Global Market Comments
October 10, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or EATING YOUR SEED CORN),
(SPY), (TLT), (PANW), BRKB), (JPM), (MS), (V),
(USO), (MU), (RIVN), (TWTR), (TSLA)
Posts
Global Market Comments
April 25, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE ESCALATOR UP AND THE WINDOW DOWN)
($INDU), (SPY), (TLT), (WFC), (JPM),
(TSLA), (TWTR), (FCX), (NFLX), (GLD)
Global Market Comments
April 22, 2022
Fiat Lux
Featured Trade:
(APRIL 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (TSLA), (TBT), (TLT), (BAC), (JPM), (MS),
(BABA), (TWTR), (PYPL), (SHOP), (DOCU),
(ZM), (PTON), (NFLX), (BRKB), (FCX), (CPER)
Global Market Comments
April 18, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GET READY TO SELL IN MAY)
($INDU), (SPY), (TLT), (WFC), (JPM), (TSLA), (TWTR)
Global Market Comments
May 8, 2020
Fiat Lux
Featured Trade:
(MAY 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(UNG), (UAL), (DAL), (INDU), (SPY), (SDS),
(P), (BA), (TWTR), (GLD), (TLT), (TBT)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 6 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: What broker do you use? The last four bond trades I couldn’t get done.
A: That is purely a function of selling into a falling market. The bond market started to collapse 2 weeks ago. We got into the very beginning of that. We put out seven trade alerts to sell bonds, we’re out of five of them now. And whenever you hit the market with a sell, everyone just automatically drops their bids among the market makers. It’s hard to get an accurate, executable price when a market is falling that fast. The important point is that you were given the right asset class with a ticker symbol and the right direction and that is golden. People who have been with my service for a long time learn how to work around these trade alerts.
Q: Is there any specific catalyst apart from the second wave that will trigger the expected selloff?
A: First of all, if corona deaths go from 2 to 3, 4, 5 thousand a day, that could take us back down to the lows. Also, the market is currently expecting a V-shaped recovery in the economy which is not going to happen. The best we can get is a U-shape and the worst is an L-shape, which is no recovery at all. What if everything opens up and no customers show? This is almost certain to happen in the beginning.
Q: How long will the depression last?
A: Initially, I thought we could get out of this in 3-6 months. As more data comes in and the damage to the economy becomes known, I would say more like 6-9, or even 9-12 months.
Q: In natural gas, the (UNG) chart looks like a bullish breakout. Does it seem like a good trade?
A: No, the energy disaster is far from over. We still have a massive supply/demand gap. And with (UNG), you want to be especially careful because there is an enormous contango—up to 50 or 100% a year—between the spot price and the one-year contract price, which (UNG) owns. Once I saw the spot price of natural gas rise by 40% and the (UNG) fell by 40%. So, you could have a chart on the (UNG) which looks bullish, but the actual spot prices in front month could be bearish. That's almost certainly what’s going to happen. In fact, a lot of people are predicting negative prices again on the June oil contract futures expiration, which comes in a couple of weeks.
Q: What about LEAPS on United (UAL) and Delta (DAL)?
A: I am withdrawing all of my recommendations for LEAPS on the airlines. When Warren Buffet sells a sector for an enormous loss, I'm not inclined to argue with him. It’s really hard to visualize the airlines coming out of this without a complete government takeover and wipeout of all existing equity investors. Airlines have only enough cash to survive, at best, 6-8 months of zero sales, and when they do start up, they will have more virus-related costs, so I would just rather invest in tech stocks. If you’re in, I would get out even if it means taking a loss. They don’t call him the Oracle of Omaha for nothing.
Q: Any reason not to do bullish LEAPS on a selloff?
A: None at all, that is the best thing you can do. And I’m not doing LEAPS right now, I’m putting out lists of LEAPS to buy on a selloff, but I wouldn't be buying any right now. You’d be much better off waiting. Firstly, you get a longer expiration, and secondly, you get a much better price if you could buy a LEAP on a 2,000 or 3,000 point selloff in the Dow Average (INDU).
Q: Would you add the 2X ProShares Ultra Short S&P 500 (SDS) position here if you did not get on the original alert?
A: I would, I would just do a single 10% weighting. But don’t expect too much out of it, maybe you'll get a couple of points. And it’s also a good hedge for any longs you have.
Q: What happens if the second wave in the epidemic is smaller?
A: Second waves are always bigger because they’re starting off with a much larger base. There isn't a scientist out there expecting a smaller second wave than the first one. So, I wouldn't be making any investment bets on that.
Q: Pfizer (P) and others seem close to having a vaccine, moving on to human trials. Does that play into your view?
A: No, because no one has a vaccine that works yet. They may be getting tons of P.R. from the administration about potential vaccines, but the actual fact is that these are much more difficult to develop than most people understand. They have been trying to find an AIDS vaccine for 40 years and a cancer vaccine for 100 years. And it takes a year of testing just to see if they work at all. A bad vaccine could kill off a sizeable chunk of the US population. We’ve been taking flu shots for 30 years and they haven’t eliminated the flu because it keeps evolving, and it looks like coronavirus may be one of those. You may get better antivirals for treatment once you get the disease, but a vaccine is a good time off, if ever.
Q: Is this a good time to buy Boeing (BA)?
A: No, it’s too risky. The administration keeps pushing off the approval date for the 737 MAX because the planes are made in a blue state, Washington. The main customers of (BA), the airlines, are all going broke. I would imagine that their 1,000-plane order book has shrunk considerably. Go buy more tech instead, or a hotel or a home builder if you really want to roll the dice.
Q: How can the market actually drop to the lows, taking massive support from the Fed and further injections into account?
A: I don’t think we will get to new lows, I think we may test the lows. And my argument has been that we give half of the recent gains, which would take us down to 21,000 in the Dow and 2400 in the (SPX). But I've been waiting for a month for that to happen and it's not happening, which is why I've also developed my sideways scenario. That said, a lot of single stocks will go to new all-time lows, such as in retailers (RTF) and airlines (JETS).
Q: Would you stay in a Twitter (TWTR) LEAP?
A: If you have a profit, I would take it.
Q: What about Walt Disney (DIS)?
A: There are so many things wrong with Disney right now. Even though it's a great company for the long term, I'm waiting for more of a selloff, at least another $10. It’s actually rallying today on the earnings report. Around the low $90s I would really love to get into LEAPS on this. I think more bad news has to hit the stock for it to get lower.
Q: Are you continuing to play the (TLT)?
A: Absolutely yes, however, we’re at a level now where I want to take a break, let the market digest its recent fall, see if we can get any kind of a rally to sell into. I’ll sell into the next five-point rally.
Q: Any reason not to do calls outright versus spreads on LEAPS?
A: With LEAPS, because you are long and short, you could take a much larger position and therefore get a much bigger profit on a rise in the stock. Outright calls right now are some of the most expensive they’ve ever been. So, you really need to get something like a $10 or $15 rise in the stock just to break even on the premium that you’re paying. Calls are only good if you expect a very immediate short term move up in the stop in a matter of days. LEAPS you can run for two years.
Q: Is gold (GLD) still a buy?
A: Yes, the fundamental argument for gold is stronger than ever. However, it has been tracking one for one with the stock market lately. That's why I'm staying out of gold—I’d rather wait for a selloff in stocks to take gold down; then I’ll be in there as a buyer.
Q: Should I take profits on what I bought in April and reestablish on a correction?
A: Absolutely. If you have monster profits on a lot of these tech LEAPS you bought in the March/early April lows, then yes, I would take them. I think you will get another shot to buy these cheaper, and by coming out now and coming in later, you get to extend your maturity, which is always good in the LEAPS world.
Q: Would you buy casinos, or is it the same risk as the airlines?
A: I would buy casinos and hotels—they have a greater probability of survival than the airlines and a lot less debt, although they’re going to be losing money for years. I don’t know exactly how the casinos plan on getting out of this.
Q: Should we exit ProShares ultra short 20+ year Treasury Bond Fund (TBT) now?
A: No, that’s more of a longer-term trade. I would hang on to that—you could get from $16 to $20 or $25 in the foreseeable future if our down move in bond continues.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Expect lower revenues from Facebook (FB) and Google (GOOGL) because ad revenue has taken a hit.
It makes no sense to spend ad money on Facebook and Google ads for restaurants and hotels during times like this and that’s if they even still exist today.
The accumulative effect of the bankruptcies in other parts of the economy will shrink Google and Facebook’s ad dollar coffers.
The two internet giants together could see more than $44 billion in worldwide ad revenue evaporate in 2020, but that doesn’t mean these companies won’t be profitable.
For 2020, Google's total net revenue is now projected to be about $127.5 billion, down $28.6 billion for the year.
Facebook’s management said there was “a weakening in the ads business in countries taking aggressive actions to reduce the spread of COVID-19.”
Facebook’s overall usage has increased during the pandemic, with data up more than 50% over the last month in countries hit hardest by the virus, but the spike in volume isn’t in a form in which they can monetize it.
In 2021, Facebook’s advertising business is projected to recover growing 23% year-over-year to $83 billion.
I now expect Google to generate $54.3 billion in operating income (43% adjusted EBITDA margin) and Facebook will make $33.7 billion (49% margin), in 2020.
Digital platforms have felt the abrupt halt in spending, given the relative ease of stopping ad spend.
Secondary ad companies are also performing worse than expected with forecasted revenue for Twitter (TWTR) down by 18% (to expected revenue of $3.2 billion) while Snap (SNAP) ad revenue is expected at $1.66 billion, 30% lower.
Amazon’s ad business boasts a fortified moat because their revenue comes from product searches and those have experienced a surge in demand because of the coronavirus.
Facebook-owned WhatsApp has increased by 50% and that number is up 70% in Italy as the Italians go through a severe outbreak and lockdown.
Another side effect from the virus is the reduction of video streaming quality to ease the strain on internet networks, as YouTube and Netflix (NFLX) have also done.
Facebook is monitoring usage patterns in order to make the system more efficient, and add further capacity as required.
To help ameliorate potential network congestion, they temporarily reduced bit rates for videos on Facebook and Instagram in certain regions.
Facebook is conducting tests and further preparing to respond to any problems that might arise with network services.
Facebook and Google’s weakness proves that even the largest of Silicon Valley tech companies are battling with revenue restructuring while waiting for the U.S. economy to open up.
Although this is terrible news for Facebook and Google, the Nasdaq index is in the process of bottoming out.
The 3.28 million U.S. jobless claims were unprecedented but could very well represent a flushing out of the horrible news as the Nasdaq index spiked by 4% intraday.
Tech shares have had this job claim number baked into the share price for quite a while and we knew it was going to drop like an atomic bomb.
Some estimates had 4 million unemployed and the pain on main street is real, just search on Twitter – hashtag #lostmyjob.
The anecdotes stream down about individuals coming to grips with a sudden sacking and new reality of zero income.
This is just the first phase of job removals and the silver lining is that tech companies largely avoided the worst of the firings partly because many tech jobs can be moved remotely unlike many hospitality jobs.
The other silver lining is that the health scare is supercharging the digital ecosystem as society has effectively been moved online.
Any short-term weakness in tech companies will only be brief as tech stock will lead the recovery as the economy starts to open up again and the record amount of fiscal stimulus breathes life into hobbled companies.
Tech investors should prepare to pull the trigger.
Don’t underestimate trading algorithms.
The “Buy the Dip” psychology is broken and computerized trading has completely flooded the market with its personality.
That is exactly the dynamic of the current tech market, and it will mountain of generous offerings to reverse the trend in the form of monstrous stimulus and cash handouts.
As we entered 2020, the sentiment was sky-high, geopolitical tensions relatively calmed and three recent interest-rate cuts from the Federal Reserve drove tech stocks to record levels.
For 10 years, traders and the algorithms they harnessed were handsomely rewarded by aggressively betting against elevated volatility.
Cogent chart trends are the algorithms’ lustful partner in bed and now that every single short-term model is flashing sell, sell, sell - there isn't much bulls can do to fight back.
Many tech hedge funds have settled on similar conclusions - the best defense right now is unwinding portfolios to return to cash.
Incessant margin calls roiling any logical strategy has struck fear into many traders who levered up 10X.
What you could possibly see is the Minsky moment: That stability ultimately breeds instability because the only input in which becomes the difference make is volatility producing massive violence on upside and downside moves.
The ones who can absorb elevated risk are nibbling and unleveraged hoping to time the turn when stocks finally react positively to good data.
The current battle in the fog of war is that of two different economic scenarios that have direct influence in which ways the algorithms flip – either shutdown the country ala Wuhan, China for an extended period of time or send the troops back to work.
Hedge fund billionaire Bill Ackman gave his 2-cents restating his passionate plea for a 30-day-shutdown to fight the coronavirus pandemic.
Former Goldman Sachs CEO Lloyd Blankfein is in favor of sending back the asymptomatic younger generation workers sooner than later.
Initially, Blankfein gave his backing for “extreme measures” in order to flatten the curve, but promoted healthy workers returning “within a very few weeks.”
Blankfein's argument rests on that if people don’t go back to work, the economy might become too damaged to recover from inciting another crash.
This contrasts starkly with Ackman’s idea of “testing, testing, testing”, which would theoretically dismantle the potency of the virus but take longer for the economy to restart.
U.S. President Donald Trump has relayed his desire to open up business by Easter Sunday.
So as mostly professional politicians hash out a towering aid package of over $2 trillion, firms will get more of an indicator of how and when the business world opens up again.
Trading algorithms are on a knives edge because of the uncertainty – until they are illegal – it is something we are stuck with.
These trading formulas are preset based on biases that start with a series of inputs and the most critical input is volatility or better known as the fear index.
If the lockdowns are extended, the flood of negative news will force algorithms to sell on the extra volatility.
When things go bonkers, many of these preset formulas sell which exacerbates the down move further simply because more than enough people have the same preset algorithm.
Cutting position size when market volatility explodes is not a farfetched theory and is quite a common trading nostrum.
Even if many of these trades would be good long-term bets, many trading algorithms are focused on short-term trades and by this, I mean milliseconds and not days.
Another input into trading algorithms are Twitter feeds.
The platform is scraped for keywords from mass media news sources and synthesized into a specific output that is fed into a computer algorithm.
These headlines offer insight into what the sentiment is for the trading day – negative, positive, or neutral.
This scraping of data is especially relevant in today’s chaotic trading world where 10% moves up or down in one day is the new normal.
Because of Dodd-Frank Wall Street reform, many of the big banks have shuttered trading operations hurting the market’s liquidity situation causing spreads to widen and down moves to accelerate.
But now that the Fed has landed the Sikorsky UH-60 Black Hawk on the helipad and the money is waiting to helicopter down as they have announced “unlimited” asset buying and guaranteeing of corporate bonds to aid financial markets.
How does computerized trading roil markets?
Here is an example. A recent trading day included more than $100 billion of selling, the worst week since the financial crisis and was triggered by a hedging strategy called “vol targeting”—using volatility as a central input in trading decisions—and other systematic tactics.
Funds making decisions based on volatility, including some with names such as volatility-targeting funds and risk-parity funds, have risen in popularity.
Risk-parity funds manage an estimated $300 billion.
Risk parity is an approach focused on allocation of risk, usually defined as volatility, rather than allocation of capital.
That is what we have now – a cesspool of risk parity hedge funds layered by high frequency funds layered by short/long vol funds layered by arbitrage funds all levered 15X.
The take into consideration that they are supercharged by massive volume-based computer algorithms and trying to head for the exit door at the same time.
Ironically, this could be one of catalysts for shares to recalibrate and head back up north as traders start to front-run the peak of the health crisis.
Let’s hope that it happens sooner than later and that the government doesn’t manage to screw up delivering the helicopter money.
Successful investors rarely disclose their modus operandi.
The truth is that success comes in all shapes and sizes.
Many take the volatility index and aggressively short it until death hoping to avoid the “big one” that wipes them out.
Picking up pennies in front of the steam roller on steroids works until it doesn’t.
Conversely, long-term investors with an eagle-eye view of the underlying trends in the economy, society, and the tech sector will let the market crash come to them only to slip in a few long-dated long-term equity anticipation securities (LEAPs) in their favorite names.
The reasons are very obvious. The risk on a LEAP is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of upside leverage.
Two years out, the longest maturity available for most LEAPS, allow plenty of time for the world and the markets to get back on an even keel.
Depressions, pandemics, tsunamis, oil shocks, interest rates going to 0, and political instability all fall away within two years and pave the way for dramatic stock market reversals.
You just put them away and forget about them. Wake me up when it is 2022.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next 1,000 point down day in the Nasdaq Index which could happen any day.
You can play around with the strike prices all you want. Going farther out of the money increases your returns but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Committing to risk when there is blood in the streets seems scary at the time, but is often the origins of fruitful trades that get fully harvested down the road.
I am zeroing in on two companies that aren’t the vaunted FANGs but are positioned right behind their back shoulder and whose share prices are poised to shoot higher long before the January 2020 expiration.
Considering we have just had an eye-gouging 20% sell-off in tech shares, there is the argument that tech shares are on discount in the shop window as we speak.
The two companies who fit the bill are Twitter (TWTR) and eBay (EBAY).
What do they have in common?
Both are being bullied and cajoled by Elliott Management, the vulture fund who cut its teeth on profiting off of distressed debt but have now ventured into the realm of public markets to only bring the same type of aggressiveness and bottom line mentality to the octagon cage.
They exist solely to deliver shareholders higher returns and brutally squeeze growth out of underperforming assets.
There is no empathy or feel-good factor at Elliot.
They have identified Twitter and eBay as low-hanging fruit in the tech ecosystem and have adamantly demanded that management get their finger out and improve its execution.
I agree with Elliot that Twitter and eBay have failed to find the parabolic growth that something like a Facebook has experienced.
Elliot Management is here to set things straight, after they quietly acquired a 4% stake in Twitter, and that couldn’t be more evident when they tried to oust CEO of Twitter Jack Dorsey a few days ago.
The vulture fund was already peeved that Dorsey was splitting time with his other company Square and imagine how they felt when Dorsey announced he would seek to spend the year in Africa working remotely.
The outcry and backlash were considerable, and the strong-arm tactics have worked out beautifully for Elliot Management who scored an extra 3 seats on Twitter’s board for agreeing to allow Dorsey to keep his job.
On top of that, Dorsey agreed to expand Twitter’s user base by at least 20% this year, achieve accelerating revenue growth, and gain market share as a digital advertiser.
In effect, Elliot Management put Dorsey in his place, and they have had the same type of end result in eBay’s management ranks as well.
Under almost any scenario, it’s hard to fathom that these two tech companies will have share prices lower by January 2022.
Granted, short-term gyrations are ripe for volatility as the coronavirus wreaks havoc on the sensitive minds of investors and traders, but the risk/reward in these two LEAPs are overwhelmingly favorable.
I would suggest looking at the $23 strike price for Twitter and eBay and executing a limit order near the bid price.
At the $23 strike price, 7 contracts would cost around $10,000 for Twitter’s LEAPs and 8 contracts for eBay.
Executing limit orders is necessary otherwise you will get gouged on the spread nullifying the leverage that is critical to making this trade a homerun.
If the market swan dives, there is a high chance of getting an order filled at the price you are comfortable with.
There is a strong likelihood of cashing out in January 2022 – what’s not to like about that?
Twitter’s Jan 2022 LEAP:
Twitter’s Jan 2022 LEAP:
Google (GOOGL) and Facebook (FB) are dominant to the extent that the U.S. administration is hoping to dismantle them.
The two companies enjoy a flourishing duopoly and guzzle up digital ad dollars.
Governments around the world are scratching their heads attempting to figure out how to put a dent in these fortresses and so far, have been unsuccessful.
Big tech has made governments look bad, to say the least, and their response has been even more shambolic.
Alphabet installed Google CEO Sundar Pichai as the top decision-maker for all Alphabet assets preparing for the onslaught of digital privacy headwinds and regulation that the E.U., U.S., and everyone else will throw at them.
Luckily, they do not need to deal with the Chinese communist party as big tech minus Apple was effectively banned years ago.
What’s on Google and Facebook’s plate right now?
Attorney General William Barr has pointed the finger at these two platforms for hiding behind a clause that gives them immunity from lawsuits while their platforms carry material promoting illicit and immoral conduct and suppressing opinions.
Barr is currently looking into potential changes to Section 230 of the Communications Decency Act, which was passed in 1996 and has been also referred to as the supercharger to tech riches.
What could eventually come of this?
Barr could decide for the Justice Department to explore ways to limit the provision, which protects internet companies from liability for user-generated content.
This could open up Google and Facebook to higher costs of managing content on their platforms and lawsuits related to malcontent in which they fail to remove.
Even though platforms love to market that they actively thwart bad actors, at the end of the day, they aren’t on the hook for what happens.
Massive alterations could fundamentally weaken their business models and force them to review each word and photo that is thrown upon their platform.
They have already hired an army of hourly paid contractors, but at their massive scale, content is simply impossible to smother.
Content generators understand how to sidestep machine learning algorithms which are based on backdated data, meaning they would not be able to catch a new iteration of past content.
Absolving themselves of any responsibility for policing their platforms has been an important catalyst in the outperformance in shares for both Facebook and Google.
The social side of this has cringeworthy unintended consequences.
The Computer & Communications Industry Association, a tech trade group that counts Google and Facebook as members want the government to stay out of it as they believe they are overreaching.
Government has been slowly making inroads in combatting the strength of these digital platforms, and the first successful foray was when Congress eliminated the liability protection for companies that knowingly facilitate online sex trafficking.
Big tech won’t go with a whimper and they will propose a range of changes to avoid direct damage to their business model such as raising the bar a smidgeon on which companies can have the shield, to carving out other laws negating attempt to weaken their platforms, to delaying the repealing of Section 230.
There is too much shareholder value on the line and as the coronavirus rears its ugly head, it’s ironic that investors perceive safety in not only the U.S. dollar but in the vaunted FANG tech group.
Ultimately, the math wins out and these companies with gargantuan earnings can weather any storm with a moat as wide as ever.
It’s to the point that a $10 billion fine is a massive victory, and what other group of companies can boast about that?
We can only trade the market we have in front of us and not the one we want.
I pulled the trigger on a Google call spread and I believe this narrow group of power tech players and their partners in crime cloud stocks of the likes of Twitter (TWTR), eBay (EBAY), Fortinet (FTNT), Adobe (ADBE), and a few others will hoist the market on its back like I predicted it would at the beginning of the trading year.
