Global Market Comments
May 26, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or LOOKING FOR THE NEW AMERICA),
(FB), (AAPL), (NFLX), (GOOGL), (MSFT), (TSLA), (VIX)
Posts
We are getting some tantalizing tastes of the new America that will soon arise from the wreckage of the pandemic.
Companies are evolving their business models at an astonishing rate, digitizing what’s left and abandoning the rest, and taking a meat cleaver to costs.
The corporate America that makes it through to the other side of the Great Depression will earn far more money on far fewer sales. That has been the pattern of every recession for the past 100 years.
While the pandemic may take earnings down from $162 per S&P 500 share in 2019 to only $50 in 2020, it sets up a run at a staggering $500 a share during the coming Roaring Twenties and Golden Age. All surprises will be to the upside and anything you touch will make you look like a genius.
For example, Target’s online sales have exploded 153%, allowing customers to order their groceries online and pick them up at curbside. (TGT) pulled this off in a mere three weeks. Without a pandemic, it would have taken three years to implement such a radical idea, if ever.
Survival is a great motivator.
The (SPY) has been greatly exaggerating the public’s understanding of the stock market. Five FANGs and Tesla (TSLA) with 50%-200% moves off the bottom have made the index look irrationally strong.
The fact is that the majority who have shares have not even made a 50% retracement of this year’s losses. A lot of stocks, especially the reopening ones, are still crawling back of subterranean bottoms.
Investors now have the choice of chasing wildly expensive stocks that have already had spectacular runs, or cheap ones that will go bankrupt by the end of the year. It is a Hobson’s choice for the ages. I expect 10% of the S&P 500 to go under by the end of 2020.
I am spending a lot of time on the ground talking to businesses in California and Nevada and have come to two conclusions. They cannot fathom the true depth of the Depression we are now in and are greatly underestimating the length of time it may take to recover. We may not see the headline unemployment rate under 10% for years unless the government redefines the statistics, which they always do.
The S&P 500 is not the economy. It only employs 25% of America’s private sector labor force accounting for 20% of its total costs. Real estate accounts for another 15%. That leaves 35% of costs that can be completely eliminated or reengineered. This creates enormous share price upside possibilities.
The concentration of the market is the most extreme I have ever seen, with five stocks getting most of the action, (FB), (AAPL), (NFLX), (GOOGL), and (MSFT).
There is a staggering $3.6 trillion in equity allocations sitting on the sidelines in cash. All those who got out at the March bottom are now desperately trying to get back in at the May top. Algorithms are making sure you get out cheap and get back expensive.
It will all end in tears.
One of the stunning developments of the crash has been the near doubling of retail stock trading. Options trading has increased even more. Millions of stimulus check recipients have poured their newfound wealth into the stock market instead of spending it on consumer goods, like they were supposed to.
This explains the over-concentration on the five FANG stocks, (FB), (AAPL), (NFLX), (GOOGL), and (MSFT), the greatest momentum stocks are out age, but in high speculative ones like Tesla (TSLA). The lowest cost online platforms like Tastytrade (click here) and Robin Hood (click here).
All of this is completely irrevocably changing the character of the stock market, perhaps permanently. This may also explain why the Volatility Index remains stuck above$26.
Fed Governor Jerome Powell said no recovery without vaccine, and that’s without a second wave. It could be a long wait. In the meantime, the Atlanta Fed said Q2 US GDP will be down -42%, the weakest quarter in American history. We find out mid-July.
Housing Starts collapsed by 30.2% in April, in the sharpest drop on record. But prices aren’t falling. There is still a massive bid under the market from still-employed millennials. Your home could be you best performing asset this year. The 30-year fixed rate mortgage at 3.0% is a big help.
Weekly Jobless Claims topped 2.4 million, taking the two-month total to a breathtaking 39 million. One out of four Americans is now unemployed, matching the Great Depression peak. US deaths just topped 98,000, 21 times China’s fatality rate where the disease originated and with four times our population. People will keep losing jobs until the death rate peaks, which could be many months, or years.
Leading Economic Indicators crashed by 4.4% for April, showing the economy is still in free fall. So, how much more stock do you want to buy here?
Up to 60% of mall tenants aren’t paying rent, with $7.4 billion skipped in April alone. See my earlier “Death of the Mall” piece. It’s another harsh example of the epidemic accelerating all existing trends.
The market is not reflecting the long-term damage to the economy, says my old buddy and Morgan Stanley colleague David Gerstenhaber. When the bailouts run out, the economy could go into free fall. It could take years to get below 10% unemployment rate again, as many of the layoffs and furloughs are permanent. Keep positions small. Anything could happen. I spent the 1987 crash with David.
Existing Home Sales cratered an incredible 17.8% in April to an annualized 4.88 million units, the largest one-month drop since 2010. Inventory dropped to an all-time low of only 1.7 million, down 19.7%, presenting a 4.1-month supply. Sellers failed to list and those who had a home took them off. Unbelievably, this pushed median home prices to a new all-time high of 286,000, up 7.4% YOY. The biggest sales fall in the west, where the US epidemic started.
China took over Hong Kong, suspending most civil liberties in response to Trump’s multiple attacks. And you know what? There is nothing we can do about it that hasn’t already been done. Talk about going into battle with no dry powder. I’m sure the US 7th Fleet will be out there soon to provoke an attack. Anything to distract attention from the 100,000 Americans who died from Covid-19 on Trump’s watch. As if markets didn’t already have enough to worry about.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $0 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance had another fabulous week, up an awesome +4.97%, and blasting us up to a new eleven-year all-time high of 77%. It has been one of the most heroic performance comebacks of all time.
My aggressive short bond positions really delivered some nice profits, despite the fact the bond market went almost nowhere. That’s because time decay for the June 19 expiration is really starting to kick in. I also got away with a small long in the bond market for the second time in two weeks.
That takes my 2020 YTD return up to +10.86%. That compares to a loss for the Dow Average of -12.6%. My trailing one-year return exploded to 50.85%, nearly an all-time high. My eleven-year average annualized profit exploded to +35.21%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here at https://coronavirus.jhu.edu.
On Monday, May 25, I’ll be leading the neighborhood veterans parade for Memorial Day. Markets are closed.
On Tuesday, May 26 at 9:00 AM, the S&P Case Shiller National Home Price Index is released.
On Wednesday, May 27, at 4:30 PM, weekly EIA Crude Oil Stocks are published.
On Thursday, May 28 at 8:30 AM, Weekly Jobless Claims are announced. We also get the second estimate for the Q1 GDP is printed. At 10:00 AM, April Pending Home Sales are announced.
On Friday, May 29, at 2:00 PM, the Baker Hughes Rig Count follows at 2:00 PM.
As for me, I will be hitting the town beaches at Lake Tahoe for the first time this spring, mask in hand, where waitresses serve you mixed drinks on order. Outdoors will be the only safe place this year.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
May 8, 2020
Fiat Lux
Featured Trade:
(WHY TECH IS THE BIG BAILOUT WINNER)
(EA), (ATVI), (TWLO), (UBER), (LYFT)
Today, we got a convincing signal that trillions of stimulus dollars are being diverted into one asset class – tech shares.
That’s right, even though main street has not participated in the V-shaped recovery that tech shares have basked in, tech’s profit engines have gotten through largely unscathed.
The earnings that have streamed out this week validate the big buying into tech shares and today’s price action was mouthwatering.
We had names like cloud communications platform Twilio (TWLO) rise 40% in one day, ride-sharing platform Lyft (LYFT) was up 21%, and Uber (UBER) another 11%.
Outperformance of 5% seemed pitiful today in an asset class that has gone truly parabolic.
Another sub-sector that can’t be held down is video games.
The rampant usage of video games dovetails nicely with the theme of tech companies who have triumphed the coronavirus.
There is nothing more like a stay-at-home stock than video game maker Electronic Arts (EA) who beat expectations during its March quarter.
The company reported adjusted earnings of $1.31 per share during its fiscal fourth quarter, topping consensus estimates at 97 cents a share.
Revenue also beat totaling $1.21 billion surpassing estimates by $.03 billion.
EA Sports has identified Apex Legends as their new growth asset and this free game is having a Fortnite-like growth effect.
Apex Legends was the most downloaded free-to-play game in 2019 on the PlayStation 4 system.
The full ramifications of Covid-19’s impact on EA’s business, operations, and financial results is hard to quantify for the long term and this has been a broad trend with many tech companies pulling annual guidance.
I can definitely say that the year 2020 is experiencing a video games renaissance.
On the downside, EA is heavy into sports video games, and cancellations of sports seasons and sporting events could impact results, given its popular sport simulation titles like FIFA and Madden NFL.
EA Sport’s competitor Activision Blizzard (ATVI) is positioned to reap the benefits by reimagining mainstay title Call of Duty Warzone and users have already hit 60 million players in just 2 months.
The result is accelerating momentum entering the second quarter from the dual tailwinds of strong execution and premium franchises following last year's increased investment.
With physical entertainment venues like movie theaters, live sports, and music venues closed, home entertainment services have pocketed the increased engagement.
Nintendo is another gaming company whose fourth-quarter profit soared 200% due to surging demand for its Switch game console, and that title Animal Crossing: New Horizons shifted a record 13.4 million units in its first six weeks.
Activision is riding other hit game franchises like World of Warcraft, Overwatch, and Candy Crush – to visit their roster of blockbuster games, please click here.
These blockbuster titles are carrying this subsector at a time when the magnifying glass is on them to provide the entertainment people crave at home.
Shares of EA and Activision Blizzard are overextended after huge run-ups and another gap up from better than expected earnings reports.
If there is a dip, then that would serve as an optimal entry point.
The lack of vaccine means that gaming will see elevated attention until there is a real health solution.
If there is a second wave that hits this fall, then pull the trigger on these video game stocks.
To visit Electronic Art’s website, please click here.
Mad Hedge Technology Letter
May 6, 2020
Fiat Lux
Featured Trade:
(THE GOLDEN AGE OF BIG TECH HAS ONLY JUST BEGUN)
(AMZN), (MSFT), (AAPL), (FB), (GOOGL), (ZM)
The tech market is telling us that the effects of coronavirus on the U.S. economy have accelerated the Golden Age of Big Tech pulling it forward to 2021.
You know, Big Tech is having their time in the sun when unscrupulous personal data seller Facebook is experiencing 10 times growth with its live camera product Portal video during the health crisis.
That is the type of clout big tech has accumulated in the era of Covid-19 and investors will need to focus on these companies first when putting together a high-quality tech portfolio.
Every investor needs upside exposure to a group of assets that is locked into the smartphone ecosphere.
There are no excuses.
Smartphones, although not a new technology, is now a utility, and the further away from the smartphone revenue stream you get, business is nothing short of catastrophic minus healthcare.
The health scare has ultimately justified the mammoth valuations of over $1 trillion that Apple, Microsoft, and Amazon command.
The next stop is easily $2 trillion and then some.
Consumers are so much more digitized in this day and age weaving in a tapestry of assets such as the iPhone at Apple, advertising at Facebook, and search ads at Google.
Can the coronavirus keep the digital economy down?
Green shoots are certainly popping up with regular consistency.
Facebook and Google have said that digital advertising has “stabilized.”
Apple, Amazon, Netflix, Facebook, and Google each reported financial results in the past week with profits and revenue that, while hit by the closure of the economy, still outperformed relative to the broader market.
Investors already priced in that Apple's iPhone sales temporarily disappeared, that Google's and Facebook's advertising revenue dropped and that Amazon is spending big to keep warehouse workers safe.
Forward expectations can only go north at this point reflecting a giant bull wave of buying that has benefited tech stocks.
Other top tier companies not in the FANG bracket have also gone gangbusters.
Zoom has turned into an overnight sensation now replacing all face-to-face meetings, sparking competition with Microsoft's Teams video chat and Google Meet.
The market grab that big tech has partaken in will position them as the major revenue accumulators for the next 25 years.
Unsurprisingly, Apple was the canary in the coal mine by calling out a dip in iPhone sales and manufacturing in China earlier in the year.
While iPhone's sales did fall, down nearly 7%, to $28.9 billion, its revenues from services and wearables, two categories that have been rising steadily for years, jumped 16.5% and 22.5% respectively.
Chip giant Qualcomm said phone shipments will likely drop about 30% around the globe in the June quarter while Apple rival Samsung, said phone and TV sales will "decline significantly" because of the coronavirus.
Google’s YouTube has grown 33% while the video giant keeps us entertained and Microsoft’s Xbox Game Pass subscription service notched more than 10 million subscribers.
Facebook said nearly 3 billion people use its collection of chat apps representing an 11% jump from a year ago.
Everywhere we turn, relative outperformance is evident which in turn minimizes the absolute underperformance in year to year growth.
The market is looking through and putting a premium on the relative outperformance.
Many are coming to the realization that the economy and population will live with the virus until there is a proper vaccine, meaning an elongated period of time where consumers are overloading big tech with higher than average usage.
President Trump’s chief economic adviser Larry Kudlow is projecting that the U.S. economy next year could see “one of the greatest economic growth rates.”
I would adjust that comment to say that big tech is tipped to be the largest winner of this monster rebound in 2021 putting the rest of the broader market on its back.
This is quickly turning into two economies – tech and everybody else.
The eyeballs won’t necessarily translate into a waterfall of revenue right away because of the nature of all the free services that they provide.
But at the beginning of 2021, a higher incremental portion of consumer’s salaries will be directed towards big tech and the fabulous paid services they offer.
Actions speak louder than words and Berkshire Hathaway’s Warren Buffett unloading billions in airline stocks is an ominous sign indicating that parts of the U.S. economy won’t come back to pre-virus levels.
The biggest takeaway in Buffet’s commentary is that he elected to not sell tech stocks like his big position in Apple validating my thesis that any investor not already in big tech will flood big tech with even more capital after being burnt in retail, energy, hotels, and airlines.
Then, when you consider the ironclad nature of tech’s balance sheets, even in the apocalyptical conditions, they will profit and rip away even market share from the weak.
It’s to the point where any financial advisor who doesn’t recommend big tech as the nucleus of their portfolios is most likely underperforming the wider market.
As the U.S. economy triggers the reopening mechanisms and we enter into the real meat and bones of the reopening, data will recover significantly signaling yet another leg up in tech shares.
Hold onto your hat!
Mad Hedge Technology Letter
May 1, 2020
Fiat Lux
Featured Trade:
(MICROSOFT KNOCKS IT OUT OF THE PARK)
(MSFT), (AMZN), (FB), (GOOGL)
Armed with the best management and stickiest tech products in the U.S., Microsoft (MSFT) has shown why every tech investor needs to own shares.
We just took profits from deep-in-the-money MSFT bull call spread and I’d be looking to get back into this name on any and every dip.
This tech company is unstoppable and the data underpinning their greatness reaffirms my point of view.
Microsoft said that 2 years of digital transformation has happened in the past 2 months.
The health crisis has shown that consumers cannot function without Microsoft and that will help fend off the regulatory monkey off their back.
Microsoft announced $35 billion in quarterly sales when analysts forecasted just $33.76 billion.
Tech companies have had to reduce their future projections as the health scare has done great damage to consumer demand with many pulling guidance completely.
Overall, tech companies were locked in for a 5% earnings decline which was the best out of any industry, but they are coming in higher than that.
Even more impressive, Microsoft’s management disclosed that COVID-19 had “minimal net impact on the total company revenue.”
That was really all you need to know about Microsoft who possesses services that consumers can never get rid of.
Everything else is just a cherry on top.
To get into the weeds a little, Azure cloud-computing business and Teams collaboration software, have become mainstay products as workers are forced to stay home and their companies need computing power and tools to support them.
Many of those products are bundled with ones that may not fare as well, however — for instance, Microsoft combines revenue from on-premises server sales with its Azure business.
The “Intelligent Cloud” segment that includes Azure rose to $12.28 billion in sales from $9.65 billion a year ago, beating the average analyst prediction of $11.79 billion.
“Productivity & Business Solutions,” which comprises mostly of the cloud software assets, including LinkedIn, grew to $11.74 billion from $11.52 billion a year ago, beating analyst predictions of $11.53 billion.
The most important nugget awaiting the masses was forward guidance.
Microsoft expects continued demand across Windows OEMs, Surface and Gaming to shift to remote work play and learn from home.
The outlook assumes this benefit remains through much of Q4, though growth rates may be impacted as stay-at-home guidelines ease.
Reduced advertising spend levels will impact search and LinkedIn and the commercial business.
A robust position in durable growth markets means Microsoft expect consistent execution on a large annuity base with continued usage and consumption growth.
LinkedIn will suffer from the weak job market and increased volatility in new, longer lead-time-deal closures.
A sign of strength and a pristine balance sheet was when Microsoft signaled that they could absorb higher costs by saying, “a material sequential increase” in capital-expenditure spending in the current quarter will “support growing usage and demand for our cloud services.”
Even best tech companies have mostly been trimming capex and freezing hiring in anticipation of weaker revenue targets.
I knew when Google announced 13% annual sales growth and Facebook saying that ad revenue “stabilized” meant that Microsoft would only do better.
The tech market had priced Microsoft doing quite positively which is why shares did not rocket by 8%.
Microsoft is not a one-trick pony like Google and Facebook either and simply doesn’t need a potential vaccine to boost sales moving forward.
They preside over a vast empire of diversified assets with even a growth lever in streaming platform YouTube.
Even if LinkedIn and the hiring that fuels it will suffer, the rest of its portfolio will keep churning out revenue in literally any type of economic environment.
Lastly, the tech market has been utterly cornered by policymakers who, according to the IMF, have thrown $14 billion of liquidity with a chunk of that following through into big tech shares.
The level of propping up from the Fed cannot be understated and their behavior feels as if there is no way anyone could ever be underweight Microsoft because of the Fed’s unlimited balance sheet.
On top of that, we are getting a steady stream of positive health reports in the form of antiviral medication Remdesivir and who knows when the next positive announcement will come.
To cap it off -they are led by the best CEO in the U.S. Satya Nadella, who is an expert on the cloud, and this company has to either be the best or second-best company in the country along with Amazon.
With the May 15 options expiration only ten trading days away, there is a heightened probability that your short options position gets called away.
We have the good fortune of having a large number of deep in-the-money call and put options spreads about to expire at their maximum profit points, five to be precise.
If that happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position with less risk. You just won the lottery, literally.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money put option spread, it contains two elements: a long put and a short put. The long put you own, but the short put can get assigned, or called away at any time and delivered to its rightful owner.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it.
All you have to do was call your broker and instruct him to exercise your long position in your May puts to close out your short position in the May puts.
Puts are a right to sell shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations.
A put owner may need to sell a long stock position right at the close, and exercising his long Put is the only way to execute it.
Ordinary shares may not be available in the market, or maybe a limit order didn’t get done by the stock market close.
There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, puts even get exercised by accident. There are still a few humans left in this market to blow it.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.
This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Mad Hedge Technology Letter
April 24, 2020
Fiat Lux
Featured Trade:
(WHERE THE ACTION WILL BE IN TECH)
(MSFT), (AMZN), (APPL), (GOOGL), (FB)
