Global Market Comments
June 29, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or COVID-19 IS BACK!)
(SPX), (TLT), (TBT), (TSLA), (BAC),
(XOM), (CCL), (MGM), (WYNN), (UAL)
Posts
This was the week that the Coronavirus came back with a vengeance.
The market had been backing out the pandemic for the past three months. Now it is abruptly pricing it back in.
Hospitalizations soared in 16 states to new all-time highs, as the first wave continues to grow exponentially. Deaths have topped 125,000. The good news is that only 5,000 died last week. That is nearly two 9/11’s, or 12 Boeing 747’s crashes worth of victims.
Apple has closed eight stores in Texas and another 14 stores in Florida. Arizona is on the verge of running out of hospital beds. This is going to weigh heavily on the market until we see another interim peak. It looks like the last one was certainly a false summit, in climber’s lingo.
What was really interesting last week is what DIDN’T happen. While the “reopening” stock LIKE banks (BAC), energy (XOM), cruise lines (CCL), hotels (MGM), casinos (WYNN), airlines (UAL) were absolutely slaughtered, gold, technology, and biotech barely moved. It says volumes about what happens next. You want to use selloffs to buy quality at a discount, not garbage that is going to zero.
Technology and biotech are where you want to focus your buying of stock, futures, and LEAPS. The next big dip is the one you buy.
You can count on the government stepping in and announcing more stimulus on the next down 1,000-point day. Thursday mornings seem to be a favorite time, right before the next horrific Weekly Jobless Claims are announced, which also seem to be reaccelerating.
The Fed can do this for free, without spending any money, simply by expanding the asset classes eligible for quantitative easing. Some $8 trillion in QE certainly buys a lot of friends in the market. I believe that any run in the S&P 500 (SPX) down to 2,700 will be met by government action.
Treasury Secretary Steve Mnuchin expects another stimulus package in July, but only if he gives away the store to Nancy Pelosi. Just what the market needs, more stimulus. Most of the 40 million out of work are still jobless. It could be $1 trillion worth of stimulus checks and other giveaways headed for the stock market, like the last lot. My kids still haven’t spent their first checks! We’re going broke anyway, so why not?
The stock market is clearly running out of gas, at a 26 multiple, the highest since the Dotcom bubble top. Any more stimulus may simply go into bank deposits. The risk/reward for new positions here is terrible. It sits nicely into my sideways range scenario for the rest of the year.
Existing Home Sales are down 9.7% in May, the worst in ten years. They are off 26.6% YOY, the worst figure since 1982 when home mortgage rates were at 18%. Inventories are down an eye-popping 18.8% to 4.8 months as sellers pulled listing to avoid virus-infested buyers. The first-time buyers live, but the action is shifting out of condos and into single family homes in the burbs.
Weekly Jobless Claims jump 1.5 million, far worse than forecast. It looks like we are getting a second wave of jobless as Corona ravages the south and business hangers-on throw in the towel. Some 20 million Americans remain on state unemployment benefits, which will start to run out shortly. Will stocks look through this?
Banks are banned from paying dividends and buying back shares, orders the US Treasury. The Fed estimates that pandemic-related loan losses could reach $700 billion, wiping out their capital. Every bailout comes with a pound of flesh. The banks have made billions off of stimulus loans, like the PPP. The banks rallied because the news wasn’t worse, like a mandatory 5% share giveaway, which happened last time. Buy banks like (JPM), (BAC), and (C) on an expected yield curve steepening.
Tesla (TSLA) is now the world’s most valuable car company, with a market capitalization of over $180 billion. It just passed Toyota Motors (TM). (TSLA) is now worth more than the entire US car industry combined. That could double very quickly. The upcoming model Y is expected to be its biggest seller and a third production plant will be announced imminently. The rush out of public transit and into private cars simply accelerated a pre-existing trend or the company.
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 still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch enjoyed another respectable week, taking in a welcome 3.87%, bringing June in at +2.56%. Despite the market diving nearly 10%, we pulled in big profits from our short positions and captured accelerated time decay on our longs. My eleven-year performance stands at a new all-time high of 368.75%.
That takes my 2020 YTD return up to a more robust +12.88%. This compares to a loss for the Dow Average of -12.3%, up from -37% on March 23. My trailing one-year return popped back up to 53.27%. My eleven-year average annualized profit recovered to +34.91%.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here. It’s jobs week and we should see an onslaught of truly awful numbers.
On Monday, June 29 at 11:00 AM EST, US Pending Home Sales for May are out.
On Tuesday, June 30 at 10:00 AM EST, the April Case-Shiller National Home Price Index is published.
On Wednesday, July 1, at 9:15 AM EST, the ADP Private Employment Report is released. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are published.
On Thursday, June 2 at 8:30 AM EST, Weekly Jobless Claims are announced.
On Friday, June 3, at 8:30 AM EST, the June Nonfarm Payroll Report is printed. Since last month was a large overstatement, June could be positively diabolical. The Baker Hughes Rig Count is out at 2:00 PM EST.
As for me, I am rushing out and doing errands, like a trip to the barber, haircut, hardware store, dry cleaners, the dentist, and the doctor in case the California economy shuts down once again. We’ve been slightly open for a few weeks.
That may be all we get this year.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
June 5, 2020
Fiat Lux
Featured Trade:
(JUNE 3 BIWEEKLY STRATEGY WEBINAR Q&A),
(FB), (M), (UAL), (LVS) , (WYNN), (MS), (SPX), (TBT), (TLT), (AAPL), (FB), (MSFT), (SDS), (SPX), (AMZN) (LEN), (KBI), (PHM), (TSLA)
Below please find subscribers’ Q&A for the June 3 Mad Hedge Fund Trader 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: Domino's Pizza (DPZ) is at all-time highs? Would you buy this name right here, right now?
A: No, I would not even buy their pizza. You would be crazy to buy them right now up here this high. I prefer Round Table, the pizza not the stock. All of these “reopening” stocks are way overextended.
Q: Will the riots delay the recovery?
A: Yes, they will, it could take as much as another 1% off the current GDP growth rate. It’s hitting the already worst-hit sector—retailers. Many retailers will not come back from these, especially the small ones. These businesses were just returning from being closed for two months when they got burned down. But we won’t see it in the macro data for many months because its happening largely at the micro level. If you didn’t like Macy’s (M) before when it was headed for Chapter 11, you definitely won’t like it now that it is burning down.
Q: If airlines like United Airlines (UAL) can’t use the middle seat, do you see ticket prices going up 10%, 25%, or 50%?
A: Yes. In theory, to just cover the middle seat, they have to increase prices 33%. And there will be a whole lot of new costs that the airlines have to endure as part of this pandemic, such as extra cleaning, disinfecting, and temperature taking. So, they’re really going to need to increase prices by 50% or more just to break even. My guess is that the airline industry will shrink in half in the fall when all the government bailout money runs out. So, I've been telling people to take profits on the airlines, especially if you have a double or triple in them, or if you have the LEAPS.
Q: Is Facebook (FB) immune from any big selloff?
A: No, nobody is immune—look how much Facebook sold off in March, some 35%. Mark Zuckerberg seems to be making a deal with the devil, accommodating the president with unrestricted incendiary Facebook posts. And the consequences of a Democratic win for Facebook could be hugely negative, so I am not participating in that one. Mark doesn’t have a lot of friends in congress right now so regulation looms.
Q: What do you think about buying Las Vegas Sands (LVS) or Wynn Resorts (WYNN) on the expectation of reopening?
A: I’m a Nevada resident and get frequently updated on the casino news. They’re only going to be allowed half of peak casino visitors that they had in January, so they will generate huge losses. Almost all companies are being allowed to reopen back to half the level that guarantees bankruptcy in 3-6 months. But we won’t see that in the numbers for many months either. I’m negative on any industry that depends on packing people in, like airlines, cruise lines, and movie theaters.
Q: What are the chances of a mass student debt cancellation?
A: That is a possibility if the Democrats win in November, and it has already been proposed. It is about a $1.5 trillion ticket. If you’re bailing out large companies, small companies, airlines, and the oil industry, why not students? It would have the benefit of adding 10 million more consumers to the economy, who are not current participants because they have massive student debts that are appreciating at 10% a year and have terrible credit ratings. So that would be another great economic stimulus measure. By the way, I paid off my student loans 40 years ago in a lump sum payment with my first paycheck from Morgan Stanley (MS). How much did four years of college cost during the 1960s? $3,000. Such a deal.
Q: What’s the next resistance level on the S&P 500 (SPX)?
A: The target we’ve been looking for is $3,125. I’m looking for roughly $40 points above that level—it should be about $3,165. We’re in uncharted territory here because nobody’s ever seen a market rise 40% in two months, so any technical recommendation has to be bearish except for a very short term, like intra-day or daily views.
Q: Any correlation between the 1918 epidemic and now?
A: Here is your History of Virology Lesson 101 for today. There is some similarity, but the 1918 flu actually originated on a farm in Kansas, had a 2% death rate, took a trip to Europe, mutated, came back months later, and then had a death rate of 50%. We haven't seen that second wave yet, or major mutations. We have seen a couple of different DNA strands out there though, meaning we would need multiple different vaccines when we get them. By the way, it was called the “Spanish Flu” because during WWI, every country had censorship except Spain because it was not a combatant. So, the pandemic was only reported in the Spanish newspapers.
Q: Would you get out of any of the previously recommended LEAPS?
A: Yes, I would be taking profits on all of your LEAPS—whether tech, domestic, “recovery”, or whatever else—so if we do get a correction over the summer, you can get back in at better prices, with longer expirations. You can go two years out from say August for example. The risk/reward today is terrible.
Q: Would you hold on to the (SDS) right now, or wait for the pullback
A: No, we have offsetting profits on all of our (SDS) positions, until today—if the market keeps accelerating to the upside, SDS losses will start to offset our profits on the positions, so that’s why I would get out.
Q: Should I buy the ProShares Ultra-Short 20 + Year Treasury Bond Fund (TBT)? I don’t do options.
A: You don’t need to do options, (TBT) is an ETF; anybody can buy that, it’s just like buying a stock.
Q: What is happening with the Australian market?
A: It will trade with the US stock market tick for tick, which means they’ve had a fantastic rally, overdue for a selloff. Wait to buy the next dip.
Q: If markets are going to go down soon, why exit the (SDS)
A: It may go up first before it goes down. And in any case, I have a great profit on the combined position of long (SDS) and short bonds. These days, I like taking big profits rather than praying they become bigger. It’s about risk control and knowing what you can get away with in certain market conditions.
Q: Is now the time to sell the highflyers in tech?
A: Yes, I would be selling Apple (AAPL), Facebook (FB), Microsoft (MSFT), and Amazon (AMZN). Get dry powder, which is worth a lot after you’ve seen a move like this; especially if the economy gets worse, which is likely. My late mentor Barton Biggs taught me to always leave the last 10% of a move for the next guy.
Q: At what point do you buy the ProShares Ultra Short S&P 500 ETF (SDS) outright?
A: Only if there is an immediate collapse in the market, which I can’t foresee with any certainty. When you play these bear ETFs, the costs are very high. You are short double the (SPX) dividend, which is about 5% a year, plus hefty management fees. So, you really have to catch a quick, large move to the downside to make any real money.
Q: Real estate seems like the big winner of the pandemic. Will prices be up by the end of the year or is this just a temporary spike?
A: They will be up at the end of the year. I have been telling readers all year that their home will be their best investment in 2020 and that is coming true. Real estate has a massive tailwind behind it which has really been in place for a couple of years now, and that is the millennials upgrading and buying houses. The pandemic has really poured gasoline on the fire and triggered a stampede out of the city and into the suburbs. Having 85 millennials ready to upgrade their homes is a huge positive for the real estate market, and I’d be looking to buy the homebuilders on any dip. That’s probably the best domestic play out there. Buy Lennar Corp. (LEN) and Pulte Homes (PHM) on dips.
Q: Post pandemic, will manufacturing have any way of helping US economic growth, or is bringing back the supply chains fake news?
A: It is fake news because if companies bring back production, it will be machines and not people making things. Unless you want to pay $10,000 for an iPhone, or $5,000 for a low-end laptop. Oh yes, and the stocks which made these things would be 90% lower as well. That’s what those products cost in today’s dollars if they were made in the United States. I wouldn't count on any repatriation of US jobs unless people want to work for $3 a day like the Chinese do. Offshoring happened for a reason.
Q: How do I hedge a municipal bond portfolio?
A: You might think about taking profits in muni bonds. They’re yielding around 2% and change. And they could get hit with a nice little 20-point decline if the US Treasury bond market (TLT) falls apart, which it will. Then you can think about buying them back. If you really want to hedge, you sell short the (TLT) against your long muni bond portfolio. But that is an imperfect hedge because the default rate on munis is going to be much higher than it is now than it was in 2008-2009, and much higher than US Treasuries, which never defaults despite what the president has said.
Q: What is dry powder?
A: It means having cash to buy stocks at market bottom. In the 1800s before cartridges were invented, black powder got wet whenever it rained causing guns to fail to shoot. That is the historical analogy.
Q: What do we do now if we’re getting started?
A: It will require a lot of discipline on your part as coming in at market tops is always risky. Wait for the next trade alert. Every one of these is meant to work on a standalone basis. I would do nothing unless you see one of these things happen; any 2 or 3-point rally in bonds (TLT), you want to sell short. We’re just at the beginning of a multiyear trade here so it’s not too late to get back into that. Gold (GLD) is probably safe to buy on the dip here since we are at the very beginning of a historic expansion of the global money supply. I wouldn’t touch any stocks unless we get at least a 10% drop and then I'll start putting out call spread recommendations on single stocks. But right here, on top of the biggest bounceback in stocks in market history, don’t do anything. Just read the research and make lists of things to buy when they do dip—something I do for you anyway.
Q: What about Beyond Meat (BYND)?
A: The burgers are not that bad, but the stock is way overpriced and you don’t want to touch it. It's one of the fad stocks of the day.
Q: Can we access the slides after the webinar?
A: Yes, we post it on the website under your “Account” section about two hours after we’re done.
Q: Are you saying sell everything currently profitable?
A: Yes, I would be selling everything on a short term basis, keep tech and biotech on a long term basis. We are the most overbought in history and you don’t get asked twice to sell tops. But yes, it could go higher before the turn happens. From a risk-reward point of view, it’s terrible to do anything right now.
Q: Could we get a pullback to the $260-$270 area in the S&P 500 (SPY)?
A: Yes, especially if we get a second worse wave of corona and the stimulus takes much longer than we thought to get into the economy, or if the rioting continues.
Q: Should you sell CCI now?
A: Yes, I actually would. You have a 57% gain in the stock in ten weeks, so why not? Long term, it’s a hold.
Q: Are any retail stocks a buy?
A: No, they aren’t because a lot of them are going to go under but you don’t know which ones. After shutting down and losing 60% of their revenues, they’re now being burned down. The pros who do well in the sector are bankruptcy specialists who have massive research teams that analyze every lease in every mall and then cherry-pick. You and I don’t have the ability to do that so stay away.
Q: What is the best way to play real estate?
A: Buy a house. If not, then you buy (LEN), (KBI), and (PHM).
Q: Is it too late to get back in the stock market?
A: Yes, I'm afraid it is. Buying, because it has gone up, is a classic retail investor mistake. After this meltdown, maybe you will learn to buy stocks when everyone else is throwing up on their shoes. That's what I was doing in March and we got returns of 50% to 100% on everything and 500% to 1,000% on the LEAPS (TSLA).
Q: Are you buying puts?
A: No, I am not taking outright short positions any more than I have now because we have a Fed-driven melt-up underway with a stimulus that's 20x larger than that seen during the 2008-2009 Great Recession. When I don’t know what’s going to happen, I get out.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 28, 2020
Fiat Lux
Featured Trade:
(EIGHT "REOPENING" STOCKS TO BUY AT THE MARKET BOTTOM)
(UAL), (DAL), (UNP), (CSX), (WYNN), (MGM), (BRK/A), (BA)
With the massive technology rally off the March 23 market bottom, the risk/reward for entering new trades has dramatically shifted.
Back then. I was begging followers to load the boat with the best big tech and biotech & healthcare names with call options and two-year LEAPS (Long Term Equity Participation Securities).
One reader told me he bought Humana (HUM) call options for 70 cents and sold them for a breathtaking $30 for a profit of 4,280%! FedEx showed up with a bottle of single malt Glenfiddich Scotch whiskey the next day.
The times have changed. Many tech stocks are now only a few dollars short of new all-time highs, like Microsoft (MSFT) and Apple (AAPL), or are at all tie highs, such as Amazon (AMZN), Teledoc (TDOC), and Zoom (ZM).
What a difference 6,000 Dow points make!
As a result, it is far more interesting now to pick up stocks that currently look like potential chapter 11 candidates, but will likely prosper once the American economy starts to reopen. Call it my “Reopening Portfolio.”
You can buy any of the stocks below outright, sit on them, and probably reap a double over the next two years. However, if you are a much more aggressive kind of trader like me, then you might consider LEAPS, where 500%-%1,000% profits are possible.
The advantage of a stock or a two-year LEAPS is that if we get a second Coronavirus wave in the fall, which is highly likely, you can outlast any short term pain and still come out a huge winner.
Some of these names we sold short at the market top and made a killing. It is now time to flip to the other side.
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of 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. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire-sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 131.8% profit from an average stock price increase of only 17.6%.
That is a staggering return 7.7 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
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 cataclysmic 1,000-point down day in the Dow Average.
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.
Buying when everyone else is throwing up on their shoes is always the best policy. That way, your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright.
Enjoy.
United Airlines (UAL) just raised $1 billion in a new equity issue to tide it over hard times. That is just a drop in the bucket for what it needs. It’s hard to imagine the company coming through the crisis without any government involvement. The most likely is for the feds to offer a big chunk of cash in exchange for a minority ownership. Around 35% might work, which is the portion the US Treasury of General Motors (GM) during the 2008-09 crash. Still, if you’re looking for a double in the shares, that just water off a duck’s back.
LEAPS: the January 21 2022 $45-$50 vertical bull call spread at a price of 83 cents delivers a 525% gain with the stock at $50, up 94.5% from the current level.
Delta Airlines (DAL) is Warren Buffet’s favorite airline, although he has been selling lately. All of the arguments above apply for this best run of US Airlines.
LEAPS: January 21 2022 $40-$45 vertical bull call spread at a price of 83 cents delivers a 502% gain with the stock at $45, up 98.8% from the current level.
MGM Resorts (MGM)
Yes, Las Vegas is reopening soon, but it certainly won’t resemble the old Vegas. (MGM) is the dominant hotel owner of the strip, owning the Bellagio, Mandalay Bay, Aria Resort, and MGM Grand hotels. It also has a China presence.
LEAPS: the January 21 2022 $25-$30 vertical bull call spread at 75 cents delivers 566% gain with the stock at $30, up 95.6% from the current level.
Wynn Hotels (WYNN)
We killed it on the short side with (WYNN), capturing an eye-popping 90% decline. (WYNN) is poised to lead the upturn. It has a major exposure in Macao, where China will lead any economic recovery.
LEAPS: the January 21 2022 $140-$150 vertical bull call spread at 90 cents delivers a 455% gain with the stock at $150, up 81% from the current level.
Union Pacific (UNP)
The reopening of industrial American means a resurgence of railroad traffic. These are not your father’s railroads. Over the last 30 years, they have evolved into highly efficient operators that offer the cheapest way far to over heavy good and bulk commodities, virtually turning into closet high-tech companies. (UNP) had the additional advantage in that as the country’s dominant East/West road, it stands to benefit the most from a recovery in trade with China. That is a likely outcome of any future administration.
LEAPS: the January 21 2022 $180-$185 vertical bull call spread at $1.40 delivers a 257% gain with the stock at $185, up 15.00% from the current level.
CSX Corp. (CSX)
Same arguments here, except that (CSX) wins on North/South trade, especially with Mexico. With a NAFTA 2 new trade agreement in place, this company benefits from an extra turbocharger.
LEAPS: the January 21 2022 $75.00-$77.50 bull call spread at 84 cents delivers a 495% gain with the stock at $77.50, up 16.27% from the current level.
Berkshire Hathaway (BRK/A)
Yes, they make more than sheets these days. Warren Buffet’s flagship holding company is the poster bot for industrial American. The shares are high priced, but after this 32% pullback, you may finally have a chance to get in.
LEAPS: the June 17 2022 $225-$230 vertical bull call spread at $2.61 delivers a 91.5% gain with the stock at $230, up 22.7% from the current level.
Boeing Co. (BA)
This has been the worst falling knife situation in the market for the last two years, cratering from $450 to $85, or down 81%. The decertification of the 737 MAX started the rot, and the grounding of its major airline customers was the coup de grace. This is another company that may require a government bailout and stock ownership, as it is a strategic national value. You may have to wait until the next administration as its Washington State location is currently politically incorrect.
LEAPS: the June 17 2022 $185-$190 bull call spread at $1.25 delivers a 400% gain with the stock at $190, up 47.8% from the current level.
Buy all eight of these and if they all work, your average return will be 411.4%.
Enjoy!
Time to Swing the Ax
Global Market Comments
April 20, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHAT’S A FED PUT WORTH?),
(INDU), (SPX), (TLT), (ZM), (TDOC),
(NFLX), (UAL), (WYNN), (CCL)
What is a Fed put worth?
That the question that traders and investors alike are pondering.
If the government had taken no action whatsoever in the face of the Corona pandemic the Dow average would easily be at 15,000 today, if not 12,000.
After all, the economic collapse we have seen has been even greater than the Great Depression. More than 22 million unemployed in four weeks? Back then, the Dow Average fell by 90%.
Enter the Feds.
Throw in $6 trillion in expected fiscal spending and $8-$0 trillion in Federal Reserve stabilization of the money markets and quantitative easing, and it makes a heck of a difference. As a result, the national debt will rocket from $23 trillion to at least $32 trillion by next year, a far faster increase than seen after Pearl Harbor.
Stocks love this.
In the past three weeks, the Dow Average has jumped an eye-popping 35% from 18,000 to over 24,000. We are likely trading at 25 X 2020 earnings, but that is just a guess at best. Nobody knows, with essentially all companies withdrawing guidance. On a valuation basis, stocks are now more expensive than at any time since 1929.
You can be excused for being confused, befuddled, and gob-sacked.
All of this adds up to a value of the Fed put of 9,000 in Dow Average terms, 17,000 in a worst-case scenario, and 27,000 if you want to go back to 1933 share valuations.
Stocks here are now priced for perfection. To buy shares here, you are making the following rosy assumptions:
1) The Corona epidemic is peaking and it is clear sailing from here.
2) Shelters-in-place ends in two weeks.
3) Critical shortages of medical supplies end.
4) US Deaths top out at 60,000 from the current 40,000, the most optimistic White House forecast.
4) Business will immediately bounce back to pre-epidemic levels
5) Domestic and international travel resume immediately
If all of the above take place, then at a stretch, shares are justified at maintaining current levels and will churn sideways from here.
Here is what is more likely:
1) We are nowhere close to a peak, especially in states that never sheltered-in-place, and there could be a secondary peak in the fall. At 2,000 a day, US deaths will easily top 100,000 in a month.
2) Shelters-in-place will extend to June in the most populous states.
3) Medical supply shortages will continue for the indefinite future, with 50 states bidding against each other to buy fake masks from China.
4) Dozens of large companies and perhaps a quarter of the country’s 30 million small businesses will go bankrupt before the recovery begins.
5) There is no sign that domestic and international travels are getting off the runway anytime soon.
If that is the case, then stocks here that are wildly overpriced are due for a retest of the Dow 18,000 and (SPX) 2,400 lows.
No matter what happens, traders should be cognizant of an enormous bifurcation of the market that has taken place.
Stay at Home stocks, like Zoom (ZM), Teladoc (TDOC), and Netflix (NFLX), have spectacularly outperformed the market. Many of these had already been recommended by the Mad Hedge Technology letter and the Mad Hedge Biotech & Healthcare letter because they were leaders in their own technologies (click here).
The problem with these companies is that they are all expensive, in some cases trading at hundreds of times their earnings.
Then there are the Reopening Stocks that will deliver outsized returns once we make it to the downslope of the epidemic. These include United Airlines (UAL), Wynn Hotels (WYNN), and Carnival Cruise Lines (CCL), which we heavily sold short near the market top, and led the recovery of the last three weeks.
The problem with these companies is that they may have to go bankrupt first, or at least accept a heavy government ownership and dilution of existing shareholders before they return to normal.
It’s a quandary that would vex Solomon.
I always tell people, if you want to make an easy, reliable, and safe living, get a job at the Post Office. Avoid the stock market.
OPEC cut oil production by 10 million barrels/day, for two months, and then 8 million barrels a day for the rest of the year. Oil prices plunged anyway to a 20-year low at $18.50 a barrel, as it only puts a small dent in the 34 million barrel a day oversupply. It only postpones the day when many energy companies go bankrupt.
The Economy could be turning on and off for 18 months, believes Fed governor Neil Kashkari. He may be partly right. I am expecting two Coronavirus waves to lead to two shutdowns in the spring and fall, and the stock market may reflect the same. If so, stocks are wildly overpriced here, and the bear market could last another year. Sell shorts, or at least add hedges, and buy the (SDS).
US Budget Deficit to top $3.8 trillion this year, the most since WWII. We were already headed for a monster $1.5 trillion in red ink before the virus hit. Now we are pouring gasoline on the fire. It'sis my worst-case scenario, I had the national debt rising from $23 trillion today to $30 trillion in a decade. It looks like that will happen by next year.
Only 90,000 cleared US airport security in one day, down from a typical 2.2 million, or down 95%. It appears that 90,000 people a day don’t care if they get Covid-19 or have already had it. Some 80% of all flights globally are grounded, with many countries now stranded. With massive debt loads, it is only a question of how soon the big US airlines go bankrupt and how much the government gets to own on the way back up. Don’t buy any airlines no matter how cheap they get.
US Retails Sales collapsed by 8.7% as the paycheck-free economics takes hold. The March Empire State Manufacturing Index crashed to a record low of 78% and March Industrial Production is off 5.4%, the lowest since 1946. The parade of the worst economic data in history has begun. And we go into this with stocks at record high valuations, more expensive than they were in January.
Goldman Sachs says this depression will be four times worse than the Great Recession of 2008-2009, likely falling 35% annualized in Q2. Unemployment will hit 15% or higher, but stocks will not retest the March lows. The bounce back in H2 will be bigger than any seen. It more or less corresponds to my view. They must have some smart people at (GS).
March Homebuilder Confidence brings the biggest crash in history, down 42 points to a reading of only 30. It's the greatest decline since the 35-year history of the index. The last time we were this low was in June 2012. Some 21% of builders are reporting virus disruption.
Housing Starts collapsed a stunning 22.3% in March, the worst one-month figure ever recorded. Social distancing makes open houses impossible. But this will be one sector that leads us out of the depression. There is still a chronic generational housing shortage.
Weekly Jobless Claims topped 5.1 million, taking the grim four-week tally to a staggering 21 million. Out of the frying pan, into the fire.
Gilead Sciences (GILD) drug sent stocks soaring, up 900 points overnight. Its Remdesivir brought rapid recovery in already infected patients at the University of Chicago in a phase three trial. The market is hypersensitive to any good Corona news. Sell into the rally.
China GDP took a 6.8% hit in Q1 as the Corona pandemic takes its toll. Services are recovering faster than manufacturing, which is why the smog has not come back yet. And international trade has ground down to zero. Public transit has been abandoned for private cars. It could be a preview to our own recovery.
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 $18 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance recovered nicely this week, thanks to some frenetic trading. I used the Monday 700-point dive in the market to cover most of my bearish positions and add short-dated longs in Apple (AAPL) and Facebook (FB).
Finally, I dove back into selling short the US bond market on the assumption that unprecedented borrowing will destroy prices.
My short volatility positions (VXX) were hammered again, even though volatility declined on the week. There seems to be heavy short selling of deep out-of-the-money puts on the assumption that the Volatility Index (VIX) won’t rise above $50 again.
We are now up +0.45% in April, taking my 2020 YTD return down to -7.97%. That compares to a loss for the Dow Average of -15% from the February top. My trailing one-year return returned to 33.88%. My ten-year average annualized profit returned to +33.67%.
This week, Q1 earnings reports continue, and so far, they are coming in much worse than the most dire forecasts. The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, April 20 at 7:30 AM, the Chicago Fed National Activity Index comes out.
On Tuesday, April 21 at 9:00 AM, the March Existing Homes Sales are released.
On Wednesday, April 22, at 9:30 AM, the Cushing Crude Oil Stocks are announced.
On Thursday, April 23 at 8:30 AM, Weekly Jobless Claims will announce another blockbuster number.
On Friday, April 24 at 7:30 AM, US Durable Goods for March are printed. The Baker Hughes Rig Count follows at 2:00 PM. Expect these figures to crash as well.
As for me, I am sitting here eating a pineapple upside-down cake that my daughter just whipped up. It's my favorite cake made by my mother, which I always got on my birthday.
Of course, I have to wash the dishes. If anyone wants to supplement their trading income, housekeeper and domestic and wants to live in mansions at Lake Tahoe and San Francisco, please contact customer support immediately.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 30, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or COPING WITH CORONA),
(INDU), (VIX), (VXX), (UAL), (WYNN), (CCL), (SSO), (SPXU)
I am sitting in my Lake Tahoe office watching a light snow blanket the surrounding High Sierras. There is a stiff north wind whipping up whitecaps on a cerulean blue lake.
Spring break normally packs the Diamond Peak ski resort at Incline Village, Nevada. This year, it is a ghost town. The resort is closed, the streets deserted and the hotels empty.
Driving up from San Francisco, I had to stop at a Tesla Supercharging station at Rocklin, California next to a huge shopping mall for a top-up to cross Donner Pass. It was bereft of shoppers, looking like everyone had been wiped out by an uncontrollable plague. Of a hundred stores only Subway, Chipotle Mexican Grill (CMG), and Target (TGT) were open. I could almost hear the rent and interest payments ticking on.
And economically, it has.
Let’s do some raw, back-of-the-envelop calculations. Congress has just passed the largest stimulus package in history, some $2 trillion. If Morgan Stanley is right and the US is about to lose 30% of its economic growth on an annualized basis, that means the GDP is about to drop from $21.4 trillion to $19.8 trillion. Get two quarters like this and we fall back to $18.2 trillion, or to the 2016 levels.
That means the government is already $1.2 trillion behind the curve in bridge spending to carry over the economy to the other side of the epidemic. It can come back with another rescue package. If it does, there is no guarantee the money will end up in the right place to have any real effect.
Yes, we have just lost three years of economic growth, and the stock market is reflecting the same.
Of course, there are silver linings behind the clouds. Some 90% of the demand in the economy hasn’t been destroyed, it has been deferred. Cruises not taken, restaurant meals not eaten, and vacations not taken are gone for good.
However, a lot of discretionary purchases, such as for home, car, and computer purchases have simply been delayed until the fall. That's why so many forecasts call for an exploding economy in the second half.
A lot more economic economy isn’t lost, it has simply been rearranged. There has been a vast migration of legacy businesses to online. Most workers in Silicon Valley have adjusted from one to two days of work at home to five or six. The background noise of kids crying, and pets barking during an online meeting has become a normal part of business life.
And let’s face it, a lot of people are being paid for doing nothing. Government employees are receiving paychecks even though their agencies have been closed. Teachers are paid in annual contracts. Those Social Security and pension payments keep coming like clockwork.
I have spent the last week talking to old friends in the scientific community. Realistically, the economy will be shut down until June. You can open it up earlier, but only at the cost of hundreds of thousands of lives. Without restrictions, mathematically, everyone in the United States will be infected with Coronavirus within two months causing 6 million deaths. That’s the worst-case scenario.
Only when the infection rate hits 53% do we start to acquire herd immunity. That happens when there’s greater than 50% chance that the next person the virus contacts is immune.
Also, the greater the number of recovered individuals, the more we can tap for serum to treat existing patients and increase immunity and survival rates. Some 98% of those infected recover and become immune and non-contagious within two weeks.
Shelter-in-place orders and social distancing will greatly reduce those numbers. That’s what China did, and they have had no growth in new cases for two weeks.
My bet is that the epidemic will peak first in the states that sheltered-in-place early, and then peak in the Midwest later. That sets up two big waves of the disease, one in the spring, and a second in the summer and fall. Every state will have its own New York crisis moment sooner or later.
The president has expressed an interest in reopening the economy on April 13. If the stock market (INDU) believes that, then it is in for new lows. There is no point in predicting a final bottom. Once the algorithms get going, they are unstoppable.
Big companies like United Airlines, Wynn Resorts (WYNN), and Carnival Cruise Lines (CCL), have seen a staggering 90% decline in sales. Yet the wage bills and interest payments mount daily. The cruel math points to disaster on an epic scale.
Face reality. There is no way the stock market can bottom before the number of cases peaks. Front run that at your peril. The consolation is that will likely happen by June. This will be the shortest, sharpest depression in history.
Global Corona cases topped 704,095, and deaths 33,509 (click here for the latest data). Why does the US have 52% more cases than China with one quarter the population? Because the federal government was asleep at the switch and then responded with a test that didn’t work for the first month. That blinded us to an epidemic that was already here in force.
A monster 3.28 million in Weekly Jobless Claims hit the market last week, five times the previous record. That’s normally the total number of jobs you lose in a full recession. This is the number of claims you get from an entire recession.
The number was probably higher as many state websites crashed, limiting applications. This rate of claims will probably increase for two more months. One can only guess what the unemployment rate is, probably over 5%. Next week will be worse. Over 50 million work in retail and most will lose their jobs.
Chicago clearing firm Ronin Capital went under, unable to meet their capital requirements. It was one of the CME’s principal clearings firm, and their problems are stemming from the (VIX) spike to $80 this week. I knew it was totally artificial.
The forced liquidation of their massive holdings probably accounted for the incredible 25-point drop in the (VIX) on Thursday and the last 500 points of the fall in Dow Average on Friday. It sounds terrible, but the loss of several brokerage firms like this often markets a market bottom. This is the second time in two years that (VIX)-related blow-ups roiled the markets. For more about the firm, visit https://www.ronin-capital.com
Internet traffic is up 30% on the week as a massive move to online commerce takes place. There is now a laptop shortage as the government outbids the private sector to get machines for first responders. Phishing attacks are at record highs. Don’t click on any links sent to you, especially from Apple, your credit card company, or the IRS.
The Fed expects a 30% Unemployment Rate in Q2, or so says James Bullard, president of the Federal Reserve Bank of St. Louis. The Great Depression only hit 25% unemployment.
The US Real Estate market is freezing up. If you’re trying to sell a house right now, you’re screwed. Closings are impossible because of the shutdown of notaries and title offices. Open houses are now virtual only. The hit to the US economy will be huge.
Tokyo 2020 Olympics were postponed a year, as the Japanese finally cave to the obvious. Canada and Australia had already withdrawn for Corona reasons. Tokyo is really unluckily with Olympics. They lost the 1940 games to the outbreak of WWII. It will be a big hit for the Japanese economy.
Online Hiring is exploding, up 44% in the past week, a decades-old trend that is now vastly accelerating. Entire school systems have moved online. We are all working now on Zoom, Skype, GoToMeeting, and Google Hangouts. Internet traffic has doubled in some neighborhoods, slowing speeds appreciably.
Target saw a staggering 50% growth in same store sales. Lines go around the block, hours are limited, and the police are on standby to maintain order. This has been one of our favorite retailers for years (click here for “Is Target the Next FANG?”). If they only had more toilet paper! Buy (TGT) on the meltdown.
Blackrock rated US stocks a “Strong Overweight.” The firm believes we won’t see a repeat of 2008. The fiscal and monetary response has been overwhelming. It’s just a matter of time before markets settle down, but not until well after new Corona cases peak. Buy (BLK) on the dip.
Oil falls again, back to $21. Not even all the stimulus in the world can save this structurally impaired industry. Ask John Hamm of Continental Resources (CLR), whose stock has just crashed from $36 to $4. He’s the guy who wrote the billion-dollar divorce check. Avoid the entire industry on pain of death.
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $20 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance has had a descent week, pulling back by -8.22% in March, taking my 2020 YTD return down to -11.14%. That compares to an incredible loss for the Dow Average of -37% at the Monday low. My trailing one-year return was pared back to 30.88%. My ten-year average annualized profit recovered to +33.81%.
My short volatility positions have held steady. I used the 3,600-point rally in the Dow Average to add enough short positions to hedge out my risk in my exiting short volatility positions (VXX). Now we have time decay working in our big time favor. These will all come good well before their ten month expiration.
At the slightest sign of a break in the pandemic, the economy and shares should come roaring back. Right now, I have a 60% cash position.
This is jobs week and it should be the most tumultuous in history.
On Monday, March 30 at 9:00 AM, the Pending Home Sales for February are released.
On Tuesday, March 31 at 8:00 AM, the S&P Case Shiller National Home Price Index for January is out and should still show a sharp upward trend.
On Wednesday, April 1, at 8:15 AM, the ADP Private Sector Jobs Index is announced.
On Thursday, April 2 at 7:30 AM, Weekly Jobless Claims are announced. The number could top 3,000,000 again.
On Friday, April 3 at 9:00 AM, the March Nonfarm Payroll is printed. The Baker Hughes Rig Count follows at 2:00 PM. Expect these figures to crash as well.
As for me, I am at Lake Tahoe to hide out from the Zombie Apocalypse with my stockpile of Chloroquine and Azithromycin. There are only 536 cases in Nevada, most of which are in Las Vegas, and has a lot more food (click here for the latest updates).
I am building a Corona-sanitizing Station at the front door made of paper towels and isopropyl or ethyl alcohol. It kills the virus on contact.
I hear they even have toilet paper in a few undisclosed places.
Shelter in place will work. Please stay healthy.
As a public service, I am posting “the entire DNA sequence of Covid-19” in its entirety, which I obtained from a lab in China. A scientist friend asked me to publicize it on my website to the widest possible audience. What better place than the Mad Hedge Fund Trader.
Typical of viruses, it is an incredible small genome, one hundred thousandth the size of our own with only 29,000 base pairs. There are only a handful of genes here compared to our 35,000. For the full code click here.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
