This Week in Barrons: 5-17-2020:
Can the stock market continue its impressive decoupling from reality, and go even higher on the belief that the worst is over and the FED has our back? Unfortunately, the economic climate continues to worsen as GDP falls, and millions of people each week are filing for unemployment. Our government continues to inject liquidity into every economic orifice it can find including: various business lending programs, asset purchases, and stimulus packages aimed at helping individuals. The last stimulus package was approximately $2T and it wasn’t nearly enough. It: (a) sent $1,200 to everyone under a certain income level, (b) allowed for significant increases in unemployment benefits in length (39 weeks) and amount (+$600 per week), (c) allocated $350B for payroll protection loans to small businesses, and (d) earmarked $500B in aid for corporate bailouts.
However, the entire heath crisis remains difficult because of intentionally inaccurate data. This has caused an economic crisis that has seen 36+ million citizens file for unemployment and thousands of businesses close. Congress believes that the situation requires another $3T of stimulus. Which means in 90 days, we will have thrown over $5T in stimulus (free money) at this situation.
I don’t think the amount of money matters. We’re creating money out of thin air, and have no intention of making deficits an issue prior to the election. In 4 months, we’ve caused a 25% increase in the national debt and still climbing. The most recent proposal is almost comical because it allows the government to print more money in order to make its debt payments – effectively allowing our government to bail themselves out.
We are finding that it’s hard to give people free money, and then take it away. It’s tantamount to career suicide in politics, but here’s the dilemma:
- Extending the additional unemployment payments (for example) through the end of the year will actually incentivize people NOT to return to work.
- Most of the unemployed have worked their asses off their entire lives, and are only in this situation because our incompetent politicians dropped the ball and completely mis-calculated the severity of this virus.
- AND let’s not forget the serious inflation implications that come with printing and giving away trillions of dollars. This single act has also destroyed traditional incentive structures. We are now in: incompetence minimization mode.
It is impossible to print trillions of dollars and not see inflation. Inflation will only increase the wealth inequality gap. The number of Americans who can’t afford a $500 emergency payment (50%) will only increase. The short term economic high (created by quantitative easing) feels great, but the long term impact destroys economies. We are devaluing our currency at an accelerating pace. This isn’t about ensuring that our country is strong and sustainable. This is all about getting re-elected, and having the egotistical satisfaction of having “won” at the negotiating table.
Soon, only the wealthy will be able to enjoy our country. The idea of a rags to riches – entrepreneurial story will be but a fairy tale. You just don’t inject 20% of annual GDP into an economy without (post-election) needing to pay-the-piper. How do you think we’re going to pay the money back? We’re going to RAISE TAXES, CUT social security and CUT defense spending. Every minority group (outside of the wealthy) will suffer. To quote President Obama: “This pandemic has finally torn back the curtain on the idea that so many of the folks in charge know what they’re doing. Most aren’t even pretending anymore to be in charge.”
The Market… You can no longer afford to live in this country.
Just think of all the information that could be gotten from this thermometer, a vaccine, and advanced facial recognition. One thing I know for certain is that it’s going to get a lot more expensive to live in the U.S. very soon. Between DNA, vaccinations, and temperature testing – we’re going to be able to pinpoint everyone’s location, financial information, and health records at a moment’s notice. Our ‘bar-bell’ society will continue to expand to the point where natives will no longer be able to afford to live in the area where they were born and raised. Between all of the proposals for $2k / month universal income, $2k / month basic unemployment, and an additional $2.4k per month for ‘special’ unemployment – the laid-off worker could easily end up making $7k / month for doing absolutely nothing. But for that $7k, they will no longer be able to afford to live in their old neighborhood – shattering their quality of life.
Combine that with Twitter (last week) telling their employees to work from home – forever. The New York Times publishing a piece on the economic implications of cities like NYC having a 50% reduction in commercial real estate occupancy due to the ‘work from home’ initiative. Then there’s hedge fund titan Stanley Druckenmiller saying: “The risk-reward for equity is as bad as I've ever seen it in my career. A V-shaped recovery is a fantasy. It doesn’t work to take massive amounts of money and allocate capital to zombie companies.” It’s no different this time than what preceded the Great Depression – we just don’t want to believe it …yet.
InfoBits:
- Hand Sanitizer is ranked #1… by consumers as the top measure that would make them more likely to visit a physical space. That was closely followed by having more hand sanitizer stations available for shoppers.
- Tesla CEO Elon Musk said… his company’s factory in Fremont, Ca. is open and has restarted production in direct conflict with any stay-at-home order. Musk said: ““I will be on the line, and only ask if anyone is arrested – let it only be me.”
- Mark Zandi of Moody’s Analytics believes… new coronavirus infections tied to reopening businesses too quickly will send the economy into a tailspin. “If we get a second wave, it will be accompanied by a depression.”
- Jeffrey Katzenberg is blaming the pandemic… for the paltry number of downloads for Quibi – despite raising $1.8B. You gotta luv Katzenberg’s quote: “I attribute everything that has gone wrong to coronavirus – everything.”
- The Consumer Price Index fell .8% in April: It was the biggest monthly drop since 2008.
- Biotech stock Novavax (see HODL portfolio)… received $384m from the CEPI to further develop its coronavirus vaccine.
- Twitter CEO Jack Dorsey emailed employees… telling them that they will be allowed to work from home permanently. This is (by far) THE worst case scenario for the commercial real estate industry.
- Apple is bucking the trend… by making plans to return employees to its major global offices over the next few months.
- Uber has been in talks since February to acquire Grubhub ($6B) in a deal that would unite two of the biggest players in the meal-delivery business.
- No one is buying pants right now… but pajama sales are soaring.
- Private label store brands are having a moment… It seems our preferred brand nowadays is “No honey, it doesn’t matter, just get whatever they have.”
- The UK economy shrank 5.8% in March… making it the worst monthly decline on record. The numbers for April and May will be even worse.
- Last week, the share of Americans staying at home fell to 36%... down from 44% a few weeks ago.
- California State University… the nation’s largest four-year public university system, has canceled in-person classes for Fall – 2020 on all 23 campuses.
- Coronavirus deaths in Latin America… are now comparable to Europe.
- David Tepper came out and called... this market the most overvalued he’s seen since 1999. Yet another hedge fund titan to come out bearish on equities.
- Wells Fargo fell 6% today… and is trading at its lowest levels since the global financial crisis. Couldn’t happen to a nicer bunch a guys. Financials are performing badly, but Wells is the worst house in a bad neighborhood.
- It’s not your imagination… grocery prices increased by 2.6% in April – the biggest monthly increase since 1974.
- Last week’s jobless claims… = 3m, bringing the coronavirus tally to 36.5m.
- Salesforce… is the newest tech giant to tell employees they can work from home for at least the rest of the year.
- Tesla plans to introduce… a new low-cost, long-life battery in its Model 3 sedan. That will bring the cost of EVs in line with gasoline models and allow EV batteries to have second and third lives in the electric power grid.
- April’s Retail Sales numbers… declined 16.4%. Clothing sales are down 90% year-over-year.
- The Justice Dept. and a group of state attorneys general… are preparing to file antitrust lawsuits against Google – and are well into litigation planning.
- Berkshire Hathaway sold most of its stake in Goldman… as GS eyes, Wells, PNC and US Bancorp as potential acquisitions. This selling by Warren Buffet at the lows should tell the world he sees a rough economic road ahead.
Crypto-Bytes:
- ConsenSys was last week … enough said.
- JPM’s CEO once called Bitcoin a fraud… but has now added its first 2 cryptocurrency exchange customers: Coinbase and Gemini. Both of these exchanges are regulated in the U.S. The move by JPMorgan is notable in a nation where banking services are hard to come by for any firms dealing with cryptocurrencies, which are viewed as a high risk by the banking industry.
Last Week:
Monday (5/11): As you know, it's all about what our FED is and isn’t buying. Nobody knows if they’re in buy or sit mode. In ‘sit mode’, we fade. In ‘buy mode’, we go higher. I’m looking at: CODX over $17.40 for an earnings run, TSCO over $108 is tempting, and AUY works if it can get over $5.35. Today it seems our FED is in ‘buy mode’. The Nasdaq moved higher for the 6th straight day, and the index is now up 2.45% YTD. Amazon, Facebook, Microsoft, Netflix, Google, and Apple were all up. Nvidia made all-time highs, and biotech stocks behaved today like they cured COVID with Biogen being up 4.5%, Amgen up 3.4%, Gilead up 4.3%, and Abbvie up 5%. On the downside there’s always energy and financials.
Tuesday (5/12): Today the rumor is that our FED will be buying junk bonds. Yep, our FED buying garbage debt from companies that should have gone belly up. Combining that thought with having a debt to GDP ratio at 138%, 30m+ people out of work, meat shortages, and thousands of businesses closed or not paying rent – you may think that stocks would move lower. Remember the old adage: “Don’t fight the FED.” Well we are witness to the fact that the FED can indeed not only keep the market up, but push it higher. Ahh, it seems that the market is getting dinged because Dr. Fauci's talking about how bad it will be to open too early. Because the techs are the heavy lifters in this market, watch the XLK as a move over $96.20 is buyable and could possibly fill the gap above that level. Dr. Fauci’s also telling reporters that the vaccines might not even work, and we could be ‘screwed’. So we are now down over 400 DOW pts.
Wednesday (5/13): This morning the futures look like they’re ready for a bounce. Yes, a bounce after a 450-point plunge is fairly normal, I just don't know that it has staying power. After a feeble attempt at being green across the board, the bottom fell out and we're now red by 179 on the DOW and 10 on the S&P. The way our FED has been playing this – run us up – let us fade – then run us up again … I could see the S&P fading another 60 points or so before a bounce. That's the problem with a market not based on fundamentals. We’re down 1,000 DOW points already this week, close to its 50-day, and the S&P is well below its 21-day moving average. We're in an area where a bounce could develop. I might consider buying some DIA / SPY call options at the close, and "bet" on a big green open tomorrow.
Thursday (5/14): What caused the big dump yesterday? Most likely it was David Tepper saying that this market isn't cheap and it's risky. As far as I'm concerned the market should be at DOW 12K, but our FED has been "told" to keep it higher at all cost. Is the market’s latest fade a reaction to Powell saying that he is not considering negative interest rates at this time? After all, the market always wants cheaper and more money. It appears that 3m more people have filed for unemployment help. Wow – we’re really in trouble. The DOW touched its 50-day, and then the PPT (Plunge Patrol Team) kicked in. We were down over 350 points, and like ‘magic’ it’s now just off 46. I’m betting the FED holds us above the 50-day for the day.
Friday (5/15): The market chatter for the day is that the "trade war" is escalating with China. Trump is asking the question: "What if we cut off relations?" At 8:30 the Empire State report came in -48, which was better than estimates of -60. Retail sales were expected to fall 12%, but came in at a negative 16% - the largest drop on record. I thought that yesterday’s huge reversal from deep red to bright green might have been the start of something, but right now that doesn't look terribly likely. Being a Friday, it’s doubtful that I buy heading into the weekend.
Stockwits Top Dawg:
The Stocktwits 25 Top Dawg for Week #20 of 2020 is Novavax (NVAX) that has gained 133% for the week and claimed the top spot on the Stocktwits Top 25 Russell 2000 list. FYI – it’s been in our HODL portfolio (see below) for the past four months – and is up 996.23% YTD. Early in the week, NVAX announced additional funding from CEPI for the development of a potential COVID-19 vaccine. This is all early stage but the stock is smoking. Can NVAX keep this up?
Next Week: Is big tech on the ropes?
- Da Bears are everywhere… How many different hedge fund managers (along with the FED itself) need to come out and be bearish on this market for people to take notice? This is the first week we saw any degree of weakness inside of the Monsters-Of-Tech: Facebook, Apple, Microsoft, Google and Amazon. This week the Atlanta FED told us that GDP could DECLINE by 42% in the second quarter. Holy cow. This market is about 2 things:
o The FED continuing to pump liquidity and back-stop the entire financial marketplace, and
o The QUANTS who are implementing the FED’s instructions.
- You want a job – good luck! Another 3m new initial jobless claims hit this past week – bringing our overall total to approximately 40m (25%) looking for work.
- Look carefully at the retail sales chart. Retail sales are down 16% month-over-month and 90% year-over-year. How is Best Buy only down 10% YTD when sales of electronics are off 60%? You can draw your own conclusions, and I’m not pointing out huge shorting possibilities as much as I am the ridiculous disconnect between reality and our FED distorting the classical marketplace. Lucky I have Alan Greenspan constantly reminding me that: “a market can remain irrational, longer than you can remain solvent”.
- The Monsters of Tech: FB + AAPL + MSFT + GOOGL + AMAZN: This was the first week in ‘forever’ that tech was weak, and threating to break down. Money flowed out of tech (XLK) and into the Russell (IWM), energy (XLE), and the financials (XLF). I realize that energy and financials have been decimated, and that Warren Buffet just exited Goldman. But if the XLK really starts to decline: (a) you should see an initial rotation into the financials, and then (b) if tech continues to decline – the financials and everything else will go with it.
- We’re still in Volatility Box: We are in the binary position of making a move to the upside or downside right here. And, the longer we are in this range – the more violent break there is going to be as more risk builds up. It could all start with a break in technology. The direction is tough to predict because the sides are split almost 50/50 in terms of breaking-up or breaking-down. Two things are for certain: (a) we’re ripe for a break, and (b) a lot of people are going to get their heads handed to them. The bonds, gold, and the dollar are at the top of their range – while indexes for equities are at the bottom of their range. Confirming this move, we have the VVIX (the volatility of the volatility index) trading at 132 (above 110). This tells me that a large percentage of professional traders are putting on their hedges – expecting something to happen.
- Bonds are showing signs of life. We’re seeing volume spikes in the bonds. If that is truly the case, then the S&Ps will be in for more of ‘Mr. Toad’s Wild Ride’ in very short order. And because there is a high market correlation coefficient – when one asset class starts moving – they all will be moving.
- SPX Expected Move: Last week’s expected move ($80) would have taken us down to SPX = 2850. We ended the week right around 2850 on the SPX. So the QUANTS are aware of this action and are making sure this market becomes more efficient (within the expected move). Next week’s expected move is $92 – so the pros are seeing increased volatility. Watch BIG TECH (XLK) – if it breaks lower, that means that bonds, gold, and the dollar have potentially broken out of their volatility box to the upside. If tech falls, consider shorting: INTC, HD, MSFT, FB, AAPL, COST, WMT and XCP – and buying GLD, Bonds and BTC (Bitcoin) I still like: gold, silver, and crypto – because they’re the only things that make sense to me to the upside. I’ve also had an investment in NovaVax for the past 4 months, and last week it moved 1,000% higher.
Tips:
In a week where we learned retail sales fell 90% year-over-year, obviously fundamentals are not going to crash this market. Next week I think we go higher – but watch BIG TECH. Interestingly enough, gold and silver have been doing well, and on this week GDX (the miner ETF) broke congestion. Keep an eye on it this week as the sector is looking good.
HODL’s:
- First Majestic Silver (AG = $8.84 / in @ 9.15),
- Yamaha Gold (AUY = $5.29 / in @ $4.60),
- Canopy Growth Corp (CGC = $15.86 / in @ $22.17),
- Camping World (CWH = $15.86 / in @ $6.55),
- DRD Gold (DRD = $10.34 / in @ $3.82),
- GBTC Bitcoin (GBTC = $11.05 / in @ $9.41),
- GOLD (GOLD = $28.04 / in @ 27.20),
- Hecla Mining (HL = $2.99 / in @ $2.36),
- KL Gold (KL = $40.97 / in @ 26.85),
- New Gold (NGD = $1.02 / in @ $0.82),
- NovaVax (NVAX = $43.63 / in @ $7.24),
- Pan American Silver (PAAS = $24.50 / in @ $13.07),
- Utility Index (XLU = $54.81 / in @ $61.03)
- SPY = $292.44 in the July 2020 Strangle = $160 Put / $305 Call … closed the Call side – it doubled – left with the PUT side.
Crypto:
- Bitcoin (BTC = $9,600),
- Ethereum (ETH = $200),
- Bitcoin Cash (BCH = $240)
Thoughts:
United Airlines (UAL = $19.92 ) Despite all the drama surrounding the airlines, UAL is currently at the same price it was about six weeks ago. UAL hasn’t made a concerted move up or down for two months. It seems like its price has digested the 100% drop in bookings as well as any optimism for a bounce this summer. Despite the sluggish price action, UAL’s options have an implied volatility of over 100%, and are relatively high-priced for a $20 stock. That means that short premium trades are rewarded for taking risk. The low stock price also means capital requirements for short option trades are relatively low. That combination means if you have the stomach for it, a short option trade in UAL could give a high return on capital. If you think UAL might continue to trade in a range for the next few weeks, the short iron condor that’s short the $16 Put and long the $15 Put and short $25 Call and long the $26 Call in the June expiration is a neutral strategy that has an 85% 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
