Bond giant PIMCO predicts 30% GDP loss in Q2 on an annualized basis. Everyone staying home doing jigsaw puzzles isn’t doing much for our economic growth. This may end up becoming the most positive forecast out there.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $20 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance had a tough week, destroying my performance back to positive numbers for the year. That is thanks to my piling on the shorts in a steadily rising market. This brings short term pain, but medium-term ecstasy.
We are now down -3.99% in April, taking my 2020 YTD return down to -12.41%. That compares to an incredible loss for the Dow Average of -17% from the February top. My trailing one-year return sank to 30.02%. My ten-year average annualized profit was pared back to +33.51%.
My short volatility positions (VXX) were hammered even in a rising market, which means no one believes the rally, including me.
I took nice profits on two very deep in-the-money, very short dated call spreads in Amazon (AMZN) and Microsoft (MSFT), the two safest companies in the entire market, betting that we don’t go to new lows in the next nine trading days. As the market rose, I continued to add to my short position with the 2X ProShares Ultra Short S&P 500 (SDS).
This week, we get the first look at Q1 earnings. All economic data points will be out of date and utterly meaningless this week. The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, April 13 Citigroup (C) and JP Morgan (JPM) report earnings.
On Tuesday, April 14 at 11:30 AM, the API Crude Oil Stocks are announced.
On Wednesday, April 15, at 2:00 PM, the New York State Manufacturing Index is released.
On Thursday, April 16 at 8:30 AM, Weekly Jobless Claims are announced. The number could top 6,000,000 again. At 7:30 AM, US Housing Starts for March are published.
On Friday, April 17 at 7:30 AM, the Baker Hughes Rig Count is released at 2:00 PM. Expect these figures to crash as well.
As for me, before the market carnage of the coming week ensues, I shall be sitting down with my kids and touring the National Gallery of Art in Washington DC. Many art museums have now opened up their collections online, for free. There is a special exhibition of “Degas at the Opera.” Please enjoy by clicking here.
Next to come will be the Louvre in Paris (click here), and the National Museum of the Marine Corps in Triangle, VA (click here). I have them tracing the dog tags I brought back from Guadalcanal. I bet some of my old weapons are in there.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
