Global Market Comments
April 10, 2019
Fiat Lux
Featured Trade:
(A NOTE ON OPTIONS CALLED AWAY),
(TLT),
(NOTICE TO MILITARY SUBSCRIBERS)
Global Market Comments
April 9, 2019
Fiat Lux
Featured Trade:
(ABBVIE’S BATTLE FOR ARTHRITIS DOMINANCE),
(USING MOMENTUM STOCKS TO CALL THE MARKET),
(MTUM)
You would think that a company with 60% of the arthritis market would see a soaring stock price. But you would be wrong.
Based on its 2019 performance to date though, AbbVie (ABBV) seems to be on the brink of a disaster. From an impressive 54% gain way back in 2017, the giant pharma stock started to lose ground this year with its share price falling by double-digit percentages. Nevertheless, staunch believers of this stock remain steadfastly optimistic about the company's future.
Here are pretty good reasons why they might be right.
A lot of investors have been wary of AbbVie due to the company's dependence on their blockbuster drug, Humira, which is marketed as a treatment for rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, Crohn's disease, ulcerative colitis, psoriasis, hidradenitis suppurativa, uveitis, and juvenile idiopathic arthritis. Since AbbVie derives 60% of its total revenue from the sales of this drug, it's understandable why its shareholders are getting nervous over its declining performance in the market along with the emergence of competitors across the globe.
Surprisingly, AbbVie isn't the least bit worried about Humira.
One of the main reasons for their confidence in Humira's continued dominance in the market is the fact that biosimilar drugs won't be available in the US until around 2023. Given that two-thirds of Humira's sales or roughly $20 billion of its global profits come from the American market, this timeframe gives AbbVie a couple more years to rake in profits from its top drug. In fact, Humira is projected to keep earning as much as $15 billion up until 2024.
Notably, AbbVie has been labeled as a ruthless competitor with its latest move to mark down Humira by up to 89%. This "market poisoning" tactic, as its critics would dub it, has resulted in exits from a number of competitors and would-be competitors aiming to target the Dutch market as well. Hence, Humira might just be able to assert a renewed monopoly in the European nation via their aggressive discounts.
On top of that, AbbVie has lined up a couple of potential blockbuster drugs to take the baton from their beloved Humira. Plaque psoriasis drug Risankizumab along with rheumatoid arthritis treatment Upadacitinib are anticipated to boost AbbVie’s revenues this year as well.
In fact, both treatments are expected to gain FDA approval this year. These drugs, which are estimated to bring in incremental yearly sales of approximately $10 billion, are expected to pick up additional approvals to cater to other autoimmune diseases as well. Using a back-of-the-envelope calculation to add these two potential blockbuster drugs, therefore, puts AbbVie’s incremental risk-adjusted sales at around $35 billion by 2025.
Meanwhile, the company’s other promising products such as blood cancer treatments Imbruvica and Venclexta as well as endometriosis drug Orilissa are doing good in the market.
AbbVie has been exploring the possibility of expanding the indications for Venclexta to cover chronic lymphocytic leukemia (CLL), multiple myeloma, and acute myeloid leukemia (AML). As for Orilissa, this drug is slated to become yet another blockbuster product for AbbVie as it attempts to win approval for the treatment of uterine fibroids. Should Orilissa succeed in this, AbbVie would be poised to become one of the leading companies in the women's health category.
With all these developments and consistent sales from AbbVie, the company is anticipated to post an earnings per share of $2.05 by the next earnings report. If that happens, then the figures would indicate a 9.63% YOY growth for the company.
In managing my portfolio, I always bear in mind the wise words of Warren Buffett: "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." At the moment, AbbVie is sold at a bargain with shares trading at lower than eight or nine times its expected earnings. Looking at the company’s pipeline and history of aggressively protecting its moneymaking drugs, it’s clear that AbbVie is poised to provide a significant boost in anyone’s portfolio in the future.
Buy AbbVie on the next market selloff.
Hardly a day goes by without a reader asking me which indicators I follow when determining my impeccable market timing.
The short answer is that there are hundreds, and the 50-year accumulation updates real-time 24/7 in my head.
However, there is one in particular indicator that is worth mentioning today. That would be the performance of momentum stocks.
Momentum stocks are shares that deliver a larger move in price, or beta, than the market as a whole.
They tend to be the shares of high growth companies that deliver a reliable stream of positive earnings surprises.
In fact, they have earned a large following of traders, known as ‘momentum investors.”
Call them the canaries in the coal mine.
Look at the list of top ten holdings below, and you will find many that you know and love, and are often the subject of Mad Hedge Fund Trader Trade Alerts.
Momentum stocks are attractive because they substantially outperform a more sedentary index, like the S&P 500 (SPY).
Momentum stocks can be a great leading indicator for the stock market as a whole.
When momentum stocks take off like a scalded chimp, it is a good idea to adopt a “RISK ON” approach towards all of your asset selections.
When momentum stocks fail to reach new highs, it is a warning signal that the party is about to end and “RISK OFF” assets are about to gain favor.
This is why I always keep a close eye on momentum stocks when assembling my own trading book.
There is one really easy way to follow momentum stocks and that is to watch the iShares MSCI USA Momentum Factor ETF (MTUM) like a hawk.
The (MTUM) seeks to track the performance of an index that measures the performance of 122 U.S. large and mid-capitalization stocks exhibiting relatively higher momentum characteristics than the main market before fees and expenses.
This portfolio is then rebalanced every six months to reflect new market trends and to deep six the losers.
If you want to see how well this works, just take a look at the chart below.
The (MTUM) is particularly attractive because its 0.15% expense ratio is the lowest among the several offerings in the marketplace.
The fund currently has $8.56 billion in assets, so the institutional community takes it seriously.
The trailing 30-day SEC yield is only 1.31%, reflecting the fact that many of its holdings are non-dividend paying technology and health care stocks.
To learn more about the details of the (MTUM) please click here.
And what are momentum stocks telling us right now?
That they have just had an incredible three-month run and are long overdue for a rest.
Just thought you’d like to know.
"There is no disinfectant like success," said Daniel Boorstin, the 12th Librarian of Congress.
Global Market Comments
April 8, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE FLIP-FLOPPING MARKET),
(SPY), (TLT), (TSLA), (BA), (LUV), (DAL)
Easy come easy go.
Flip flop, flip flop.
Up until March 25, the bond market was discounting a 2019 recession. Bonds soared and stocks ground sideways. Exactly on that day, it pushed that recession out a year to 2020.
For that was the day that bond prices hit a multiyear peak and ten-year US Treasury yields (TLT) plunged all the way to 2.33%. Since then, interest rates have gone straight up, to 2.52% as of today.
There was also another interesting turn of the calendar. Markets now seem to be discounting economic activity a quarter ahead. So, the 20% nosedive we saw in stocks in Q4 anticipated a melting Q1 for the economy, which is thought to come in under 1%.
What happens next? A rebounding stock market in Q2 is expecting an economic bounce back in Q2 and Q3. What follows is anyone’s guess. Either continuing trade wars drag us back into a global recession and the stock market gives up the $4,500 points it just gained.
Or the wars end and we continue with a slow 2% GDP growth rate and the market grinds up slowly, maybe 5% a year.
Which leads us to the current quandary besieging strategists and economists around the world. Why is the government pressing for large interest rate cuts in the face of a growing economy and joblessness at record lows?
Of course, you have to ask the question of “what does the president know that we don’t.” The only conceivable reason for a sharp cut in interest rates during “the strongest economy in American history” is that the China trade talks are not going as well as advertised.
In fact, they might not be happening at all. Witness the ever-failing deadlines that always seem just beyond grasp. The proposed rate cut might be damage control in advance of failed trade talks that would certainly lead to a stock market crash, the only known measure of the administration view of the economy.
This also explains why politicization of the Fed is moving forward at an unprecedented rate. You can include political hack Stephen Moore who called for interest rate RISES during the entire eight years of the Obama administration but now wants them taken to zero in the face of an exploding national debt. There is also presidential candidate Herman Cain.
Both want the US to return to the gold standard which will almost certainly cause another Great Depression (that’s why we went off it last time, first in 1933 and finally in 1971). The problem with gold is that it’s finite. Economic growth would be tied to the amount of new gold mined every year where supplies have been FALLING for a decade.
The problem with politicization of the Fed is that once the genie is out of the bottle, it is out for good. BOTH parties will use interest rates to manipulate election outcomes in perpetuity. The independence of the Fed will be a thing of the past.
It has suddenly become a binary world. It either is, or it isn’t.
Positive China rumors lifted markets all week. Is this the upside breakout we’ve been looking for? Buy (FXI). While US markets are up 12% so far in 2019, Chinese ones have doubled that.
The Semiconductor Index, far and away the most China-sensitive sector of the market, hit a new all-time high. Advanced Micro Devices (AMD), a Mad Hedge favorite, soared 9% in one day. It’s the future so why not? This is in the face of semiconductor demand and prices that are still collapsing. Buy dips.
Verizon beat the world with its surprise 5G rollout. It’s really all about bragging rights as it is available only in Chicago and Minneapolis and it will take time for 5G phones to get to the store. 5G iPhones are not expected until 2020. Still, I can’t WAIT to download the next Star Wars movie on my phone in only ten seconds.
US auto sales were terrible in Q1, the worst quarter in a decade, and continue to die a horrible death. General Motors (GM) suffered a 7% decline, with Silverado pickups off 16% and Suburban SUVs plunging 25%. Is this a prelude to the Q1 GDP number? Risk is rising. You have to wonder how much electric cars are eating their lunch, which now accounts for 4% of all new US sales.
Tesla (TSLA) disappointed big time, and the stock dove $30. Q1 deliveries came in at only 63,000 as I expected, compared to 90,700 in Q4, down 30.5%. I knew it would be a bad number but got squeezed out of my short the day before for a small loss. That’s show business. It’s all about damping the volatility of profits.
By cutting the electric car subsidy by half from $7,500 in 2019 and to zero in 2020, the administration seems intent on putting Tesla out of business at any cost. I hear the company has installed a revolving door at its Fremont headquarters to facilitate the daily visits by the Justice Department and the SEC. Did I mention that the oil industry sees Tesla as an existential threat?
The March Nonfarm Payroll Report rebounded to a healthy 196,000, just under the 110-month average. Weekly Jobless Claims dropped to New 49-Year Low. Whatever the problems the economy has, it’s not with job creation. But at what cost? Of course, we have to cut interest rates!
Boeing successfully tested new software, even taking the CEO for a ride. Maybe it will work this time. Airlines will love it. (BA) shares have already made back half their $80 losses since the recent crash and we caught the entire move. Buy (BA), (DAL), and (LUV).
The Mad Hedge Fund Trader hit a new all-time high briefly, up 15.46% year to date, and beating the pants off the Dow Average. Good thing I didn’t buy the bearish argument. There’s too much cash floating around the world. However, my downside hedges in Disney and Tesla cost me some money when I stopped out. I was late by a day.
We are taking profits on a six-month peak of 13 positions across the GTD and Tech Letter services and will wait for markets to tell us what to do next.
March turned positive in a final burst, up +1.78%. April is so far down -1.76%. My 2019 year to date return retreated to +13.69%, paring my trailing one-year return back up to +26.59%.
My nine and a half year return recovered to +313.83%, pennies short of a new all-time high. The average annualized return appreciated to +33.62%. I am now 80% in cash and 20% long, and my entire portfolio expires at the April 18 option expiration day in 9 trading days.
The Mad Hedge Technology Letter has gone ballistic, with an aggressive and unhedged 40% long, rising in value almost every day. It is maintaining positions in Microsoft (MSFT), Alphabet (GOOGL), and PayPal (PYPL), and Amazon (AMZN), which are clearly going to new highs.
It’s going to be a dull week on the data front after last week’s fireworks.
On Monday, April 8 at 10:00 AM, February Factory Orders are released.
On Tuesday, April 9, 6:00 AM EST, the March NFIB Small Business Optimism Index is published.
On Wednesday, April 10 at 8:30 AM, we get the March Consumer Price Index.
On Thursday, April 11 at 8:30 AM EST, the Weekly Jobless Claims are announced. The March Producer Price Index is printed at the same time.
On Friday, April 12 at 10:00 AM, the April Consumer Sentiment Index is published.
The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I have two hours until the next snow storm pounds the High Sierras and closes Donner Pass. So I have to pack up and head back to San Francisco.
But I have to get a haircut first.
Incline Village, Nevada is the only place in the world where you can get a haircut from a 78-year-old retired Marine Master Sargent, Louie’s First Class Barbers. Civilian barbers can never grasp the concept of “high and tight with a shadow”, a cut only combat pilots are entitled to. He’ll regale me with stories of the Old Corps the whole time he is clipping away. I wouldn’t miss it for the world.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 5, 2019
Fiat Lux
Featured Trade:
(APRIL 3 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (VIX), (TSLA), (BA), (FXB), (AMZN), (IWM), (EWU)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 3 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: I’ve gotten a lot of newsletters but not many trades. Why is that?
A: Perfect trades do not happen every day of the year. They happen a few times a year and they tend to bunch up. Most time in the market is spent waiting for an entry point and then piling on 5 or 10 trades rapidly. We’re letting our profits run and waiting for new trades to open up, so just be patient and we’ll get you more trades than you can chew on.
If you have to ask this question, you are probably overtrading. The goal is to make yourself rich, not your broker. The other newsletters that offer a trade alert every day don’t publish their performance as I do and lose money for their followers hand over fist.
Q: Are we on track for a market peak in May?
A: Yes; if we keep climbing up, eventually hitting new highs this month, then we are setting up perfectly for a pretty sharp pullback around May 10th. That would be a good time to get rid of all your longs and put on some short positions, certainly deep in the money put spreads—we’ll be knocking quite a few of those out in the end of April/beginning of May.
Q: Are you worried about the Russell 2000 (IWM) climb?
A: I’m not. If you look at the chart, every up move has been weak, and every down move has been strong. Looking at the chart, it’s still in a clear downtrend dragging all the other markets, and this is because small-cap stocks do poorly in recessions or market pullbacks.
Q: How severe and how long do you see the coming bear market being?
A: If history repeats itself, then it’s going to be rather shallow. The last move down was only three months long and that stunned a lot of people who were expecting a more extreme pullback. I don’t see conditions in place that indicate a radically deep pullback—25% at most and 6-12 months in duration, which won’t be enough to liquidate your portfolio and justify the costs of getting out now and trying to get back in later. They key thing is that there are no systemic threats to the market other than the exploding levels of government borrowing.
Q: If you had the Tesla (TSLA) April $310-$330 vertical bear put spread, would you keep it?
A: Probably, yes, because you have a $15 cushion against a good news surprise and a lot less at risk. I got out of my Tesla (TSLA) April $300-$320 vertical bear put spread because my safety cushion shrank to only $5 and the risk/reward turned sharply against me.
Q: Should we be buying the Volatility Index (VIX) here for protection?
A: Not yet; we still have enough momentum in the stock market to hit all-time highs. After that, you really want to start looking at the VIX hard, especially if we get down to the $12 level. So good thinking, just not quite yet—as we know in the market, timing is everything.
Q: Are you getting nervous about the short Disney (DIS) calls?
A: I’m always nervous, every day of the year about every position, and yes, I’m watching them. You are paying me to be nervous so you can go play golf. We may take a small hit on the calls if the stock keeps rising, but that will be offset by a bigger gain on the call spread we’re long against.
Q: When is the quarterly option expiration?
A: It was on March 15 and the next one is June 21. This is an off-month expiration coming up on April 18th, and that’s only 12 trading days away.
Q: If you get a hard Brexit (FXB) in the next few weeks, what will happen to the pound?
A: It’s risen about 10% in the last few weeks on hopes of a Brexit outright failure. If that doesn't happen, the pound will get absolutely slaughtered.
Q: If China (FXI) is stimulating their economy, will that eventually help the U.S.?
A: Stimulus anywhere in the world always gets back to the U.S. because we’re the world’s largest market. So, yes, it will be positive.
Q: Would you consider trading UK stocks under Brexit fail?
A: Yes, and there is a UK stock ETF, the iShares MSCI United Kingdom ETF(EWU) and you’re looking at a 20%-25% rise in the British stock market if they completely give up on Brexit or just have another election.
Q: What are your thoughts on the China trade war?
A: The Chinese are in no rush to settle; that’s why we keep missing deadline after deadline and all the positive rumors are coming from the U.S. side. It’s looking more like a photo op trade deal than an actual one.
Q: If we get a top in stocks in May, how far do you expect (SPY) to go?
A: Not far; maybe 5% or 10%, you just have to allow all the recent players who got in to get out again, and if the economy slows to, say, a 1% rate in Q1, that’s not a panicky type market. That’s a 10% correction market and what we’ll probably get. If the economy then improves in Q2 and Q3, then we may go back up again to new highs. We seem to have a three quarter a year stock market and therefore, a three quarter a year stock market. Q1 is always a write off for the economy.
Q: Do you still like Amazon (AMZN)?
A: Absolutely, yes—it’s going to new highs. And it’s also starting to make a move on the food market, cutting prices at Whole Foods, which it owns, for the 3rd time this year. So, it’s moving on several fronts now, including healthcare. There’s at least a double in the company long term from these levels, and a triple if they break the company up.
Q: If you bought the stock in Boeing (BA) instead of the option spread, would you stay long?
A: I would, yes. It’s a great company and there's an easy 10% move in that stock once they get the 737 MAX back off the ground again which they should do within the month.
Q: What do you think about food stocks with big name brands like Hershey (HSY)?
A: I’ve never really liked the food industry. It’s really a low margin industry. You’re looking at 2% a year earnings growth against the big food companies vs 20% a year growth in tech which is why I stick with tech. My advice is always to focus on the few sectors that are the best 5% of the market and leave the dross for the index funds.
Q: With the current bullish wave in the market (SPY), what sector/stocks do you think have the most momentum to break out another 10% to 15% gain in the next one to three months?
A: The next 10% to 15% in the market will only happen after we drop 5-10% first. I believe this is the last 5% move of the China trade deal rally and after that, markets will fall or go to sleep for six months.
Q: Do you expect 2019 to be more like 2018 or 2017? We know you are predicting the (SPX) will hit an all-time high of 3000 in 2019. Do you think it zooms up to a blow-off top in Q2/Q3 and then pulls back in Q4, like 2018? Or, do you expect a steadier ascent with minor pullbacks along the way (like 2017), closing at or near the year's highs on Dec 31? This guidance will really help.
A: I think we have made most of the gains for 2019. Only the tag ends are lifted. We have already hit the upside targets for most strategists, and mine is only 7% higher. After that, there is a whole lot of boring ahead of us for 2019 and the (VIX) should drop to $9. After complaining about horrendous market volatility in December, traders will beg for volatility.
Good Luck and Good Trading
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader
Global Market Comments
April 4, 2019
Fiat Lux
Featured Trade:
(TEN REASONS WHY STOCKS CAN’T SELL OFF BIG TIME),
(SPY)
(SCAM OF THE MONTH CLUB)
