Global Market Comments
March 9, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SEARCHING FOR A BOTTOM),
(SPX), (VIX), (VXX), (CCL), (UAL), (WYNN)
Posts
OK, I’ll give it to you straight.
If the American Coronavirus epidemic stabilizes at current levels of infection, the double bottom in the S&P 500 (SPX) at 2,850 will hold, down 16% from the all-time high two weeks ago.
If it gets worse, it won’t, possibly taking the index down another 8.8% to 2,600, the 2018 low. Not only have we lost the 2019 stock market performance, we may be about to lose 2018 as well.
Of course, the problem is testing kits, which the government has utterly failed to provide in adequate numbers. The president is relying on disease figures provided by Fox News and ignoring those of his own experts at the CDC. And the president told us that the governor of Washington state, the site of the first US Corona hot spot, is a “snake,” and that the outbreak on the Diamond Princess is not his fault.
It’s not the kind of leadership the stock market is looking for at the moment. It amounts to an economic and biological “Pearl Harbor” where the government slept while the disease ran rampant. Until we get the true figures, markets will assume the worst. The real number of untested cases could be in the hundreds of thousands or millions, not the 350 reported. And stock prices will react accordingly.
There is an interesting experiment going on at the Grand Princess 100 miles off the coast of San Francisco right now which will certainly affect your health. Of the 39 showing Corona symptoms, 21 were found to have the disease and 19 of these were crew.
That means ALL of the passengers who took the last ten cruises were exposed, about 30,000 people, 90% of whom are back ashore. The Grand Princess may turn out to be the “Typhoid Mary” of our age.
You can see these fears expressed in the volatility index, which hit a decade high on Friday at $55, although it closed at $42. We live in a world now were all economic data is useless, earnings forecasts are wildly out of date, and technical analysis is ephemeral at best. Airlines, restaurants, and public events are emptying out everywhere and the deleterious effects on the economy will be extreme.
That is kind of hard to trade.
The good news is that this won’t last more than a couple of months. By June, the epidemic will be fading, or we’ll all be dead. All of the buying you see now is of the “look through” kind where investors are picking up once in a decade bargains in the highest quality companies in expectation of ballistic moves upward out the other side of the epidemic.
Enormous fortunes will be made, but at the cost of a few sleepless nights over the next few weeks. The bear market will end when everyone who needs tests get them and we obtain the results.
The Fed cut interest rates by 50 basis points taking the overnight rate down to 1.25%. They may cut again in two weeks. Traders were looking for some kind of global stimulus to head off a global recession. Markets are in “show me” mode and were down 300 prior to the announcement.
Quantitative Easing has become the cure for all problems. So, if it doesn’t work, try, try again? The Fed has now used up all its dry powder levitating the stocks, with the market already at a 1.00% yield for ten-year money. We need a vaccine, not a rate cut. New York schools close on virus fears.
The Beige Book says Corona is a worry, in their minutes from the last Fed meeting six weeks ago, mentioning it 48 times in yesterday’s report. No kidding? Travel and leisure are the hardest hit, and international trade is in free fall. The presidential election is also arising as a risk to the economy. Worst of all, the new James Bond movie has been postponed until November. The report only applies to data collected before February 24.
The next recession just got longer and deeper, as the Fed gives away the last of its dry powder. It’s the first time the central bank was used to fight a virus. It only creates more short selling and volatility opportunities for me down the line. Thanks Jay!
Gold ETF assets hit all-time high, both through capital appreciation and massive customer inflows. Fund values have exceeded the 2012 high, when gold futures reached $1,927. They saw 84 metric tonnes added to inventory in February. The barbarous relic is a great place to hide out for the virus. I expect a new all-time high this year and a possible run to $3,000.
Biotech & healthcare are back! Bernie’s thrashing last week in ten states takes nationalization of health care off the table for good. Biden should sweep most of the remaining states. There’s nothing left for Bernie but Michigan and Florida. Buy Health Care and Biotech on the dip!
The Nonfarm Payroll was up 273,000 in February, much higher than expectations. At least we HAD a good economy. The headline unemployment rate was 3.5%%. As if anyone cares. The only number right now that counts is new Corona infections. This may be the last good report for a while, possibly for years.
Private Payrolls were up 183,000, says the February ADP Report. No Corona virus here. Do you think companies believe this is a short-term ephemeral thing? What if they gave a pandemic and nobody came?
Mortgage Applications were up 26%, week on week, as free money keeps the housing market on fire. Don’t expect too much from the banks though. Mine offered a jumbo loan at 3.6%. Banks are not lining up to sell at the bottom.
The OPEC Meeting was desperate to stabilize prices and they failed utterly. But if they fail to deliver at least 1 million barrels a day in production slowdowns at their Friday Vienna meeting, Texas tea could reach the $30 a barrel handle in days.
The airline industry will lose $113 billion from the virus, says IATA, the International Air Transport Association. All events everywhere have been cancelled, even my Boy Scout awards dinner for Sunday night and my flight to a wedding in April. Lufthansa just cancelled half of all it flights worldwide. Who knows where the bottom is for this industry? I bet you didn’t know that airline ticket sales account for 8% of all credit card purchases. Keeping my short in United Airlines (UAL).
My Global Trading Dispatch performance took a shellacking, pulling back by -4.41% in March, taking my 2020 YTD return down to -7.33%. That compares to a return for the Dow Average of -16% at the Friday low. My trailing one-year return is stable at 48.44%. My ten-year average annualized profit ground back up to +34.00%.
I took my hit of the year on Friday, losing 4.4% on my bond short. A 9-point gap move has never happened in the long history of the bond market. Fortunately, my losses were mitigated by a five-point dip I was able to use to get out, a hedge within my bond position, and three short positions in Corona related-stocks, (CCL), (WYNN), and (UAL), which cratered.
All eyes will be focused on the Coronavirus still, with deaths over 3,000. The weekly economic data are virtually irrelevant now. This is usually the weakest week of the month on the data front.
On Monday, March 9 at 10:00 AM, the Consumer Inflation Expectations is out.
On Tuesday, March 10 at 5:00 AM, the NFIB Business Optimism Index is released.
On Wednesday, March 11, at 7:30 AM, the Core Inflation Rate for February is printed.
On Thursday, March 12 at 8:30 AM, Initial Jobless Claims are announced. Core Producer Price Index for February is also out.
On Friday, March 13 at 9:00 AM, the University of Michigan Consumer Sentiment Index is published. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be shopping for a cruise this summer. I am getting offered incredible deals on cruises all over the world. Suddenly, every cruise line in the world is having sales of the century.
Shall it be a Panama Canal cruise for $99, a trip around the Persian Gulf for $199, or a voyage retracing the route of the HMS Bounty across the Pacific for $299. Of course, the downside is that I may be subject to a two-week quarantine on a plague ship on my return.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 24, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WAKE-UP CALL)
(SPY), (AAPL), (MSFT), (UAL), (CCL), (WYNN), (TLT)
After weeks of turning a blind eye, poo-pooing, and wishfully ignoring the global Coronavirus pandemic, traders are finally getting a wake-up call.
It turns out that the prospect of a substantial portion of the world’s population dying over the next few months cannot be offset by quantitative easing after all.
At least for the short term.
This weekend we learned that all Asian cruises have been cancelled. More factories in South Korea have been shut down for the lack of Chinese parts. Technology conferences in San Francisco have been cancelled. Some 80% of all Chinese flights are grounded.
GM assembly lines in Michigan are slowing, both from missing parts and customers. And we have just learned that a section of Italy near Milan has been quarantined, thanks to a major outbreak there.
I learned the true severity of Corona a week ago when I ended up sitting next to a research doctor who worked for San Francisco-based Gilead Sciences (GILD) on a first-class flight from Melbourne, Australia to San Francisco.
He was returning from Wuhan, China, the epicenter of the virus. Since all flights from China to the US are now banned, he had to route his return home via Australia.
What he told me was alarming.
The Chinese are wildly understating the spread of the Coronavirus by perhaps 90% to minimize embarrassment to the government, which kept the outbreak secret for a full six months.
Bodies are piling up outside of hospitals faster than they can be buried. Police are going door to door arresting victims and placing them in gigantic quarantine centers. Every covered public space in the city is filled with beds and the roads are empty. Smaller cities and villages have set up barriers to bar outsiders.
He expected it would be many months before the pandemic peaked. It won’t end until the number of deaths hits the tens of thousands in China and at least the hundreds in the US.
The frightening close in the S&P 500 (SPY) on Friday and the horrific trading in futures overnight in Asia suggest that the worst is yet to come.
Since the beginning of 2019, we have been limited to mere 5% downturns in the major indexes, creating a parabola of euphoric share prices. This time, we may not get off so lightly.
There is no doubt that Corona will take a bite out of growth this year. The question is how much. Central banks could well dip in for yet another round of QE to save the day.
The bigger question for you and me is whether investors are willing to look through to the other side of the disease and use this dip as an opportunity to buy. If they are, we are looking another 5% draw down. If they aren’t, then we are looking for 10%, or even more.
Then there is the worst-case scenario. If Corona reaches the proportion of the 1918 Spanish flu pandemic where 5% of the world’s population died, then we are looking at a global depression and an 80% stock market crash.
Hopefully, modern science, antibiotics, and rapid response research teams will prevent that from happening. We already have the Corona DNA sequence and several vaccines are already in testing. In 1918, they didn’t even know what DNA was.
The disease could well be peaking now as the course of the last surprise epidemic, that of Ebola in 2014, suggests (see chart below). Until then, we shall just have to hope and pray.
In addition to praying, I’ll be raising cash and adding hedges just in case providence is out of range.
30-Year Treasury Bond Yields (TLT) hit all-time lows following on from the logic above, calling for a melt-up of all asset prices. Collapsing interest rates doesn’t signal an impending recession but a hyper-acceleration of technology wiping out jobs by the millions and capping any wage growth. I’m looking for 1.00% on the ten-year. Money will remain free as far as the eye can see.
Apple tossed Q2 guidance, giving up most Chinese sales because of the big Coronavirus shutdown. The stores have been closed. The stock dives overnight, down $10. Shutdown of its main production factory at Foxconn didn’t help either. Nintendo is also struggling with production of its wildly popular Switch game. When you lose the leader, watch out for the rest of the market.
Massive Chinese Stimulus should head off any sharp downturn in the economy. Will an interest rate cut and a huge dose of QE be enough to offset the deleterious effects of the Coronavirus? Ask me again in another month.
Expats fled Asia and are not returning until the epidemic is over. My plane on the way home was full of Americans taking families home to avoid the plague. It’s yet another drag on the global economy.
Housing Starts plunged 3.6% in January, while permits hit a 13-year high. It’s all a giant interest rate play fueled by massive liquidity.
US Existing Home Sales faded in January, down 1.3%, to a seasonally adjusted rate of 5.46 million units. Inventories are down to an incredible 3.1 months, near an all-time low. I guess consumers don’t want to rush out and buy a new home if they are about to die of a foreign virus.
The Fed Minutes came out and it looked like the central bank wanted to keep American interest rates unchanged. The January meeting showed a stronger forecast for the economy, so no chance of another interest rate cut here. Even last month, Coronavirus was becoming an issue.
Leading Economic Indicators soared, up 0.8%, versus 0.4%. It’s the highest reading in 2 ½ years. If Coronavirus is going to hurt our economy, it’s not evident in the numbers yet.
The Philly Fed was also red hot, at 36.7. It’s another non-confirmation of the Corona threat.
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 used the steadily falling prices and sharply rising volatility Index of last week to scale into an aggressive long position from 100% cash.
I bought deep in-the-money call spreads in FANG stocks like (AAPL) and (MSFT) I also picked up additional positions in shares most affected by the Coronavirus, like Carnival Cruise Lines (CCL), United Airlines (UAL), and Wynn Resorts (WYNN), which are all down 25% from recent peaks.
My Global Trading Dispatch performance rose to a new all-time high at +359.73% for the past ten years. February stands at +0.69%. My trailing one-year return is stable at 46.61%. My ten-year average annualized profit ground back up to +35.38%.
All eyes will be focused on the Coronavirus still, with deaths over 2,000. The weekly economic data are virtually irrelevant now. However, some important housing numbers will be released.
On Monday, February 24 at 8:30 AM, the Dallas Fed Manufacturing Index is published.
On Tuesday, February 25 at 8:30 AM, the S&P Case Shiller National Home Price Index for December is out .
On Wednesday, February 26, at 8:00 AM, January New Home Sales are released.
On Thursday, February 27 at 8:30 AM, the government announced the second look at Q4 GDP. Weekly Jobless Claims are also out at 8:30.
On Friday, February 28 at 9:45 AM, the Chicago Purchasing Manager Index is printed.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, we have just suffered the driest February on record here in California, so I’ll be reorganizing my spring travel plans. Out goes the skiing, in comes the beach trips. Such is life in a warming world.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 10, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BATTLING THE CORONAVIRUS),
(SPY), (CCL), (RCL), (WYNN), (DAL), (VIX), (VXX)
I am writing this to you from the first-class cabin of Quantas Airlines on the nonstop flight from Melbourne, Australia to San Francisco, a 14-hour flight. While my flight from the US to the Land Down Under was packed, the return was half empty, great for free upgrades.
It has been a daunting day. I was originally scheduled to transfer on my flight from Perth to Sydney. But my plane there was found to be contaminated with Coronavirus and had to be decontaminated. I quickly rerouted.
I ended up sitting next to a research doctor who worked for San Francisco based-Gilead Sciences (GILD) and was returning from Wuhan, China, the epicenter of the virus. Since all flights from China to the US are now banned, he had to route his return home via Australia.
What he told me was alarming.
The Chinese are wildly understating the spread of the Coronavirus by perhaps 90% to minimize embarrassment to the government, which kept the outbreak secret for a full six months.
Bodies are piling up outside of hospitals faster than they can be buried. Police are going door to door arresting victims and placing them in gigantic quarantine centers. Every covered public space in the city is filled with beds and the roads are empty. Smaller cities and villages have set up barriers to bar outsiders.
He expected it would be many months before the pandemic peaked. It won’t end until the number of deaths hits the tens of thousands in China and at least the hundreds in the US.
The good news is that Gilead Sciences has an antiviral agent it developed for the other Coronaviruses, MERS and SARS, years ago which may be effective against the present epidemic. The company has already sent a planeload of the drug to China for immediate testing, which my new friend escorted.
The world has learned a lot since the West African Ebola outbreak of 2013. The Coalition for Epidemic Preparedness Innovation (CEPI) set up in response to that disease is now leading the charge against Corona.
A lab in Australia was able to isolate the virus in a month. The AIDS virus took ten years. It only required another day to sequence the genome. That has greatly shortened the time for the development of a vaccine and a cure. It will take a year to mass produce enough vaccine to inoculate the world. That will be too late to save the many in China who have already perished.
Needless to say, the impact on the global economy will be immense. As we learned from the trade war, take China out of the equation and many things don’t work anymore.
The country’s GDP growth rate is expected to plunge from 6% to 2% this quarter, and possibly zero. Factories have closed, disrupting supply chains globally. The car industry is most affected, with Hyundai in South Korea already shutting down production for lack of parts.
Travel and tourism shares, like airlines (DAL), casinos (WYNN), and cruise lines (CCL), (RCL) have also been hard hit.
US stocks are taking notice, but slowly. It seems that massive Quantitive Easing by the Federal Reserve is enough to head off even a global pandemic, at least for now. This will not last. We have already seen one 600-point down day and a (VIX) spike to $21. There will be more.
Despite the fact that we may be facing the end of the world, the Mad Hedge Trader Alert Service managed to catapult to new all-time highs.
My long volatility positions I picked up when the Volatility Index (VIX), (VXX) was a lowly $12, brought in a double or a triple for most holders in a mere two weeks.
My Global Trading Dispatch performance rose to a new high at +358.96% for the past ten years. My trailing one-year return rose to +48.59%. We closed out January with a respectable +3.11% profit. My ten-year average annualized profit ground back up to +35.31%.
All eyes will be focused on Corona, the virus, not the beer. The weekly economic data are virtually irrelevant now.
On Monday, February 10 at 1:00 PM, US Consumer Inflation Expectations are out.
On Tuesday, February 11 at 12:00 PM, JOLTS Job Openings for December are released.
On Wednesday, February 12, at 12:00 PM, Federal Reserve Chairman Jerome Powell testifies in front of congress.
On Thursday, February 13 at 8:30 AM, Weekly Jobless Claims come out. US Core Inflation for January is published.
On Friday, February 14 at 10:30 AM, Retail Sales for January are printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, after my epic voyage home, I’ll be catching up on my sleep, dealing with the 16 hours of jet lag from Western Australia.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
