This Week in Barrons: 4-5-2020:
April Fool…
April 1st was once a day to fake left and go right, or at minimum pretend that we’re not on the brink of an apocalypse. It was April 1st when I first saw someone wearing a helmet while riding a bicycle, and wondered if it was a prank. Per SG, 10 years ago, if you wore a face mask at work, you were either: a surgeon, a carpenter, or a bank robber. As the coronavirus mask idea continues to spread, non-mask wearers see this as either a generous act where the wearer doesn’t want to infect others, or something slightly isolationist and paranoid.
When the pandemic first hit the US, masks became the focus of hoarding. This had 2 unfortunate side effects: (a) it kept masks away from our front-line medical workers who needed them, and (b) it created a sense of false security because many of the people who were using them were not using them properly. And even now the CDC and our media have shifted their stance on homemade masks.
But I still see someone in a mask as having an air of mystery around them. The non-mask wearer is thinking: “Is this person wearing a mask to let me know that they’re ill, and I should steer away? Are they just anti-social, maybe they’re shaming me, or just smarter than I am?” Then the story shifts from being a potential joke to: “How do I protect myself and keep my loved ones safe?” The idea of wearing a mask will continue to be a hard sell to J.Q. Public as real science is not their forte, and instead land in the: “Is somebody getting something over on me?” camp.
Whether or not you choose to wear a mask, it’s worth remembering that the same two questions: (a) “What’s the story that I’m telling myself?”, and (b) “What’s the story I’m telling everyone else?” still need to be answered. It’s just that now we have a third one: “If I contract the coronavirus while not wearing a mask, what story should I tell that downplays my own stupidity?” Whatever you decide – please stay safe!
The Market:
Q1: The first quarter is in the books and it was a train wreck. The S&P 500 fell just over 20%, oil fell close to 70%, and the 10-Year Treasury yield fell below 1% for the first time in history. Energy stocks lost half their value, and financials fell over 30%. Small caps were destroyed with the Russell 2000 falling 31%. Q1 will also go down as the quarter we went from record low unemployment to a record high jobless rate.
Brave New World: In this new world, there are a million things going on at the same time. Even if our leaders said: “Okay, the coast is clear”, they've done such a good job of scaring us that nobody’s going to be rushing to bars, restaurants, concerts, and/or ballgames anytime soon. I see mandatory vaccinations coming our way, and if you don’t have the vaccination mark you won’t be allowed to travel. There is a huge reset both socially and economically coming. Many people will suddenly be forced to work for our government. Right now we don’t know – what we don’t know. This virus is just setting the stage for a lot of change coming our way.
Leadership: The dark side of digital leadership is leading by email and tweet. Email and Twitter are two of the least effective tools for a leader. A better option is to pick up the phone and call someone. Even better would be to use a video call with a provider such as Zoom. Leaders need to decide whether they simply need to inform = communicate in one direction = email & Twitter. OR whether they need to lead & manage = communicate in multiple directions = phone and/or video.
Investor Uncertainty: Historical volatility contracted this week as markets played a wait and see game. Our jobless claims were through the roof, resulting in zero clarity of where we’re headed. Nobody knows how we will reboot this economy once the crisis is over. Earnings season is coming up, but the SEC has given firms the ability to move their earnings date even at the last minute. And then of course how many of these firms will survive? All of this uncertainty makes for a greater, informed investor opportunity.
Info Bits:
- $350B in ‘forgivable’ small business loans … is a key portion of the massive government aid package that is not moving forward because neither the government nor the banking industry is equipped to get that kind of cash out the door quickly. Yet another hurry-up and wait.
- Just Do It (online)... Nike stock jumped 28% last week after Q1’s online sales surged 36%. But overall sales in China fell for the 1st time in 7 years.
- Being world famous ain't easy... Coke's supply chain is creaking, and their biggest customers (movie theaters, restaurants, sports arenas) are closed so it's expecting a severe 2020 sales slowdown.
- So many eyes, so few dollars... While Facebook and Twitter are cherishing massive usage surges of 50% and 23% respectively, advertisers never needed them less. Companies are not wasting precious marketing dollars on ads when no one's shopping. So FB and TWTR have failed to translate increased usage into their digital lifeblood = advertising $’s.
- It’s never a good VC sign… when Asia’s biggest companies are selling down their stakes in the region’s most promising tech start-ups, including Indonesia’s Gojek and China’s Didi Chuxing. This wave of selling will likely hit the U.S. in the coming weeks.
- Google's revenue is on track to shrink for the first time ever.
- Art is flying off the walls… in the Singer Lauren Museum in the Netherlands. Van Gogh's The Parsonage Garden at Nuenen in Spring was stolen – despite it being Vincent’s birthday.
- The other F-bomb: Macy’s is furloughing a majority of its 130,000 employees. This is unprecedented, and is probably the last nail in that coffin.
- Joblessness… According to the St. Louis FED, the coronavirus will cost 47m jobs and send the unemployment rate past 32%. There are also 67m additional Americans working at jobs that are in the high risk of layoff range.
- 50,000 ventilators… is how many Ford plans to make in 100 days – out of its Ypsilanti, Michigan plant.
- Mortgage rates… are 24% lower than last year.
- Tips to survive working at home with your spouse: (a) Don’t look each other in the eye. (b) Only use surnames. And (c) communicate solely over email.
- March’s ISM manufacturing index is 49.1… signaling contraction / recession.
- SoftBank & WeWork: SoftBank has decided to back out of a large part of the WeWork bailout package. The company will not go through with a planned purchase of $3B worth of shares from other investors and employees (including former CEO Adam Neumann). The decision also likely means that WeWork itself won't be able to tap into a $1.1B credit line. Hasta la Vista – baby!
- SpaceX and NASA… have banned its employees from using Zoom due to significant privacy and security concerns.
- Don’t need no stinkin’ Unemployment Numbers … Last week, an astonishing 6.6m Americans applied for unemployment benefits. This is a record and double the number from a week before that. Unfortunately the Government’s Jobs Report – issued on Friday – only covered half the month of March – the first half. “We can’t handle ALL OF the truth.”
Crypto Bytes:
- ATM’s are our best friend… At this point, a bank run is more a theoretical threat than real. People are storing cash in their mattresses at an alarming rate. Crypto visionaries think COVID-19 is the catalyst for systemic payments change. “In crypto we trust.”
- Quarterly results: Bitcoin ended the first quarter of 2020 down 10% from the start of the year, but not as badly as the record-setting losses suffered by the Nikkei (20%), the FTSE (14%), and the S&P 500 (18% – worst Qtr. since 1938).
- Yearly predictions: While many analysts are predicting a bitcoin bull run, the options market sees only a 4% probability of BTC hitting a new record high by December. The probability of BTC ending the year above $10,000 is 16%, and the odds it hitting the June 2019’s high of $13,880 by December are 10%.
- Massive acquisition Binance has acquired CoinMarketCap (CMC) for an undisclosed price ($400m). CMC is the most popular data aggregator for this sector, often seen as the top of the funnel for crypto adoption, but is also (as of late) accused of providing less-than-accurate figures.
Last Week:
Monday: With two days left in the quarter, there still could be some rebalancing going on. So, for a trade, there are a few names that come to mind. PNC has been trying to break free. CCJ is moving out of some congestion, and looks like it could go for a run above $7.20. MAXR is shaping up, and AVDL is trying to get back to some resistance it set earlier. Any strength is based upon quarter ending window dressing, rebalancing because of the 30% haircut, and latching onto anything they can consider good news. But the Dallas FED survey that was supposed to come out a negative -10, came out a negative -70. We're going to see horrific numbers like that for the coming weeks – including the velocity of money – which is hugging the zero line. Money isn't changing hands, so printing trillions will not make people go out and buy things even if there’s something to buy.
Tuesday: If this day doesn't shape up and go green, we could have a problem. After the big plunge, we had the ‘V’-style rebound. But if we fade from yesterday's high, then we could be looking at the making of "lower lows and lower highs". As the news burbs hit, each state Governor is trying to ‘out safety’ the next guy. Virginia says everyone's shut in until JUNE. Combine this with yesterday’s Dallas FED reading of -70 and the question becomes whether the FED’s money and their buying of virtually everything can offset the selling that will take place when an economy grinds to a halt? I don’t think so. What fund manager knowing that the world is shutting down is going to be out there buying ETFs and stock? But if you're a trader, I’m watching: SQ > $55.50, AMD > $48.50, and DIS > $103.20
Wednesday: Today is April Fool’s day, but the futures are no joke. Yesterday, the market was up for 80% of the day, but in the last hour the wheels came off and down we went for 400 points. This morning the DOW futures are blood red, and the implied open is for a loss of about 750 points. They've locked down nations across the globe, and the chants for Government to rescue everyone are at a fever pitch. U.S. shale company Whiting Petroleum just became the first energy company to go down – filing for Chapter 11 Bankruptcy Protection as oil prices plunge. The frackers can't survive with oil at $20, and the banks that loaned the frackers money are going to be under pressure; therefore, the FED will have no choice but to continue the bailouts. My question is whether the FED’s Plunge Patrol Team continue to offset the shutdown of our entire nation? I don't think so – unless they simply print up $500B a day and buy the: SPY, DIA, IWM, QQQ etc. Today X (U.S. Steel) is moving well in response to Trump suggesting we need a $2T infrastructure bill. I would nibble over $7.20.
The Russell (IWM) lost 7% today. It’s been a leading indicator on the way down, so keep an eye on the 991 level. If it were to close below that, it could trigger tech and the financials to follow suit. The financials continue to be weak and traded down 6% on the day, and 36.4% on the year. The regional banks are sort of the worst of both worlds. They're small caps and financial companies. The KBW Regional Bank Index is down 44% YTD – you’d almost think it was an energy company.
Thursday: Today is "Initial Jobless Claims" Day. The number is out and 6.6m new people signed up for unemployment benefits. WOW. So, in 2 weeks we're at 10m people needing economic help over this shut down. Double-Wow. In response to this, Saudi Arabia has just called an urgent OPEC+ meeting in order to restore balance to the oil market. The oil industry can’t survive with oil at $20, and with 99% of the oil industry being funded by debt – that means the banking industry is in trouble as well. The financials got a bid this morning and if the XLF exceeds 20.20 it might work for a trade. If you want some short side exposure, the SH over 29.20 could work.
Factually:
- U.S. Factory Orders disappointed in February – before any lockdowns began.
- U.S. Consumer Confidence suffered its biggest 2-week crash – ever.
- Walgreens plunged on slowing sales, less foot traffic, and smaller discretionary spending.
- Global coronavirus cases edged toward 1m as deaths surge in U.S. and Europe.
- GE aviation is laying off 50% of its engine manufacturing staff.
Today oil went higher by 23% all based upon a tweet from President Trump. As such, energy closed higher by 9%. Lukin Coffee (the Starbucks of China) dropped 75% today on news that its COO and staff members fabricated past financial numbers.
Friday: The coronavirus is NOT going away anytime soon. The UN just announced that it would like to levy a 10% tax to help pay for global activity combating the virus. The jobs report came in at a negative -701k jobs, and the unemployment rate jumped from 3.5, to 4.4%. But wait, this included ONLY the first part of March. That was the easy part of the month. I don’t think that there’s anything to do here other than day trade the swings. It's pretty risky to hold anything over the weekend. That said, nibbling on some SH in here might not be a bad idea. As hard as they're trying to keep this market up, gravity is working against it.
Weed:
- High on social distancing: Pot producers are finally enjoying a sales boom, as lockdown-panicked shoppers stock up. Recreational weed sales in CA, CO and OR jumped 50% in one week. Tilray shares rose 125% on the week while Aurora and Canopy jumped over 20%.
Next Week: Will the gigantic bailout save this market?
The DARK employment report casts a hideous picture:
The market is experiencing record volatility, and that’s potentially a once in a lifetime event. This week implied volatility contracted, but even more importantly – historical price movement also contracted. But Friday’s employment report painted an absolute hideous picture going forward. Estimates by global economists thought that we would lose 100k jobs – instead we lost 701k jobs and that was only up to March 12th. The day before the Jobs Report we found out that 6.6m new people filed for unemployment. If you would have told me those stats a week ago – I would have thought we’d be trading 250 S&P points lower. Our FED is actively buying everything that it can – for now.
Are the dominos beginning to fall?
There remains zero clarity moving forward. How will all of us personally and organizationally – reboot? What will the earnings look like, and how bad will they be? I am expecting the dominos to start falling first with travel, then casinos, then energy, and then banking. The gravity points are still in play, but the minute the SPX breaks through 2411 – all bets are off and this marketplace will begin to become volatile again. Once the dominos begin to fall, nothing will be immune to sell side activity.
Did the VIX peak?
Right now volatility is subsiding even with the SPX, QQQs, and the Russell all down. So the FED is out there manipulating. I do not believe the VIX has peaked. I’m considering being long the VIX into June – with a spike above 85 occurring in the not too distant future.
Earnings will be a complete debacle:
Almost every firm reporting is removing guidance from their earnings remarks, and some firms are even moving their earnings dates. We will begin to hear from the financials in about 2 weeks.
Once over 250% volatility, you begin to question a company’s survival.
What companies will survive and be around at the end of the year? Will Ford, American Airlines, Wynn Casinos, and/or Carnival Cruise Lines last. Begin to examine the implied volatility figure a month out. If it’s starting to be in the 250% range, it means that the company is fighting for its life. At this point, there’s a really good chance that every company on that above list will not make it out alive. Maybe they all get bailed out – but that normally comes with first declaring bankruptcy and complete shareholder capitulation. However, let all 4 of these stocks rally before taking a new short position.
In General:
Last week’s expected move in the SPX was $205, and we ended up substantially inside of that boundary. Next week is a short trading week due to Easter. The market is closed Friday, but even with that closure – the expected move in the SPX has contracted to $120. 10 out of the last 12 weeks we have seen moves outside of the expected move. Let’s watch the FED this week because if they can keep this SPX market within a $120 range with more initial jobless claims, and FOMC / ECB minutes to be released – that means they’re really printing: “To Infinity and Beyond.”
The Feds have been doing their best to step in and prop things up, because otherwise we'd have been down 1,000 points. I do not think that the bottom was set on March 23rd. After all: (a) Are businesses open and expanding? (b) Have the lockdown restrictions on people been lifted? And (c) didn't 10m people just sign up for unemployment in 2 weeks – with an eye toward a lot more? If the Fed wasn't actively supporting this market, we'd already be at DOW 15K. Can it continue to hold off the effects of a nationwide shut down? The ripple "add on" effects of millions of unemployed. And an "oil war" which isn’t going well – phone call by Trump or not. Our economy was built on oil, and our currency is pegged to oil. When the oil producers can't make enough money to pay their debts, then both the oil producer and the financing bank are in trouble. I think we’re trading sideways and down for the foreseeable future = a "controlled" market fade. I think the high speed crashes are behind us, and now it’s a stair step lower. Good luck out there and stay safe.
Tips:
Watch the following:
- Junk Bonds = Let HYG rally – and then fade it.
- Tesla = Let TSLA rally into its earnings – and then fade it.
- Microsoft = MSFT is only down 4% on the year. If and when the S&Ps get hit – they will be coming for all of tech – including MSFT.
o For April 17, I bought the $155 Put and sold the $152.5 Put.
o Longer term, I’m looking for MSFT to come down to $100 or $80.
- I’m beginning to nibble on the energy sector (XOP and XLE) to the long side. OPEC+ is meeting on Monday, and we should hear a good statement from them which will bounce the ETFs higher.
Top Equity Recommendations:
HODL’s:
- Aurora (ACB = $0.81 / in @ $3.07),
- First Majestic Silver (AG = $6.05 / in @ 10.50),
- Canopy Growth Corp (CGC = $13.25 / in @ $22.17),
- DRD Gold (DRD = $5.87 / in @ $4.20),
- GBTC Bitcoin (GBTC = $7.48 / in @ $10.01),
- KL Gold (KL = $33.00 / in @ 28.50),
- NVAX (NVAX = $15.61 / in @ $7.24),
- Pan American Silver (PAAS = $15.00 / in @ $18.00),
- Real Estate ETF (XLRE = $29.30 / in @ $39.05),
- Utility Index (XLU = $51.79 / in @ $67.10)
- SPY = in the July 2020 Strangle = $160 Put / $305 Call
Crypto:
- Bitcoin (BTC = $6,800),
- Ethereum (ETH = $145),
- Bitcoin Cash (BCH = $235)
Thoughts: Gold / GLD = $152.65 After being a relative safe haven for the early part of the year, Gold (GLD) joined in the sell-off as hoarding toilet paper became more fashionable than hoarding gold. Those swings have pushed GLD’s implied volatility up 250%, and that means option prices are relatively rich. Now, GLD may decide to keep swinging around, but if you think it may settle down for the next few weeks, you might want to take advantage with a short premium / iron condor strategy. The short iron condor that’s long the $138 Put, short the $140 Put, short the $165 Call and long the $167 Call in the May monthly expiration is a neutral strategy that collects a credit 1/3 the width of its strikes, and has a 74% 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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R.F. Culbertson
Until next week – be safe.
R.F. Culbertson
