Global Market Comments
April 21, 2020
Fiat Lux
Featured Trade:
(OIL CATACLYSM)
(USO), (XLE)
Posts
I spent the day trying to charter a 500,000-tonne oil tanker.
No luck.
If I had found one, I could have bought oil at the close of the market today at negative -$37.78 a barrel and then immediately resold it for June delivery for $21, generating an instant $57.78 a barrel profit. At 7.33 barrels a metric ton that gives me a $211 million profit. All I have to do is keep the oil for a month. Big hedge funds are doing this right now.
When I toured Australia in February, I warned investors that crude would fall from $80 to $10 by 2030, which many called extreme. I warned them to get out of all energy investments immediately, as I have done with you for the past several years. It is an industry that is going the way of the buggy whip maker.
Instead, we saw a move from $80 to negative -$37 in two months. They must think I’m some kind of idiot, clueless about the functioning of this important commodity market, despite having invested and worked in the industry for five years.
Of course, the wild prices are a product of the futures market, where financial derivatives outnumber the underlying physical market by 100 to one. Anyone who buys here today has to take delivery by 2:30 EST on Tuesday. With all the world’s storage and shipping already committed that is impossible. You literally can’t give oil away right now.
All transportation use of oil has virtually ceased. Most airlines are grounded, no ships are sailing, and nobody is driving anymore. Of the world’s potential daily oil supply, we have crashed from 100 million b/d to 65 b/d in two months. It is a move unprecedented in history.
Throwing gasoline on the fire are 16 supertankers which sailed from Saudi Arabia but for which there are no buyers.
This panic is happening in the face of Cushing, Oklahoma’s storage capacity which is now at 61 million barrels and could be at its limit of 78 million barrels in a couple of weeks. Then where does the Texas tea go?
Since June futures are still trading at $21, I believe this carnage is due to the future expiration and should pass in a few days. But unless more storage shows up out of the blue, or the industry shuts in production of 35 million b/d, the Armageddon in the futures market will become a monthly affair.
All eyes are now on the United States Oil Fund (USO), which liquidated all its May oil contracts two weeks ago to avoid precisely this kind of debacle. All longs were rolled forward to June contracts, which expire on May 19, and into July.
(USO) now owns one-third of all June oil contracts. Some $1.5 billion poured into the (USO) last week, which then immediately dropped in value by half.
I know this sounds insane, but if you bought the (USO) at the Monday close of $3.75 and it returns to the $5.00 where it was trading last Thursday and oil was trading at $25 you should be able to make a quick 33% on your money in a few days.
I wouldn’t let this trade grow hair on it. I’ll be selling on the first rally. That’s why I’m only going with a 5% position instead of the usual 10%. Now is not the time to get greedy in the oil market.
Eventually, supply and demand will come into balance from a combination of production cuts and demand increases from a recovering global economy. Best guess is that happens in July or August at the earliest. OPEC has already cut production by 10 million barrels a day for two months and 8 million b/d for the rest of the year. After that, oil could trade back as high as $40 a barrel.
If oil stays this low for too long, the geopolitical implications are immense. There will be a second Russian Revolution, which depends on crude sales for 70% of total government revenues.
Saudi Arabia will go up in flames and the royal family will flee to Geneva, Switzerland where their money is, leaving 34 million citizens to perish. What population did the country support before the post-war oil industry took off in 1950? About 4 million. I remember Saudi Arabia in the 1960s and it was not a pleasant place. People walked barefoot on 150-degree sands.
But I diverge.
At some point, another trade of the century on the long side of oil is out there. But the price of being early is high.
A “BUY” Signal?
Global Market Comments
March 23, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE GREAT DEPRESSION),
(INDU), (SPY), (GS), (MS), (FXI), (USO), (TSLA)
The neighborhood is alive with power tools.
These are the implements that were given as Christmas presents to dads years ago. But to afford life in the San Francisco Bay Area said dads have to work 12 hours a day and weekends. Now, suddenly they have all the free time in the world and those ancient gifts are coming out of decade-old original packaging.
I’ve noticed something else about my neighborhood. People have suddenly started to turn gray. Beauty salon appointments have been banned for weeks, not designated essential businesses.
The GDP forecasts released by Goldman Sachs (MS) last week have been turning a lot of other people gray as well. Q1 is thought to show a -6% annualized shrinkage and Q2 is expected to come in at -24%. The unemployment rate will peak at 9%. Not to be outdone, Morgan Stanley (MS) cut their Q2 forecast to -30%.
That means America’s GDP will shrink to the 2016 level of $18.62 trillion, down enormously from today’s $21.5 trillion. Yes, three years of economic growth will be gone in a puff of smoke. These are far worse than the last Great Recession when the worst two quarters came in at -2% and -8%. That’s double the worst figures of the Great Recession.
In the meantime, vast swaths of the American economy are moving online, never to return.
The good news is that growth will return at a historic 12% rate in Q3. That sets up an exaggerated “V” for the stock market. How soon should you start buying stocks if this economic scenario plays out? Probably a month, if not weeks, but only if you have the courage to do so.
The numbers from China (FXI) this week are very encouraging, showing no increase in new cases. In February, they enacted the kind of severe lockdown which California enacted a week ago.
Hopefully, that means we will get the Chinese results in a month or two. But the problem is that these are Chinese numbers that may be intended more to please the government than shed light on the truth.
The first real look we get at the effectiveness of lockdown may be in Italy in a few weeks, which has been quarantined since February.
In the US, the states have abandoned all hope of help from Washington and are leading the charge with the most aggressive measures. In California, it is now illegal for 40 million people to go outside unless it is a trip to the grocery store, the pharmacy, or the doctor.
The Golden State is now on a WWII footing. Tesla (TSLA) is switching production to ventilators. The state national guard is setting up field hospitals in parks. I am growing my own victory garden in the back yard.
The state is seeking to double the number of hospital beds to 20,000 within weeks. It just bought an entire hospital in Oakland, Seton Hospital. It went bankrupt last year and the administrators couldn’t give it away. The state i taking control of abandoned college dormitories and leasing empty hotels and cruise ships.
I expect food rationing to hit in a month. The distribution system is strained but working now. It may start to fail in April or May when large numbers of workers get sick.
The good news is that shelter in place should work, possibly by May. Kids are out of school until August.
With Trump refusing to put the entire country on lockdown that raises the specter of those in red states dying, while those in blue ones live. The big blue states of New York, California, New Jersey, Connecticut, and Illinois were the first to order shelter-in-place and will certainly see lower and sooner peaks in disease and fatalities.
And guess who has a one-month supply of Chloroquine, along with antibiotics widely believed to be a cure for the Coronavirus? That would be me, who bought them to fight off malaria for my trip to Guadalcanal six weeks ago. I was planning on going back in June to collect more dog tags for the Marine Corps, so I have an extra supply. As long as you can read, I’ll still be writing.
There is one more unexpected aspect of the pandemic and the shelter-in-place orders. I expect a baby boom to ensue in about nine months, thanks to all this enforced togetherness. The US birth rate has been falling for decades and is now well below the replacement rate. It’s about time we found a way to turn it around. Just don’t count me in on this one. I already have five kids.
So, you’re still asking for a market bottom.
The futures in Asia are limit down as I write this, just above the Dow Average 17,000 handle (INDU), thanks to the Senate failure to pass a virus rescue bill. Near 15,000 seems within range, down 49% from the February high. Modern history is no longer relevant here. We have to go back to 1929 to see numbers this extreme. I’ll be doing the research on that in the coming days.
The 1987 crash was already revisited a week ago, with a 3,000-point plunge in the Dow Average, or 12%. Some 33 years ago, we saw a 20% single day haircut, which I remember too well. This is with the Federal Reserve throwing everything at the stock market but the kitchen sink. I never thought I’d live long enough to see another one of these.
The Fed took interest rates to zero to stave off a depression, but the stock market crashes in overnight trading anyway. That brings the total to 150 basis points in cuts in five days. The Treasury is to buy an eye-popping $700 billion in mortgage securities to clear out the refi market for the first time in a decade. The Fed has just fired its last bullets to save stocks.
Goldman Sachs is targeting 2,000 in the (SPX), down 10% from here and 41% from the top. That is a 14X multiple on a 2020 S&P 500 earnings decline from $165 to $143. Yes, it’s just a guess. Investors could care less now about fundamentals or technicals. Cash is king.
Oil (USO) is headed for the teens. Saudi Arabia is ramping up production to a record 13 million barrels a day. The recession is collapsing US demand from 20 to 15 million b/d, half of which is consumed by transportation.
Russian national income has just collapsed by 75%. Will there by a second Russian Revolution? The 3% of the US market capitalization accounted for by energy stocks will drop below 1%. Fill her up! Avoid energy, even though some are going for pennies on the dollar.
The only data point that counts now is the daily real-time Corona tally of cases and deaths from Johns Hopkins, (click here). All other economic data is now irrelevant. Right now we are at 335,997 cases worldwide and 14,641 deaths. The US is at a frightening 33,276 cases as of writing.
Insider buying is exploding, with CEOs picking up their own stocks at 50%-70% discounts. Charles Scarf, president of Wells Fargo, just bought $5 million worth of (WFC) down 52% from the recent top. This is a legendary indicator that we may be within weeks of a market bottom.
The New York Stock Exchange closes its floor trading operations last week after several members tested positive for the Corona virus. Online trading will continue, where 95% of the business migrated years ago. It’s really just a TV stage now.
It’s all about hedge funds, triggering the massive volatility of the past month. They have been unwinding massive positions with up to 13X leverage in illiquid markets that can’t handle the massive volume.
When the last hedge fund is liquidated, the market will go up and the (VIX) will collapse. They may have started and the (VIX) plunged an incredible 25 points in hours.
Trump asked states to keep unemployment data secret to minimize market impact. Just what we need, less information, not more. The Weekly Jobless Claims were a bombshell, adding 70,000 to 271,000, the sharpest increase in a decade. Look for far worse to come in coming weeks as whole industries are shut down, and state unemployment computers explode from the weight of applications. Jobless Claims over 2 million are imminent!
Existing Home Sales soared by a stunning 6.5% in February, a 13-year high. The West saw an amazing 17% increase. The median home price jumped by 8% YOY. While the data is great, it’s all pre-Corona. It is illegal for people to go out to look at homes in many states, and no one wants to sell to keep strangers out of the house.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $20 a barrel, and many stocks down by three quarters, there will be no reason not to.
My Global Trading Dispatch performance has had a great week, thanks to the collapse in market volatility, 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 Friday low. My trailing one-year return was pared back to 31.68%. My ten-year average annualized profit shrank to +33.56%.
I have been fighting a battle for the ages on a daily basis to limit my losses. My goal here is to make it back big time when the market comes roaring back in the second half.
My short volatility positions have largely recovered. I shorted the (VXX) when the Volatility Index (VIX) was at $35. It then went to an unbelievable $80 before falling back to $55. I was saved by only trading in very long maturity, very deep out-of-the-money (VXX) put options where time value will maintain a lot of their value. Now, we have time decay working in our favor. These will all come good well before their one-year expiration.
At the slightest sign of a break in the pandemic, the economy and shares should come roaring back. Right now, I have a 70% cash position.
On Monday, March 23 at 7:30 AM, the Chicago Fed National Activity Index is out.
On Tuesday, March 24 at 9:00 AM, the New Home Sales for February are released.
On Wednesday, March 25, at 7:30 AM, US Durable Goods for February are published.
On Thursday, March 26 at 7:30 AM, Weekly Jobless Claims are announced. The number could top 1,000,000. The final read on Q4 GDP is announced, although it is ancient history.
On Friday, March 27 at 9:00 AM, the US Personal Income for February is printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I will be in training doing daily ten-mile hikes with a 50-pound backpack. I will be leading the Boy Scouts on a 50-mile hike at Philmont in New Mexico. I expect the epidemic to peak well before then and normalcy to return.
Shelter in place will work. Please stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Going Shopping
Global Market Comments
March 19, 2020
Fiat Lux
Featured Trade:
(INVESTING ON THE OTHER SIDE OF THE CORONA VIRUS),
(SPY), (INDU), (FXE), (FXY), (UNG),
(EEM), (USO), (TLT), (TSLA)
The Coronavirus has just set up the investment opportunity of the century.
In a matter of three weeks, stocks have gone from wildly overbought to ridiculously cheap. Price earnings multiples have plunged from 20X to 13X, well below the 15.5X long term historical average. The Dow Average is now 5% lower than when Donald Trump assumed the presidency more than three years ago. The world of investing after Coronavirus is looking pretty good.
I believe that as a result of this meltdown, the global economy is setting up for a new Golden Age reminiscent of the one the United States enjoyed during the 1950s, and which I still remember fondly. In other words, when it comes to investing after Coronavirus, we are on the cusp of a new “Roaring Twenties.”
This is not some pie in the sky prediction.
It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.
For a start, medical science is about to compress 5-10 years of advancement into a matter of months. The traditional FDA approval process has been dumped in the trash. Any company can bring any medicine, vaccine, or anti-viral they want to the market, government be damned. You and I will benefit enormously, but a few people may die along the way.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million “Gen Xer’s”.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, healthcare, and “RISK OFF” assets like bonds.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward two years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xer’s being chased by 85 million of the “millennial” generation trying to buy their assets.
By then, we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes.
The middle-class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.
The stock market rockets in this scenario. And this pandemic has just given us a very low base from which to start, making investing after Coronavirus a promising prospect.
Once the virus is beaten, we could see the same fourfold return we saw from 2009 to 2020. That would take us from The Thursday low of 18,917 to 76,000 in only a few years.
If I’m wrong, it will hit 100,000 instead.
Emerging stock markets (EEM) with much higher growth rates do far better.
This is not just a demographic story. The next ten years should bring a fundamental restructuring of our energy infrastructure as well.
The 100-year supply of natural gas (UNG) we have recently discovered through the new “fracking” technology will finally make it to end users, replacing coal (KOL) and oil (USO), so this sort of energy investing after Coronavirus in particular is looking undoubtedly promising.
Fracking applied to oilfields is also unlocking vast new supplies.
Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC’s share of global reserves is collapsing.
This is all happening while the use of electric cars is exploding, from zero to 4% of the market over the past decade.
Mileage for the average US car has jumped from 23 to 24.9 miles per gallon in the last couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five-year low and collapsing.
Alternative energy technologies will also contribute in an important way in states like California, which will see 100% of total electric power generation come from alternatives by 2030.
I now have an all-electric garage, with a Tesla Model 3 for local errands and a Tesla Model X (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. Both cars are powered by my rooftop solar system.
The net result of all of this is lower energy prices for everyone.
It will also flip the US from a net importer to an exporter of energy, with hugely positive implications for America’s balance of payments.
Eliminating our largest import and adding an important export is very dollar bullish for the long term.
That sets up a multiyear short for the world’s big energy-consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.
Accelerating technology will bring another continuing positive for investing after Coronavirus.
Of course, it’s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos. But at the enterprise level, this is enabling speedy improvements in productivity that are filtering down to every business in the US, lower costs everywhere.
This is why corporate earnings have been outperforming the economy as a whole by a large margin.
Profit margins are at an all-time high.
Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development.
When the winners emerge, they will have a big cross-leveraged effect on the economy.
New healthcare breakthroughs, which are also being spearheaded in the San Francisco Bay area, will make serious disease a thing of the past.
This is because the Golden State thumbed its nose at the federal government 18 years ago when the stem cell research ban was implemented.
It raised $3 billion through a bond issue to fund its own research, even though it couldn’t afford it.
I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years, they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday.
What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver’s seat on these innovations? The USA.
There is a political element to the new Golden Age as well. Gridlock in Washington can’t last forever. Eventually, one side or another will prevail with a clear majority.
This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now but nobody wants to be blamed for.
That means raising the retirement age from 66 to 70 where it belongs and means-testing recipients. Billionaires don’t need the maximum $45,480 Social Security benefit. Nor do I.
The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cut defense spending from $755 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.
I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up.
A Pax Americana would ensue.
That means China will have to defend its own oil supply, instead of relying on us to do it for them for free. That’s why they have recently bought a second used aircraft carrier. The Middle East is now their headache, not ours.
The national debt then comes under control, and we don’t end up like Greece.
The long-awaited Treasury bond (TLT) crash never happens.
The reality is that the global economy will soon spin off profits faster than it can find places to invest them, so the money ends up in bonds instead.
Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won’t kick in for another decade.
But some individual industries and companies will start to discount this rosy scenario now.
Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.
Needless to say, investing after Coronavirus runs it's course will be a welcome change for both individual investors and the economy as a whole.
Dow Average 100-Year Chart
Another American Golden Age is Coming
I just drove from Carmel, California to San Francisco on scenic Highway 1. I was virtually the only one on the road.
The parking lot at Sam’s Chowder House was empty for the first time in its history. The Pie Ranch had a big sign in front saying “Shut”. The Roadhouse saw lights out. It was like the end of the world.
The panic is on.
The economy has ground to a juddering halt. Most US schools are closed, sports activities banned, and travel of any kind cancelled. All ski resorts in the US are shut down as are all restaurants, bars, and clubs in California. Virtually all public events of any kind have been barred for the next two months. Apple (AAPL) and Nike (NIKE) have closed all their US stores.
The moment I returned from my trip, I learned that the Federal Reserve has cut interest rates by a mind-boggling 1.00% on the heels of last week’s 0.50% haircut. This is unprecedented in history. S&P Futures responded immediately by going limit down for the third time in a week.
The most pessimistic worst-case scenario I outlined a week ago came true in days. The (SPX) is now trading at 2,500. Goldman Sachs just put out a downside target at 2,000, off 41% in three weeks.
That takes the market multiple down from 20X three weeks ago to 14X, and the 2020 earnings forecast to crater from $165 to $143. These are numbers considered unimaginable only a week ago.
You can blame it all on the Coronavirus. Global cases shot above 160,000 yesterday, while deaths exceeded 5,800. In the US, we are above 3,000 cases with 60 deaths. The pandemic is growing by at least 10% a day. All international borders are effectively closed.
The stock market has effectively impeached Donald Trump, unwinding all stock market gains since his election. At the Thursday lows, the Dow Average ticked below 20,000, less than when he was elected. Economic growth may be about to do the same, wiping out the 7% in economic growth that has taken place during the same time.
Leadership from the top has gone missing in action. The president has told us that the pandemic “amounts to nothing”, is “no big deal”, and a Democratic “hoax.” There is no Fed effort to build a website to operate as a central clearing house for Corona information. In the meantime, the number of American deaths has been doubling every three days.
There have only been 13,500 tests completed in the US so far and they are completely unavailable in my area. The bold action to stem the virus has come from governors of the states of all political parties.
The good news is that all this extreme action will work. If you shut down the economy growth, the virus will do the same. In two weeks, all carriers will become obvious. Then you simply quarantine them. Any dilution of the self-quarantine strategy simply stitches out the process and the market decline.
The hope now is that the recession, which we certainly are now in, will be sharp but short. “An ounce of prevention is worth a pound of cure” is certainly in control now.
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 $25 a barrel, and many stocks down by half, there will be no reason not to.
Oil (USO) crashed, taking Texas tea down an incredible $22 overnight. OPEC collapsed as Saudi Arabia took on Russia in a price war, flooding the market. All American fracking companies with substantial debt have just been rendered worthless. I told you to stay away from MLPs! It’s amazing to see how the effect of one million new electric cars can have on the oil market. Blame it all on Elon Musk.
The oil crash is all about the US. American fracking has added 4 million barrels a day of supply over the last five years and 8 million b/d during the last ten. Saudi Arabia and Russia would love to wipe out the entire US industry.
Even if they do, the private equity boys are lining up to buy assets at ten cents on the dollar and bring in a new generation of equity investors. The wells may not even stop pumping. How do you say “Creative Destruction” in Arabic and Russian? We do it better than anyone else.
Gold (GLD) soared above $1,700, on a massive flight to safety bid bringing the old $1,927 high within easy reach.
Bond yields (TLT) plunged to 0.31% as recession fears exploded. Looks like we are headed to 0% interest rates in this cycle. Corona cases top 4,000 in the US and fatalities are rising sharply. Malls, parking lots, and restaurants are all empty.
Trump triggered a market crash, with a totally nonsensical Corona plan. Banning foreigners from the US will NOT stop the epidemic but WILL cause an instant recession, which the stock market is now hurriedly discounting. This is an American virus now, not a foreign one or a Chinese one. The market has totally lost faith in the president, who did everything he could to duck responsibility. The US is short 100,000 ICU beds to deal with the coming surge in cases. No one has any test kits at the local level. We could already have 1 million cases and not know it.
The US could lose two million people, according to forecasts by some scientists. At 100 million cases with a 5% fatality rate, get you there in three months. That could cause this bear market to take a 50% hit. The US is now following the Italian model, doing too little too late, where bodies are piling up at hospitals faster than they can be buried.
Stocks are back to their January 2017 lows, down 1,000 (SPX) points and 9,500 Dow points (INDU) in three weeks. Yikes! Unfortunately, I lived long enough to see this. We’ve seen 14 consecutive days of 1,000-point moves. The speed of the decline is unprecedented in financial history.
The Recession is on. Look for a short, sharp recession of only two quarters. JP Morgan is calling for a 2% GDP loss in Q2 and a 3% hit in Q3. The good news is that the stock market has already almost fully discounted this. The only way to beat Corona is to close down the economy for weeks.
A two-week national holiday is being discussed, or the grounding of all US commercial aircraft. Warren Buffet has cancelled Berkshire Hathaway’s legendary annual meeting. All San Francisco schools are closed, events and meetings cancelled. The acceleration to the new online-only economy is happening at light speed.
Municipal bonds crashed, down ten points in three days to a one-year low. If you thought that you parked your money in a safe place, think again. Municipalities are seeing tax and fee incomes collapse in the face of the Coronavirus. Brokers are in panic dumping inventories to meet margin calls. There is truly no place to hide in this crisis but cash, which is ALWAYS the best hedge. I would start buying (MUB) around here.
Bitcoin collapsed 50% in two days, to an eye-popping $4,000. So much for the protective value of crypto currencies. I told you to stay away. No Fed help here.
My Global Trading Dispatch performance has gone through a meat grinder, pulling back by -10.36% in March, taking my 2020 YTD return down to -13.28%. That compares to an incredible loss for the Dow Average of -32% at the Friday low. My trailing one-year return was pared back to 35.31%. My ten-year average annualized profit shrank to +33.84%.
I have been fighting a battle for the ages on a daily basis to limit my losses. My goal here is to make it back big time when the market comes roaring back in the second half.
My short volatility positions have been hammering me. I shorted the (VXX) when the Volatility Index (VIX) was at $35. It then went to an unbelievable $76. I was saved by only trading in very long maturity, very deep out-of-the-money (VXX) put options where time value will maintain a lot of their value. These will all come good well before their one-year expiration.
I also took profits in four short position at the market lows in Apple (AAPL) and the three short positions in Corona-related stocks, (CCL), (WYNN), and (UAL), which cratered, picking up an 8% profit there.
At the slightest sign of a break in the pandemic, the economy and shares should come roaring back. As things stand, I can handle a 3,000 point in the Dow Average from here and still have all of my existing positions expire at their maximum profit point with the Friday options expiration.
On Monday, March 16 at 7:30 AM, the New York Empire State Manufacturing Index is out.
On Tuesday, March 17 at 5:00 AM, the Retail Sales for February is released.
On Wednesday, March 18, at 7:30 AM, the Housing Starts for February is printed.
On Thursday, March 19 at 8:30 AM, Weekly Jobless Claims are announced.
On Friday, March 20 at 9:00 AM, the February Existing Home Sales is published. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I went down to Carmel, California to hole up in a hotel near the most perfect beach in the state and do some serious writing. This is the city where beachfront homes go for $10 million and up, mostly owned by foreign investors and tech billionaires from San Francisco. Locals decamped from here ages ago because it became too expensive to live in.
This is also where my parents honeymooned in 1949, borrowing my grandfather’s 1947 Ford.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 26 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: There’s been a moderation of new coronavirus cases in China. Is this what the market needs to find a bottom?
A: Absolutely it is; of course, the next risk is that cases keep increasing overseas. The final bottom will come when overseas cases start to disappear, and that could be a month or two off.
Q: How low will interest rates go after the coronavirus?
A: Well, interest rates already hit new all-time lows before the virus became a stock market problem. The virus is just giving it a turbocharger. Our initial target of 1.32% for the ten-year US Treasury bond was surpassed yesterday, and we think it could eventually hit 1.00% this year.
Q: What is the best way to know when to buy the dip?
A: When the Volatility Index (VIX) starts to drop. If you can get the volatility index down to the mid-teens and stay there, then the market will stabilize and start to rise fairly sharply. A lot of the really high-quality stocks in the market, like United Airlines (UAL), Walt Disney (DIS), Apple (AAPL) and Amazon (AMZN), have really been crushed by this selloff. So those are the names people are going to look at for quality at a discount. That’s going to be your new investment theme, buying quality at a discount.
Q: Do recent events mean that Boeing (BA) is headed down to 200?
A: I wouldn't say $200, but $280 is certainly doable. And if you get to $280, then the $240/$250 call spread all of a sudden looks incredibly attractive.
Q: What does a Bernie Sanders presidency mean for the market?
A: Well, if he became president, we could be looking at like a 50-80% selloff—at least a repeat of the ‘09 crash. However, I doubt he will get elected, or if elected, he won’t have control of congress, so nothing substantial will get done.
Q: Is this the beginning of Chinese (FXI) bank failures that will cause an economic crisis in mainland China?
A: It could be, but the actual fact is that the Chinese government is doing everything they can to rescue troubled banks and companies of all types with short term emergency loans. It’s part of their QE emergency rescue package.
Q: Can you explain what lower energy prices mean for the global economy?
A: Well, if you’re an oil consumer (USO), it’s fantastic news because the price of gas is going down. If you’re an oil producer (XLE), like for people in the Middle East, Texas, Louisiana, Oklahoma, and North Dakota, it’s terrible news. And if you’re involved anywhere in the oil industry, or own energy stocks or MLPs, you’re looking at something like another great recession. I have been hugely negative on energy for years. I’ve seen telling people to sell short coal (KOL). It’s having a “going out of business” sale.
Q: Should I aggressively short Tesla (TSLA) here? Surely, they couldn’t go up anymore.
A: Actually, they could go up a lot more. I would just stay away from Tesla and watch in amazement—there’s no play here, long or short. It suffices to say that Tesla stock has generated the biggest short-selling losses in market history. I think we’re up to about $15 billion now in short losses. Much smarter people than us have lost fortunes trying in that game.
Q: Was that an Amazon trade or a Google trade?
A: I sent out both Amazon and an Apple trade alert this morning. You should have separate trade alerts for each one.
Q: Are chips a long term buy at today’s level?
A: Yes, but companies like NVIDIA (NVDA), Micron Technology (MU), and Advanced Micro Devices (AMD) may be better long-term buys if you wait a couple of weeks and we test the new lows that we’ve been talking about. Chips are the canary in the coal mine for the global economy, and we have not gotten an all-clear on the sector yet. If you’re really anxious to get into the sector, buy a half of a position here and another half 10% down, which might be later this week.
Q: When will Foxconn reopen, the big iPhone factory in China?
A: Probably in the next week or so. Workers are steadily moving back; some factories are saying they have anywhere from 60-80% of workers returning, so that’s positive news.
Q: Are bank stocks a sell because of lower interest rates?
A: Yes, absolutely. If you think the 10-year treasury is running to a 1.00% yield as I do, the banks will get absolutely slaughtered, and we hate the sector anyway on a long-term basis.
Q: What about future Fed rate cuts?
A: Futures markets are now pricing in possibly three more rate cuts this year after discounting no more rate cuts only a few weeks ago. So yes, we could get more interest rates. I think the government is going to pull all the stops out here to head off a corona-induced recession.
Q: Once your options expire, is it still affected by after-hours trading?
A: If you read the fine print on an options contract, they don’t actually expire until midnight on a Saturday night after options expiration day, even though the stock market stops trading on a Friday. I’ve never heard of a Saturday exercise, but you may have to get a batch of lawyers involved if you ever try that.
Q: What’s the worst-case scenario for this correction?
A: Everything goes down to their 200-day moving averages, including Indexes and individual stocks. You’re talking about Apple dropping to $243 and Microsoft (MSFT) to $144, and NASDAQ (QQQ) to 8,387. That could tale the Dow Average (INDU) to maybe 24,000, giving up all the 2019 gains.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 12 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 do you think about Facebook (FB) here? We’ve just had a big dip.
A: We got the dip because of a double downgrade in the stock from a couple of brokers, and people are kind of nervous that some sort of antitrust action may be taken against Facebook as we go into the election. I still like the stock long term. You can’t beat the FANGs!
Q: If Bernie Sanders gets the nomination, will that be negative for the market?
A: Absolutely, yes. It seems like after 3 years of a radical president, voters want a radical response. That said, I don't think Bernie will get the nomination. He is not as popular in California, where we have a primary in a couple of weeks and account for 20% of total delegates. I think more of the moderate candidates will come through in California. That's where we see if any of the new billionaire outliers like Michael Bloom or Tom Steyer have any traction. My attitude in all of this is to wait for the last guy to get voted off the island—then ask me what's going to happen in October.
Q: When should we come back in on Tesla (TSLA)?
A: It’s tough with Tesla because although my long-term target is $2,500, watching it go up 500% in seven months on just a small increase in earnings is pretty scary. It’s really more of a cult stock than anything else and I want to wait for a bigger pullback, maybe down to $500, before I get in again. That said, the volatility on the stock is now so high that—with the short interest going from 36% down to 20%—if we get the last of the bears to really give up, then we lose that whole 20% because it all turns into buying; and that could get us easily over $1,000. The announcement of a new $2 billion share offering is a huge positive because it means they can pay off debt and operate with free capital as they don’t pay a dividend.
Q: Is Square (SQ) a good buy on the next 5% drop?
A: I would really wait 10%—you don't want to chase trades with the market at an all-time high. I would wait for a bigger drop in the main market before I go aggressive on anything.
Q: What about CRISPR Technology (CRSP) after the 120% move?
A: We’ve had a modest pullback—really more of a sideways move— since it peaked a couple of months ago; and again, I think the stock either goes much higher or gets taken over by somebody. That makes it a no-lose trade. The long sideways move we’re having is actually a very bullish indication for the stock.
Q: If Bernie is the candidate and gets elected, would that be negative for the market?
A: It would be extremely negative for the market. Worth at least a 20% downturn. That said, according to all the polling I have seen, Bernie Sanders is the only candidate that could not win against Donald Trump—the other 15 candidates would all beat Trump in a 1 to 1 contest. He's also had one heart attack and might not even be alive in 6 months, so who knows?
Q: I just closed the Boeing (BA) trade to avoid the dividend hit tomorrow. What do you think?
A: I’m probably going to do the same, that way you can avoid the random assignments that will stick you with the dividend and eat up your entire profit on the trade.
Q: When do you update the long-term portfolio?
A: Every six months; and the reason for that is to show you how to rebalance your portfolio. Rebalancing is one of the best free lunches out there. Everyone should be doing it after big moves like we’ve seen. It’s just a question of whether you rebalance every six months or every year. With stocks up so much a big rebalancing is due.
Q: I have held onto Gilead Sciences (GILD) for a long time and am hoping they’ll spend their big cash hoard. What do you think?
A: It’s true, they haven’t been spending their cash hoard. The trouble with these biotech stocks, and why it's so hard to send out trade alerts on them, is that you’ll get essentially no movement on them for years and then they rise 30% in one day. Gilead actually does have some drugs that may work on the coronavirus but until they make another acquisition, don’t expect much movement in the stock. It’s a question of how long you are willing to wait until that movement.
Q: Is it time to get back into the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?
A: No, you need to maintain discipline here, not chase the last trade that worked. It’s crucial to only buy the bottoms and sell the tops when trading volatility. Otherwise, time decay and contango will kill you. We’re actually close to the middle of the range in the (VXX) so if we see another revisit to the lows, which we could get in the next week, then you want to buy it. No middle-of-range trades in this kind of market, you’re either trading at one extreme or the other.
Q: Could you please explain how the Fed involvement in the overnight repo market affects the general market?
A: The overnight repo market intervention was a form of backdoor quantitative easing, and as we all know quantitative easing makes stocks go up hugely. So even though the Fed said this wasn't quantitative easing, they were in fact expanding their balance sheet to facilitate liquidity in the bond market because government borrowing has gotten so extreme that the public markets weren’t big enough to handle all the debt; that's why they stepped into the repo market. But the market said this is simply more QE and took stocks up 10% since they said it wasn't QE.
Q: What about Cisco Systems (CSCO)?
A: It’s probably a decent buy down here, very tempting. And it hasn't participated in the FANG rally, so yes, I would give that one a really hard look. The current dip on earnings is probably a good entry point.
Q: Should we buy the Volatility Index (VIX) on dips?
A: Yes. At bottoms would be better, like the $12 handle.
Q: When is the best time to exit Boeing?
A: In the next 15 minutes. They go ex-dividend tomorrow and if you get assigned on those short calls then you are liable for the dividend—that will eat up your whole profit on the trade.
Q: Do you like Fire Eye (FEYE)?
A: Yes. Hacking is one of the few permanent growth industries out there and there are only a half dozen listed companies that are cutting edge on security software.
Q: What are your thoughts on the timing of the next recession?
A: Clearly the recession has been pushed back a year by the 2019 round of QE, and stock prices are getting so high now that even the Fed has to be concerned. Moreover, economic growth is slowing. In fact, the economy has been growing at a substantially slower rate since Trump became president, and 100% of all the economic growth we have now is borrowed. If the government were running a balanced budget now, our growth would be zero. So, certainly QE has pushed off the recession—whether it's a one-year event or a 2-year event, we’ll see. The answer, however, is that it will come out of nowhere and hit you when you least expect it, as recessions tend to do.
Q: Would you buy gold (GLD) rather than staying in cash?
A: I would buy some gold here, and I would do deep in the money call spreads like I have been doing. I’ve been running the numbers every day waiting for a good entry point. We’re now at a sort of in between point here on call spreads because it’s 7 days to the next February expiration and about 27 days to the March one after that, so it's not a good entry point this week. Next week will look more interesting because you’ll start getting accelerated time decay for March working for you.
Q: When are you going to have lunch in Texas or Oklahoma?
A: Nothing planned currently. Because of my long-term energy views (USO), I have to bring a bodyguard whenever I visit these states. Or I hold the events at a Marine Corps Club, which is the same thing.
Q: Would you use the dip here to buy Lyft (LYFT)? It’s down 10%.
A: No, it’s a horrible business. It’s one of those companies masquerading as a tech stock but it isn’t. They’re dependent on ultra-low wages for the drivers who are essentially netting $5 an hour driving after they cover all their car costs. Moreover, treating them as part-time temporary workers has just been made illegal in California, so it’s very bad news for the stocks—stay away from (LYFT) and (UBER) too.
Q: Is the Fed going to cut interest rates based on the coronavirus?
A: No, interest rates are low enough—too low given the rising levels of the stock market. Even at the current rate, low-interest rates are creating a bubble which will come back to bite us one day.
Q: Household debt exceeded $14 trillion for the first time—is this a warning sign?
A: It is absolutely a warning sign because it means the consumer is closer to running out of money. Consumers make up 70% of the economy, so when 70% of the economy runs out of money, it leads to a certain recession. We saw it happen in ‘08 and we’ll see it happen again.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader January 22 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: Are you concerned about a kitchen sink earnings report on Boeing (BA) next week?
A: No, every DAY has been a kitchen sink for Boeing for the past year! Everyone is expecting the worst, and I think we’re probably going to try to hold around the $300 level. You can’t imagine a company with more bad news than Boeing and it's actually acting as a serious drag on the entire economy since Boeing accounts for about 3% of US GDP. If (BA) doesn’t break $300, you should buy it with both hands as all the bad news will be priced in. That's why I am long Boeing.
Q: Do you think IBM is turning around with its latest earnings report?
A: They may be—They could have finally figured out the cloud, which they are only 20 years late getting into. They’ve been a lagging technology stock for years. If they can figure out the cloud, then they may have a future. They obviously poured a lot into AI but have been unable to make any money off of it. Lots of PR but no profits. People are looking for cheap stuff with the market this high and (IBM) certainly qualifies.
Q: Will the travel stocks like airlines and cruise companies get hurt by the coronavirus?
A: Absolutely, yes; and you’re seeing some pretty terrible stock performance in these companies, like Delta (DAL), the cruise companies like Royal Caribbean Cruises (RCL), and the transports, which have all suffered major hits.
Q: Will the Wells Fargo (WFC) shares ever rebound? They are the cheapest of the major banks.
A: Someday, but they still have major management problems to deal with, and it seems like they’re getting $100 million fines every other month. I would stay away. There are better fish to fry, even in this sector, like JP Morgan (JPM).
Q: Will a decrease in foreign direct investment hurt global growth this year?
A: For sure. The total CEO loss of confidence in the economy triggered by the trade war brought capital investment worldwide to a complete halt last year. That will likely continue this year and will keep economic growth slow. We’re right around a 2% level right now and will probably see lower this quarter once we get the next set of numbers. To see the stock market rise in the face of falling capital spending is nothing short of amazing.
Q: Do you think regulation is getting too cumbersome for corporations?
A: No, regulation is at a 20-year low for corporations, especially if you’re an oil (USO), gas (UNG) or coal producer (KOL), or in the financial industry (XLF). That’s one of the reasons that these stocks are rising as quickly as they have been. What follows a huge round of deregulation? A financial crisis, a crashing stock market, and a huge number of bankruptcies.
