Global Market Comments
March 27, 2020
Fiat Lux
Featured Trade:
(MARCH 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(ROM), (BA), (VIX), (UPRO), (SSO), (UBER), (LYFT), (MDT),
(GLD), (GOLD), (NEM), (GDX), (UGL)
Posts
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 25 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: Since we flipped the off button on the economy, I don’t see how we can simply flip the on button and have a V-shaped recovery. It seems much more unlikely that it will get back to pre-recession levels.
A: Actually, all we really need is confidence. Confident people can go outside and not get sick. Once we start seeing a dramatic decline in the number of new cases, the shelter-in-place orders may be cancelled, and we can go outside and go back to work. It’s really that simple. So, we will get an initial V-shaped recovery probably in the third quarter, and after that, it will be a slower return spread over several quarters to get back to normal. Everybody wants to get back to normal and let's face it, there's an enormous amount of deferred consumption going on. I have hardly spent any money myself other than what I’ve spent online. All of those purchases get deferred, so in the recovery, there's going to be a massive binge of entertainment, shopping, and travel that is all being pent up now—that will get unleashed once the airlines start flying again and the shelter-in-place orders are cancelled. We’re not losing so much of this growth, we’re just deferring it. Obviously, some of the growth is gone permanently; you can forget about any kind of vacation in the next couple of months. I would say, the great majority of consumption in the US—and thus growth and thus stock appreciation—is just being deferred, not cancelled outright.
Q: Other than the ProShares Ultra Technology ETF (ROM), do you have any other leveraged sectors coming into the recovery?
A: There is a 50/50 chance the Roaring 20s started 2 days ago, on Monday, March 23 at the afternoon lows. We may go back and test those lows one more time, which at this point is 3,700 points below here, but we are clocking 1,000 points a day. It doesn’t take much, like a bad non-farm payroll number, to go back and test those lows. The good news is out; they're not going to spend any more money other than the $10 trillion they're putting in now.
Q: Would you buy Boeing (BA) here? Is this the bottom?
A: The bottom was at $94 on Monday; we went up 100% in three days and now we’re at $180. Incredible moves, and a total lack of liquidity. One reason I haven't added any positions lately is that they have closed the New Yok Stock Exchange floor and its not clear that of I send out a trade alert, it could get done. We have gone totally online, so I just want to see what happens as a result of that. I don’t want to be putting out trade alerts that no one can get in or out of, heaven forbid.
Q: What do you mean by “The spike to $80 in the Volatility Index (VIX) was totally artificial?”
A: When you have a series of cascading shorts triggered by margin calls, that is artificial. I have seen this happen many times before, both on the upside and the downside. This happened twice in the (VIX) in the last two years. When you go from a (VIX) of $25 to $80 and back down to $39 in days, which is what we did, you know it was a one-time-only spike and we are not going to visit the $80 level again— at least not until the next financial crisis because those positions are gone and are never coming back. A (VIX) of $80 means we are going to have 1,000 point move in the Dow Average for the next 30 days.
Q: I bought some ProShares Ultra Pro ETF (UPRO) which is the 3x long the S&P 500 at $1,829. Do I take profits by selling calls or just hold longer?
A: I would just sell the whole position outright. The (UPRO) is so incredibly volatile that you are rewarded heavily for just coming out completely and then reopening fresh positions on these big meltdown days. We will probably be doing trade alerts on (UPRO) or its cousin, the 2x long ProShares Ultra S&P 500 (SSO) sometime in the near future.
Q: With 2-year LEAPs, would you go at the money or out of the money?
A: This is the golden opportunity to go way out of the money because the return goes from 100% to 500%, or even 1000% if you go, say, 30%-50% out of the money. A lot of these stocks are ripe for very quick 30% bouncebacks, especially the (ROM). So yes, you want to do out of the money 20% to 30%. It will easily recover those losses in weeks if you are picking the right stocks. Over a two-year view, a lot of these big tech stocks could double by the time your LEAP expires, and then you will get the full profit. The rule of thumb is: the farther out of the money you go, the bigger the profit is. But I wouldn’t go for more than a 1000% profit in 2 years; you don't want to get greedy, after all.
Q: You called the Dow to hit 15,000. Is that still possible? We got down to the 18 handle.
A: Yes, if the coronavirus data gets worse, which is certain, we could get another panic selloff. How will the market handle 100,000 US deaths, given the exponential rise in cases we are seeing? With cases doubling every three days that is entirely within range. So, I would say, there is a 50% chance we hit the bottom on Monday at 18,000, and 50% chance we go lower.
Q: Do you know anything about the coronavirus stocks like Regeneron (REGN)?
A: Actually, I do, it's covered by the Mad Hedge Biotech & Health Care Letter, click here for the link. If you get the Biotech Letter, you already know all about stocks like Regeneron. Regeneron literally has hundreds of drugs in testing right now to work as vaccines or antivirals, and some of them, like their arthritis drug, have already been proven to work. So, we just have to get through the accelerated trials and testing to unleash it on the market. But for anybody who has a drug, it's going to take a year to mass-produce enough to inoculate the entire country, let alone the world. So, don't make any big bets on getting a vaccine any time soon—it's a very long process. Even in normal times, some of these drugs take months to manufacture.
Q: Are there any ventilator stocks out there?
A: There are; a company called Medtronic (MDT), which the Mad Hedge Biotech & Healthcare Letter also covers. They are the largest ventilator company in the US. Their normal production is 100 machines a week. Now, they are increasing that to 500 a week as fast as they can, but it isn’t enough. We need about 100,000 ventilators. China is now selling ventilators to the US. Elon Musk from Tesla (TSLA) just bought 1,000 ventilators in China and had them shipped over to San Francisco at his own expense, and Virgin Atlantic just flew over a 747 full of ventilators and masks and other medical supplies from China. So yes, there are stocks out there to play these things, they have already had large moves. We liked them anyway, even before the pandemic, so those calls were quite good. And China thinks their epidemic is over, so they are happy to sell us all the medical supplies they can make.
Q: Why did 30-year mortgage rates just go up instead of down? I thought the Fed rate cuts were supposed to take them down; am I missing something?
A: In order to get 30-year mortgage rates down, you have to have buyers of 30-year loans, and right now there are buyers of nothing. The lending that is happening is from banks lending their own money, which is only a tiny percentage of the total loan market. When the Fed moves into the mortgage market, you will see those yields move to the 2% range. The other problem is how to get a loan if all the banks are closed. They are running skeletal staff now, and you can’t close on real estate deals because all the notaries and title offices are closed; so essentially the real estate industry is going to shut down right now and hopefully, we’ll finish that in a month.
Q: Do you think Uber (UBER) and Lyft (LYFT) will go bankrupt?
A: It is a possibility because one to one human contact inside a car is about the last situation you want to be in during a pandemic. Their traffic was down 25% according to a number I saw. It’s very heavily leveraged, very heavily indebted, and those are the companies that don’t survive long in this kind of crisis. So, I would say there is a chance they will go under. I never liked these companies anyway; they are under regulatory assault by everybody, depend on non-union drivers working for $5 an hour, and there are just too many other better things to do.
Q: Is this the end of corporate buybacks?
A: To some extent, yes. A future Congress may make it either illegal or highly tax corporate buybacks, in some fashion or another because twice in 12 years now, we have had companies load up on buying back their own stock, boosting CEO compensation to the hundreds of millions—if not billions—and then going broke and asking for government bailouts. Something will be done to address that. If you take buybacks out of the market (the last 10,000-point gain in the Dow were essentially all corporate buybacks), we may not see a 20X earnings multiple again for another generation. Individuals were net sellers of stock for those two years. We only reached those extreme highs because of buybacks, so you take those out of the equation and it's going to get a lot harder to get back to the super inflated share prices like we had in January.
Q: How long before an Italian bank collapses, and will they need a bailout?
A: I don’t think they will get a collapse; I think they will be bailed out inside Italy and won’t need all of Europe to do this. But the focus isn't on Europe right now, it's on the US.
Q: Do you think this virus is really subsiding in China based on their past history of dishonest reporting?
A: Yes, that is a risk, and that's why people aren’t betting the ranch right now—just because China is reporting a flattening of cases. And China could be hit with a second wave if they relax their quarantine too soon.
Q: What's your opinion on how the Fed is doing and Steve Mnuchin in this crisis?
A: I think the Fed is doing everything they possibly can. I agree with all of their moves—this is an all-hands-on-deck moment where you have to do everything you can to get the economy going. Notice it’s Steve Mnuchin doing all the negotiating, not the president, because nobody will talk to him. For a start, he may be a Corona carrier among other things, and you’re not seeing a lot of social distancing in these press conferences they are holding. About which 50% of the information they give out is incorrect, and that's the 50% coming from Donald Trump.
Q: What do you think about no debt and no pension liability?
A: That’s why Tech has been leading the upside for the last 10 years and will lead for the next 10. You can really narrow the market down to a dozen stocks and just focus on those and forget about everything else. They have no net debt or net pension fund liabilities.
Q: Why have we not heard from Warren Buffet?
A: I'm sure negotiations are going on all over the place regarding obtaining massive stakes in large trophy companies that he likes, such as airlines and banks. So that will be one of the market bottom indicators that I mentioned a couple of days ago in my letter on “Ten Signs of a Market is Bottoming.”
Q: What’s the outlook for gold?
A: Up. We just had to get the financial crisis element out of this before we could go back into gold, so I would be looking to buy SPDR Gold Shares ETF (GLD), the gold miners like Barrick Gold (GOLD) and Newmont Mining (NEM), the Van Eck Vectors Gold Miners ETF (GDX), and the 2X long ProShares Gold ETF (UGL).
Q: Does the Fed backstop give you any confidence in the bond market?
A: Yes, it does. I think we finally may be getting to the natural level of the market, which is around an 80-basis point yield. Let’s see how long we can go without any 50-point gyrations.
Q: Do you foresee a depression?
A: We are in a depression now. We could hit a 20% unemployment rate. The worst we saw during the Great Depression was 25%. But it will be a very short and sharp one, not a 12-year slog like we saw during the 1930s.
Good Luck and Good Trading and stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
It’s Been a Tough Month
Global Market Comments
March 24, 2020
Fiat Lux
Featured Trade:
(TEN SIGNS THE MARKET IS BOTTOMING),
(FXI), (BRK/A), (BA), (DAL), (SPX),
(INDU), (UUP), (VIX), (VXX), (AAPL)
I spent the morning calling some big hedge fund friends asking what they are looking for to indicate the market may be bottoming. I’ll give you a warning right now. None of the traditional fundamental or technical measures have any validity in this market.
Markets will need to see at least one, and maybe all of these before they launch into a sustainable recovery. The good news is that several have already happened and are flashing green.
1) Watch New Corona Cases in China
The pandemic started in China and it will end in China (FXI). The president of China, Xi Jinping, has already announced that the epidemic is over and that the country is returning to normal. The country is donating thousands of respirators and millions of masks to Europe and poor countries all over the world. China was able to enforce a quarantine far more severe than possible in the West, such as using the army to surround 60 million people for a month. So, the results in the Middle Kingdom may not be immediately transferable to the US.
If we do get an actual fall in the number of cases in China, that could indicate the end is near. To keep track, click here.
2) Watch Corona Cases in Italy
Italy quarantined two weeks before California so we should get an earlier answer there. The numbers are reliable, but we don’t know the true extent of their quarantine. After all, this is Italy. Also, Italy has a much older population than the US (that Mediterranean diet keeps Italians alive forever), so they will naturally suffer a higher death rate. However, a decline in cases there will be proof that a western-style shelter-in-place order will work. To keep track, click here.
3) Watch Corona Cases in California
The Golden State was the first to quarantine ten days ago, so it will be the first American state to see cases top out. On Monday, we were at 1,733 cases and 27 deaths, or one in 1.5 million. However, it is a partial quarantine at best, with maybe half of the 20 million workforce staying home. When our cases top out, which should be the week of April 13, it could be an indication that the epidemic is flagging. To keep track, click here.
4) Watch Washington
Passage of a Corona Economic Recovery Bill could take place as early as Friday and could be worth $2 trillion. Add in the massive stimulus provided by the Federal Reserve, a large multiple of the 2008-2009 efforts, and $10 trillion is about to hit the economy. Warning: don’t be short an economy that is about to be hit with $10 trillion worth of stimulus.
5) Watch the Technicals.
Yes, technicals may be worthless now but someday in the future, they won’t be. The stock market has traded 20% below the 200-day moving average only four times in the last century. The Dow Average (INDU) was 32% below the 200-day moving average at the Monday low. The next rip-your-face off short-covering rally is imminent and may initially target that down 20% level at $21,496, or 18% above the Monday low.
6) Watch for the Big Buy
Value players are back in the market for the first time in six years, the last time the S&P 500 (SPX) traded at a discount to its historical 15.5X earnings multiple and are circling targets like hungry sharks. Watch for Warren Buffet of Berkshire Hathaway (BRK/A) to buy a large part of a trophy property, like a major bank or airline. He’s already stepped up his ownership in Delta Airlines (DAL). I’m sure he’s going over the books of Boeing (BA). Warren might even buy back his own stock at a discount to net asset value, down 31.4% in a month. Any move by Warren will signal confidence to the rest of the markets.
7) Watch the US Dollar
With US overnight interest rates having crashed by 1.5% in recent weeks, the US dollar (UUP) should be the weakest currency in the world. The greenback overnight became a zero-yielding currency. Instead, it has been the strongest, rocketing on a gigantic global flight to safety bid. When the foreign exchange rates return to rationality, the buck should weaken, as it has already started to do after last week’s super spike. A weak dollar will be good for American companies and their stocks.
8) Watch the (VIX)
We now know that the Volatility Index (VIX), (VXX) was artificially boosted last week by hundreds of short players covering positions with gigantic losses and going bust. Now that this is washed out, I expect volatility to decline for the rest of 2020. It has already fallen from $80 to $49 in days. This is a precursor to a strong stock market.
9) Watch the Absolute Value of the Market
There could be a magic number beyond which prices can’t fall anymore. That could be yesterday’s 18,000, 17,000, or 15,000. Some 80% of all US stocks are owned by long term holders who never sell, like pension funds, corporate crossholdings, or individuals who have owned them for decades and don’t want to pay the capital gains tax. When the ownership of that 20% is shifted to the 80%, the market runs out of sellers and stocks can’t fall anymore. That may have already happened. Similarly, a final capitulation selloff of market leaders, like Apple (AAPL) may also be a sign that the bear market is ending. (AAPL) is off 34.40% since February.
10) Watch John Thomas
I am watching all of the above 24/7. So rather than chase down all these data points every day, just watch for my next trade alert. I am confined to my home office for the duration, probably for months, so I have nothing else to do. No trips to Switzerland, the Taj Mahal, or the Great Pyramids of Egypt for me this year. It will just be nose to the grindstone.
Stay Healthy and we’ll back a killing on the back nine.
John Thomas
Global Market Comments
March 11, 2020
Fiat Lux
Featured Trade:
(A NOTE ON ASSIGNED OPTIONS, OR OPTIONS CALLED AWAY),
(AAPL), (BA), (UAL), (CCL), (WYNN), (FB)
I almost got to take a shower today.
However, whenever I got close to the bathroom, I'd get an urgent call from a concierge member, Marine buddy, Morgan Stanley retiree, fraternity brother from 50 years ago, or one of my kids asking me which stocks to buy at the bottom.
It’s been that kind of market.
I refer them to the research piece I sent out last week, “Ten Long Term LEAPs to Buy at the Bottom” for a quick and dirty way to get into the best names in a hurry (click here for the link).
I have been doing the same, and as a result, I have one of the largest trading portfolios in recent memory. When the Volatility Index is above $50, it is almost impossible to lose money as long as you remember to buy the 1,000 dips and sell the 1,000 point rallies.
In the run-up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
If that happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position. Whenever you have sold short an option, you run an assignment risk.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.
Let’s say you get an email from your broker saying that your call options have been assigned away. I’ll use the example of the Microsoft (MSFT) December 2019 $134-$137 in-the-money vertical BULL CALL spread.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 8 days before the December 20 expiration date. In other words, what you bought for $4.50 last week is now with $5.00!
All have to do is call your broker and instruct them to exercise your long position in your (MSFT) December 134 calls to close out your short position in the (MSFT) December $137 calls.
This is a perfectly hedged position, with both options having the same expiration date, the same amount of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.
To say it another way, you bought the (MSFT) at $134 and sold it at $137, paid $2.60 for the right to do so, so your profit is 40 cents, or ($0.40 X 100 shares X 38 contracts) = $1,520. Not bad for an 18-day limited risk play.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (MSFT) position after the close, and exercising his long December $134 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it. They’ll tell you to take delivery of your long stock and then most additional margin to cover the risk.
Either that, or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates a ton of commission for the brokers but impoverishes you.
There may not even be and evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. It doesn’t pay. In fact, I think I’m the last one they really did train.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many legal ways to steal money that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Calling All Options
Global Market Comments
February 18, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TRADE ALERT DROUGHT)
(SPY), (TLT), (MSFT), (BA), (TSLA), (MGM)
Like it or not, we have a trade alert drought on our hands.
I just ran the numbers on 200 potential trades in stocks, bonds, foreign exchange, commodities, precious metals, and real estate, and there was not a single one that was worth executing.
They all had one thing in common: for taking huge risks, there were only paltry profits on offer. Even with a 90% success rate, I would still lose money.
And here is the problem. Massive quantitative easing from the US Federal Reserve is keeping the prices of all assets artificially high. But fears of a global Coronavirus pandemic are keeping all prices capped. The spread between the bid and the offer is only 3%. That is not enough to make an honest living, nor even a dishonest one.
I’ve seen all this before. The US in 1974, Tokyo in 1989, NASDAQ in 1999 presented similar trading dilemmas. The outcome is always the same. Prices always go up much longer than expected and then are followed by horrific crashes. Only when the last dollar is sucked in do trends change.
So, for right now, I would rather do nothing than something. We are in a contest to see who can make the most money with the fewest drawdowns, not to see who can strap on the most trades. The latter makes your broker rich, not you.
Cash is a position, it is an opinion, and it has option value. A dollar at a market top is worth $10 at a market bottom. Opportunity cost is not to be underestimated.
For the time being, everything depends on the Coronavirus. It is universally believed that the Chinese data is wildly inaccurate, possible by tenfold. The risks to the markets are similarly underestimated by US investors.
That became screamingly clear to me after returning from a trip halfway around the world where my temperature was taken every time I crossed a border and planes had to be sterilized before boarding
So, the smart game here is to be patient and learn some discipline. Wait for the market to come to you. This is a year when it will be incredibly difficult to make money and extremely easy to lose it.
All trade alert droughts end. Whether it will be sooner or later is anyone’s guess.
China is planning massive stimulus, to get the economy back on track. GDP could drop from 6% to 0% and maybe -6% thanks to the Coronavirus. A borrowing stampede is underway as shut down companies seek to address hemorrhaging cash flow.
Tesla (TSLA) exploded again to the upside, up 10% at the opening. The company has become a good news factory. The German government stepped in to subsidize a massive Gigafactory there. I won’t touch the stock here, but my long terms target is still $2,500.
Tesla finally took my advice and launched a $2 billion common stock offering at these lofty prices. It should be $5 billion. They can retire all their debt, including the convertible bonds, and with no dividend they can operate at a zero cost of capital. Elon Musk is taking $10 million of the deal. He took $100 million of the last offering. Buy (TSLA) on dips. Losses pile up for the short-sellers. Tesla always does the right thing after trying everything else out first.
The Fed’s Jay Powell cheers the economy but warned that the Coronavirus could become a factor. He also cautioned about a federal deficit that will top $1 trillion this year.
With the economy growing at a 2.2% annual rate, it’s below the Obama era growth. Did anyone notice that he said he would trim back QE by reigning in the repo program initiated last fall? Risk in the stock market is now extremely high.
Apple (AAPL) and Microsoft (MSFT) are now 10% of the entire stock market and are wildly overbought. Such incredible concentration is a typical sign of a topping market. Virtually all the stocks Mad Hedge has been recommending for the last decade are at new all-time highs. Be careful what you wish for.
Household Debt soared hitting a 12-year high. It’s up $601 billion to $14 trillion. It’s pedal to the metal for consumer spending, another classic market-topping indicator. What happens when the bill comes due and interest rates rise?
MGM (MGM) canceled guidance as the Coronavirus upends their business. High-end Chinese gamblers won’t show up to lose gobs of money at the gaming tables if they can’t get here. The epidemic has put the whole gaming industry into turmoil. Call me after new virus cases peak in China. Avoid (MGM).
Boeing had no net deliveries of aircraft in January, the first time since 1962, but the stock rose anyway. That tells me the bottom is firmly in. Buy (BA) on dips. When will the suffering of one of America’s best-run companies, accounting for 3% of GDP, end?
Despite the fact that we may be facing the end of the world, the Mad Hedge Trader Alert Service managed to maintain new all-time highs. I came out of my last position in Boeing (BA) to beat the ex-dividend day and a possible call on my short February $280 calls.
My Global Trading Dispatch performance rose to a new high at +359.00% for the past ten years. February stands at -0.04%. My trailing one-year return is stable at 47.39%. My ten-year average annualized profit ground back up to +35.31%.
All eyes will be focused on the Coronavirus still, with deaths over 1,800. The weekly economic data are virtually irrelevant now. However, some important housing numbers will be released.
On Tuesday, February 18 at 8:30 AM, the NY State Manufacturing Index for February is released.
On Wednesday, February 19, at 9:30 PM, January Housing Starts are out.
On Thursday, February 20 at 8:30 AM, Weekly Jobless Claims come out. The February Philadelphia Fed Manufacturing Index is announced.
On Friday, February 21 at 10:30 AM, January Existing Home Sales are printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be driving back from Lake Tahoe, where I spent the long weekend catching up on the markets. There was virtually no snow, amazing for February, but great hiking.
Since I will be dropping 7,200 feet from Donner Pass and I have the new expended range Model X, I will be able to make it the 220 miles home on a single charge.
In two years, I’ll be able to make the 440-mile round trip on a single charge when the new Tesla Cyber truck comes out. Of course, people will think I’m nuts and my kids have refused to be seen in the cutting edge vehicle, but when did that ever stop me?
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 14, 2020
Fiat Lux
Featured Trade:
(FEBRUARY 12 BIWEEKLY STRATEGY WEBINAR Q&A)
(SQ), (TSLA), (FB), (GILD), (BA), (CRSP), (CSCO), (GLD)
(FEYE), (VIX), (VXX), (USO), (LYFT), (UBER)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 12 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What do you think about Facebook (FB) here? We’ve just had a big dip.
A: We got the dip because of a double downgrade in the stock from a couple of brokers, and people are kind of nervous that some sort of antitrust action may be taken against Facebook as we go into the election. I still like the stock long term. You can’t beat the FANGs!
Q: If Bernie Sanders gets the nomination, will that be negative for the market?
A: Absolutely, yes. It seems like after 3 years of a radical president, voters want a radical response. That said, I don't think Bernie will get the nomination. He is not as popular in California, where we have a primary in a couple of weeks and account for 20% of total delegates. I think more of the moderate candidates will come through in California. That's where we see if any of the new billionaire outliers like Michael Bloom or Tom Steyer have any traction. My attitude in all of this is to wait for the last guy to get voted off the island—then ask me what's going to happen in October.
Q: When should we come back in on Tesla (TSLA)?
A: It’s tough with Tesla because although my long-term target is $2,500, watching it go up 500% in seven months on just a small increase in earnings is pretty scary. It’s really more of a cult stock than anything else and I want to wait for a bigger pullback, maybe down to $500, before I get in again. That said, the volatility on the stock is now so high that—with the short interest going from 36% down to 20%—if we get the last of the bears to really give up, then we lose that whole 20% because it all turns into buying; and that could get us easily over $1,000. The announcement of a new $2 billion share offering is a huge positive because it means they can pay off debt and operate with free capital as they don’t pay a dividend.
Q: Is Square (SQ) a good buy on the next 5% drop?
A: I would really wait 10%—you don't want to chase trades with the market at an all-time high. I would wait for a bigger drop in the main market before I go aggressive on anything.
Q: What about CRISPR Technology (CRSP) after the 120% move?
A: We’ve had a modest pullback—really more of a sideways move— since it peaked a couple of months ago; and again, I think the stock either goes much higher or gets taken over by somebody. That makes it a no-lose trade. The long sideways move we’re having is actually a very bullish indication for the stock.
Q: If Bernie is the candidate and gets elected, would that be negative for the market?
A: It would be extremely negative for the market. Worth at least a 20% downturn. That said, according to all the polling I have seen, Bernie Sanders is the only candidate that could not win against Donald Trump—the other 15 candidates would all beat Trump in a 1 to 1 contest. He's also had one heart attack and might not even be alive in 6 months, so who knows?
Q: I just closed the Boeing (BA) trade to avoid the dividend hit tomorrow. What do you think?
A: I’m probably going to do the same, that way you can avoid the random assignments that will stick you with the dividend and eat up your entire profit on the trade.
Q: When do you update the long-term portfolio?
A: Every six months; and the reason for that is to show you how to rebalance your portfolio. Rebalancing is one of the best free lunches out there. Everyone should be doing it after big moves like we’ve seen. It’s just a question of whether you rebalance every six months or every year. With stocks up so much a big rebalancing is due.
Q: I have held onto Gilead Sciences (GILD) for a long time and am hoping they’ll spend their big cash hoard. What do you think?
A: It’s true, they haven’t been spending their cash hoard. The trouble with these biotech stocks, and why it's so hard to send out trade alerts on them, is that you’ll get essentially no movement on them for years and then they rise 30% in one day. Gilead actually does have some drugs that may work on the coronavirus but until they make another acquisition, don’t expect much movement in the stock. It’s a question of how long you are willing to wait until that movement.
Q: Is it time to get back into the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?
A: No, you need to maintain discipline here, not chase the last trade that worked. It’s crucial to only buy the bottoms and sell the tops when trading volatility. Otherwise, time decay and contango will kill you. We’re actually close to the middle of the range in the (VXX) so if we see another revisit to the lows, which we could get in the next week, then you want to buy it. No middle-of-range trades in this kind of market, you’re either trading at one extreme or the other.
Q: Could you please explain how the Fed involvement in the overnight repo market affects the general market?
A: The overnight repo market intervention was a form of backdoor quantitative easing, and as we all know quantitative easing makes stocks go up hugely. So even though the Fed said this wasn't quantitative easing, they were in fact expanding their balance sheet to facilitate liquidity in the bond market because government borrowing has gotten so extreme that the public markets weren’t big enough to handle all the debt; that's why they stepped into the repo market. But the market said this is simply more QE and took stocks up 10% since they said it wasn't QE.
Q: What about Cisco Systems (CSCO)?
A: It’s probably a decent buy down here, very tempting. And it hasn't participated in the FANG rally, so yes, I would give that one a really hard look. The current dip on earnings is probably a good entry point.
Q: Should we buy the Volatility Index (VIX) on dips?
A: Yes. At bottoms would be better, like the $12 handle.
Q: When is the best time to exit Boeing?
A: In the next 15 minutes. They go ex-dividend tomorrow and if you get assigned on those short calls then you are liable for the dividend—that will eat up your whole profit on the trade.
Q: Do you like Fire Eye (FEYE)?
A: Yes. Hacking is one of the few permanent growth industries out there and there are only a half dozen listed companies that are cutting edge on security software.
Q: What are your thoughts on the timing of the next recession?
A: Clearly the recession has been pushed back a year by the 2019 round of QE, and stock prices are getting so high now that even the Fed has to be concerned. Moreover, economic growth is slowing. In fact, the economy has been growing at a substantially slower rate since Trump became president, and 100% of all the economic growth we have now is borrowed. If the government were running a balanced budget now, our growth would be zero. So, certainly QE has pushed off the recession—whether it's a one-year event or a 2-year event, we’ll see. The answer, however, is that it will come out of nowhere and hit you when you least expect it, as recessions tend to do.
Q: Would you buy gold (GLD) rather than staying in cash?
A: I would buy some gold here, and I would do deep in the money call spreads like I have been doing. I’ve been running the numbers every day waiting for a good entry point. We’re now at a sort of in between point here on call spreads because it’s 7 days to the next February expiration and about 27 days to the March one after that, so it's not a good entry point this week. Next week will look more interesting because you’ll start getting accelerated time decay for March working for you.
Q: When are you going to have lunch in Texas or Oklahoma?
A: Nothing planned currently. Because of my long-term energy views (USO), I have to bring a bodyguard whenever I visit these states. Or I hold the events at a Marine Corps Club, which is the same thing.
Q: Would you use the dip here to buy Lyft (LYFT)? It’s down 10%.
A: No, it’s a horrible business. It’s one of those companies masquerading as a tech stock but it isn’t. They’re dependent on ultra-low wages for the drivers who are essentially netting $5 an hour driving after they cover all their car costs. Moreover, treating them as part-time temporary workers has just been made illegal in California, so it’s very bad news for the stocks—stay away from (LYFT) and (UBER) too.
Q: Is the Fed going to cut interest rates based on the coronavirus?
A: No, interest rates are low enough—too low given the rising levels of the stock market. Even at the current rate, low-interest rates are creating a bubble which will come back to bite us one day.
Q: Household debt exceeded $14 trillion for the first time—is this a warning sign?
A: It is absolutely a warning sign because it means the consumer is closer to running out of money. Consumers make up 70% of the economy, so when 70% of the economy runs out of money, it leads to a certain recession. We saw it happen in ‘08 and we’ll see it happen again.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
