This Week in Barrons: 7-5-2020:
Payback’s a B*tch…
When I was a child (as part of the land-line generation) in order to get money it meant doing extra chores, mowing lawns, helping neighbors with odd jobs, and as a last resort – asking Mom and Dad. The 90’s (pre-cell phone) generation grew up thinking that money came from ATM’s. And the cell phone generation believes that money comes thru apps on your phone. The difference in all 3 of these methodologies was NOT how you obtained the money, but rather – whether you Paid It Back. My Italian side made sure that I understood what ‘Payback’ meant. And my parents made sure that I understood what ‘Payback’ meant. But paying back an ATM is a difficult concept to teach. Our present day leadership has decided that ‘Paying Back’ debts is completely unnecessary. After all, doesn’t the FED just pay for everything? The FED is already paying for: the stock market, the bond market, the dollar, and the consumer. Heck, our government is giving out PPP loans with zero accountability and zero transparency. What scared me last week was the following headline: “The FED reveals bond purchases now include: Microsoft, Volkswagen, Apple, Comcast, AT&T, United Health, and Walmart”. I thought the goal of the FED’s program was simply to maintain liquidity in the corporate debt markets – not give-away free money. What does it say about our debt markets if Apple and Microsoft bonds aren’t liquid? Interest rates are already at zero, so bond prices are at all-time highs. That means our tax dollars are adding liquidity to a marketplace where there are NO buyers, and therefore the cash is going directly into corporate war chests. Who eats the losses when interest rates rise and bond prices fall? If the corporate bond market is suffering a lack of liquidity when interest rates are zero – what about the stock market? Are the trillion-dollar-plus digital monopolies (AMZN, MSFT, AAPL, GOOGL) too big to fail? If nobody wants to buy Walmart or Apple bonds with interest rates at all-time lows, who’s going to want any other corporate bonds? ‘Payback’ needs to be a part of the solution, and should be a b*tch because both parties need to remember it. My dad always told me: “Pay back everyone with interest. It’s the right thing to do.”
The Market:
“The FED literally spent their last penny”… TCC
Honestly, I can only dream that the above would be true, and that free-market capitalism would return. The goals of our FED are to: promote maximum employment, stabilize prices, and moderate long-term interest rates. By our FED concentrating on the stock and bond markets – they’re leaving their main goals unattended. The employment-population ratio (the number of employed people as a percentage of the U.S. adult population) plunged to below 53% in May – meaning that about HALF of Americans are jobless. “To get the employment-to-population ratio back to reasonable levels, we will need to create 30 million jobs, and it will take the better part of the next decade,” said the Congressional Budget Office. They also predicted that the recession will quadruple the federal budget deficit. So maybe our FED is broke? It’s more likely however that they’re spending all of their money taking over private U.S. businesses. Powell and Mnuchin told Congress last week that they’re still going to “play in the market” and feed the banks, who in turn buy the DIA, SPY and FAANG stocks.
For the first half of 2020, what led the way in the markets were companies related to: software, COVID, and precious metal mining. Stocks in the other sectors started to slowly roll downhill. The number of distribution days in the major stock indexes has increased significantly in the past couple of weeks, so it would not be a big surprise if even the Nasdaq 100 tests its 50-day moving average at some point in the next week or so. On a positive note, give yourself a pat on the back for surviving the first half of the craziest year I can recall.
InfoBits:
- Chesapeake Energy… the poster child of the U.S. shale revolution, filed for bankruptcy protection in order to wipe out it’s $7B debt.
- Wirecard AG has filed for insolvency… days after revealing that more than $2B in cash is missing from their balance sheet.
- The discount retail giant TJX… (TJ Maxx, Marshalls, and Homegoods) wants nothing to do with online shopping. They took an $887m loss on closed stores last quarter, AND shut down their ecommerce sites.
- Ford announced a redesign of the F-150… but Lordstown Motors threw its own pickup-unveiling party on the same day, and got America's VP to attend. Ford’s stock dropped after its outshined unveiling.
- JPMorgan and Johns Hopkins University… analyzed data from 30m cardholders and found that higher restaurant spending predicted a rise in new COVID infections 3-weeks later. Also, higher supermarket spending predicted a slower spread of the virus.
- On June 29, 2007… Apple dropped the iPhone, and the world has never looked back.
- Lululemon is buying Mirror Interactive Fitness for $500M. Mirror makes an interactive workout mirror. It’s LuLu vs Peleton - place your bets
- Uber has made a takeover offer… to buy Postmates for $2.6B.
- The European Union has reopened… its external border to 15 countries – one of those is NOT the U.S.
- China discovered a new type of swine flu… called the G4 virus that can infect humans and has what researchers call “all the essential hallmarks of another pandemic virus.” OK, now that we KNOW – let’s do something!
- $3,120… is how much a course of the COVID drug Remdesivir will cost.
- The U.S. has 4% of the world’s population… and 25% of its COVID cases.
- Firearm purchases set another record in June… with 40% of those being 1st time buyers. It looks like TP and masks aren't the only things people are buying.
- Over 500 advertisers… have now paused Facebook spending over concerns the social network promotes hate speech. According to CEO Mark Zuckerberg: “They’ll be back soon enough.”
- According to BL… “Trump’s not gonna lose. Either he’s going to declare victory or drop out of the race.”
- America is now home to an all-time-high 800 billionaires. They control $3.4T in total assets – over 14% more than we had at the end of 2018.
- Lemonade (insurance industry disruptor)… just enjoyed the year's strongest IPO as its shares more than doubled on their first day of trading.
- Young people are throwing COVID parties… with payouts for whoever gets infected first. Do NOT do this!
- $172B… is how much Amazon CEO Jeff Bezos is now worth – a new record for the world’s richest person.
- Tesla (+188% YTD)… became the world’s most valuable automaker last week.
- 57,497… is the new record number of COVID infections reported yesterday.
- Walmart is transforming 160 of its parking lots… into drive-in movie theaters. Now that’s adapting to change!
- Clothing retailer Lucky Brand has filed for bankruptcy… with a possible deal to sell its business to the operator of Aéropostale and Nautica brands.
- Peter Thiel… told associates that he plans to sit out this year’s U.S. presidential campaign because he thinks Trump’s re-election is increasingly a long shot.
Crypto-Bytes:
- Digital Dollars: The U.S. Senate Committee on Banking, Housing and Urban Affairs will hold a hearing on “The Digitization of Money and Payments.” Their focus seems to be around central bank digital currencies and stablecoins.
- BlockFi says its monthly revenue has doubled… as it sees a surge in new users for its crypto lending service and interest accounts.
- June trading volume on decentralized exchanges… set a record high of $1.52B – an increase of 70% over May. This double-digit percentage growth is simply the continuation of a trend dating back to the end of 2019.
Last Week:
Monday: Last night the futures were once again blood red – until the plunge patrol team kicked in and up we went. Now they’re saying today's green futures are because Boeing is going to start their recertification flights. But even if the Max passes its tests, when will people trust flying again – let alone flying on a 737 Max? Powell is going to be speaking tomorrow, and if he promises more unicorns, any idea of a fade could be all wet. We're going to be running into earnings pretty soon, so start thinking about earnings runs and chart set-ups. For this morning I'm watching: BOX and NBIX. MMM is up way too much already, but if they get over $156.60 they could go. The DOW is up 483, and I have no idea why – other than those same folks that had to sell stocks last week, have gone right back into buying more stocks. Remember VSTO? They're the parent company of a lot of outdoors products. Today, they made an intra-day high of $14.45. If they get up and over that, I will go in. I could still see NBIX > $131, BOX > $21.50, and OSTK > $29.70 working for me. I am being cautious here.
Tuesday: Yesterday they were in their ‘Buy the Dip’ (BTFD) mode, and pushed the averages up sharply. The DOW ended the day +580 points, and the S&P got back up and over its 200-day moving average. For the most part, the S&P spent June going sideways. On June 1st we closed at 3055, and on the 29th we closed at 3053 – about as sideways as it gets. Today we get to hear lies from both Powell and Mnuchin as they address the House Financial Services Committee. If they suggest more rainbows and unicorns, this market will go higher. I’m watching: VSTO, OSTK, ON, BOX, and NBIX. Unfortunately, BOX and NBIX just aren't doing anything. ON looks interesting and a move > $19.85 could send it running. OSTK has a lot going for it, but it can't seem to wrangle the volume it needs. It needs to get over $28.50 to get me interested.
Wednesday: Can you believe this market? Best quarter ever for stocks since 1998. The S&P 500 closed just shy of a 20% gain, while the Nasdaq surged over 30%. Roll that around in your head. Our economy was shut down almost all of April and May. Re-openings are being halted. Riots are everywhere. Police forces are being defunded and shot at – and we put in the best market quarter on record. OUR FED is completely willing to print until their digital machines blow up. The bankers are taking that free money and plowing it right back into the stocks that the pensions sold last week. This market is so detached from the reality of the economy, that you can't even get them on the same side of a photo. It’s manipulation, and until they stop it – red is simply not allowed. You all know about the fake numbers – right? The ISM manufacturing index came in at 52.6. Are you kidding me? You want me to believe that manufacturing is BACK to where it was pre-COVID. Really? The largest fast-food franchise in America, which owns 1,600 Pizza Hut and Wendy’s locations – just filed for bankruptcy. So it’s all roses and puppies? Nobody’s hiring anybody. Tomorrow is non-farm payrolls, but it's also the last trading day of the week – so anything can happen.
Thursday: They say we gained 4.8m jobs, and that the unemployment rate fell to 11% - but they will have ‘adjustments’ coming. The initial jobless claims came in at +1.42m – so we have 4m heading back to work (before the shut downs) and another 1.5m getting laid-off. But it appears the only question of the day is if they're going to keep us this green heading into a 3-day weekend. Unfortunately, the Bureau of Labor & Statistics just came out and said that the JOBS report was a bunch of baloney. The BLS admitted that: (a) survey errors continue – resulting in artificially lower unemployment rates, and (b) the number of permanent job losses continued to rise to 2.9m in June. That flies in the face of the ‘official report’ but hey, all I know is that our FED is buyin’. I'm looking at KL this morning. If it exceeds the $41.85 level – I’m in. The market is well off the opening highs, but congrats to our FED for another week of a job well done.
Weed:
- The most recent states to introduce adult-use cannabis programs have been Illinois, Michigan, and Maine. While Michigan and Illinois began sales in December 2019 and January 2020 respectively, Maine has only begun to issue conditional adult-use licenses in the past few months, with sales now delayed past their original target in the spring.
- U.S. retail marijuana sales are on pace to rise 40% in 2020.
Next Week: What’s working and What’s not.
BackSpreads… are working as an outlier strategy. The Ratio BackSpread is a low risk – high reward strategy that responds to large, outlier moves. Look at the XLE ($37.34). For the week of July 31st, sell -1 $37 Call and buy +2 $39.50 Calls for a $0.17 Credit. If it does nothing or goes down – you win. If it explodes higher – you’re buyin’.
In/Out Spreads: I’m pulling back on my allocation here because the ‘skew’ in the market place is making it extraordinarily difficult to make profitable In/Out spread trades. It’s because the markets have been on such a tear to the upside, that the volatility skew is making the math too tough. Wait until the market comes to us.
Duration positions… are the most difficult positions to hold. This is an investment (HODL) – NOT a trade. I originally opened up a ‘short’ on Boeing in January of 2018, and held that position until April of 2020. Currently, I’m thinking of a duration short position in Facebook. When I ask myself: “What do I want to OWN at these levels?” My answer is: financials (maybe), energy (maybe) – but definitely not Facebook.
Buying Iron Condors: I’ve sold options premium for a long time – until I stopped. I think that right now you want to be on the ‘buying side’ of the option. I bought some Iron Condors in gold (GLD) because I believe the precious metals have a bias to the upside and will naturally exceed their expected move(s).
Calendar Spreads: Look at the financials, down -26% YTD, but the implied volatility is only 19%. What the calendar spread allows you to do is to ‘buy volatility’. Right now in the XLF, I’m into the July 31st / September 18th … $21 Put Calendar Spread.
Pairs Trading (going long & short): I’m seeing fairly large capital rotations between the XLF (financials), XLE (energy) and the XLK (technology). Going forward, I’m beginning to think more like a ‘pairs’ trader. Going forward, I think that it’s going to be incredibly difficult to find the next NVAX or TSLA, but finding that technology (XLK) goes up when energy (XLE) goes down – will be a much more profitable trade in the long run.
The disconnect between stocks and main street: Everybody’s talking about it. The bottom line is that it doesn’t matter what anyone thinks the market place should be doing. Maybe it’s the FED, the retail trader, or the quant – right now we’re in a volatility channel. If we break below 2983 on the SPX, then we’ll see some ‘rockin’ again.
Next major move will be about MAGNITUDE! Be very careful. We have extraordinarily high correlations. When correlations are high, it really doesn’t matter what happens fundamentally. Due to high correlations and low volatility (relative to where we’ve been) – there should be a move coming of impressive size. Again, think about some low risk / high-reward Ratio BackSpreads.
SPX Expected Move: We cracked thru the upside of the expected move last week. In those 4 trading days we were looking for a $101 move, but instead we got a $121.05 move. Next week (5 trading days) the expected move is only $80.50. That makes me nervous especially after seeing last week’s $121 move. It also scares me because we’re not seeing reduced summer volumes, but rather fragile liquidity. This could be the perfect recipe for the ‘calm’ before the ‘storm’.
Tips:
If you’re going on probabilities, all of the following have a 68% chance of falling between the two boundaries listed by the end of 2020:
- SPY of landing between $249 and $369,
- QQQ of landing between $200 and $302,
- IWM of landing between $105 and $177,
- TLT of landing between $145 and $182, and
- VIX of landing above $13.
HODL’s:
- First Majestic Silver (AG = $9.50 / in @ 9.15 = up 4%),
- Yamaha Gold (AUY = $5.35 / in @ $4.60 = up 16%),
- Canopy Growth Corp (CGC = $16.45 / in @ $22.17 = down 26%),
- DRD Gold (DRD = $15.43 / in @ $3.82 = up 304%),
- GBTC Bitcoin (GBTC = $9.37 / in @ $9.41 = flat),
- GOLD (GOLD = $26.27 / in @ 27.20 = down 4%),
- Hecla Mining (HL = $3.19 / in @ $2.36 = up 35%),
- KL Gold (KL = $41.68 / in @ 26.85 = up 55%),
- NovaVax (NVAX = $81.64 / in @ $7.24 = up 1,027%),
- New Gold (NGD = $1.33 / in @ $0.82 = up 62%),
- Pan American Silver (PAAS = $29.24 / in @ $13.07 = up 124%),
- Sandstorm Gold (SAND = $9.50 / in @ $9.12 = up 4%),
- SPY = $312.23 = in the July 2020 Strangle = $164 Put – sold the Call side.
- XLF = $22.97 = July 31st = SELL -1 $23 call, and BUY +2 $24.5 Calls for $0.14 credit == You win if it explodes higher and you don’t lose if it doesn’t.
Crypto:
- Bitcoin (BTC = $9,125),
- Ethereum (ETH = $225),
- Bitcoin Cash (BCH = $220)
Thoughts: Is it possible for a stock index to be tired? As the QQQ hits another all-time high, the SPY and IWM continue to lag. It’s not that they’re that weak, it’s just that the Q’s are so strong. Both SPY and IWM have been trading in a wide range for the past month, but they’ve left the Q’s to steal the show. That could that change in the next month, but it’s just as likely that the two broader ETFs could take it easy in the summer heat and wait for cooler weather for any drama. That said, IWM’s implied volatility is relatively high at 37% overall, and that means traders willing to take risk can be rewarded by shorting IWM’s relatively rich option premiums. If you think IWM will stay inside the bounds of a wide range for the next few weeks, the short iron condor that’s long the $125 Put, short the $127 Put, short the $155 Call and long the $157 Call in the Aug monthly expiration is a neutral strategy that collects a credit 1/3 the width of its strikes, has a 73% probability of making 50% of its max profit before expiration.
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
Until next week – be safe.
R.F. Culbertson
