Global Market Comments
December 7, 2020
Fiat Lux
FEATURED TRADE:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or A DICEY LANDING)
(SPY), (TLT), (AMZN), (TSLA), (CRM), (JPM), (CAT), (BABA),
(FCX), (GLD), (SLV), (UUP), (FXE), (FXA), (FXB), (FXY), (FXI), (EWZ), (THD), (EPU)
Landing my 1932 de Havilland Tiger Moth biplane can be dicey.
For a start, it has no brakes. That means I can only land on grass fields and hope my tail skid catches before I run out of landing strip. If it doesn’t, the plane will hit the end, nose over, and dump a fractured gas tank on top of me. Bathing in 30 gallons of 100 octane gasoline with sparks flying is definitely NOT a good long term health plan.
The stock market is starting to remind me of landing that Tiger Moth. On Friday, all four main stock indexes closed at all-time highs for the first time since pre-pandemic January. A record $115 billion poured into equity mutual funds in November. This has all been the result of multiple expansion, not newfound earnings.
Yet, stocks seem hell-bent on closing out 2020 at the highs.
And there is a major factor that the market is completely ignoring. What if the Democrats win the Senate in Georgia?
If so, Biden will have the weaponry to go bold. The economy goes from zero stimulus to maybe $6 trillion raining down upon it over the next six months. That will go crazy, possibly picking up another 10%, or 3,000 Dow points on top of the post-election 4,000 points we have seen so far.
That is definitely NOT in the market.
The other big decade-long trend that is only just starting is the weak US dollar. Lower interest rates for longer were reaffirmed by the appointment of my former economics professor Janet Yellen as Treasury Secretary.
A feeble dollar brings us a fading bond market, as half the buyers are foreigners. A sickened greenback also provides the launching pad for all non-dollar assets to take off like a rocket, including commodities (FCX), precious metals (GLD), (SLV), Bitcoin, and the currencies (UUP), (FXE), (FXA), (FXB), (FXY), and emerging stock markets like China (FXI), Brazil (EWZ), Thailand (THD), and Peru (EPU).
All of this is happening in the face of a US economy that is clearly falling apart. Weekly jobless claims for November came in at 245,000, compared to a robust 638,000 in October, taking the headline unemployment rate down to 6.9%. The real U6 unemployment rate stands at an eye-popping 12.0%, or 20 million.
Some 10.7 million remain jobless, 900,000 higher than in February. Transportation and Warehousing were up 140,000, Professional & Business Services by 60,000, and Health Care 46,000. Retail was down 35,000 as stores shut down at a record pace.
OPEC cuts a deal, adding 500,000 barrels a day to the global supply. The hopes are that a synchronized global recovery can take additional supply. Texas tea finally busts through a month's long $44 cap, the highest since March. Avoid energy. I’d rather buy more Tesla, the anti-energy.
Black Friday was a disaster, with in-store shopping down 52%. Long lines and 25% capacity restrictions kept the crowds at bay. If you don’t have an online presence, you’re dead. In the meantime, online spending surged by 26%.
Amazon (AMZN) hires 437,000 in 2020, probably the greatest hiring binge since WWII, and is continuing at the incredible rate of 3,000 a week. That takes its global workforce to 1.2 million. Most are $12 an hour warehouse and delivery positions. The company has been far and away the biggest beneficiary of the pandemic as the world rushed to online commerce.
Tesla’s (TSLA) full self-driving software may be out in two weeks, instead of the earlier indicated two years. The current version only works on freeways. The full street to street version could be worth $8,000 a car in upgrades. Another reason to go gaga over Tesla stock.
Goldman Sachs raised Tesla target to $780, the Musk increased market share to a growing market. No threat from General Motors yet, just talk. Volkswagen is on the distant horizon. In the meantime, Tesla super bear Jim Chanos announced he is finally cutting back his position. He finally came to the stunning conclusion that Tesla is not being valued as a car company. Go figure. Short interest in Tesla has plunged from a peak of 35% in March to 6% today. It’s learning the hard way.
The U.S. manufacturing sector pauses, activity in the U.S. manufacturing sector barely ticked up in November as production and new orders cratered, data from a survey compiled by the Institute for Supply Management showed on Tuesday. The ISM Manufacturing Report on Business PMI for November stood at 57.5, slipping from 59.3 in October.
Salesforce (CRM) overpays for workplace app Slack, knocking its stock down 9%. This is worth a buy the dip trade in the short-term and this is still a great tech company which is why the Mad Hedge Tech Letter sent out a tech alert on Salesforce on the dip.
Weekly Jobless Claims dive, with Americans applying for unemployment benefits falling last week to 712,000 down from 787,000 the week before. The weakness is unsurprising as we head into seasonal Christmas hiring.
The end of the tunnel for Boeing (BA) as they bring to an end an awful 2020. Irish-based airline Ryanair Holdings placed a large order for a set of brand new Boeing 737 MAX aircraft, giving the plane maker a shot in the arm as the single-aisle jet comes off an unprecedented 20-month grounding.
Ryanair, Europe’s low-cost carrier, has 135 Boeing 737 MAX jets on order and options to bring the total to 200 or more. Hopefully, they won’t crash this time around. My fingers are crossed.
Dollar Hits 2-1/2 Year Low. With global economies recovering, the next big-money move will be out of the greenback and into the Euro (FXE), the Aussie (FXA), the Looney (FXC), the Japanese yen (FXY), the British pound (FXB), and Bitcoin. Keeping interest rates lower for longer will accelerate the downtrend.
When we come out the other side of this pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Global Trading Dispatch catapulted to another new all-time high. December is up 5.34%, taking my 2020 year-to-date up to a new high of 61.78%.
That brings my eleven-year total return to 417.69% or double the S&P 500 over the same period. My 11-year average annualized return now stands at a nosebleed new high of 38.00%. My trailing one-year return exploded to 64.56%. I’m running out of superlatives, so there!
I managed to catch the 50%, two-week Tesla melt-up with a 5X long position, which is always nice for performance.
The coming week will be a slow one on the data front. We also need to keep an eye on the number of US Coronavirus cases at 14.5 million and deaths at 285,000, which you can find here.
When the market starts to focus on this, we may have a problem.
On Monday, December 7 at 4:00 PM EST, US Consumer Credit is out.
On Tuesday, December 8 at 11:00 AM, the NFIB Business Optimism Index is published.
On Wednesday, December 9 at 8:00 AM, MBA Mortgage Applications for the previous week are released.
On Thursday, December 10 at 8:30 AM, the Weekly Jobless Claims are published. At 9:30 AM, US Core Inflation is printed.
On Friday, November 11, at 9:30 AM EST, the US Producer Price Index is announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, at least there is one positive outcome from the pandemic. Boy Scout Christmas tree sales are absolutely through the roof! We took delivery of 1,300 trees from Oregon for our annual fundraiser expected to sell them in two weeks. We cleared out our entire inventory in a mere six days!
We sold trees as fast as we could load them. With the scouts tying the knots, only one fell onto the freeway on the way home. An “all hands on deck” call has gone out to shift the inventory.
It turns out that tree sales are booming nationally. The $2 billion a year market places 21 million trees annually at an average price of $8 and are important fundraisers for many non-profit organizations. It seems that people just want something to feel good about this year.
Governor Gavin Newsome’s order to go into a one-month lockdown Sunday night inspired the greatest sales effort I have ever seen, and I worked on a Morgan Stanley sales desk! We shifted the last tree hours before the deadline, which was full of mud with broken branches and had clearly been run over by a truck at a well-deserved 50% discount.
I can’t wait until next year!
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
November 27, 2020
Fiat Lux
FEATURED TRADE:
(NOVEMBER 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (CRM), (CRSP), (CVS), (SQ), (CRSP), (LUV), (GLD). (SLV), (SPY), (TMO), (UUP), (TAN), (FXA), (FXE), (FXY), (FXB), (CYB)
Below please find subscribers’ Q&A for the November 25 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis.
Q: Is gold (GLD) still a hold?
A: Long term yes; short term no. Short term, cash is being drained out of gold in order to buy Bitcoin, just like silver. And once Bitcoin peaks, which could be today or tomorrow when it hits 20,000, then you could get a round of profit-taking and a nice little pop in gold. So, it's basically moving totally counter-cyclically to Bitcoin and the other cryptocurrencies right now.
(Note: since this webinar, Bitcoin has crashed by $3,000)
Q: A competitor of yours claims that asymptomatic transmission of COVID does not occur.
A: I would bet money that person does not have a medical degree. Asymptomatic transmission occurs in almost all diseases, so why COVID would be an exception is beyond me. I suggest that somebody is trying to sell newsletters at your expense with zero knowledge about the topic. Ask him to kiss a Covid victim. This is common in my industry where 99% of the people are crooks. This is also an example of the vast amounts of information that have been spread during an election year.
Q: Will you take a vaccine when it’s out or will you let others try it first?
A: Actually, by the time the public gets the vaccine, more than a million people will have already tried it, so I think it will be fairly safe. I am probably already the most vaccinated person on the planet; I've had flu shots every year for 40 years, so I will happily try it out. At my age, I have little to lose. And I would like to travel again, and that’s going to be a requirement for international travel. I am worried there could be long term side effects that we’ve seen with other drugs in the past, like all future children being born without arms and legs, which is what happened in the 1950s with Thalidomide.
Q: If the Senate flips to the Democrats, how do you see it affecting the market?
A: It doesn’t really affect the market overall; what it will do is affect sector reallocation. Solar, alternative energy and ESG companies do a lot better in A Democratic Senate, and energy oil companies do a lot worse. All you do is short the losers and buy the winners; it really makes no difference who wins. Most of the big conflicts over issues these days are social ones that don’t affect the market.
Q: Where do you see Tesla (TSLA) by the end of the year?
A: Well, this morning, it’s at an all-time high of $565. It looks like it wants to take a run at $600, and then we will be up 50% from where the news was announced that it was joining the S&P 500. That seems to me like a heck of a move on no real fundamental news. During this news, the market completely ignores a Model X recall and a Model Y pan from Consumer Reports. I would be inclined to take profits there or at least roll the strikes up on my options positions.
Q: What’s a good stock to play a commodity recovery?
A: You can’t do any better than Freeport-McMoRan (FCX), which I’ve been following for almost 50 years since I covered it for the Australian Financial Review newspapers.
Q: Will Salesforce (CRM) hold?
A: Yes, it’s just a matter of time before we break out to substantial new highs, and this is a stock that could double next year.
Q: What brokers do you suggest?
A: I would pick tastytrade, owned by my friend Tom Sosnoff who will be speaking at the Mad Hedge Traders & Investors Summit next week and will be answering all your questions. Click here for their site. To register for the summit, click here.
Q: Is CVS (CVS) a good buy?
A: I would say yes; a billion Covid-19 vaccine doses will need to be distributed next year. You can't do that without all the drug companies participating big time.
Q: Does Trump have a chance to win in his lawsuits?
A: It’s more likely that I will be elected the next Miss America; so, I wouldn’t place any bets on that. Some 30 consecutive Republican judges ruling against him does not augur well for his future.
Q: Would you buy any LEAPS here (Long Term Equity Participation Securities)?
A: Only in special one-off situations in the domestic stocks that haven’t moved in ten years. There are a lot of those out there now that I have been recommending. Those are all fertile territory for LEAPs, especially going out 2 years where you get the maximum bang for the buck and a 1,000% return. Don’t touch LEAPs in technology stocks here, and don’t touch Tesla in LEAPs.
Q: What’s your outlook on Southwest Air (LUV)?
A: I like it; it’s one of the healthiest domestic airlines most likely to come back.
Q: Are you going to update your long-term portfolio?
A: Yes, but I only update it twice a year and my next turn is on January 22. If you bought the last update on July 22, you made a fortune getting into Freeport McMoRan at $12 (it’s now $23), CRISPER Therapeutics at $80 (CRSP) (it’s now $110), and Square (SQ) at $110 (the current is $212). You can find it by logging into www.madhedgefundtrader.com, going to My Account, clicking on Global Trading Dispatch, on the drop-down menu, click on the Long-Term Portfolio tab and then clicking on the red tab for the Long-Term Portfolio. That lets you download an excel spreadsheet.
Q: Do you have any LEAPS to suggest now?
A: I only put out portfolios of LEAPS at giant market bottoms like we had in March. Then I put out lists and lists of LEAPS. At all-time highs, it’s not good LEAPS territory, except for specific names. So, if you want to get involved in that on a regular basis, I suggest you sign up for our Mad Hedge Concierge Service. There they are making millions of dollars a week right now.
Q: Where does the US dollar (UUP) go from here?
A: Straight down; the outlook for the buck couldn't be worse. I would be selling short the US dollar like crazy right now except that there are much better trades in US equities.
Q: Just to be clear, there’s no voter fraud?
A: There’s probably never been an election in US history without voter fraud on all sides; it’s just a question of who’s better at it. In the 1948 Texas Democratic Party runoff, back when the party owned Texas, Lyndon Johnson won by 87 votes out of 988,295 cast. It was later found that in five Hispanic-dominated counties that bordered Mexico, everyone had voted 100% for Johnson ….in alphabetical order. Johnson then took the seat with a 66% margin and went on to dominate the US Senate. I remember in the 1960 election, all the military absentee votes were sent flying around in circles over the Atlantic so Kennedy would win; that’s a story that’s been out there for a long time.
Q: You said stay away from other EVs except for Tesla?
A: A few have gone crazy this week, but that doesn’t mean they can actually make a car. So, you might get lucky on a quick trade on some of these, but long term, I don’t think any of the other non-Tesla EV companies are going to make it except for General Motors, which is plowing $27 billion into the sector. Even if (GM) may be able to put out a lot of cars, but they won’t be able to make very much money at it because they’re nowhere near the neighborhood of Tesla with the software where all the money is made.
Q: As the dollar gets weaker, will you expand your international stock picks?
A: Yes, we put out the first one in a long time, Ali Baba (BABA), on Monday, and we’ll be adding to that a bunch. I think the dollar could be weak for 5 or 10 years, a lot like it was in the 1970s.
Q: What’s your outlook for silver (SLV)?
A: Same as for gold (GLD). Quiet for the short term, double for the long term.
Q: Favorite names in biotech?
A: For that, you really need to subscribe to the biotech letter; we’re giving you two names a week there and all of them have done great. But another one might be Thermo Fisher (TMO), which seems to double every time I recommend it. It’s a great takeover target too.
Q: Is there any possibility of a 30% dip in the market (SPY) in 2021?
A: No, I don’t see more than a 10% dip in 2021. The tailwinds now are gale-force, generational, and will run for a decade.
Q: How do you sell the US dollar rally?
A: You buy all the ETFs that we cover in our foreign exchange sections. Those are the Australian dollar (FXA), the Euro (FXE), the Japanese Yen (FXY), the British pound (FXB), and the Chinese Yuan (CYB). Those are five ETFs that will do well on a weak dollar for the next several years.
Q: What about the Invesco Solar ETF TAN?
A: We have been recommending (TAN) for many years and it has done spectacularly well. I still love it long term, but it’s had one heck of a run; it’s up 300% from the March low. I think the entire country is about to have a solar explosion because the costs are now quite simply less than for oil. It’s an economic question. We are going to an all-Electric America.
Q: What do you think about LEAPS on gold?
A: It’s not really LEAPs territory yet, but on a two-year view, you’d have to do well on gold LEAPs.
Q: Is the Invesco DB US Dollar Index Bullish Fund (UUP) good to buy?
A: You should be looking to short the UUP. It’s a long dollar basket which we think will do terribly.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 30, 2020
Fiat Lux
Featured Trade:
(OCTOBER 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (VIX), (AMZN), (TSLA), (FEYE), (HACK), (PANW), (V), (TLT), (FXA), (FXC), (ZM), (DOCU), (RTX), (LMT), (NOC), (GD)
Below please find subscribers’ Q&A for the October 28 Mad Hedge Fund Trader 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 think if Trump contests the election, it will be bad for stocks?
A: Yes, count on that knocking another 10% off of stocks. The market has spent the last six months pricing in a Biden win. Take that away and you have to price that back out again, about 6,000 Dow Average points (INDU). We’ve already dropped 2,500 points so that leaves another 3,500 points of downside t0 go in the event of a Trump win.
Q: Will that result in a crash?
A: Yes. At least 1,000 points in the overnight session following.
Q: Do you think it’s going to happen?
A: No. According to the polls, Trump will lose by at least 15 million votes. While the polls missed the Electoral College result last time, they were dead on with the popular vote, with Hillary Clinton winning by 3 million votes. If the margin were only a few hundred or thousand votes in a single battleground state, Trump might win a court fight. But he can’t win if the margin is in ten states and tens of millions of votes. That is too much to fudge. That is how markets react: they hate surprises, and a second Trump win would be the surprise of the century.
Q: With all of the earnings positive, do you think markets will stay positive?
A: Earnings aren’t important right now. Everyone knew earnings would be great because we were coming off of hundred-year lows caused by the pandemic. So yes, we knew they’d be up 50%, 100%, 150%; that's not the surprise. The bigger issue is what the pandemic is going to do, and of course, only biochemists know that—most stock traders have no idea, which is reflected in these gigantic swings we’re seeing in the market both on the upside and the downside. As a biochemist, I can tell you that this is our final wave that's coming up and it could last several months. After that, we get a vaccine or herd immunity. When it's done, you have the bull market of a lifetime—up 400% in ten years from these levels. Dow 120,000 here we come!
Q: Do you see a tax selloff if Biden gets in? Should we get short?
A: Definitely; there will be a tax selloff. Past ones have only lasted a week or two and those were the last two weeks of December, so it really won’t be that bad. It’s not like it’s a surprise that Biden is ahead in the polls, because he has been for 6 months. Nor is it a surprise that he is going to raise taxes on the wealthy. I wouldn’t get short though. The short play was last week and the week before; and I did manage to get out three shorts but didn't want to get too big in front of an election. So those all worked. I'm out of all of them now, and now we’re looking only at long plays. And with the Volatility Index (VIX) over $40, you can go 20% or 30% in-the-money on these call spreads and still look to make 10%-20% profit on the position in a month.
Q: Isn’t the pandemic great for Amazon (AMZN)?
A: Yes, Amazon was taking over the world anyway, and forcing everyone to an online-only economy which couldn’t be better for them. A lot of this shifting is permanent and won’t be going back to the way it was before the pandemic with brick and mortar shops and malls. So yes, we love Amazon and I would buy on the dips. There’s a double from here.
Q: Do you have long term names I can buy to sit on?
A: Yes, we actually do have a long-term portfolio posted on the website. It would be listed under your subscription area once you log in—we rebalance that twice a year. And of course, we had a 10% holding in Tesla (TSLA) which went up ten times, so the performance of the long-term portfolio is through the roof. To find the long-term portfolio, please click here.
Q: Do you record this webinar?
A: Yes, we post it on the www.madhedgefundtrader.com site in two hours.
Q: Do you still like the Internet security stocks like FireEye (FEYE)?
A: Yes. Hacking is growing faster than the Internet itself. You should also look at Palo Alto Networks (PANW) and the ETF (HACK).
Q: Should we hold on to the Visa (V) spread hoping it will come back after the election drop?
A: Hope is not an investment strategy. I always stop out of positions when they hit a 2% loss. The only time I have 4% losses is when we get these gigantic gap moves overnight, which tend to happen once every one or two years. In this case, Visa got hit with a surprise antitrust suit from the Department of Justice that knocked $10 off of the stock. So no, I will not hold on to it in the hope that it does better; I will try to minimize my losses, get out, and get into the next winning position. Hope is what turns a 4% loss into a complete 10% write off.
Q: What’s your view on the Canadian dollar (FXC)?
A: I like it, but it’s not as good as the Australian dollar (FXA) because Canada has a major oil exposure, and actually the worst kind of oil exposure—tar sands in northern Alberta. The outlook for oil is poor and that will be a drag on the currency in the form of fewer exports. Buy the (FXA). No oil troubles here. Kangaroos are another story.
Q: Will you be looking to sell short on the United States Treasury Bond Fund (TLT)?
A: Yes, if we can just get a little bit higher. We’re looking at an economic recovery next year, so we’d expect the (TLT) to be lower by at least $20 points in 2021.
Q: Do you think the San Francisco and New York housing markets will return to what they were before with so many people are moving out of the city?
A: Yes, they will come back, I’ve been through many of these cycles in San Francisco over the past 50 years; it always comes back. Once the pandemic is over, people will say, “Oh my gosh, I can’t believe you can get a two-bedroom apartment in San Francisco for only $2 million.” That's probably another year or two off after a vaccine is in widespread distribution.
Q: Is real estate in a bubble?
A: Absolutely, but real estate bubbles can go on for a long time, like ten years. The bubble in Australia has been going on for 30 years. Ultimately, real estate prices are driven by the earnings power of the local economy which, in the case of San Francisco, is huge. This time around, we have a record large millennial generation looking for real estate. There are 85 million millennia buyers with only 65 million Gen X-er’s selling homes. So, we have to make up a shortfall of 20 million houses at some point. That’s why building permits are through the roof every month.
Q: Zoom (ZM) and DocuSign (DOCU) are the darling stocks of COVID 2020—what do you think about them at these high prices?
A: Very high risk. If you bought these a year ago when we first started covering them, good for you as they're up ten times. However, there are better fish to fry than chasing these big pandemic winners at all-time highs.
Q: If Biden wins, what happens to defense stocks like Raytheon Technology (RTX)?
A: They go down. It turns out a lot of the defense business is in very long term contracts that can’t be broken. They have to supply so many planes a year to the government for a decade or more. However, the sentiment on these sectors sours under democratic administrations because they are not initiating new weapons systems where the big money is made. Lockheed Martin (LMT), Northrop Grumman (NOC), and General Dynamics (GD) all have the same problem. I grew up with these companies. They were the FANGs of their day.
Q: How does a Biden win affect Tesla (TSLA)?
A: Then $2,500 a share for Tesla looks cheap (it’s now at $410). Biden will do everything he can to slow climate change and accelerate alternative energy. Tesla is front and center on that. Under current law, car manufacturers are limited on the number of units they can sell to get the $7,500 tax break per vehicle. Tesla used up all their subsidies five years ago. My bet is that the limits will be eliminated and that leads to a huge surge in Tesla sales in the U.S., which is why the stock has gone up 10 times in the last year. Tesla has promised to drop their car price to $25,000 in three years. If you throw in $10,000 in federal and state tax subsidies you get the car for free. Then you can write off General Motors (GM) and Ford (F).
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 2, 2020
Fiat Lux
Featured Trade:
(SEPTEMBER 30 BIWEEKLY STRATEGY WEBINAR Q&A),
(NVDA), (AMD), (JPM), (DIS), (GM), (TSLA), (NKLA),
(TLT), (NFLX), (PLTR), (VIX), (PHM), (LEN), (KBH), (FXA), (GLD)
Below please find subscribers’ Q&A for the September 30 Mad Hedge Fund Trader 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: Which is a better buy, NVIDIA (NVDA) or Advanced Micro Devices (AMD)?
A: NVIDIA is clearly the larger, stronger company in the semiconductor area, but AMD has more growth ahead of it. You’re not going to get a ten-bagger from NVIDIA from here, but you might get one from Advanced Micro Devices, especially if a global chip shortage develops once we’re out the other side of the pandemic. So, I vote for (AMD), and did a lot of research on that company last week. You can find the report at www.madhedgefundtrader.com but you have to be logged in to see it.
Q: Do you have any thoughts on the JP Morgan Chase Bank (JPM) spoofing cases, where they had to pay about a billion in fines? Is this a terrible time to invest in banks?
A: No, this is a great time to invest in banks because this is the friendly administration to banks now; the next one will be less than friendly. On the other hand, an awful lot of bad news is already in the price; buying these companies at book value or discount of book like JP Morgan, it's a once in a lifetime opportunity. All the bad behavior they’re being fined on now happened many years ago. So yes, I still like banks, but you really have to be careful to buy them on the dip, just in case they stay in a range. If you stay in a range, you’re buying them call spread, you always make money. The bigger drag on share prices will be the Fed ban on bank share buybacks but that may end after Q4.
Q: Is it time to buy Disney (DIS) after they laid off 28,000?
A: This is a company that practically every fund manager in the company wants to have in their portfolio. However, it could be at least a year before they get back to normal capacity in the theme parks, meaning customers packing in shoulder-to-shoulder. So, it could be another wait-for-a-turnaround, buy-on-the dip situation for sure. This company is so well managed that you’re always going to have to pay up to get into the Mouse House. By the way, my dad did business with Disney during the 1950s so we got Disneyland opening day tickets and I got to shake Walt Disney’s hand.
Q: How desperate is General Motors (GM) in buying the fake Tesla (TSLA) company, Nikola (NKLA), who've been exposed as giant frauds? Is GM hopeless?
A: Yes, the future is happening too fast for a giant bureaucracy like General Motors to get ahead of the curve. The fact that they’re trying to buy in outside technologies shows how weak their position is, and of course, it’s a great way to get stuck with a loser, as Tesla selling out to anyone. The Detroit companies are all stuck with these multibillion-dollar engine factories so they can’t afford to go electric even if they wanted to. So, I expect all the major Detroit car companies to go under in the next 5 years or so. Electric cars are already beating conventional internal combustion engines on a lifetime cost basis and will soon be beating them, within 3 years, on an up-front cost basis as well.
Q: Will Netflix (NFLX) pass $600 before the year's end?
A: I’m expecting a monster after-election rally to new all-time highs in the market and Netflix will be one of the leaders, so easy to tack on another hundred bucks to Netflix. That’s one of my targets for a call spread if we can get in at a lower price. And if you really want to be conservative, buy 2-year LEAPS, two-year call options spreads on Netflix, and you’ll get an easy 100% return on those.
Q: Who will win, Trump or Biden?
A: Neither. You will win. I am not a member of any political party as I would never join any club that would stoop to have me as a member. Groucho Marx told me that just before he died in the early 70s. Don’t ask me, ask the polls. Suffice it to say that the London betting polls are 60%-40% in favor of Biden, having just added another 5% for Biden after the debate. My expectation is that Biden picks up another point in the opinion polls in all the battleground states this weekend. So, Biden will be up anywhere from 6-10% in the 6 states that really count.
Q: What will the market impact be?
A: It makes no difference who wins. The mere fact that the election is out of the way is worth a 10% move up in the stock market.
Q: Should we keep the January 2022 (TLT) 140/143 bear put spread?
A: Absolutely, yes. That’ll be a chip shot and we in fact should go in the money on those number sometime next year. A huge cyclical recovery will create an enormous demand for funds and crowding out by the government will crush the bond market.
Q: Do you think it would be better to wait a week or two to lock in refis on home loans?
A: I think we are at the low in interest rates in the refi market. Even if the Fed lowers interest rates, banks aren’t going to lower their lending rates anymore because there's no money in it for them. It’s also taking anywhere from 2-4 months to close on a loan, as the backlogs are so enormous. If you can even get a loan officer to return a phone call, you’re lucky. So, I wouldn't be too fancy here trying to pick absolute bottoms; I would just refi now and whatever you get is going to be close to a century low.
Q: Why so few trade alerts?
A: Well, very simple. We only do trade alerts when we see really good sweet spots in the market. There aren’t sweet spots in the market every day; you’re lucky if you get 1 or 2 in a month. Then we tend to pour in and out of the market very quickly with a lot of alerts. There is no law that says you have to have a position every day of the year. That buys the broker’s yacht, not yours. You should only have positions when the risk reward is overwhelmingly in your favor. That is not now when our market timing index is hugging the 50 level. At 50, you actually have the worst possible entry point for new trades, long or short, so I’d rather wait for it to get away from that level before we get aggressive again. We have gone 100% invested multiple times in the last two months and made a ton of money. So, you just have to wait for your turn to get a sweet spot, and then you’ll make a very quick 10% or 15% in the market. Patience is rewarded in this business.
Q: Would you wait for the election because of the high implied volatility?
A: No, I would not wait. The game is to get in at the lowest price before the election. When the implied volatilities drop after the election, the profits you can make on these deep out of the money LEAPs drop by about half. Thank the volatility while it’s here because it’s creating great trading opportunities now, not in two months after the volatility Index (VIX) has collapsed.
Q: What about Zoom (ZM)?
A: As much as Zoom has had a 10-fold return since we recommended it a year ago, it looks like it wants to go higher. The Robinhood traders just love this stock; it’s a stay at home stock, stay at home is lasting a lot longer than anyone thought. Zoom is just coining it on that.
Q: Is the best outcome a Biden presidency and a Republican Senate?
A: No, that is the worst outcome. When you have a global pandemic going on, you don’t want gridlock in Washington. You want a very active Washington, controlled by a single party that can get things done very quickly. That is not now, which is possibly a major reason that we have the highest Covid-19 death rate in the world. It’s because Washington is doing absolutely nothing to stop the virus; the president won’t even wear a mask, so yes, you need one party to control everything so they can push stuff through. If it works, great, and if not then you kick them out of office next time and let the other guys have a try.
Q: Will property markets be up 20% by the end of the year?
A: If you live in a suburb of New York or San Francisco, then yes it will be up that much. For the whole rest of the country, the average is more like 5% gains year on year. In the burbs of these big money-making cities, prices are going absolutely nuts. My neighbor put his house up and it sold in a week for a $1 million over asking. So, the answer to that is yes, hell yes.
Q: Can you explain why the IPO market is suddenly booming now?
A: A lot of these companies like Palantir (PLTR) have been in development for 20 years, and prices are high. On valuation terms, we are at dot com bubble peaks now. That is the very best time to take your company public and get a huge premium for your stock. When the world is baying for paper assets, you print more of them.
Q: What is the best way to play real estate?
A: Buying the single home building companies like Pulte Homes (PHM), Lennar Homes (LEN), and KB Homes (KBH).
Q: What is your Tesla overview in China?
A: Tesla’s already announced that they’re doubling production of the Shanghai factory, from 250,000 units a year to 500,000. They built the last one in 18 months. It would take (GM) like 5 years to build something like that.
Q: Why has gold (GLD) lost its risk-off status?
A: It’s now a quantitative easing asset—like tech stocks, like bitcoin, and the stay at home stocks. It is being driven much more by QE-driven speculators flush with free cash than anyone looking for a flight to safety bid. When this group sells off, gold drops as well. The only risk-off asset right now is cash. That is the only “no risk” trade.
Q: What does reversal in lumber prices tell you?
A: Lumber was another one of those QE assets—it tripled. But you have this monster increase in new home building, huge demand for new homes in the suburbs, huge import duties leveled by the Trump administration on lumber coming from Canada. Also, a lot of people are getting COVID-19 in the lumber mills. So, they’re having huge problems on the production side in lumber, as a result of the pandemic.
Q: Are there any alternative ways to buy the Australian dollar besides (FXA)?
A: You go into the futures market and buy the Australian dollar futures. That is an entirely new regulatory regime so can be a huge headache. It requires you to register with the Commodities Futures Trading Commission, which is the worst of all the major regulators, but that is an alternative. If you’re an individual and not regulated instead of being a professional money manager, then it’s much easier.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Summit of Mount Rose
Global Market Comments
August 18, 2020
Fiat Lux
Featured Trade:
(HOW TO HEDGE YOUR CURRENCY RISK),
(FXA), (UUP),
Let’s say you absolutely love a stock but despise the currency of the country it comes from.
The United States comes to mind.
The US Federal Reserve has announced they don’t expect to raise interest rates for three years. The US government is running record budget deficits. Debt to GDP is now at the highest level since WWII.
That means the greenback is about to become the weakest currency in the world. Look at the ten-year chart below and you’ll see that a major double bottom for the Aussie may be taking place.
Most American technology stocks are likely to gain 30% or more over the next two years. However, it’s entirely possible that the US dollar declines by 30% or more against the Australian (FXA) and Canadian (FXC) dollars during the same period. Making 30% and then losing 30% leaves you with precisely zero profit.
There is a way to avoid this dilemma that would vex Solomon. Simply hedge out your currency risk. I’ll use the example of the Australian dollar, as we have recently had a large influx of new subscribers from the land down under.
Let’s say you want to buy AUS$100,000 worth of Apple (AAPL), the world’s most widely owned stock.
Since Apple is listed on the New York Stock Exchange, its shares are denominated in US dollars. When you buy Apple in Australia, your local broker will automatically buy the US dollars for your account to settle this trade in the US, taking out a small commission along the way. You are now long US dollars, thus creating a currency risk.
Getting rid of this currency risk is quite simple. You need to offset your US dollar long with a US dollar short of equal value. Long dollars/short dollars give the Australian investor a currency-neutral position. The US dollar can go to hell in a handbasket and you won’t care.
There are several financial instruments with which you can do this. Buying Invesco Currency Shares Australian Dollar Trust ETF (FXA) is the easiest. This ETF invests 100% of its assets in long Australian dollar/short US dollar futures and overnight cash positions.
I’ll do the math for you on the final hedged position assuming that the Australian dollar is worth 70 US cents.
BUY AUS$100,000 long US dollars X US$0.70 cents/dollar = US$70,000.
US$70,000/$210 per share for Apple = 333 Apple shares
BUY US$70,000/$70 (FXA) price = US$1,000 shares of the (FXA)
Thus, by owning AUS$100,000 shares of Apple shares and 1,000 shares of the (FXA) you have completely removed the currency risk in owning Apple. You have, in effect, turned Apple into an Australian dollar-denominated stock. Apple can rise, the US dollar will fall, and you will make twice as much money in Australian dollars.
There are a few problems with this precise trade. The liquidity in the (FXA) is not great, especially during US trading hours. Understandably, the bulk of Aussie liquidity takes place during Australian business hours.
There are other instruments with which you can hedge out the currency risk of Apple, or any other US dollar-denominated investment.
You can take out your own short dollar position in the futures market. You can ask your bank to create a short position in the US dollar in the cash market. Or, you can simply ask your broker to hedge out your US dollar currency risk, for which they will charge you another small commission.
Hedging out currency risk not only is free, the market will pay you to do it. That’s because Australian dollar overnight interest rates at 1.00% are lower than US dollar overnight interest rates at 2.50%. By shorting Aussie against the buck, you get to keep this 1.50% interest differential.
You don’t have to be Australian to want your Apple shares denominated in Australian dollars. In fact, hedge funds do this all day long. They pursue a strategy of keeping their long position in the world’s strongest securities (Apple), and their shorts positions in the world’s weakest securities (the US dollar). This, by the way, is also the strategy of the Mad Hedge Fund Trader. It’s called “global long/short macro.”
The better ones often make money on both sides of the equation, with the longs rising and the shorts falling. You can do the same in your own personal online trading platform.
I should urge a word of caution here. What happens if you hedge out your US dollar risk, and the dollar continues to appreciate? Then you will get none of the gains from that appreciation and will end up losing money in Australian dollars if Apple shares remain unchanged.
In the worst case, if both Apple and the Aussie could go down, this accelerates your losses. So, currency hedging can be a double-edged sword. Yes, this may be irrational given the fundamentals of the Aussie and Apple. But as any experienced long term trader will tell you, “Markets can remain irrational longer than you can remain liquid.”
Many thanks to John Maynard Keynes.
