The Earnings That Will Never Come
As we start July, it signals the beginning of what could be a crucial earnings season. It’s hard to even believe I’m writing this, but stocks are expensive! By traditional valuation metrics, like price-to-earnings multiples, they are anyway.
And when stocks are expensive, people want to see earnings! Especially after stocks in the U.S. just posted their best quarter since 2008, albeit after a horrendous Q1.
And yet July is off to roaring start, with tech darlings continuing to reach unfathomable heights.
Take TESLA for instance. A stock I’ve only recommended and traded from the long side has completely torched short seller skeptics. A very good lesson in trading the markets can be learned just from observing the TSLA case.
The market doesn’t have to “make sense” for a move to be real. And when one gets stuck in fighting that reality, real pain can arise.
A colleague of mine recently asked me about TSLA and I said... If I hired a junior trader, and they put on a TSLA short, and their case was it’s expensive, their ass would be out the door faster than you can say margin call!
Now my point isn’t that TSLA can’t go down. Of course it can -- and has. And for me it’s a no-trade right now. The lesson is to avoid the traps that come with that type of trading.
The past couple of months have seen risk assets all move up in lockstep. For a pairs trader looking for winners and losers, it’s been more difficult, to say the least. The good news is the current market environment is without precedent. And I expect a more normal distribution of performance to re-emerge in short order.
Key Market Movers:
These are assets that are moving the broader markets and affecting everything. It’s always changing but part of the art of trading is reading the texture of the market. Though I don’t necessarily have a trade or position in these assets, I’m always watching them as indicators.
U.S. 10 YEAR YIELD
One precarious sign that things are not yet quite alright are bond yields. The 10-year bond yield under .90% is a direct objection to the recovery case that stocks are making. If the economy were truly rebounding with velocity, you’d see rates rip to the upside.
Technically if rates break lower, in the low .50’s, it could spell short term trouble for stocks.
SHANGHAI COMPOSITE
The Shanghai exchange is at multi-year highs. And we’ve seen some parabolic action early this month, after the Chinese State-run media promoted stock investment. Last time the CCP promoted stocks was 2015. And we saw a vicious bubble burst in short order. One thing to note though, it can get A LOT crazier first before the burst…
DOLLAR BULLISH WEDGE
This is a bullish setup in the dollar to pay attention to. A strong dollar would be bad for emerging markets and raw commodities.
Another negative news bomb came out this week. The White House is contemplating meddling with the Hong Kong Dollar peg, via dollar shortages. If that were to happen, look out.
Core Portfolio Long/Shorts:
These are longer-term holdings I recommend that you have positions in. I’m not a long term investor, so by long term I’m not talking years per-se, but weeks to a few months. Of course, there’s still a healthy positive skew and risk-reward embedded in all the trades. And I’ll be providing stops, upside guidance and updates. They will typically be single stock names.
Current Link Trades:
DKNG/LVS
DraftKings is becoming synonymous with online sports betting in the U.S. The premium to be known as the way to do something online can be immense! Consider Google, which is synonymous with using a search engine. That's how Americans will refer to placing a bet online. I made X bet on Draftkings… I love the upside of that.
PYPL/V
Paypal is, of course, a linchpin of the stay-at-home trade. We’ve seen delays in the reopening of America, as cases increase with you guessed it -- more testing! But this is one change from COVID I don’t see us going back to anytime soon. Even splitting a bill with a friend recently, I offered to pay cash and my friend preferred -- and by that I mean demanded -- a Venmo send instead.
JPM/DB
U.S. Banks have really taken it on the chin, while the zombies of Europe have miraculously caught a bid. This is perhaps one of the biggest head scratchers of the new reality for me. But I expect the traditional Money Link relationship from JP Morgan and Deutsche Bank to re-emerge in short order.
Current Swing Trades:
The bread and butter of my strategy. These are weekly swing trades -- sometimes intra week -- long/short spreads. They will mostly be International ETF’s. I’ll also have sector ETF’s from time to time, as the action warrants it. These trades are meant to be done together, and I’ll be tracking the performance of each long/short pair for the return. I’ll also send a weekly trading summary reporting on the swing trading pairs. And I’ll give updates as events rise to take advantage of.
CURRENT SWING TRADE MONEY LINKS: TLT/XOP, ASHR/EEM
TLT/XOP
This trade has been a home run. And though these trades aren’t meant to last more than a week or two, a big part of trading is letting your winners run. This Money Link has done well in a market environment where it shouldn’t have! With stocks back in risk-on mode, Nasdaq near all-time highs and oil staying near 40, I’d expect this trade to perform badly. But it's not! So my thesis is... when the risk comes back in oil, or rates go lower, this trade will continue to crush.
ASHR/EEM
If you can’t beat ‘em join ‘em! The Chinese Communist Party wants a bubble in stocks and that's what they’ll get. And I’m joining them for a quick swing trade.
It’s counter to the long term trend of Chinese investment flight that I’ve normally played. But this is different. The majority of capital flight will occur outside of Mainland listed names, just like the ones listed in EEM.
In Conclusion:
I expect July to be a turbulent month, with second waves of COVID springing up around the world, and major question marks surrounding the rest of 2020. Summer is seasonally low volume -- a slow period in the markets. But this summer will be anything but slow! I expect tensions with China to increase as the trade truce proves to be tenuous at best. And the political rancor will begin to build into late summer as we head toward the U.S. Presidential election.
The slower than expected reopening of the world will continue to boost internet stay-at-home stocks. They thrive in this environment. The value bounce in the recovery names should lag.
As always, we need to be vigilant and ready for any environment -- and tweak the game plan to win.