This Week in Barrons: 4-19-2020:
Why Pay Taxes – When we can just Print Money?
It seems that Space-X made their deal with NASA to GTFO planet Earth – just in time to avoid COVID-22 and COVID-23. I’m sure if Elon could move-up the new lunar mission to this summer he would – because with +28m out of work, ‘social unrest’ is coming. The government is telling everyone to stay home, and to that end is using the police and military to enforce that order. They’ve even started to bribe the population with stimulus checks, rent abatements, and student loan deferrals.
I’m reminded of Henry Ford’s line, “If people understood our banking and monetary system, there would be a revolution before morning.” As people learn that our Fed CAN print as much money as it wants, they are going to start to fight back against anything that hurts them financially. Taxes for example. If our government can create money out of thin air, why are we paying taxes? Why can’t they just print themselves tax checks just like they did stimulus checks? Heck, if I were Bernie Sanders, I would now be able to say: “I’d pay for National Healthcare by having our FED write a check for it.”
In 2008, the banks took the majority of the blame for the meltdown. Today, our government will clearly take the heat. People are going to put two and two together. They see our FED: printing trillions of dollars, pushing out stimulus checks, deferring loan payments, and giving away ‘forgivable loans’ to large corporations. These developments have been presented as: “I’m from the government and I’m here to help,” but in reality these are merely bribes to keep the peace. Our FED is simply playing the hand in front of them, and kicking the can of ‘social unrest’ down the road. But our FED is giving gold bugs and crypto experts fuel for debating our ability to continue to create “In God we Manipulate” currency.
The current administration’s balancing act is: trying to keep the peace without bragging that our FED can print as much money as they want – whenever they want. I think we’re about to see a financial revolution like this world has never seen.
The Market:
This earnings season (and maybe the next one) are meaningless. All that matters now is how bad COVID-19 winds up being, how long this quarantine continues, and how fast businesses are able to ramp back up. That’s what’s moving markets.
Last week’s initial unemployment claims totaled more than 5.2m. This is on top of the +16m that filed for unemployment in the prior 3 weeks. That means that almost 22m people have filed new unemployment claims in the past month. Including the previously unemployed, that brings the total to nearly 28m people looking for work. There are 165m people in the labor force; therefore, the current unemployment rate is over 16%. In the last 6 weeks, we have gone from 3.5% unemployment to levels that now rival the 2nd year of the Great Depression. If we continue the trend, unemployment will hit 25% by the end of Q3, and exceed Great Depression numbers.
Are $1,200 stimulus checks the answer? The average apartment rents for $800 per month; therefore, stimulus checks will only cover rent and groceries for one month. Because of this, a new proposal is being floated: the Emergency Money to the People Act. It states that every American, over the age of 16, that makes under $130,000 – will receive $2,000 a month until the economy fully recovers and unemployment levels drop back to pre-COVID levels. This pushes the conversation for universal basic income (UBI) onto the front burner. There’s only one problem – once we start this program, there’s NO turning back. This is because: (a) returning to pre-COVID unemployment levels will take a decade, and (b) it will be political suicide for any politician to give money to people for a decade and then try to take it away from them.
Finally, the cost is almost unfathomable at $400B per month. It would add more than 5% to the FED’s balance sheet on a monthly basis – with no way to slow down. The U.S. has reached the ultimate decision – capitalism vs socialism. Oh I forgot, our FED can just print more money – like Zimbabwe does.
InfoBits:
- Airbnb will raise another $1B… in debt financing @ 7.5% plus LIBOR. Does the economy turn around before they run out of money ... again?
- Netflix and Amazon… are both at or near all-time highs. Good business models thrive in good and bad times.
- Groupon is laying off… almost 50% of its staff.
- SoftBank expects to lose $17B… in its Vision Fund for the fiscal year.
- The next domino to fall… will be cash-strapped states, cities and towns.
- IMF expects the world economies to contract by 3% this year: That makes it the worst downturn since the Great Depression.
- Retail sales plunged 8.7% in March… the biggest decline ever recorded.
- Best Buy laid-off 51,000 employees… but will continue their health benefits.
- Home invasions… are on the rise for cash, jewelry and food.
- Apple unveils a new $399 iPhone… So it will hurt just a bit less when I drop it facedown.
- The $350B U.S. Payroll Program… is busted – broke – out of money.
- Robinhood is raising $250m… at an $8B pre-money valuation. Why can’t companies figure out how to stay in business without begging for more money?
- Buzz haircuts are bac … out of necessity as much as style I assume.
- “The Great Lockdown”… is the worst economic downturn since the Great Depression. The U.S. will grow at a (negative) -6% rate this year.
- GoPro is laying off 20% of its staff… and will cut out the middleman by selling cameras directly to consumers.
- Y Combinator changed its model: It will now take a 4% stake in each startup it funds (down from 7%) and will only make case-by-case follow-on investments.
- Zoox (self-driving startup)… has admitted that employees stole confidential documents from their previous employer – Tesla.
- Healthcare is crushing it… and has been the strongest performing sector in the last 30 days.
- A second wave of job losses is coming… and it will be hitting businesses previously thought to be recession-proof such as: corporate lawyers, government bureaucrats, and healthcare workers not fighting the pandemic.
- Oil Settles Below $20 per barrel: Could we see single digits in 2020?
- China’s economy shrank by 6.8% in Q1… ending a 50-year run of growth.
- Shopify’s in beast-mode… as it was up 41% this week. I guess everybody’s doing business online – imagine that.
- To quote Berkshire Hathaway’s Charlie Munger: “Nobody in America’s ever seen anything else like this. This thing is different. Everybody talks as if they know what’s going to happen, and nobody knows what’s going to happen.”
Crypto-Bytes:
- Gold has left Bitcoin in the dust: Gold is now up 9% on a month-to-date basis, while bitcoin is lagging with just a 5% gain.
- China will launch a national blockchain platform (BSN): The BSN enables software developers to build blockchain-based applications as easily as assembling Lego sets (at least in theory).
- Libra blinks: In a major concession to global regulators, Libra has pulled back from its original vision of a digital currency backed by a basket of national currencies to (now) stablecoins each representing a different national currency, which will back their multi-currency stablecoin.
Last Week:
Tuesday: The big banks and others missed their earnings, but they were not trashed because some aspect of their business grew. That’s the game that will be played a thousand times over, for the next two weeks. Earnings will be poor, but companies and investors will try to find any glimmer of hope. Don't forget, our economy was already in the toilet BEFORE the virus problem. 36% of companies in the Russell 2000 had negative pre-tax income. 27% of S&P 500 companies with a market cap over $10B had negative year-over-year EPS growth. So, we had a fading economy, propped up via repo actions, and now we get a virtual shut down. Our FED is the only thing keeping this market up. Look at gold and the miners. People know that all these Fed trillions will beat up the dollar. Specifically NEM, WPM, GOLD and FNV look great and the ETFs GDX and GDXJ look good as well. Here are some entry levels to play: NEM > $61.55, GOLD > $25.10, FNV > $127.90, WPM > $35.40, KL > $40.10, AUY > $4.60, HL > $2.48 and NGD > $0.87 There are some real ‘Crazy Eddie’ moves going on out there. Amazon’s up almost 20% in the last 6 sessions. Tesla’s up 56% since April 2. AMD’s up 29% since April 3. The S&Ps are now up 27% from their March 23rd bottom, and another 18% move higher would get us back to all-time highs.
Wednesday: It’s a sea of red out there – all 650 points of it. MSFT is very strong. The market's down 650 points and MSFT is off by 60 cents. A move over $173.50 could drag me in. Mortgage applications crashed to five year lows. Retail sales fell the most ever recorded, and the Empire State reading fell to a (negative) -78. The war between the reality and our FED’s attempt to fix it – wages on.
Thursday: Last week 5.2m additional people applied for unemployment. Housing starts fell 22%, and the Philly Fed came in (negative) -56.6. It was horrible, yet the DOW moved higher on the news. A lot of those numbers were from March, and most of the lockdown didn't come until the third week of March. April’s numbers will be worse. There are millions of people jammed up in the system as state unemployment websites have been crashing daily. And the self-employed can't get unemployment, but are effectively out of a job. The FED gave out $500B last night and that’s buoying stocks today. The FAANG stocks and Microsoft are holding the market up. Healthcare has been strong, and I like the XLV > $98.18 here.
Friday: Yesterday after the close, GILD said that they were having good success with their COVID-19 drug. The algo’s took the GILD news and jumped on it. Trump told the Governors that they had sole discretion about opening their states. So we’re coming into Friday in rally mode. MSFT did climb back over $175 yesterday and I picked up some more shares. I’ve been harping on energy weakness, and have been focused on the $20 per barrel level for oil. Today we broke through that with a vengeance – closing down 8% to $18.27. The November 2001 intraday low was $17.12, and that’s now in play. Today, the 5 largest stocks in the S&P make up a greater percentage than ever before. Microsoft, Apple, Amazon, Alphabet (Google), and Facebook comprise over 21% of the S&P. Fewer and fewer stocks are having greater influence over the broader index. The last time we had this type of action was at the tail end of the internet bubble.
Weed:
Next Week: Quant Rules in a FED fueled Rally?
“Quant Rules in a FED-backed Rally:”
- Are fundamentals dead? China’s GDP is the worst on record. Our jobless claims are off the chart. The data is absolutely horrific. But none of this matters in a FED-backed marketplace. The market stopped adhering to its own gravity points half-way through this past week, and at that point I declared the fundamentals – dead. Last week, our government gave the airlines a $25B lifeline, when the entire group was worth less than $25B. So I guess we now own all the airlines. As long as our FED continues buy corporate bonds, the market’s fundamentals will remain on life-support.
- Is there a Bond Market anymore? The 30-year Treasury is 1.27% and the 10-year is now at 0.65%. It’s very plausible that negative interest rates are coming to a bank near you. Right now the FED is trying to keep short term rates near zero, and targeting the 10-year and 30-year rates into their respective regions. Our FED has ramped its firepower by over $2T in the past couple weeks – and until that decreases – treat bonds as you would a ‘controlled substance’.
- Is Buy ‘n Hold dead? As long as our FED is as heavily invested in the market as they are – Buy ‘n Hold is dead. Our FED has made financial planners and advisors obsolete, but has re-invigorated volatility and trading.
- Got Junk? Our FED announced a bit ago that it was going to start buying junk bonds (HYG). And you can see by the graph, that was the point at which junk exploded higher. Our FED actually hired Blackrock (the firm that started the HYG) to do their bidding for them. I think our FED will discriminate when it comes to junk – so a short position within the HYG is a good idea even with the FED vocally coming out in support of the sector.
- Sector Rotations:
o Tech (XLK) is up 4% YTD, but is rotating into financials and energy.
o Financials (XLF) are down 30% YTD and tied with energy for the 2 sectors on the receiving side of this rotation.
o Energy (XLE) is down 43% YTD but moving higher due to the rotation.
o Consumer Staples (XLP) are correlated with tech in terms of rotation.
o Gold (GLD) is not a sector but is behaving like one. Commodities should begin to see extraordinary volatility because (now that our government controls the bond market) bond traders are now trading commodities and gold. Watch the price movements here to exceed the expected moves.
- Why does Volatility remain so high? Even though the VIX has fallen from 85 down to 40’ish, that is logarithmically light years away from where we were last summer. Things are still in a complete free-for-all in the trading world with the VVIX remaining above 110 – in the 125 to 130 range and screaming ‘danger’.
- SPX expected move… Last week’s expected move was $135 and we moved well inside that. Next week’s expected move is $111, and I think we will exceed that range this coming week. That means we have traded outside the expected move 11 out of the last 14 weeks. However, last week the Nasdaq (QQQ) exceeded its expected move to the upside, while the Russell (IWM) broke through its expected move to the downside. I’m anticipating that sector rotation continues this coming week with the QQQ and the IWM continuing to converge.
Tips:
Tips:
Many of you have written and asked how can this market be this high? After all, our nation is shut down, our supply chains are broken, we are basically at war with China, there is a virus running around, and we are only 17% from the biggest bubble market in human history. Well, as I’ve said before – this ain’t your grandfather’s market. In the short-term, the FED’s $500B a night in Repo's, and whatever else they’re doing is indeed keeping us afloat. One thing you have to remember about all of this, is that nobody knows what our FED is really doing. In 2009, it was uncovered that our FED secretly sent $16T to Europe to help stabilize them. When B. Bernanke (then FED Chief) was asked under oath: "Who got the money?" He replied: "I don't know." So their ability to hold back the truth – even under oath – is uncompromising. Maybe our FED can pull this off in the short term, as everyone is focused on the virus, being shut-in and in bad health. But can they keep it up forever? Contrary to public opinion, this economy is NOT going to come roaring back.
We've had two weeks of an ‘up’ market. I tend to think that we're going to see some profit taking and a move back down this week. I can see the current momentum lasting another day or two and by mid-week a reversal appears.
1. MSFT – go short due to the convergence between IWM and XLK, and sector rotation,
2. LULU – go short – they’re up 32% YoY, and they’re retail.
3. XLP – go short – they’re up 6.4% YoY, and when the panic buying in toilet paper goes away – look for the gains in the XLP to go with it.
HODL’s:
- Aurora (ACB = $0.69 / in @ $3.07),
- First Majestic Silver (AG = $6.97 / in @ 9.15),
- Canopy Growth Corp (CGC = $15.10 / in @ $22.17),
- DRD Gold (DRD = $8.21 / in @ $3.82),
- GBTC Bitcoin (GBTC = $7.49 / in @ $9.41),
- KL Gold (KL = $34.54 / in @ 26.85),
- NVAX (NVAX = $19.02 / in @ $7.24),
- Pan American Silver (PAAS = $19.09 / in @ $13.07),
- Real Estate ETF (XLRE = $34.54 / in @ $35.08),
- Utility Index (XLU = $60.53 / in @ $61.03)
- SPY = in the July 2020 Strangle = $160 Put / $305 Call … close to selling the Call side – it’s tripled!
Crypto:
- Bitcoin (BTC = $7,200),
- Ethereum (ETH = $160),
- Bitcoin Cash (BCH = $240)
Thoughts:
Carnival Cruise Lines: CCL = $12.57: Heck, let’s all take a cruise! CCL, like just about every leisure stock, has been crushed. Even though it doesn’t have the diverse revenue streams of Disney (DIS), it might stop dropping if all the bad news is baked into its price. Even though its implied volatility is only 38%, its actual volatility is high enough to make short options a relatively attractive trade candidate. If you think that CCL might stay off its lows for the next few weeks (even if people aren’t flooding aboard its cruise ships), the selling the $10 Put and buying the $7.50 Put in the May monthly expiration is a bullish strategy that has an 87% 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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