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)
Posts
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 21, 2020
Fiat Lux
Featured Trade:
(ON EXECUTING MY TRADE ALERTS),
(TEN REASONS WHY STOCKS CAN’T SELL-OFF BIG TIME),
(SPY)
Global Market Comments
February 18, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TRADE ALERT DROUGHT)
(SPY), (TLT), (MSFT), (BA), (TSLA), (MGM)
Like it or not, we have a trade alert drought on our hands.
I just ran the numbers on 200 potential trades in stocks, bonds, foreign exchange, commodities, precious metals, and real estate, and there was not a single one that was worth executing.
They all had one thing in common: for taking huge risks, there were only paltry profits on offer. Even with a 90% success rate, I would still lose money.
And here is the problem. Massive quantitative easing from the US Federal Reserve is keeping the prices of all assets artificially high. But fears of a global Coronavirus pandemic are keeping all prices capped. The spread between the bid and the offer is only 3%. That is not enough to make an honest living, nor even a dishonest one.
I’ve seen all this before. The US in 1974, Tokyo in 1989, NASDAQ in 1999 presented similar trading dilemmas. The outcome is always the same. Prices always go up much longer than expected and then are followed by horrific crashes. Only when the last dollar is sucked in do trends change.
So, for right now, I would rather do nothing than something. We are in a contest to see who can make the most money with the fewest drawdowns, not to see who can strap on the most trades. The latter makes your broker rich, not you.
Cash is a position, it is an opinion, and it has option value. A dollar at a market top is worth $10 at a market bottom. Opportunity cost is not to be underestimated.
For the time being, everything depends on the Coronavirus. It is universally believed that the Chinese data is wildly inaccurate, possible by tenfold. The risks to the markets are similarly underestimated by US investors.
That became screamingly clear to me after returning from a trip halfway around the world where my temperature was taken every time I crossed a border and planes had to be sterilized before boarding
So, the smart game here is to be patient and learn some discipline. Wait for the market to come to you. This is a year when it will be incredibly difficult to make money and extremely easy to lose it.
All trade alert droughts end. Whether it will be sooner or later is anyone’s guess.
China is planning massive stimulus, to get the economy back on track. GDP could drop from 6% to 0% and maybe -6% thanks to the Coronavirus. A borrowing stampede is underway as shut down companies seek to address hemorrhaging cash flow.
Tesla (TSLA) exploded again to the upside, up 10% at the opening. The company has become a good news factory. The German government stepped in to subsidize a massive Gigafactory there. I won’t touch the stock here, but my long terms target is still $2,500.
Tesla finally took my advice and launched a $2 billion common stock offering at these lofty prices. It should be $5 billion. They can retire all their debt, including the convertible bonds, and with no dividend they can operate at a zero cost of capital. Elon Musk is taking $10 million of the deal. He took $100 million of the last offering. Buy (TSLA) on dips. Losses pile up for the short-sellers. Tesla always does the right thing after trying everything else out first.
The Fed’s Jay Powell cheers the economy but warned that the Coronavirus could become a factor. He also cautioned about a federal deficit that will top $1 trillion this year.
With the economy growing at a 2.2% annual rate, it’s below the Obama era growth. Did anyone notice that he said he would trim back QE by reigning in the repo program initiated last fall? Risk in the stock market is now extremely high.
Apple (AAPL) and Microsoft (MSFT) are now 10% of the entire stock market and are wildly overbought. Such incredible concentration is a typical sign of a topping market. Virtually all the stocks Mad Hedge has been recommending for the last decade are at new all-time highs. Be careful what you wish for.
Household Debt soared hitting a 12-year high. It’s up $601 billion to $14 trillion. It’s pedal to the metal for consumer spending, another classic market-topping indicator. What happens when the bill comes due and interest rates rise?
MGM (MGM) canceled guidance as the Coronavirus upends their business. High-end Chinese gamblers won’t show up to lose gobs of money at the gaming tables if they can’t get here. The epidemic has put the whole gaming industry into turmoil. Call me after new virus cases peak in China. Avoid (MGM).
Boeing had no net deliveries of aircraft in January, the first time since 1962, but the stock rose anyway. That tells me the bottom is firmly in. Buy (BA) on dips. When will the suffering of one of America’s best-run companies, accounting for 3% of GDP, end?
Despite the fact that we may be facing the end of the world, the Mad Hedge Trader Alert Service managed to maintain new all-time highs. I came out of my last position in Boeing (BA) to beat the ex-dividend day and a possible call on my short February $280 calls.
My Global Trading Dispatch performance rose to a new high at +359.00% for the past ten years. February stands at -0.04%. My trailing one-year return is stable at 47.39%. My ten-year average annualized profit ground back up to +35.31%.
All eyes will be focused on the Coronavirus still, with deaths over 1,800. The weekly economic data are virtually irrelevant now. However, some important housing numbers will be released.
On Tuesday, February 18 at 8:30 AM, the NY State Manufacturing Index for February is released.
On Wednesday, February 19, at 9:30 PM, January Housing Starts are out.
On Thursday, February 20 at 8:30 AM, Weekly Jobless Claims come out. The February Philadelphia Fed Manufacturing Index is announced.
On Friday, February 21 at 10:30 AM, January Existing Home Sales are printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll be driving back from Lake Tahoe, where I spent the long weekend catching up on the markets. There was virtually no snow, amazing for February, but great hiking.
Since I will be dropping 7,200 feet from Donner Pass and I have the new expended range Model X, I will be able to make it the 220 miles home on a single charge.
In two years, I’ll be able to make the 440-mile round trip on a single charge when the new Tesla Cyber truck comes out. Of course, people will think I’m nuts and my kids have refused to be seen in the cutting edge vehicle, but when did that ever stop me?
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 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
Global Market Comments
February 5, 2020
Fiat Lux
Featured Trade:
(A NOTE ON OPTIONS CALLED AWAY),
(MSFT), (TLT), (BA), (GOOGL), (SPY)
Global Market Comments
January 15, 2020
Fiat Lux
Featured Trade:
(FRIDAY, JANUARY 31, 2020 GUADALCANAL STRATEGY LUNCHEON)
(A RADICAL VIEW OF THE MARKETS),
(INDU), (SPY)
What if the consensus is wrong?
What if instead of being in the 11th year of a bull market, we are actually in the first year, which has another decade to run? It is not only possible, it is probable. Personally, I give it a greater than 50% chance.
There is a possibility that the bear market that everyone and his brother has been long predicting and that the talking heads assure you is imminent, has already happened.
It took place during the fourth quarter of 2018, when the Dow Average plunged a heart-rending 20%. How could this be a bear market when historical ursine moves down lasted anywhere from six months to two years?
Blame it all on hyperactive algorithms, risk parity traders, and hedge funds, which adjust portfolios with the speed of light. If this WAS a bear market and you blinked, then you missed it.
It certainly felt like a bear market at the time. Lead stocks like Amazon (AMZN), Apple (AAPL), Facebook (FB), and Alphabet (GOOGL) were all down close to 40% during this hellacious three-month period. High beta stocks like Roku (ROKU), one of our favorites, was down 67% at the low. It has since risen by 600%.
In my experience, if it walks like a duck and quacks like a duck, then it is a bear. If true, then the implications for all of us are enormous.
If I’m right, then my 2030 target of a Dow Average of $125,000, an increase of 331% no longer looks like the mutterings of a mad man, nor the pie in the sky dreams of a permabull. It is in fact eminently doable, calling for a 15% annual gain until then, with dividends.
What have we done over the last ten years? How about 13.08% annually with dividends reinvested for a total 313% gain.
For a start, from here on, we should be looking to buy every dip, not sell every rally. Institutional cash levels are way too high, and bearishness is rampant.
It all brings into play my Golden Age scenario of the 2020s, a repeat of the Roaring Twenties, which I have been predicting for the last ten years. This calls for a generation of 85 million big spending Millennials to supercharge the economy. Anything you touch will turn to gold, as they did during the 1980s, the 1950s, and well, the 1920s. Making money will be like falling off a log.
If this is the case, you should be loading the boat with technology stocks and biotech stocks at every opportunity. Although stocks look expensive now, they are still only at one-fifth peak valuations of the 2000 summit.
Let me put out another radical, out-of-consensus idea. It has become fashionable to take the current red-hot stock market as proof of a Trump win in the 2020 election.
What if the opposite is true? What if, in fact, the market is discounting a Trump defeat? It makes economic sense. It would bring an immediate end to our trade war with the world, which is currently costing us 1% a year in GDP growth. Take Trump out of the picture and our economy gets that 1% back immediately, leaping from 2% to 3% growth a year.
The last Roaring Twenties started with doubts and hand wringing similar to what we are seeing now. Everyone then was expecting a depression in the aftermath of WWI, now that the big-time military spending was ending. After a year of hesitation, massive reconstruction spending in Europe and a shift from military to consumer spending won out, leading to the beginning of the Jazz Age, flappers, and bathtub gin.
I know all this because my grandmother regaled me with these tails, an inveterate flapper herself. This is the same grandmother who owned the land under the Bellagio Hotel in Las Vegas until 1978 and then sold it for $10 million.
It all sets up another “Roaring Twenties” very nicely. You will all look like geniuses.
I just thought you’d like to know.
