(UAL) Archives

The Market Outlook for the Week Ahead, or The Wake-Up Call

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

February 24, 2020/by Mad Hedge Fund Trader

Delta Airlines is Cleared for Takeoff

Diary, Newsletter, Research

When I was a young, clueless investment banker at Morgan Stanley 30 years ago, the head of equity sales took me aside to give me some fatherly advice. Never touch the airlines.

The profitability of this industry was totally dependent on fuel costs, interest rates and the state of the economy, and management hadn't the slightest idea of what any of these were going to do. If I were ever tempted to buy an airline stock, I should lie down and take a long nap first.

At the time, the industry had just been deregulated, and was still dominated by giants like Pan Am, TWA, Eastern Air, Western, Laker, Braniff, and a new low cost upstart called People Express. None of these companies exist today. It was the best investment advice that I ever got.

If you total up the P&L's of all of the US airlines that ever existed since Orville and Wilber Wright first flew in 1903 (their pictures are on my new anti-terrorism edition commercial pilots license), it is a giant negative number, well in excess of $100 billion. This is despite the massive government subsidies that have prevailed for much of the industry's existence.

The sector today is hugely leveraged, capital intensive, heavily regulated, highly unionized, offers customers terrible service, and is constantly flirting with, or is in bankruptcy. Its track record is horrendous. It is a prime terrorist target. A worse nightmare of an industry never existed.

I became all too aware of the travails of this business while operating my own charter airline in Europe as a sideline to my investment business during the 1980?s.

The amount of paperwork involved in a single international flight was excruciating. Every country piled on fees and taxes wherever possible. The French air traffic controllers were always on strike, the Swiss were arrogant, and the Italians unintelligible and out of fuel.

The Greek military controllers once lost me over the Aegean Sea for two hours, while the Yugoslavs sent out two MIG fighter jets to intercept me. As for the US? Did you know that every rivet going into an American built aircraft must first be inspected by the government and painted yellow before it can be used in manufacture?

While flying a Red Cross mission into Croatia, I got shot down by the Serbians, crash landed at a small Austrian Alpine river, and lost a disc in my back. I had to make a $300 donation to the Zell Am Zee fire department Christmas fund to get their crane to lift my damaged aircraft out of the river (see picture below). Talk about killing the competition!

Anyway, I diverge.

So you may be shocked to hear that I think there is a great opportunity here in airline stocks. A Darwinian weeding out has taken place over the last 30 years that has concentrated the industry so much that it would attract the interest of antitrust lawyers, if consumers weren?t such huge beneficiaries.

With the American-US Air (AAL) deal done, the top four carriers (along with United-Continental (UAL), Delta (DAL), and Southwest (LUV) will control 90% of the market.

That is up from 60% only five years ago. The industry has fewer seats than in 1982; while inflation adjusted fares are down 40%. Analysts are referring to this as the industry?s new ?oligopoly advantage.?

Any surprise bump up in oil prices is met with a blizzard of higher fares, baggage fees, and fuel surcharges. I can't remember the last time I saw an empty seat on a plane, and I travel a lot. Lost luggage rates are near all time lows because so few now check in bags. Interest rates staying at zero don?t hurt either.

The real kicker here is that stock in an airline is, in effect, a free undated put on the price of oil. If the price of oil stays in the $80 handle for a prolonged period of time, which it should, or continues to fall, airline stocks will rocket. This is on top of a $27 plunge in the price of Texas tea, the largest single cost item for the airline industry.

If you are looking for another indirect play, look at the bond market. With a new Boeing 787 Dreamliner costing up to $300 million each, airlines are massive borrowers of capital. With interest rates at all time lows, another huge source of costs have just been lifted off the airlines? backs.

The Ebola virus is an additional sweetener (if you could use such a term for a deadly disease), because it is enabling us to buy the stock down 30% than it would be otherwise. Delta Airlines (DAL) just so happened to be the airline that brought the first Ebola carrier to the US, so it has suffered the most. As frightening as this disease is (I studied it in my Army bacteriological warfare days), I doubt we will see more than a dozen cases in the US.

At least we are finally getting something for our $120 billion investment in Homeland Security since 2002. How much do you want to bet that they don?t cut the budget for the Center for Disease Control (CDC) this year, as they have for the past dozen!

On top of the massive fuel savings, a recovering US economy should boost profitability, given its recent maniacal pursuit of controlling costs. Some airlines have become so cost conscious that they are no longer painting their planes to gain fuel savings from carrying 100 pounds less weight! Just the missing pretzels alone should be worth a few cents a share in earnings.

This is not just a US development, but an international one. The International Air Transport Association (IATA) has just raised its forecast of member earnings from $7.6 billion in 2012 to $10.6 billion in 2013, a gain of 40%. The biggest earnings are based in Asia (China Southern Airlines, China Eastern Airlines, Air China), followed by those in the US, with $3.6 billion in profits.

Add all this together, and the conclusion is clear. The checklist is complete, the IFR clearance is in hand, and it is now time to push the throttles to the firewall for the airline stocks and get this bird off the ground.

And no, I didn't get free frequent flier points for writing this piece.

Meet the New Big Four

Maybe I Should Try Hedge Fund Trading?

October 16, 2014/by Mad Hedge Fund Trader

Airline Stocks are Cleared for Take Off

Diary, Newsletter

When I was a young, clueless investment banker at Morgan Stanley 30 years ago, the head of equity sales took me aside to give me some fatherly advice. Never touch the airlines.

The profitability of this industry was totally dependent on fuel costs, interest rates and the state of the economy and management hadn't the slightest idea of what any of these were going to do. If I were ever tempted to buy an airline stock, I should lie down and take a long nap first.

At the time, the industry had just been deregulated and was still dominated by giants like Pan Am, TWA, Eastern Air, Western, Laker, Braniff, and a new low cost upstart called People Express. None of these companies exist today. It was the best investment advice that I ever got.

If you total up the P&L's of all of the US airlines that ever existed since Orville and Wilber Wright first flew in 1903 (their pictures are on my new anti-terrorism edition commercial pilots license), it is a giant negative number, well in excess of $100 billion. This is despite the massive government subsidies that have prevailed for much of the industry's existence.

The sector today is hugely leveraged, capital intensive, heavily regulated, highly unionized, offers customers terrible service, and is constantly flirting with or is in bankruptcy. Its track record is horrendous. It is a prime terrorist target. A worse nightmare of an industry never existed.

I became all too aware of the travails of this business while operating my own charter airline in Europe as a sideline to my investment business. The amount of paperwork involved in a single international flight was excruciating. Every country piled on fees and taxes wherever possible. The French air traffic controllers were always on strike, the Swiss were arrogant, and the Italians unintelligible and out of fuel.

The Greek military controllers once lost me over the Aegean Sea for two hours, while the Yugoslavs sent out two MIG fighter jets to intercept me. As for the US? Did you know that every rivet going into an American built aircraft must first be inspected by the government and painted yellow before it can be used in manufacture?

While flying a Red Cross mission into Croatia, I got shot down by the Serbians, crash landed at a small Austrian Alpine river, and lost a disc in my back. I had to make a $300 donation to the Zell Am Zee fire department Christmas fund to get their crane to lift my damaged aircraft out of the river (see picture below). Talk about killing the competition!

So you may be shocked to hear that I think there is a great opportunity here in airline stocks. A Darwinian weeding out has taken place over the last 30 year that has concentrated the industry so much that it would attract the interest of antitrust lawyers, if consumers weren?t such huge beneficiaries.

With the American-US Air (AAL) deal done, the top four carriers (along with United-Continental (UAL), Delta (DAL), and Southwest (LUV) will control 90% of the market. That is up from 60% only five years ago. The industry has fewer seats than in 1982; while inflation adjusted fares are down 40%. Analysts are referring to this as the industry?s new ?oligopoly advantage.?

Any surprise bump up in oil prices is met with a blizzard of higher fares, baggage fees, and fuel surcharges. I can't remember the last time I saw an empty seat on a plane, and I travel a lot. Lost luggage rates are near all time lows because so few now check in bags. Interest rates staying at zero don?t hurt either.

The real kicker here is that stock in an airline is, in effect, a free undated short volatility play on oil. If oil doesn?t move, airline stocks go up. You may have noticed that I have written at length on the rough balance that has emerged in the global oil markets, where rising Chinese demand is offset by increasing US production from fracking. The end result has been the lowest volatility in the oil market in years.

This is not a bad position to have when peace talks in Geneva with Iran threaten to collapse the price of oil. On top of that, you can add the huge economies offered by the new Boeing 787, known in the industry as the ?plastic fantastic, which uses 40% less fuel than existing models.

I picked United Continental Group (UAL) because it suffered from some integration problems from their recent merger, like a reservations system that wouldn?t work. That gives them the greatest snap back potential.

And even if the fuel savings turn out to be modest, a recovering US economy should boost profitability, given its recent maniacal pursuit of controlling costs. Some airlines have become so cost conscious that they are no longer painting their planes to gain fuel savings from carrying 100 pounds less weight! Just the missing pretzels alone should be worth a few cents a share in earnings.

This is not just a US development, but an international one. The International Air Transport Association (IATA) has just raised its forecast of member earnings from $7.6 billion in 2012 to $10.6 billion in 2013, a gain of 40%. The biggest earnings are based in Asia (China Southern Airlines, China Eastern Airlines, Air China), followed by those in the US, with $3.6 billion in profits.

Add all this together, and the conclusion is clear. The checklist is complete, the IFR clearance is in hand, and it is now time to push the throttles to the firewall for the airline stocks and get this bird off the ground.

And no, I didn't get free frequent flier points for writing this piece.

Meet the New Big Four

Time to Consider Another Career

Fly the Friendly Skies with a Long Position

January 23, 2014/by Mad Hedge Fund Trader

Pulling the Ripcord on United

Newsletter

Delta announces that revenues grew by only 2% in the last quarter, so of course, they trash United Continental Group (UAL), taking it down 11% from the recent high.? As a former pilot myself, I always allow an extra safety margin separating me from a catastrophic event. This time it came in handy, my deep out-of-the-money call spread limiting my losses to a handful of basis points.

Have no doubt this position will expire in the money. But the share price has crossed that line in the sand of the upper strike price on the call spread. Prudent risk control demands that I bail. I am still up 30% in 2013. There is no point in blowing it on a crappy airline that doesn?t even give you free peanuts back in coach anymore. Or so I heard.

The one mitigating factor here is that those who also strapped on the United Continental Holdings (UAL) April, 2013 $34-$36 bear put spread at $1.76 will now almost certainly take in 68 basis points in profit by running it to the maximum $2 value, cutting the loss on the call spread by half. Such is the value of the hedge. If I had gone with a full 10% weighting on the short side, I would have had the luxury of running both positions into expiration.

After sending you 30 consecutive winning trade alerts, it was just a matter of time before one of these bites you back. Notice that the higher prices go, the more often this will happen. Markets get dizzy, squirrely, and punch drunk at high altitude, no doubt from the shortage of oxygen in the form of fresh new cash flows. Let this be a shot across your bow, that we are entering dangerous, even uncharted territory.

Notice also that we lost money an individual name while the main market continued to ascend. That is the double-edged sword of picking a single sector or company. A one off news event can send your prices spilling while everyone else is laughing all their way to the bank. This happened to me last year with Apple (AAPL). You get double the profit with individual option spreads, but with double the risk. Live by the sword, die by the sword.

Crash and Burn With a United Call Spread

April 3, 2013/by Mad Hedge Fund Trader

Airline Stocks Are Cleared for Take Off

Newsletter

When I was a young, clueless investment banker at Morgan Stanley 30 years ago, the head of equity sales took me aside to give me some fatherly advice. Never touch the airlines.

The profitability of this industry was totally dependent on fuel costs, interest rates, and the state of the economy, and management hadn't the slightest idea of what any of these were going to do. If I were ever tempted to buy an airline stock, I should lie down and take a nap first.

At the time, the industry had just been deregulated, and was still dominated by giants like Pan Am, TWA, Eastern Air, Western, Laker, Braniff, and a new low cost upstart called People Express. None of these companies exist today. It was the best investment advice that I ever got.

If you total up the P&L's of all of the US airlines that ever existed since Orville and Wilber Wright first flew in 1903 (their pictures are on my new anti-terrorism edition commercial pilots license), it is a giant negative number, well in excess of $100 billion. This is despite the massive government subsidies that have prevailed for much of the industry's existence.

The sector today is hugely leveraged, capital intensive, heavily regulated, highly unionized, offers customers terrible service, and is constantly flirting with, or is in bankruptcy. Its track record is horrendous. They are a prime terrorist target. A worse nightmare of an industry never existed.

I became all too aware of the travails of this business while operating my own charter airline in Europe as a sideline to my investment business. The amount of paperwork involved in a single international flight was excruciating. Every country piled on fees and taxes wherever possible. The French air traffic controllers were always on strike, the Swiss were arrogant, and the Italians unintelligible and out of fuel.

The Greek military controllers once lost me over the Aegean Sea for two hours, while the Yugoslavs sent out two MIGs to intercept me. As for the US? Did you know that every rivet going into an American built aircraft must first be inspected by the government and painted yellow before it can be used in manufacture?

While flying a Red Cross mission into Croatia, I got shot down by the Serbians, crash landed at a small Austrian Alpine River, and lost a disc in my back. I had to make a $300 donation to the Zell Am Zee fire department Christmas fund to get their crane to lift my damaged aircraft out of the river. Talk about killing the competition!

So you may be shocked to hear that I think there is a great opportunity here in airline stocks. A Darwinian weeding out has taken place over the last 30 year that has concentrated the industry so much that it would attract the interest of antitrust lawyers, if consumers weren?t such huge beneficiaries.

If the American-US Air (AAMRQ) ? (LCC) deal goes through, as expected, the top four carriers (along with United-Continental, Delta, and Southwest) will control 90% of the market. That is up from 60% only five years ago. The industry has fewer seats than in 1982; while inflation adjusted fares are down 40%. Analysts are referring to this as the industry?s new ?oligopoly advantage.?

Any surprise bump up in oil prices is met with a blizzard of higher fares, fees, and fuel surcharges. I can't remember the last time I saw an empty seat on a plane, and I travel a lot. Lost luggage rates are near all time lows because so few now check in bags. Interest rates staying at zero don?t hurt either.

The real kicker here is that stock in an airline is, in effect, a free undated short volatility play on oil. If oil doesn?t move, airline stocks go up. You may have noticed that I have written at length on the rough balance that has emerged in the global oil markets, where rising Chinese demand is offset by increasing US production from fracking. The end result has been the lowest volatility in the oil market in years. On top of that, you can add the huge economies offered by the soon to be reintroduced Boeing 787, which uses 40% less fuel than existing models.

I picked United Continental Group (UAL) because it suffered from some integration problems from their recent merger, like a reservations system that wouldn?t work. That gives them the greatest snap back potential.

And even if the fuel savings turn out to be modest, a recovering US economy should boost profitability, given its recent maniacal pursuit of controlling costs. Some airlines have become so cost conscious that they are no longer painting their planes to gain fuel savings from carrying 100 pounds less weight! Just the missing pretzels alone should be worth a few cents a share in earnings.

This is not just a US development, but an international one. The International Air Transport Association (IATA) has just raised it forecast of member earnings from $7.6 billion in 2012 to $10.6 billion this year, a gain of 40%. The biggest earnings are based in Asia (China Southern Airlines, China Eastern Airlines, Air China), followed by those in the US, with $3.6 billion in profits.

Add all this together, and the conclusion is clear. The checklist is complete, the IFR clearance is in hand, and it is now time to push the throttles to the firewall for the airline stocks. And no, I didn't get free frequent flier points for writing this piece.

Time to Consider Another Career

Fly the Friendly Skies With a Long Position

March 25, 2013/by Mad Hedge Fund Trader

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Crash and Burn With a United Call Spread

Time to Consider Another Career

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Fly the Friendly Skies with a Long Position