Global Market Comments
March 30, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or COPING WITH CORONA),
(INDU), (VIX), (VXX), (UAL), (WYNN), (CCL), (SSO), (SPXU)
Posts
I am sitting in my Lake Tahoe office watching a light snow blanket the surrounding High Sierras. There is a stiff north wind whipping up whitecaps on a cerulean blue lake.
Spring break normally packs the Diamond Peak ski resort at Incline Village, Nevada. This year, it is a ghost town. The resort is closed, the streets deserted and the hotels empty.
Driving up from San Francisco, I had to stop at a Tesla Supercharging station at Rocklin, California next to a huge shopping mall for a top-up to cross Donner Pass. It was bereft of shoppers, looking like everyone had been wiped out by an uncontrollable plague. Of a hundred stores only Subway, Chipotle Mexican Grill (CMG), and Target (TGT) were open. I could almost hear the rent and interest payments ticking on.
And economically, it has.
Let’s do some raw, back-of-the-envelop calculations. Congress has just passed the largest stimulus package in history, some $2 trillion. If Morgan Stanley is right and the US is about to lose 30% of its economic growth on an annualized basis, that means the GDP is about to drop from $21.4 trillion to $19.8 trillion. Get two quarters like this and we fall back to $18.2 trillion, or to the 2016 levels.
That means the government is already $1.2 trillion behind the curve in bridge spending to carry over the economy to the other side of the epidemic. It can come back with another rescue package. If it does, there is no guarantee the money will end up in the right place to have any real effect.
Yes, we have just lost three years of economic growth, and the stock market is reflecting the same.
Of course, there are silver linings behind the clouds. Some 90% of the demand in the economy hasn’t been destroyed, it has been deferred. Cruises not taken, restaurant meals not eaten, and vacations not taken are gone for good.
However, a lot of discretionary purchases, such as for home, car, and computer purchases have simply been delayed until the fall. That's why so many forecasts call for an exploding economy in the second half.
A lot more economic economy isn’t lost, it has simply been rearranged. There has been a vast migration of legacy businesses to online. Most workers in Silicon Valley have adjusted from one to two days of work at home to five or six. The background noise of kids crying, and pets barking during an online meeting has become a normal part of business life.
And let’s face it, a lot of people are being paid for doing nothing. Government employees are receiving paychecks even though their agencies have been closed. Teachers are paid in annual contracts. Those Social Security and pension payments keep coming like clockwork.
I have spent the last week talking to old friends in the scientific community. Realistically, the economy will be shut down until June. You can open it up earlier, but only at the cost of hundreds of thousands of lives. Without restrictions, mathematically, everyone in the United States will be infected with Coronavirus within two months causing 6 million deaths. That’s the worst-case scenario.
Only when the infection rate hits 53% do we start to acquire herd immunity. That happens when there’s greater than 50% chance that the next person the virus contacts is immune.
Also, the greater the number of recovered individuals, the more we can tap for serum to treat existing patients and increase immunity and survival rates. Some 98% of those infected recover and become immune and non-contagious within two weeks.
Shelter-in-place orders and social distancing will greatly reduce those numbers. That’s what China did, and they have had no growth in new cases for two weeks.
My bet is that the epidemic will peak first in the states that sheltered-in-place early, and then peak in the Midwest later. That sets up two big waves of the disease, one in the spring, and a second in the summer and fall. Every state will have its own New York crisis moment sooner or later.
The president has expressed an interest in reopening the economy on April 13. If the stock market (INDU) believes that, then it is in for new lows. There is no point in predicting a final bottom. Once the algorithms get going, they are unstoppable.
Big companies like United Airlines, Wynn Resorts (WYNN), and Carnival Cruise Lines (CCL), have seen a staggering 90% decline in sales. Yet the wage bills and interest payments mount daily. The cruel math points to disaster on an epic scale.
Face reality. There is no way the stock market can bottom before the number of cases peaks. Front run that at your peril. The consolation is that will likely happen by June. This will be the shortest, sharpest depression in history.
Global Corona cases topped 704,095, and deaths 33,509 (click here for the latest data). Why does the US have 52% more cases than China with one quarter the population? Because the federal government was asleep at the switch and then responded with a test that didn’t work for the first month. That blinded us to an epidemic that was already here in force.
A monster 3.28 million in Weekly Jobless Claims hit the market last week, five times the previous record. That’s normally the total number of jobs you lose in a full recession. This is the number of claims you get from an entire recession.
The number was probably higher as many state websites crashed, limiting applications. This rate of claims will probably increase for two more months. One can only guess what the unemployment rate is, probably over 5%. Next week will be worse. Over 50 million work in retail and most will lose their jobs.
Chicago clearing firm Ronin Capital went under, unable to meet their capital requirements. It was one of the CME’s principal clearings firm, and their problems are stemming from the (VIX) spike to $80 this week. I knew it was totally artificial.
The forced liquidation of their massive holdings probably accounted for the incredible 25-point drop in the (VIX) on Thursday and the last 500 points of the fall in Dow Average on Friday. It sounds terrible, but the loss of several brokerage firms like this often markets a market bottom. This is the second time in two years that (VIX)-related blow-ups roiled the markets. For more about the firm, visit https://www.ronin-capital.com
Internet traffic is up 30% on the week as a massive move to online commerce takes place. There is now a laptop shortage as the government outbids the private sector to get machines for first responders. Phishing attacks are at record highs. Don’t click on any links sent to you, especially from Apple, your credit card company, or the IRS.
The Fed expects a 30% Unemployment Rate in Q2, or so says James Bullard, president of the Federal Reserve Bank of St. Louis. The Great Depression only hit 25% unemployment.
The US Real Estate market is freezing up. If you’re trying to sell a house right now, you’re screwed. Closings are impossible because of the shutdown of notaries and title offices. Open houses are now virtual only. The hit to the US economy will be huge.
Tokyo 2020 Olympics were postponed a year, as the Japanese finally cave to the obvious. Canada and Australia had already withdrawn for Corona reasons. Tokyo is really unluckily with Olympics. They lost the 1940 games to the outbreak of WWII. It will be a big hit for the Japanese economy.
Online Hiring is exploding, up 44% in the past week, a decades-old trend that is now vastly accelerating. Entire school systems have moved online. We are all working now on Zoom, Skype, GoToMeeting, and Google Hangouts. Internet traffic has doubled in some neighborhoods, slowing speeds appreciably.
Target saw a staggering 50% growth in same store sales. Lines go around the block, hours are limited, and the police are on standby to maintain order. This has been one of our favorite retailers for years (click here for “Is Target the Next FANG?”). If they only had more toilet paper! Buy (TGT) on the meltdown.
Blackrock rated US stocks a “Strong Overweight.” The firm believes we won’t see a repeat of 2008. The fiscal and monetary response has been overwhelming. It’s just a matter of time before markets settle down, but not until well after new Corona cases peak. Buy (BLK) on the dip.
Oil falls again, back to $21. Not even all the stimulus in the world can save this structurally impaired industry. Ask John Hamm of Continental Resources (CLR), whose stock has just crashed from $36 to $4. He’s the guy who wrote the billion-dollar divorce check. Avoid the entire industry on pain of death.
When we come out 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 $20 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 has had a descent week, pulling back by -8.22% in March, taking my 2020 YTD return down to -11.14%. That compares to an incredible loss for the Dow Average of -37% at the Monday low. My trailing one-year return was pared back to 30.88%. My ten-year average annualized profit recovered to +33.81%.
My short volatility positions have held steady. I used the 3,600-point rally in the Dow Average to add enough short positions to hedge out my risk in my exiting short volatility positions (VXX). Now we have time decay working in our big time favor. These will all come good well before their ten month expiration.
At the slightest sign of a break in the pandemic, the economy and shares should come roaring back. Right now, I have a 60% cash position.
This is jobs week and it should be the most tumultuous in history.
On Monday, March 30 at 9:00 AM, the Pending Home Sales for February are released.
On Tuesday, March 31 at 8:00 AM, the S&P Case Shiller National Home Price Index for January is out and should still show a sharp upward trend.
On Wednesday, April 1, at 8:15 AM, the ADP Private Sector Jobs Index is announced.
On Thursday, April 2 at 7:30 AM, Weekly Jobless Claims are announced. The number could top 3,000,000 again.
On Friday, April 3 at 9:00 AM, the March Nonfarm Payroll is printed. The Baker Hughes Rig Count follows at 2:00 PM. Expect these figures to crash as well.
As for me, I am at Lake Tahoe to hide out from the Zombie Apocalypse with my stockpile of Chloroquine and Azithromycin. There are only 536 cases in Nevada, most of which are in Las Vegas, and has a lot more food (click here for the latest updates).
I am building a Corona-sanitizing Station at the front door made of paper towels and isopropyl or ethyl alcohol. It kills the virus on contact.
I hear they even have toilet paper in a few undisclosed places.
Shelter in place will work. Please stay healthy.
As a public service, I am posting “the entire DNA sequence of Covid-19” in its entirety, which I obtained from a lab in China. A scientist friend asked me to publicize it on my website to the widest possible audience. What better place than the Mad Hedge Fund Trader.
Typical of viruses, it is an incredible small genome, one hundred thousandth the size of our own with only 29,000 base pairs. There are only a handful of genes here compared to our 35,000. For the full code click here.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 27, 2020
Fiat Lux
Featured Trade:
(MARCH 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(ROM), (BA), (VIX), (UPRO), (SSO), (UBER), (LYFT), (MDT),
(GLD), (GOLD), (NEM), (GDX), (UGL)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 25 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: Since we flipped the off button on the economy, I don’t see how we can simply flip the on button and have a V-shaped recovery. It seems much more unlikely that it will get back to pre-recession levels.
A: Actually, all we really need is confidence. Confident people can go outside and not get sick. Once we start seeing a dramatic decline in the number of new cases, the shelter-in-place orders may be cancelled, and we can go outside and go back to work. It’s really that simple. So, we will get an initial V-shaped recovery probably in the third quarter, and after that, it will be a slower return spread over several quarters to get back to normal. Everybody wants to get back to normal and let's face it, there's an enormous amount of deferred consumption going on. I have hardly spent any money myself other than what I’ve spent online. All of those purchases get deferred, so in the recovery, there's going to be a massive binge of entertainment, shopping, and travel that is all being pent up now—that will get unleashed once the airlines start flying again and the shelter-in-place orders are cancelled. We’re not losing so much of this growth, we’re just deferring it. Obviously, some of the growth is gone permanently; you can forget about any kind of vacation in the next couple of months. I would say, the great majority of consumption in the US—and thus growth and thus stock appreciation—is just being deferred, not cancelled outright.
Q: Other than the ProShares Ultra Technology ETF (ROM), do you have any other leveraged sectors coming into the recovery?
A: There is a 50/50 chance the Roaring 20s started 2 days ago, on Monday, March 23 at the afternoon lows. We may go back and test those lows one more time, which at this point is 3,700 points below here, but we are clocking 1,000 points a day. It doesn’t take much, like a bad non-farm payroll number, to go back and test those lows. The good news is out; they're not going to spend any more money other than the $10 trillion they're putting in now.
Q: Would you buy Boeing (BA) here? Is this the bottom?
A: The bottom was at $94 on Monday; we went up 100% in three days and now we’re at $180. Incredible moves, and a total lack of liquidity. One reason I haven't added any positions lately is that they have closed the New Yok Stock Exchange floor and its not clear that of I send out a trade alert, it could get done. We have gone totally online, so I just want to see what happens as a result of that. I don’t want to be putting out trade alerts that no one can get in or out of, heaven forbid.
Q: What do you mean by “The spike to $80 in the Volatility Index (VIX) was totally artificial?”
A: When you have a series of cascading shorts triggered by margin calls, that is artificial. I have seen this happen many times before, both on the upside and the downside. This happened twice in the (VIX) in the last two years. When you go from a (VIX) of $25 to $80 and back down to $39 in days, which is what we did, you know it was a one-time-only spike and we are not going to visit the $80 level again— at least not until the next financial crisis because those positions are gone and are never coming back. A (VIX) of $80 means we are going to have 1,000 point move in the Dow Average for the next 30 days.
Q: I bought some ProShares Ultra Pro ETF (UPRO) which is the 3x long the S&P 500 at $1,829. Do I take profits by selling calls or just hold longer?
A: I would just sell the whole position outright. The (UPRO) is so incredibly volatile that you are rewarded heavily for just coming out completely and then reopening fresh positions on these big meltdown days. We will probably be doing trade alerts on (UPRO) or its cousin, the 2x long ProShares Ultra S&P 500 (SSO) sometime in the near future.
Q: With 2-year LEAPs, would you go at the money or out of the money?
A: This is the golden opportunity to go way out of the money because the return goes from 100% to 500%, or even 1000% if you go, say, 30%-50% out of the money. A lot of these stocks are ripe for very quick 30% bouncebacks, especially the (ROM). So yes, you want to do out of the money 20% to 30%. It will easily recover those losses in weeks if you are picking the right stocks. Over a two-year view, a lot of these big tech stocks could double by the time your LEAP expires, and then you will get the full profit. The rule of thumb is: the farther out of the money you go, the bigger the profit is. But I wouldn’t go for more than a 1000% profit in 2 years; you don't want to get greedy, after all.
Q: You called the Dow to hit 15,000. Is that still possible? We got down to the 18 handle.
A: Yes, if the coronavirus data gets worse, which is certain, we could get another panic selloff. How will the market handle 100,000 US deaths, given the exponential rise in cases we are seeing? With cases doubling every three days that is entirely within range. So, I would say, there is a 50% chance we hit the bottom on Monday at 18,000, and 50% chance we go lower.
Q: Do you know anything about the coronavirus stocks like Regeneron (REGN)?
A: Actually, I do, it's covered by the Mad Hedge Biotech & Health Care Letter, click here for the link. If you get the Biotech Letter, you already know all about stocks like Regeneron. Regeneron literally has hundreds of drugs in testing right now to work as vaccines or antivirals, and some of them, like their arthritis drug, have already been proven to work. So, we just have to get through the accelerated trials and testing to unleash it on the market. But for anybody who has a drug, it's going to take a year to mass-produce enough to inoculate the entire country, let alone the world. So, don't make any big bets on getting a vaccine any time soon—it's a very long process. Even in normal times, some of these drugs take months to manufacture.
Q: Are there any ventilator stocks out there?
A: There are; a company called Medtronic (MDT), which the Mad Hedge Biotech & Healthcare Letter also covers. They are the largest ventilator company in the US. Their normal production is 100 machines a week. Now, they are increasing that to 500 a week as fast as they can, but it isn’t enough. We need about 100,000 ventilators. China is now selling ventilators to the US. Elon Musk from Tesla (TSLA) just bought 1,000 ventilators in China and had them shipped over to San Francisco at his own expense, and Virgin Atlantic just flew over a 747 full of ventilators and masks and other medical supplies from China. So yes, there are stocks out there to play these things, they have already had large moves. We liked them anyway, even before the pandemic, so those calls were quite good. And China thinks their epidemic is over, so they are happy to sell us all the medical supplies they can make.
Q: Why did 30-year mortgage rates just go up instead of down? I thought the Fed rate cuts were supposed to take them down; am I missing something?
A: In order to get 30-year mortgage rates down, you have to have buyers of 30-year loans, and right now there are buyers of nothing. The lending that is happening is from banks lending their own money, which is only a tiny percentage of the total loan market. When the Fed moves into the mortgage market, you will see those yields move to the 2% range. The other problem is how to get a loan if all the banks are closed. They are running skeletal staff now, and you can’t close on real estate deals because all the notaries and title offices are closed; so essentially the real estate industry is going to shut down right now and hopefully, we’ll finish that in a month.
Q: Do you think Uber (UBER) and Lyft (LYFT) will go bankrupt?
A: It is a possibility because one to one human contact inside a car is about the last situation you want to be in during a pandemic. Their traffic was down 25% according to a number I saw. It’s very heavily leveraged, very heavily indebted, and those are the companies that don’t survive long in this kind of crisis. So, I would say there is a chance they will go under. I never liked these companies anyway; they are under regulatory assault by everybody, depend on non-union drivers working for $5 an hour, and there are just too many other better things to do.
Q: Is this the end of corporate buybacks?
A: To some extent, yes. A future Congress may make it either illegal or highly tax corporate buybacks, in some fashion or another because twice in 12 years now, we have had companies load up on buying back their own stock, boosting CEO compensation to the hundreds of millions—if not billions—and then going broke and asking for government bailouts. Something will be done to address that. If you take buybacks out of the market (the last 10,000-point gain in the Dow were essentially all corporate buybacks), we may not see a 20X earnings multiple again for another generation. Individuals were net sellers of stock for those two years. We only reached those extreme highs because of buybacks, so you take those out of the equation and it's going to get a lot harder to get back to the super inflated share prices like we had in January.
Q: How long before an Italian bank collapses, and will they need a bailout?
A: I don’t think they will get a collapse; I think they will be bailed out inside Italy and won’t need all of Europe to do this. But the focus isn't on Europe right now, it's on the US.
Q: Do you think this virus is really subsiding in China based on their past history of dishonest reporting?
A: Yes, that is a risk, and that's why people aren’t betting the ranch right now—just because China is reporting a flattening of cases. And China could be hit with a second wave if they relax their quarantine too soon.
Q: What's your opinion on how the Fed is doing and Steve Mnuchin in this crisis?
A: I think the Fed is doing everything they possibly can. I agree with all of their moves—this is an all-hands-on-deck moment where you have to do everything you can to get the economy going. Notice it’s Steve Mnuchin doing all the negotiating, not the president, because nobody will talk to him. For a start, he may be a Corona carrier among other things, and you’re not seeing a lot of social distancing in these press conferences they are holding. About which 50% of the information they give out is incorrect, and that's the 50% coming from Donald Trump.
Q: What do you think about no debt and no pension liability?
A: That’s why Tech has been leading the upside for the last 10 years and will lead for the next 10. You can really narrow the market down to a dozen stocks and just focus on those and forget about everything else. They have no net debt or net pension fund liabilities.
Q: Why have we not heard from Warren Buffet?
A: I'm sure negotiations are going on all over the place regarding obtaining massive stakes in large trophy companies that he likes, such as airlines and banks. So that will be one of the market bottom indicators that I mentioned a couple of days ago in my letter on “Ten Signs of a Market is Bottoming.”
Q: What’s the outlook for gold?
A: Up. We just had to get the financial crisis element out of this before we could go back into gold, so I would be looking to buy SPDR Gold Shares ETF (GLD), the gold miners like Barrick Gold (GOLD) and Newmont Mining (NEM), the Van Eck Vectors Gold Miners ETF (GDX), and the 2X long ProShares Gold ETF (UGL).
Q: Does the Fed backstop give you any confidence in the bond market?
A: Yes, it does. I think we finally may be getting to the natural level of the market, which is around an 80-basis point yield. Let’s see how long we can go without any 50-point gyrations.
Q: Do you foresee a depression?
A: We are in a depression now. We could hit a 20% unemployment rate. The worst we saw during the Great Depression was 25%. But it will be a very short and sharp one, not a 12-year slog like we saw during the 1930s.
Good Luck and Good Trading and stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
It’s Been a Tough Month
Global Market Comments
March 18, 2020
Fiat Lux
Featured Trade:
(LOOKING FOR LEVERAGED LONG PLAYS),
(SPY), (INDU), (SSO), (UPRO)
This is a time where everyone is wondering: what is the future of coronavirus and, in turn, the economy?
It is highly likely that the stock market will bottom out over the next few weeks and then begin a period of sideways chop in a wide range.
That range could be half the recent loss, a staggering 5,000 points in the Dow Average (INDU), or 500 S&P 500 points (SPX).
The math is quite simple.
With much of the country now on lockdown, Corona cases will keep climbing sharply in the US from the present 5,000 cases. They will keep doubling every three days for the next two weeks, the incubation time for the disease possibly reaching as high as 40,000 cases.
Just in the time it took me to write this piece, the number of cases worldwide jumped from 184,000 to 194,873 (click here for the link).
At that point, everyone who has the disease will become visible and can be isolated. The following week will bring a sharp falloff in the number of new cases, which many traders and investors will read as the end of the epidemic.
Shares will rocket.
The lockdowns and the “shelters in place” will come off. The economy will start to return to normal. Stock investors will pile in.
Then another spike in new cases will take place, prompting a secondary round of shutdowns and another run at the lows.
On top of this, the market will have to digest a coming set of economic numbers that will be the worst in history. All eyes will be on the Thursday Weekly Jobless Claims out at 8:30 AM, that will be our first look at the terrifying layoffs to come.
Our first look at economic growth comes at the end of April when the Q1 GDP is released. Since we had two months of growth before the crash and lockdown, it comes in as high as zero.
Not so with Q2, which could bring in a 5% or more shrinkage in the economy at an annualized rate. No doubt more 1,000 point down days are setting up when these figures are printed.
This is precisely what healthcare officials want to happen. That way, Corona cases can be spaced out over a year, keeping the national civilian and military hospital system from getting overwhelmed.
This is what the future of coronavirus will look like for the economy. Suffice it to say that there are some spectacular long side plays setting up. I’ll cover some of the best ways to play it.
One is the ProShares Ultra S&P 500 (SSO), a 2x long the underlying stock index. Since the all-time high four weeks ago, the (SSO) has cratered by 54.50%.
Another is the ProShares Ultra Pro S&P 500 (UPRO), a 3x long the underlying stock index. Since the all-time high four weeks ago, the (SSO) has cratered by an eye-popping 74.40%.
Needless to say, the velocity of these instruments is enormous, and the bid offered spreads wide. If you want your “E-ticket” ride for the stock market, this is it. Trade these with extreme caution.
Get a piece of either one of these and the gains can be huge. The (SSO) has to jump by 120% to the old high, while the (UPRO) needs to soar by 290%.
Good Luck!
This Morning’s Traffic Report
The San Francisco Rush Hour
