This Week in Barrons: 6-14-2020:
Thoughts:
It’s a really BIZARRO world right now. It resembles the 1970’s when revolutions were cool, change was powerful, and protests came with passion. We’re mixing: a killer virus with deeply rooted social unrest. We’re then adding in political divisiveness along with an intentionally manipulated financial climate. The ‘trader’ in me sees the divergence between the equity prices on my screen and Main Street’s reality as an amazing pairs trading opportunity. After all, stock prices may be wrong, but they don’t lie. I believe that smart money, dumb money, and virtually all new money is chasing a ghost of an investment. Investors are long stocks and short-selling the world, while I would rather be long the world and short stocks. Notice the following BIZARRO behavior:
- This week the U.S. saw a 37% jump in COVID-19 cases, and our experts warned us that we will double our deaths by September. So our states (showing their ultimate wisdom) immediately opened up more facilities.
- This week 1.5m MORE Americans filed for unemployment. So rather than craft a jobs or infrastructure bill, Treasury Sec. Mnuchin is going to ask Congress for $1T in additional free-stimulus money in mid-July.
- And this week our broken educational system produced graduates who (on average) are being paid 12 to 15% LESS than last year’s graduates.
Market speculation is running rampant and volatility metrics are going through the roof. As an investor, you’ve seen this movie before. On one side you have a Central Bankster blowing up a balloon and singing: "Laissez les bon temps rouler" (“Let the good times roll”) – and on the other side a long, sharp pin. Today, our market thumbs its nose at the ‘Warren Buffet’s’ of the world, while it bids up the price of bankrupt companies (HTZ). 2020 is clearly the investing year where nothing makes sense.
- Hertz has just been granted the approval from bankruptcy court to sell $1B in stock. Its stock is already up 450% off its $0.56 cent lows. And YES, bankruptcy does mean that your company is basically worthless. This could be the first time a company EVER raised money in the stock market while bankrupt.
- Last month crude oil traded below zero, and now it’s flirting with $40 per barrel.
- Nikola trucks ($0 = revenue) is worth more than Ford ($150B in revenue).
But what’s really BIZARRO is that on Friday: NASCAR banned the confederate flag!
The Market… The Nasdaq hits 10,000.
I remember when entrepreneurs drove taxis and recommended stocks (1999). Now they’re Uber drivers because VC’s own their companies. I remember when Google was not public, Zuckerberg was in college, and Steve Jobs was fired by Apple. Now, China and India are building a new financial, blockchain based infrastructure that will take global trading to the next level, and leave the U.S. a financial power wannabee.
Of course the media is spinning this as a market that’s out of control, and the older generation is seeing an impending crash. For the last month, the elder hedge fund owners have been drawing lines in the sand at S&P 2,800 and then 3,000 as a place to short the markets. Today we are S&P 3,200 and they’re awfully quiet. For years they thought social media and Robinhood were dumb toys designed to waste time and money. Now, they believe Robinhood traders are actually moving the market.
Interest rates are still zero, global monetary easing is in full force, and the professional hedge funds are on record as either being ‘short the market’ or at best ‘confused’. The technology revolution is relentless, and the 4 trillion dollar companies (Microsoft, Apple, Amazon and Google) just might be undervalued.
As HL said: “At Nasdaq 10,000, I remain bullish on the business of entrepreneurship and building companies. I refuse to bet against the entrepreneur. Nasdaq 20,000 is coming – maybe next month, maybe in 2030, or maybe after Nasdaq hits 5,000 again.”
InfoBits:
- A Footnote to the last Jobs Report… indicates that due to a "misclassification error" — unemployment was maybe 19.2% in April and 16.1% in May – or higher.
- COVID cases broke records this week… with 14 states recording a surge in hospitalizations. Arizona is close to declaring a state of emergency. Utah and Oregon will pause reopening efforts. Nashville will delay phase 3, and both Florida and Texas say their states are “on the precipice of disaster.”
- May the (Labor) Force be with you: U.S. personal incomes jumped by 10.5% in April - thanks to stimulus checks and the extra $600/wk. in unemployment pay. Over half the people laid-off are earningmore than they did at their jobs.
- 80% who lost jobs during the corona-crisis… are expecting to be hired back. Employers are suggesting that ‘hired back’ number is closer to 30%.
- The economy is still using training wheels... that will be taken off on July 31st, when the beefed up unemployment benefits are scheduled to end.
- IBM, MSFT & AMZN are exiting the facial recognition business (for now): they oppose the use of such technology for mass surveillance and racial profiling.
- The S&P 500 turned positive for the year… on the same day economists said the U.S. fell into a recession. Timing is everything.
- Lemonade – a SoftBank funded insurance company… filed plans to go public. Naturally (in true SoftBank tradition) they are also losing a ton of money.
- SoftBank Group’s Vision Fund is preparing to cut its staff significantly, after reporting record losses for the last fiscal year.
- Tesla’s stock price hit $1,000… making it the most valuable automaker in the world (surpassing Toyota). The boom is due to a big uptick in Chinese car sales.
- The California Public Utilities Commission officially ruled… that it formally considers Uber and Lyft drivers to be employees and not contractors, in line with a newly enacted state law known as AB5. Next up = Airbnb.
- The UK economy fell 20.4% in April… the largest monthly decline on record.
- President Trump’s only caveat to holding a rally… ‘Attendees must sign a waiver that they won’t sue him or the RNC if they contract the coronavirus.’
- Sony revealed its PS5… so staying inside just got a little easier.
- Dan Gilbert’s doing it again… taking Quicken Loans public. Quicken was originally called Rock Financial, and founder Dan Gilbert took it public in 1998. The following year, Intuit purchased it and renamed it Quicken Loans. In 2002, Gilbert led a small group of private investors that repurchased Quicken Loans.
Crypto-Bytes:
- Emerging Markets: Lebanon’s financial crisis has banks looking for alternative monetary policy and citizens scrambling for alternative banking services.
- The Saudi Arabian Monetary Authority (SAMA)… used blockchain to distribute an unknown proportion of the $13B in stimulus given to banks.
- Digital Dollars: Friday, the House Financial Services Committee (FSC) Task Force on Financial Technology convened to discuss the possible role of a digital dollar in distributing COVID-19 relief payments.
- Security in Technology: Mutual fund giant Vanguard has completed the first phase of a blockchain pilot to issue digital asset-backed securities (ABS).
Last Week:
- Monday: Last week’s overbought market appears to be even more overbought as futures suggest another move higher. Momentum is strong and FOMO even stronger. I really haven't found anything that's screaming to me. I’m finding that somedays just aren’t right for trading. Bonds are moving higher along with the VIX. The VVIX is breaking over 110 while the XLF is up. What’s wrong with this picture? Hertz (HTZ) is bankrupt, and it’s up 115%. Airlines, cruise ships, and hotels are all ripping higher – which is hilarious. Watch the $26.50 level on the XLF – above it and we could be moving even higher.
- Tuesday: The S&P 500 is now positive on the year – despite a massive recession and 21 million still unemployed. Meanwhile, 5 stocks in bankruptcy were up triple digits yesterday despite little to no expected equity recovery: VAL: +132% / CHK: +175% / WLL: +151% / XOG: +247% / HTZ: +114%. This is so bizarro, I just continue to shake my head. “As many as 25,000 U.S. stores could close permanently this year, shattering the record of 9,800 closures in 2019” said Coresight Research. But just maybe today is the day we make a down move. Tomorrow afternoon we find out what our FED banksters are going to do with rates and stimulus. I must say, SQ looks interesting over $91.18.
- Wednesday: Welcome to FED day. It’s when our FED Banksters tell us what is going on in our economy, and what they're going to do about it. They have decided not to change their interest rate policy = still at zero, and they expect low rates to extend through 2022. The NASDAQ and gold both moved higher on the report. Federal Reserve Chair Jerome Powell spoke today and had an epic quote: “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”
- Thursday: Am I really seeing the DOW indicated to open DOWN 834? The initial jobless claims are out, and they were 1.5m – a smidge better than last week’s 1.8m. Headline PPI was up big, because of food and energy. Treasury Sec. Mnuchen said that he would like to pump another $1T into the system. They will NOT shut down the country again even though they are seeing ‘surging’ cases of COVID. Maybe there's a "stay at home" play for this second wave = PZZA. If people decide to rush back home again, they'll be ordering pizza and I could see buying PZZA over $83.35. Today, nothing exceeded my buy-in levels. In fact, Kroger was the ONLY stock in the entire S&P 500 that closed higher. The story resonating today was the increase in coronavirus cases, and the 14 states where cases are rising.
- Friday: We've lost 2,400 DOW points off Monday’s close. That's a decent correction. Yesterday’s loss of 1,860 DOW points was excessive, and history shows that we’ll probably get a dead cat bounce. The big question of the day is: will this be a “pop and drop" or will this remain green into the close? With Fauci and his gang screaming about second waves, they may just want to cruise out flat. I’m not nibbling because I simply do not trust this bounce.
Weed: Will Cannabis be the new Cash Crop?
The world has been looking to cannabis as a reliable, lucrative source of financial support and jobs for some time. Cannabis has been deemed an essential business in all but one state across the country. The cannabis industry employs over 200,000 full-time workers – which is amazing for an industry that is still illegal at the federal level.
We are in a time when (a) Americans desperately need employment, (b) governments need a reliable sources of taxable revenue, and (c) when the overwhelming majority of its citizens support cannabis legalization. National legalization could result in an estimated $128.8B in tax revenue, and roughly 1.6m new jobs. Despite the biggest economic downturn since the Great Depression, cannabis sales have hit record highs, proving to be a rather wealthy “cash crop” in legal states. Sales of cannabis have risen 159% in California by mid-March compared with the same period in 2019.
As the nation continues to heal, states continue to deal with the current economic destruction COVID-19 has left in its wake. States will have little choice except to look further into cannabis legalization as a means to repair financial gaps in their economy.
Next Week: Feeling the Wrath of Volatility?
- SPX Expected Move – Efficiency vs Inefficiency: Last week the markets expected the SPX (S&Ps) to move $78. In reality, the SPX moved over 2 standard deviations = $154 to the downside. Until February, we had a very efficient market, and now we’re seeing an extremely inefficient one. Inefficient means that the experts are predicting these expected move(s) inaccurately. The errors are not simply in the S&Ps – but rather across all sectors. Next week the experts are predicting an SPX move of $126. Given we just moved $154 in one day – prepare yourself for continued volatility.
- Outliers Lead to more Outliers: The financials (XLF) have breached their expected move for the last 4 weeks. In fact, this past week the XLF moved 3 standard deviations to the downside. Energy (XLE) and healthcare (XLV) were also hideous movers. The only sector that closed calmly this past week was technology (XLK). That means that tech will be in the cross-hairs for many weeks to come, and potentially the next sector to crack.
- Weekly percentage Moves: This past week, the financial sector (XLF) closed down 11%, healthcare (XLV) was down 6%, energy (XLE) was off 15%, consumer staples (XLPs) was down 5%, but technology sector (XLK) was only off by 2.5%. If the S&Ps continue to crack, the world will ‘sell the news’ in the tech sector at a much faster rate.
- Watch the VVIX – it was the preeminent indicator: Last week I thought that if the volatility of the volatility index (VVIX) went back above 110 – we would see a quick return to a high-volatility market, and that’s exactly what happened. Even on Friday (an up day) – the VVIX closed higher with traders purchasing weekend protection. For the next 3 to 4 weeks we are in ‘duck-n-cover’ territory. When you have the VVIX breaking above 110, every sector missing their ‘expected move’, and a rising bond market – you have a recipe for a substantial pull-back in the equity markets.
- Bonds UP – Market DOWN: The bonds came back to life this week, and warned us on Monday, Tuesday and Wednesday of their direction. It was the bonds that triggered the major selloff on Thursday.
- Back in the Volatility Box: We’re right around 300 in the SPY, which is at the very upper edge of the volatility box for the S&Ps. I think they will have a tough time breaking through the 300 level, but if / when we do – I anticipate the SPYs revisiting the 275 level prior to bouncing. If they decide to break through the bottom side of the box – that’s when this movie really gets exciting.
- Big Tech will be the Epicenter of ANY major Sell-Off: With the VIX and VVIX this high, it’s no longer about sector rotation – it’s about correlations and where specifically you would like to be long. The Nasdaq forecast their fear by underperforming on Friday. The financials and energy have already been decimated, so we’re now down to watching: MSFT, AMZN, AAPL, FB and GOOGL move to the downside. To those Fab-5, I would add: Wal-Mart (WMT) and Costco (COST) moving to the downside as well. I’d play them fairly inexpensively by buying out of the money Puts and Calls out into September.
- Apple is the new Boeing: If the DOW has issues, then Apple will have issues. Everything has changed in the DOW since the Boeing collapse. The DOW is NOT market cap weighted but rather price weighted – and right now the highest priced stock in the DOW is Apple @ $339. If the DOW is going to come off – they’re going to have to crush AAPL to do it. If you’re thinking of shorting Apple – short Home Depot (HD) for good measure along with it.
- Keep your Helmet ON: At this point, I would look to fade any rally. Even though, the S&P reclaimed its 200-day moving average on Friday, there are some definite ‘book-end’ formations that mark the beginning and potential end to this rally. Now, I’ve been preaching that for months – and honestly it’s still about the FED’s money printing. With this being an options expiration week, we could see more volatility and more red at the end of the week. As the S&Ps come back below 3,000 – use the gravity points to gauge downside support and resistance. It appears that Wall Street is coming to Main Street.
Tips:
HODL’s:
- First Majestic Silver (AG = $9.26 / in @ 9.15 = up 1%),
- Yamaha Gold (AUY = $4.91 / in @ $4.60 = up 7%),
- Canopy Growth Corp (CGC = $16.50 / in @ $22.17 = down 25%),
- DRD Gold (DRD = $10.11 / in @ $3.82 = up 164%),
- GBTC Bitcoin (GBTC = $10.88 / in @ $9.41 = up 16%),
- GOLD (GOLD = $24.07 / in @ 27.20 = down 12%),
- Hecla Mining (HL = $3.10 / in @ $2.36 = up 31%),
- KL Gold (KL = $36.74 / in @ 26.85 = up 37%),
- NovaVax (NVAX = $45.57 / in @ $7.24 = up 529%),
- New Gold (NGD = $1.27 / in @ $0.82 = up 55%),
- Pan American Silver (PAAS = $26.14 / in @ $13.07 = up 100%),
- SPY = in the July 2020 Strangle = $164 Put – sold the Call side.
Crypto:
- Bitcoin (BTC = $9,450),
- Ethereum (ETH = $235),
- Bitcoin Cash (BCH = $240)
Thoughts: AAPL’s the most valuable company in the world again after it surged to all-time highs in the past couple days. Any fears that the high unemployment rate would make people spend less on AAPL’s products have evaporated in the late spring heat. But in what might be a sign of slowing demand, AAPL is expanding its zero-interest Apple card payment plan program for things like Air pods, Macs and iPads. Not only does it sound good for consumers, it also sounds like what car companies do when no one’s buying their stuff -- give ‘em incentives to spur demand. Now, AAPL might be doing this out of the goodness of their corporate heart, or maybe it's just glossing over the fact that some of their products might be overpriced given their technology. AAPL’s low IV is no surprise given the stock’s rally, which points to long debit spreads for speculative trades. If you are a contrarian trader and think that AAPL might sell off at some point the next few weeks, the long put vertical that’s short the 330 put and long the 335 put in the July monthly expiration is a bearish strategy that has a 68% probability of making 50% of its max profit before expiring.
Follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.
R.F. Culbertson
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