Global Market Comments
February 24, 2023
Fiat Lux
Featured Trade:
(FEBRUARY 22 BIWEEKLY STRATEGY WEBINAR Q&A)
(SPY), (BA), (CCI), (HD), (TLT), (TSLA), (PPLT), (PALL),
(JPM), (NVDA), (AAPL), (GOOGL), (META), (AMZN)
CLICK HERE to download today's position sheet.
Below please find the subscribers’ Q&A for the February 22 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: Will Russia use nuclear weapons on Ukraine?
A: No, they won’t. If you’re trying to take over a country, you don’t exactly want to drop atomic bombs on it first and render it useless. If they do, Ukraine will retaliate in kind with the nukes they have. Most of the nuclear weapons the old Soviet Union had were assembled in Ukraine and the machinery is still there. We know Ukraine has four nuclear power plants and hundreds of tons of fuel so they have uranium. You only need to increase the purity from 80% to 93% and then convert it to plutonium to get weapons-grade and you only need 20 pounds to make a small bomb. At the very least, they could build a dirty truck bomb and make Moscow uninhabitable for 100 years. If the Russians did explode a nuke, the fallout cloud would blow back on them the next day, China in three days, the US in 10 days, and back on Russia again in two weeks. If Ukraine doesn’t remember how to make nuclear weapons, they can just ask me. I do have “Nuclear Test Site” on my resume.
Q: What would be the impact on the markets of a government debt default?
A: Bonds would collapse, causing interest rates to spike, and taking down stocks big time. Higher interest rates would crash the real estate market. You also can’t do real estate closings during a shutdown because Fannie Mae and Freddie Mac aren’t there to buy the debt. Commodities would fall sharply on recession fears. Even gold and silver do poorly on a massive liquidity squeeze. Government payments would cease, including Social Security, Medicare, and military salaries. Air traffic control would stop unless they are happy to work for free. The only place to hide is cash under your mattress since US Treasury bills and commercial banks will also be at risk. This is what the House Republicans are risking. It really depends on how long the shutdown lasts. Every time Georgia representative Marjorie Taylor Greene shouted “liar” at the State of the Union address you could see bond prices ticking down. She is one of the people who has to agree to a rise in the debt ceiling and she didn’t inspire a lot of confidence in bondholders. All that said, a $10 dip is a good place to buy the (TLT).
Q: Would you buy Boeing up here?
A: I loved Boeing at $100 and we did a could trades down there. At $220 not so much. It’s more than doubled off the October low and all the best-case scenarios have happened. The 737 MAX, which crashed twice due to an AI issue, got back in the air. The 787 Dreamliner is selling well. The company now has a two-year order backlog. And Air India followed up with the biggest aircraft order in history, some 450 planes over ten years. If Boeing dips $50 that would be another story because I think it hits a new all-time high at $450 in a couple of years. By the way, I took a 737 MAX on my flight back from Hawaii last weekend and the crew loved it. There are no screens on the seats. Instead, they broadcast the 800 greatest movies of all time on free WIFI.
Q: How do we know if your trade alert is for the stock, the ETF, or another underlying position?
A: Look at the ticker symbol—it always tells you exactly which security we are working in.
Q: With Bullard signaling a 50 basis-point rate hike, will the S&P (SPY) go down in the near term and how much?
A: Well Bullard is only one guy out of nine, so he doesn’t have the final say. It really depends on what Jay Powell wants. And if the data continues hot and inflation keeps rising, we will get a 50 basis point rise, and that should take the index down 10% from the recent high, or give up half of its recent year-to-date gains, so that’s a good rule of thumb. As long as we’re waiting for bad news, (which we won’t get until March 22) the markets will do nothing until then.
Q: What do you think about Crown Castle International (CCI), the cell tower company, taking a big hit with the bond market?
A: It pretty much moves in sync with the bond market, which has just dropped 10 points, so you probably want to be buying or doubling up on (CCI) right here, because it will be the first thing to recover once we see a negotiated increase in the debt ceiling which has to happen before the summer. The 5G buildout continues unabated.
Q: Would you recommend buying Tesla (TSLA) shares again?
A: Yes, but at least $50 lower, which we may get. Or at least $50 off the $217 top. I think Tesla goes to $1,000 sometime in the next couple of years and so does Elon Musk. All of the factors that could drive the stock that high are in progress. I know it’s happening over there, and that’s easily a $1,000 stock once their current breakthroughs go mass-market.
Q: Any interest in Iron Condors?
A: It is the same as Strangles, with more limited risk with four legs, a call spread and a put spread because you stop out your losses at much lower levels. But they are very trading-intensive, commission-intensive trades, and it’s really too much for most beginners to handle. However, if you’re a professional, you might consider doing iron condors on these positions. Iron Condors also max profits when nothing moves, and lately, no move is a pretty rare event. We’re going to get it for the next couple of months, but don’t count on that being a frequent trade.
Q: Any iShares 20 Plus Year Treasury Bond ETF (TLT) LEAPS to buy now?
A: Yes I've been kind of sitting on my hands waiting to see if this bottom here holds at 99 before I put out LEAPS, but we’re so close it really almost makes no difference. And if I were to do a LEAPS here it probably would be the $100-$105 one-year out. That might get you about a 100% profit in a year. That’s a very safe LEAPS, and I’ll get the numbers out when I get a chance.
Q: What’s your opinion on Home Depot (HD)?
A: I like it for the long term. Clearly, their disastrous earnings report shows that the economy for home repair is not as strong as we thought it was, so it may go lower first. I would hold off until we get a real capitulation selloff in those stocks.
Q: Are gold and silver possible candidates for LEAPS?
A: Yes, especially in view of the recent correction in these metals. And we did put these out last October at the market bottom. I probably will be updating that sometime in the next few weeks.
Q: How much longer will the Ukraine/Russia war last?
A: The general consensus among the military now is that this goes on for several more years, and both sides will just keep pouring troops into the meat grinder until they get exhausted.
Q: Any way to play Platinum (PPLT) or Palladium (PALL)?
A: Yes, there are ETFs on each of them.
Q: Any thoughts on the crypto industry?
A: I have given up on the crypto industry because it has been shown that so many of these trading platforms were stealing from their customers. Once you lose the confidence of a customer on trust, you never get it back in the financial industry. Also, crypto was interesting a couple of years ago when it was going up and everything else in the world was too expensive, but now you have all the best stocks trading not far from multi-year lows, and that makes quality stocks much more attractive than a crypto where you really don't know what’s going to happen. Crypto could be another Nikkei, which after 32 years still hasn’t reached its old highs. That is unless it gets taken over by big banks like (JPM) and regains respectability that way.
Q: Any thoughts on investing in the AI trend?
A: AI has suddenly become what crypto was 2 years ago, and what 3D printing was 15 years ago. It’s just the theme of the day, and something to promote. There are no pure AI plays. Basically, all companies have been using it for 10 or 15 years, it’s not a new thing. In fact, AI is already in every aspect of your life, you just might not know it yet. NVIDIA (NVDA) is probably the purest AI play out there whose chips everyone needs to execute AI. Beyond that, the biggest AI users are Apple (AAPL), Alphabet (GOOGL), Meta (META), and Amazon (AMZN). When Amazon makes ten more recommendations on books you might like or movies you might watch, that is AI.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
With Medal of Honor Winner Colonel Mitchel Paige
Global Market Comments
December 2, 2022
Fiat Lux
Featured Trade:
(NOVEMBER 30 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMD), ($INDU), (TLT), (RCL), (VIX), (RIVN), (TSLA), (NVDA), (SLV), (GOLD), (USO), (XOM), (ALB), (SQM), (FMC), (CCI)
Below please find subscribers’ Q&A for the November 30 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: You keep mentioning December 13th as a date of some significance. Is this just because the number 13 is unlucky?
A: December 13th at 8:30 AM EST is when we get the next inflation report, and we could well get another 1% drop. Prices are slowing down absolutely across the board except for rent, which is still going up. Gasoline has come down substantially since the election (big surprise), which is a big help, and that could ignite the next leg up in the bull market for this year. So, that is why December 13 is important. And we could well flatline, do nothing, and take profits on all our positions before that happens, because whatever it is you will get a big move one way or another (and maybe both) on December 13.
Q: I’m a new subscriber, and I am intrigued by your structuring of options spreads. Why do you do debit spreads instead of credit spreads?
A: It’s really six of one and a half dozen of the other—the net profit is pretty much the same for either one. However, debit spreads are easier to understand than credit spreads. We have a lot of beginners coming into this service as well as a lot of seasoned old pros. And it’s easier to understand the concept of buying something and watching it go up than shorting something and watching it go down. Now, doing the credit spreads—shorting the put spread—gives you a slight advantage in that it creates cash which you can then use to meet margin requirements. However, it’s only a small amount of cash—only the potential profit in that position. And guess what? All the big hedge funds actually kind of like easy-to-understand trade alerts also, so that’s why we do them.
Q: I have a lot of exposure in NVIDIA (NVDA), so is it worth trading out of it and coming back in at a lower rate?
A: NVIDIA is one of the single most volatile stocks in the market—it’s just come up 50%. But it could well test the lower limits again because it is so volatile, and the chip industry itself is the most volatile business in the S&P 500. If your view is short-term, I would take profits now, and look to go back in next time we hit a low. If you’re long-term, don’t touch it, because NVIDIA will triple from here over the next 3 years. I should caution you that if you do try the short-term strategy, most people miss the bottom and end up paying more to get back into the stock; and that's the problem with all these highly volatility stocks like Tesla (TSLA), NVIDIA (NVDA) and Advanced Micro Devices (AMD) unless you’re a professional and you sit in front of a screen all day long.
Q: Would you buy now and step in to make it long-term?
A: I think we get a couple more runs at the lows myself. We won’t get to the old lows, but we may get close. Those are your big buying points for your favorite stocks and also for LEAPS. And I’m going to hold back on new LEAPS recommendations—we’ve done 12 in the last two months for the Concierge members, and maybe half of those went out to Global Trading Dispatch before they took off again. So, that would be my approach there.
Q: How much farther can the Fed raise interest rates until they reverse?
A: 1%-2%, unless they get taken over by the data—unless suddenly the economy starts to weaken so much that they panic and reverse like crazy. I think that's actually what’s going to happen, which is why we went hyper-aggressive in October on the long side, especially in bonds (TLT). You drop rates on the ten-year from 4.5% to 2.5% in six months—that’s an enormous move in the bond market. That is well worth running a triple long position in it; I think that’s what's going to happen. That’s where we will make out the first 30% in 2023.
Q: Should I short the cruise lines here, like Royal Caribbean (RCL)?
A: They do have their problems—they have massive debts they ran up to survive the pandemic when all the ships were mothballed, so it is an industry with its major issues. The stock has already doubled since the summer so I wouldn’t chase it up here. I’m not rushing to short anything here right now though unless it’s really liquid or has horrendous fundamentals like the oil industry, which everyone seems to love but I hate—right now the haters are winning for the short term, until December 16, which is all I care about.
Q: Is the diesel shortage going to affect farmers and all other industries like the chip?
A: As the economy slows down, you can expect shortages of everything to disappear, as well as all supply chain issues, which is a positive for the economy for the long term.
Q: What about the 2024 iShares 20 Plus Year Treasury Bond ETF (TLT) 95—is that not a trade?
A: That’s a one-year position with a 100% potential profit. That is worth running to expiration unless we get a huge 20-point move up in the next 3 months, which is possible, and then there won’t be anything left in the trade—you’ll have 95% of the profit in hand at which point you’ll want to sell it. So, with these one-year LEAPS or two-year LEAPS, run them one or two years unless the underlying suddenly goes up a lot, and then grab the money and run; that's what I always tell people to do. Because if you sell your position, they can’t take the money away from you with a market correction.
Q: Is the current US economy the best economy in the world?
A: It is. If you look at any other place in the world, it’s hard to find an economy that's in better shape, and it’s because we have the best management in the world and hyper-accelerating technology which everyone else begs and borrows. Or steals. People who are predicting zero return on stocks for 10 years are out of their minds. You don’t short the best economy in the world. If anything, technology is accelerating, and that will take the stock market with it in the next year or so.
Q: Do you see the Dow ($INDU) outperforming the other indexes until the Fed positive pivots?
A: Absolutely yes, because the S&P 500 (SPY) has a very heavy technology weighting and technology absolutely sucks right now. That would probably be a good 3-month trade—buy the Dow, and short the S&P 500 in equal amounts. Easy to do—you might pick up 10% on a market-neutral trade like that.
Q: Do you see a Christmas rally this year?
A: Actually, I do, but it won’t start until we get the next inflation report on December 13, at which point I'm going 100% cash. I’ve made enough money this year, and this is a problem I had when I ran my hedge fund: when you make too much money, nobody believes it, so there's really no point in making more than 50% or 60% a year because people think it’s fake. This is true in the newsletter business as well. Markets also have a nasty habit of completely reversing in January; this year, we had one up day in January, and then it was bombs away and we just piled on the shorts like crazy, so you have to wait for the market to first give you the fake move for the year, and then the real one after that. The best way to take advantage of that is to be 100% cash, and that’s why I usually do.
Q: What indicators do you see that give you the most confidence that inflation has peaked?
A: There's one big one, and that’s real estate. Real estate is absolutely in a recession right now and has the heaviest weighting of any individual industry in the inflation calculation. If anybody thinks house prices are going up, please send me an email and tell me where, because I’d love to know. The general feeling is they’re down 10-15% over the last six months. New homes are only being sold with massive buydowns in interest rates and free giveaways on upgrades. It is an industry that is essentially shut down, with interest rates having gone from 2.75% to 7.5% in a year, so there’s your deflation, but unfortunately, real estate is also the slowest to price in in the Fed’s inflation calculation, so we have to go through six months of torture until the Fed finally sees proof that inflation is falling. So, welcome to the stock market because it's just one of those factors. Just for fun, I got a quote on financing an investment property. The monthly payment would have been double for half the house that I already have.
Q: Are LEAPS a buy with the CBOE Volatility Index (VIX) this low?
A: No, you want to look at stocks first, and then the VIX; and with all the stocks sitting on top of 30-50% rises, it’s a horrible place to do LEAPS. LEAPS were an October play—we bought the bottom in a dozen LEAPS in October, and those were great trades, except for Tesla (TSLA) and Rivian (RIVN) which still have two years left to run. Up here, you’re basically waiting on a big selloff before you go into these one to two-year options positions.
Q: Why does Biden keep extending student loans? Will this catch up at some point?
A: He’s going to take it to the Supreme Court, and if he loses at the Supreme Court, which is likely, then he’ll probably give up on any loan extensions. At this point, the loan extensions on student loans are something like 2 or 2.5 years. The reason he’s doing this is to get 26 million people back into the economy. As long as you have giant student loan balances, you can’t get credit, you can’t get a credit card, you can’t buy a house, you can’t get a home loan. Bringing that many new people into the economy is a huge positive for not only them but for everyone else because it strengthens the economy. That has always been the logic behind forgiving student loans—and by the way, the United States is virtually the only country in the world that makes students pay back their loans after 30 or 40 years. The rest give college educations away either for free or give some interest-free break on repayments until they can get a salary-paying job.
Q: Does the budget deficit drop impact the stock market?
A: Yes, but it impacts the bond market first and in a much bigger way. That’s one of the reasons that bonds have rallied $13 points in six weeks because less government borrowing means lower interest rates—it’s just a matter of supply and demand. This has been the fastest deficit reduction since WWII, and markets will discount that.
Q: Will the US dollar (UUP) crash?
A: Yes, it will. You get rid of those high interest rates and all of a sudden nobody wants to own the US dollar, so we have great trades setting up here against everything, except maybe the Yuan where the lockdowns are a major drag.
Q: Is silver (SLV) a buy now?
A: No, it’s just had a big 10% move; I would wait for any kind of dip in silver and gold (GOLD) before you go into those trades. And when/if you do, there are better ways to do it.
Q: How is the Ukraine war going?
A: It’ll be over next year after Ukraine retakes Crimea, which they’ve already started to do. Russia is running out of ammunition, and so are we, by the way. However, the United States, as everybody learned in WWII, has an almost infinite ability to ramp up weapons production, whereas Russia does not. Russia is literally using up leftover ammunition from WWII, and when that’s gone, they’ve got nothing left, nor the ability to produce it in any sizable way. All good reasons to sell short oil companies ahead of a tsunami of Russian oil hitting the market. By the way, oil is now down for 2022.
Q: What's the number one short in oil (USO)?
A: The most expensive one, that would be Exxon Mobile (XOM).
Q: What’s going to happen to the markets in January?
A: After this Christmas rally peters out, I’m looking for profit-taking in January.
Q: When is a good time to buy debit spreads on oil?
A: Now. Look at every short play you can find out there; I just don’t see a massive spike up in oil prices ahead of a recession. And by the way, if the war in Ukraine ends and Russian oil comes back on the market, then you’re looking at oil easily below $50.
Q: What is the best way to invest in iShares Silver Trust (SLV) in the long term?
A: A two-year LEAP on the Silver (SLV) $25-$26 call spread—that gets you a 100%-200% return on that.
Q: Is lithium a good commodity trade?
A: Lithium will move in sync with the EV industry, which seems to have its own cycle of being popular and unpopular. We’re definitely in the unpopular phase right now. Long term demand for lithium will be increasing on literally hundreds of different fronts, so I would say yes, lithium is kind of the new copper. Look at Albemarle (ALB), Societe Chemica Y Minera de Chile (SQM), and FMC Corp. (FMC).
Q: If we do a LEAPS on Crown Castle Incorporated (CCI), you won’t get the dividend right?
A: No, you won’t, it’s a dividend-neutral trade because you’re long and short in a LEAPS. You have to buy the stock outright and become a registered shareholder to earn the dividend which, these days, is a hefty 4.50%. That said, if you’re looking for a high dividend stock-only play, buying the (CCI) down here is actually a great idea. For the stock-only players, this would be a really good one right now.
Q: Do you know people who are selling because of large capital gains?
A: The only people I know who are selling have giant tax bills to pay because of all the money they made trading options this year. I happen to know several thousand of those, as it turns out. So yes, I do know and that could affect the market in the next couple of weeks, which is why I went with the flatlined scenario for the next two weeks. Most tax-driven selling will be finished in the next two weeks, and after that, it kind of clears the decks for the markets to close on a high note at the end of the year.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING or DISPATCH TECHNOLOGY LETTER as the case may be, then click on WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
October 16, 2020
Fiat Lux
Featured Trade:
(CELL TOWER INDUSTRY IS PRINTING MONEY)
(CCI), (SBAC), (UNIT), (VNQ), (LMRK), (VMI)
Investors who want to green light capital into this sector should consider American Tower (AMT), Crown Castle (CCI), SBA Communications (SBAC), and Uniti Group (UNIT). Cell towers are the largest property sector by market capitalization making up 18% of the broad-based Vanguard Real Estate ETF (VNQ).
Three disruptive developments started before the pandemic will remain influential from the chronic housing shortage to retail apocalypse, and the migration to digital.
The 2020s will supercharge these three trends and tech investors need to scurry into the intersection of seminal trends to profit from the appreciation taking place in the U.S. economy.
As a 10% pullback in cell tower REITs over the last quarter reared its ugly head, offering a rare entry point into this segment of the U.S. tech ecosystem.
Usage of the cell towers has mushroomed throughout the pandemic. Cellular network capacity has been pushed to the limits as businesses, schools, and individuals take their in-person life and migrate it online.
5G is circling in the skies looking for a soft landing. Phone makers are frantically upgrading their device iterations to accommodate an internet speed that is 100X faster than what we have now.
Any company that flubs the 5G smartphone will be left in the dust.
Cell tower REITs will eventually be the focal point of 5G networks, supported by a network of higher-density small cells. High-power macro towers provide the most economical mix of wide coverage and capacity.
Super-fast Wi-Fi speeds will usher in a new era of super apps that will fundamentally disrupt the telecommunications space and deliver cheaper and more efficient apps to the consumer marketplace.
These super apps will make the apps we use now on our phones seem like a waste of time.
Cell tower REITs continue to benefit from favorable competitive positioning within the telecommunication sector. Scant supply and high demand should translate into continued pricing power for cell tower REITs.
Cell tower REITs are the “landlords” to the United States' four nationwide cellular network operators: AT&T (T), Verizon (VZ), T-Mobile (TMUS), and DISH Network (DISH). These three cell tower REITs own roughly 50-80% of the 100-150k investment-grade macro cell towers in the United States. This favorable competitive positioning has given these REITs substantial pricing power over the last decade amid the roll-out of 3G and 4G networks.
5G is the fifth-generation mobile network that powers mobile broadband, promising far-faster speeds and lower latency than the prior iteration.
5G networks require up to 10 times more physical antennas per tower, and cell tower REITs typically negotiate higher revenue per tower after each incremental equipment upgrade.
Cell tower REITs continue to be one of the few remaining growth engines of the REIT sector, and the health crisis has validated the need for additional network investments.
The dearth of cell tower supply - combined with the absolute necessity of these towers for networks - has given REITs substantial pricing power even as the number of potential tenants has dwindled down to just four national carriers over the last two decades.
High barriers to entry through the local permitting process and due to the economics of mass scaling make competition irrelevant.
This is a high-margin business with significant operating leverage driven by adding additional multiple tenants to existing towers.
Cell towers aren’t going away anytime soon and there is nothing to replace it on the horizon.
Another viable infrastructure play would be Landmark Infrastructure Partners (LMRK), an MLP that owns real property interests that underlie cellular towers, rooftop wireless sites, billboards, and wind turbines.
I would throw Valmont Industries, Inc. (VMI), who manufactures communication infrastructure, into the mix as well.
Global Market Comments
May 21, 2020
Fiat Lux
Featured Trade:
(MAY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (SDS), (TSLA), (VIX), (ROM), (SPY),
(TLT), (TBT), (DRI), (CCI), (BOTZ)
(TESTIMONIAL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 20 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: Do you believe chairman Powell when he says no negative rates?
A: I do believe that he does not want negative rates—that would be hugely detrimental to the economy. Europe and Japan have been trying them for the last ten years and they absolutely do not work. When it costs something to deposit money in the bank, people take it out of the financial system and hide it under their mattresses or buy gold (GLD). Although Powell doesn’t want negative rates, he may not have a choice; the market’s already taking them there in the futures market one year out. If we do get a big second wave of corona in the fall, and we do go to new lows in the stock market, and unemployment goes to new highs, negative rates will happen on their own whether Powell wants them or not.
Q: What is your best metric for determining when this bounce is over?
A: We passed those metrics on when a normal bounce is over weeks and weeks ago, and it just keeps going up. If you’ll notice, I have no stocks right now. I have some balanced long and short stock indexes but that’s it. My big trade is short bonds. When an asset class is no longer attractive, avoid it like Covid-19.
Q: What range should I wait for to buy the Proshares Ultra Short S&P 500 ETF (SDS)?
A: I’m really only using (SDS) as a hedge to limit the risk on much bigger long positions that I may have. (SDS) doesn’t lend itself to normal technical analysis because it is an artificial construct.
Q: What price to get into Tesla (TSLA)?
A: If you look at the Tesla chart, it's almost exactly the same as all of the other FANGS, as it’s essentially becoming the next FANG. So, they will trade with the FANGS for that reason, at least in the short term. Don’t buy it here, wait for the next major selloff to $600 or so. We actually had a bunch of concierge customers to buy long term leaps under $500 dollars in March, and they got 500% returns in 3 weeks.
Q: Why didn’t we just buy the ProShares Ultra Technology ETF (ROM) and go to sleep for five years?
A: If you recall, I was actually recommending just that in March when (ROM) was trading in the $80s, and we actually had a (ROM) position that we got stopped out of. The (ROM) is the 2x long technology ETF that's gone from $80 to $160 since the market bottomed almost 2 months ago.
Q: Why do you keep using deep in the money put spreads and call spreads?
A: You use them when volatility is very high like it is now—right now the Volatility Index (VIX) is at $28. The normal price is at $14 or $15, and we’ve just come down from $80. Even in the high $20s, you still get huge payoffs (like 10% a month) per call and put spread. As long as (VIX) is that high, we’ll keep doing them. They are also the perfect trade to have in range trading markets like we’ve had for the past month. They give you a nice extra kicker on your P&L.
Q: What is the worst-case scenario?
A: We get a second wave of the virus, another couple hundred thousand Americans die, the stock market goes to new lows, and we have a presidential election. How’s that for a worst-case scenario? Other than that, how is your day going?
Q: Do you trade pre and post market?
A: No; I used to when I ran my hedge fund, but I don’t do anything now if it’s beyond the capability of most individuals. I only want to put out trade alerts that people can get done. So, I'm only trading US hours. The reason you trade overseas is that you always get the highest highs and lowest lows in the Asian markets. During the late 1990s, I was the number one or two volume trader in the Singapore futures market.
Q: Do you think the 200-day moving average will be substantial resistance to the market?
A: I think absolutely yes, and I also believe that the only downside trigger for a major breakdown in the market is a second corona wave.
Q: If we get negative interest rates, would (SDS) fall?
A: No, (SDS) is a 2X bear (SPY) ETF that would go through the roof because negative rates would only happen if the stock market was collapsing. You might get a double on (SDS) on a second corona wave and negative interest rates. That’s why I’m keeping my position.
Q: Could the market just keep going up with no major pullbacks if the Fed keeps stimulating the economy?
A: Yes, and that’s what has been happening. Jerome Powell has said that the Fed’s ability to borrow is unlimited, therefore the amount of stimulus they can keep throwing is also unlimited, and if that’s what happens, all of that money will go into financial assets, even if the real economy is in utter freefall (which it has been). You can’t rule out anything these days. You always have to trade with the belief that anything can happen at any time.
Q: I need help setting up Long term Equity Participation Securities (LEAPS). Is there a video on that?
A: You can take all the educational videos we have on call spreads and put spreads, and everything applies exactly the same, except that instead of doing a one-month maturity, you do a two-year maturity. If you play around with the maturity tab on your platform, you can find the longest dated maturity on each option series. Sometimes, it’s only a year, sometimes all the way up to 2.5 years.
Q: Are there any other options besides the United States Treasury Bond Fund (TLT) to short the bond market?
A: Yes, there’s the ProShares Ultra Short 20 Year Treasury ETF (TBT); that’s a 2x short bond market ETF. But you don’t get anywhere near the leverage that we have in the (TLT) put options spreads.
Q: Do you expect a return in inflation with all the stimulus going on?
A: Absolutely yes; food prices have already increased 20%—that will be a big inflationary push. Another $14 trillion in government QE and spending hitting the economy is also highly inflationary. And a lot of the price cuts which fueled deflation are ending as global supply chains are cut and the US food distribution system breaks down.
Q: Is the Great Depression on the table?
A: We are in a Great Depression now that is already far worse than the last one, except that this one will be shorter than the decade seen in the 1930s.
Q: How long will it take for unemployment to recover to the December 2019 3.5% unemployment lows?
A: We will never get back to those lows. A lot of that was over employment (artificial employment), with a lot of temporary marginal workers being picked up. And the net effect of the epidemic will be to make businesses forcibly more efficient; that means getting a lot more done with a lot fewer workers. So, I don't think we’ll ever see that 3.5% rate again. Economists are predicting that the next new low in unemployment may be 5% or 6%, and even that could take 2 or 3 years to get there.
Q: Will the market soar on vaccine news?
A: Well probably not; I would bet that two-thirds of any real vaccines are already in the price. We are getting vaccine announcements every day and the market is immediately discounting it, so when we actually do get the real thing, we may get a rally of only a few days and that’s it. We also won’t know for many months if it is real and is moved to mass production.
Q: If you would buy one restaurant, what would it be?
A: None; I would not touch the restaurants here with a 10-foot pole. None of the restaurant chains have any prospect of making a profit, except for maybe the ones that already had takeout models like Subway or Chipotle Mexican Grill (CMG). Some hedge funds are buying Darden (DRI), but with their money, not mine.
Q: Should I double my short position in volatility (VIX)?
A: No, not down here, especially after a huge run in the stock market like we had—a 40% rise off the bottom. If we do get above $50 though, I will be shorting volatility then.
Q: I bought the (BOTZ) AI and robotics ETF, on your recommendation—it’s now almost double off the lows. What should I do with it now?
A: Short term, take profits, long term keep it. I think the (BOTZ) doubles again from these levels, and I know some of you out there bought LEAPS on the (BOTZ) at the lows and you’re up 1,000% on those. If you have a 1,000% profit take it, you probably won’t get another one in your lifetime.
Q: Time to refi the house?
A: No, I think refi rates are artificially high now (and totally out of line with the bond market) because the default rate is so high—8%. Once that default rate starts to drop, the interest rate on mortgages should also fall, and I think you could see 2.5% on the 30-year fixed rate mortgage. Europe has had 0% rates for almost 10 years, and their home mortgages are at 2%, so that’s ultimately how low we could go.
Q: Are you worried about the debt related to Crown Castle International (CCI)?
A: No because they’re putting all the debt to good use and they can always refi at lower rates. There is no question that the demand for cell phone towers is going to be enormous—epidemic or not, because of the roll-out of 5G phones.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
May 20, 2020
Fiat Lux
Featured Trade:
(THE HYPER-ACCELERATION OF 5G)
(AMZN), (5G), (CCI), (MSFT), (NFLX), (APPL)
I will explain to everyone why a wonky side effect of coronavirus is supercharging the 5G revolution.
Market valuations reflect the state of expected future cash flows in a company.
Under this assumption, some could argue that most tech companies with staying power are almost a good buy at any price.
No-brainers would include a list of Microsoft, Amazon, Apple, and Netflix.
The health scare and the carnage associated with it has brought forward the tech industry as a whole to the forefront of the global economy.
When you mix that with the Fed hellbent on saving everything that has a heartbeat, it sets up conditions for heavy buying in an industry that is going to be king of the global economy anyway.
It is not a question of if, but when and the health phenomenon has accelerated the dramatic migration to tech by showing how business will be conducted in about 15 years.
The change took place in a blistering 4 weeks.
The clearest signal of who is really calling the shots in the equity market is looking at which companies are dragging it up.
Technology is shouldering the responsibility of the equity market by outperforming the broader market with many software companies’ share price higher than before the crisis.
For every Amazon or Microsoft, there is also a Macy’s or JC Penny showing that this is really a stock pickers market.
We have not only learned that tech companies are critical to our functioning as a society, but that large tech companies will be even more central than before even if they are currently losing gross revenue.
The relative gains to tech stemming from the coronavirus are equal or greater than an innovation of a game-changing product and will double the effect of 5G.
We are setting up for the Golden Age of 5G with tech poised to invade even more of the broader equity market.
One rough estimate notes that the 5G industry is expected to add about $40bn in incremental revenue to the semiconductor industry, add 5X growth in mobile data monthly traffic by 2024, and a $4.2tn boost to global economies from revenue streams connected to 5G in the next ten years.
I do agree that currently, the network effect is working in reverse order, but the positive force multiplier, when the economy is riding high again cannot be emphasized enough.
Digital revenue streams will effectively be pumped into every nook and crevice of the digital economy because of current modifications to the business environment.
When business does come back online, investors of physical assets will sell what they can at discounted prices to get into the digital ecosystem causing asset prices to explode as investors chase prices to the sky.
Do you remember commercial real estate guru and Colony Capital’s CEO Tom Barrack?
The company hoped to sell as much as 90% of its $20 billion property portfolio of hotels, warehouses, and other commercial real estate by the end of 2021.
They are also another big investor in nursing homes.
A real-estate pioneer who founded Colony in the early 1990s and is the firm’s chief executive and executive chairman, Barrack said he wanted to go “all digital.”
Rejigging the 29-year-old investment company represented an extreme response to the way technologies have been dismantling cash flow for almost every type of commercial real estate, and Barrack was met with fierce backlash from entrenched stakeholders regarding the new direction.
Commercial real estate and hotel operators have had to fight against the triple whammy of office sharing WeWork, short-term hotel platform Airbnb, and the coronavirus - a lethal three-part cocktail of malicious forces to the “traditional” model.
The coronavirus has proven Barrack was spot on with his synopsis, but he wasn’t able to get rid of Colony’s inventory of commercial real estate in the expeditious way he desired.
Other companies have taken a direct hit like 24 Hour Fitness who is pondering filing for bankruptcy, but I could say the same for a slew of companies like Colony Capital.
Another key manifestation of the current economic malaise is that regulators, antitrust, tax, foreign, and all of the above are less likely to disrupt big tech companies moving forward considering they may be the only ones able to get us out of a similar crisis in the future.
Government officials will be under rapid pressure to boost GDP levels and crimping big tech is counterintuitive to this overall goal.
I don’t agree with the glass half empty crowd who believe Amazon needs to be clamped down because of dominating retail during the time of the virus - if Amazon didn’t exist, the panic could have accelerated to an uncontrollable level creating anarchy in the streets.
The big boys have pushed soft power as a legitimate policy tool with Apple sourcing over 20 million face masks and is now building and shipping face shields.
Big tech is becoming like a mini-government in its own right.
Granted that thousands of bankruptcies from restaurants, nail salons, and yoga studio will be swept into the dust bin of economic history, but once the next iteration of the economic cycle turns up, tech is about to go gangbusters in a way many never thought imaginable.
Then if you bake a little 5G into the pecan pie, investors are justified to be salivating about the tech industry’s prospects.
Any deep-pocketed investors should be cherry-picking every quality 5G tech play possible because they will be the most supercharged sub-sector of tech once the economy is reset.
Any long-term investor with a pulse should buy Crown Castle International Corp. (REIT) (CCI) on any and all dips.
They are the largest owner of cell towers owning over 40,000 in the U.S.
