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Sunday Equities Talk — Negative Oil, Market Bulls Charging, Fed Buys Everything

Today we’ll discuss many things related to Coronavirus, negative oil, the Brazilian currency crisis, the irrational bullishness of equities, and even throw in some premium content at the end.

Image by Arek Socha from Pixabay

Welcome to the weekly Alpha Trades Sunday market overview!

To be discussed:

  • How we can expect the market to fare next week and what stocks we’re looking at to buy/sell
  • How Brazil, Argentina, and the Eurozone are impacted by the US
  • The effect of the economic downturn on currencies
  • Is the market still overvalued, and is another drop inbound?

Coronavirus and what comes next.

The United States is still the global leader in infections and death count on a national basis, while globally, the curb has begun to flatten.

Source: Financial Times Coronavirus data updated April 25

Parts of the economy are re-opening despite the fact that the number of new cases and deaths is only just beginning to flatten, and while mass testing is still being rolled out.

“Here in Texas, we’re gearing up to reopen a large chunk of the state’s economy along with Georgia… getting a lot of the close contact businesses open again. In Houston, (we haven’t) really done that much testing… It increases the long-term risk (of)… a second wave. But I think overall, it’ll be looked at in the short-term as a positive, more so than a negative.” -Faisal, markets analyst at Alpha Trades

Everyone’s eyes are on Texas and more immediately, Georgia. President Trump has already discussed in press briefings the White House’s plans to reopen the American economy, so it’s only a matter of time. This will be a test of how well we’ve handled the pandemic in the late stage. Economists will be observing infection rates and the revenue stream of various businesses in these regions to better judge where we are going as a nation.

Austin, Dallas, and Houston, Texas are crucial cities for the energy and tech sectors, so the performance of Texas in a post-corona economy will be a crystal ball for other areas of the American economy. We’ll be paying close attention to jobless claims and the health of industries connected to the state.

America is unemployed tracks the rate of layoffs in small businesses, like startups. Across the board, whether you’re a dentist, sales, tech, clothing, marketing, or the service industry, no industry has been immune to this downturn. Last week brought another 4.3 million jobless claims. That brings the grand total to about 26.5 million. Based on those numbers, what’s a reasonable timeline for overall economic recovery at the level of small businesses compared to large corporations?

At a glance, the technicals make a case that the overall market has impressive strength. This is a true economic crisis, and chances are low that it is going to be over soon. But when will sellers step up and when will the pool of buyers deflate enough to put any dent in the Fed’s campaign to restore the economy to its pre-corona levels?

This recession is not the same as 2008–2009. Even though jobless claims have reached nosebleed levels, unemployment benefits are great compared to what they were in the last recession. In the short term, many people who are struggling are able to receive something like a living wage. The banking system is also much healthier than it was in the last economic crisis.

There is also a healthy level of consumer demand for companies like Chipotle, where despite a massive disruption in their supply chain and revenue, the company’s stock went up about 10% on earnings this week. This was attributed to positive digital sales, a trend we can identify across several industries at the moment. It’s only the beginning of the recessive period, but in this first leg, the American consumer appears to be strong.

In the face of all odds of what’s happening in the real economy, where bankruptcies and defaults keep piling, bonds are being downgraded, and unemployment reaching 18% of the total workforce (about 26.5 million people), that half of reality is not being reflected in the technicals of the market. The Fed is prepared to backstop bond markets — whether those assets be junk bonds or investment-grade — and even tap into ETFs. In the short-term, the numbers are printing a sign that it may be enough. The Fed is pulling it off, on paper.

Hedge fund managers and institutions may be thinking, “We’ve learned our lesson in history; never fight the Fed”. If the Fed is prepared to launch its fiscal bazooka at this looming recession by the magnitude of trillions of dollars, who are willing to fight it? Bears, rational as they may be to cast a negative outlook in the short and long-term, are facing the Fed’s war chest of infinite money-printing of the world’s reserve currency.

The market is unhealthy and heavily distorted in its current condition, but there is ample reason for people to be short-term bullish.

An important question is how much of the overall market’s price action is thanks to Fed distortions, or rather a heavy level of speculation. The Fed will ideally place a floor in bonds and the stock market. However, that removes an enormous amount of risk for speculators. Additionally, COVID-19 is most likely a short-term direct issue to the economy. The scientific community will eventually make significant progress in terms of vaccines and therapies. You have to consider the overall timeline of this recessive event in the context of COVID. People expect a vaccine will be available by 2021. The damages are real and people are certainly dying from this pandemic, but in the long-term, the majority of the damage still has a strong chance of petering out within a year or less.

Where the market stands, in a nutshell:

The S&P 500 has dropped and slightly stabilized at -30% of where it was pre-COVID. The Fed’s fiscal actions have received a positive response in terms of technicals, and unemployment benefits are relatively great compared to the last financial crisis.

When people return to work over the next few weeks, it’s likely that we’ll learn that their stimulus checks are what carried them through these exceptional times. However, for regions where the lockdown is extended in some arrangement, recovery may lag behind regions that are able to reopen their economies faster, barring any second wave of extreme COVID cases. For the sake of a worst-case scenario, three more months of deep lockdown would be a serious issue. But with various states reopening their economy, such as Georgia and Texas, their fate over the next couple of weeks will reveal whether or not the worst may be coming to an end.

We have to remember that the market is a discounting mechanism — it often discounts, one, two, even three years of economic activity and pivotal events that shape the economy.

Oil futures dropped to negative levels, a historical precedent

Oil futures contracts fell to nearly negative $42 before resetting to the following month’s contract prices. No one has ever seen that before, but what’s interesting is that the June futures contract has not dropped as significantly as one would expect. There’s no immediate reason why June’s contract would not drop to near-zero or even negative levels once more. Oil demand remains dismal, storage facilities are full, and oil tankers across the world are camping near ports, waiting to fill a currently nonexistent demand.

Marine Vessel Traffic, Source:

The image below shows a barrage of oil tankers anchored along the southern coast of California. Docking facilities have effectively told these tankers that there’s no room, they’ll have to wait their turn.

This does not paint a pretty picture for June’s oil futures contracts. Even if the economy reopens tomorrow, it’s going to take a while for this oil to find its way into the economy.

This week, many people holding oil contracts waited until the final day before pulling their positions. That should be a lesson to anyone trying to buy a dip in oil futures at the moment. More people will understand how severe the problem of storage has become, and how much it costs to store and maintain all that excess oil. Companies were paying people to take the barrels off their hands, which is in large part how futures fell to negative prices in the first place. The range in which these instruments can trade has been altered forever, especially as long storage over-capacity continues to plague the industry. It may happen last-minute, like what we witnessed this week as people rushed to close their positions, but the community at Alpha Trades expects negative oil prices through June and maybe into July.

Sharp uptick of people interested in trading oil; Let’s consider not doing that.

An average futures contract is about 1000 barrels of oil. If you sit on a contract through to its expiration, or if there are simply no buyers on the other end, you are legally obligated to accept those 1000 barrels of oil. I hope you have a large closet.

Alternatively (not financial advice), you may consider USO, an ETF that has heavy exposure to the oil industry and the commodity itself. USO is a basket of assets that’s currently composed of June oil futures by 30%. Considering everything we’ve stated up to this point (low demand, over-supply, pandemic uncertainty, economic damages), it’s probable that the instrument goes to zero.

The chart below reveals that there’s an alarming amount of people long USO right now, which may indicate that the majority of retail investors in oil do not adequately understand the dire situation the oil industry is currently facing. If those retailers don’t understand the instruments they’ve invested in and realize that too late, it may cause a cascade of selling that pulls USO to zero or may even lead to the ETF being delisted.

Robinhood Users Holding, Source: Robinhood

Beyond having a balanced mindset, knowing what tools and instruments to invest in, is key to success as an investor or trader. If you want to understand how every industry impacts the rest, subscribe to our Youtube channel or join the Advantage Community, where you’ll get updates throughout the day from the Alpha Trades team of financial analysts.

We discussed how despite the structural danger of the oil industry right now, retail buyers continue to buy and hold positions in oil futures as well as ETFs with heavy exposure to oil (USO). We can see this same exuberance in other areas of the economy. NASDAQ PowerShares (QQQ), SPY, the Russell 2000 Index (IWN), the Industrial Sector (XLI), Google (GOOGL) and even Tesla (TSLA) have seen a near-linear increase in buy-and-hold positions throughout all the mayhem of the past month.

Source: Robinhood

The “buy the dip” mentality of retail traders is high, and these charts reveal cracks in the war-time mindset you’d expect retailers to occupy in such a recessive environment. There remain reasons, however, that this exuberance can be nothing but a ticking time bomb.

One may think people around the world wouldn’t be speculating on markets right now, and rather saving their funds for emergencies. It begs the question, by setting a floor in the market, has the Fed stoked a steep uptick in irrational behavior on the part of retail traders?

Whether it’s Nike or Facebook, we are waiting for what should be an inevitable liquidation of over-leveraged instruments. That may be followed by the next chapter of recession, which is a slow, perpetual grind to lower price levels on the screen, and lower productivity on the ground level. Retailers who bought the dip this month may finally acknowledge the pain and drop their bags at the absolute bottom.

A caveat: Retailers aren’t the only ones fueling market exuberance.

There’s no doubt that institutions are following the Fed’s lead in buying up the market, as some of these instruments are down by 20 or 30% today. Within that reality is another concern — many of these companies deserve their devaluation. Regarding the S&P 500, the companies that make up that index spent about $7 trillion on buybacks and dividends. Since the 2007–2008 financial crisis, only one third of those companies put meaningful money towards research and development.

America’s corporate culture has become complacent on understanding the difference between real growth versus artificial growth as an effect of stock buybacks and dividend growth. A stock’s price is influenced by the decisions of the company’s executives, who are compensated handsomely to prop up and grow the company’s valuation at all costs. Add that to the irrational behavior of retail investors as well as the Fed artificially inflating the overall valuation of the market, and you’re left with a powerful argument that the crisis is not only far from over, it could actually get much worse.

The winners and losers from now until 2022 (retail traders get crushed)

Renowned investors Ray Dalio, Chamath Palihapitiya, and the Bianco Research team all agree with us at Alpha Trades that since the 2007–2008 crisis, ETFs have gained a tremendous amount of money, but that the implications behind this are not entirely bullish. When you buy an ETF, you’re investing in a basket of assets, therefore your risk is diversified. But what may not be as well understood is that the companies that compose the ETF in question may already be overvalued. Thus, the ETF is overvalued. If you consider the graph below, which maps out the total market cap over GDP, the overall market is still significantly overvalued (by 131%).


Companies like AMD, which have reached pre-COVID levels, and Amazon (AMZN), which reached all-time highs this week.These are great companies, but how are they performing so well in the midst of a global economic crash? Both companies are expecting revenues to increase in the next 12 months, we’ll see how that plays out. In the meantime, the strong performance of these “COVID Advantage” names may reveal details of what the economy will look like in the coming months.

Up until recently, shareholders have always come first. Now we’re moving away from that mindset, companies like Salesforce and even Facebook as an example. These are still huge companies, and they continue to take care of shareholders.

Take a look at OKTA, which in our opinion is a great company. This is an industry-leading software company, the stock price broke out amidst the pandemic, but the fact of the matter is they’re not expecting positive earnings until 2022. Earnings for OKTA this year are regressing 20% and yet the stock just made an all-time high. That tells you people are looking much further out — growth rates for 2021 to 2022 still look good. This is a healthy sign, because companies like OKTA are the most at risk during an economic recession, yet people are willing to buy them even at these prices. When people expect OKTA to be worth $200-$300 within three years, why wouldn’t they buy it now?

What I’m focusing on with my portfolio are companies that are able to maintain high growth rates through 2021 and 2022. That’s where big money is playing today; they are looking far beyond a 12-month period.

The Fed has considered bringing interest rates to negative as early as next week. To better understand the implications of that, let’s recap some of what’s happened since 2008.

The 10-year Treasury Bonds have consistently depressed over the last several weeks, even as the equity markets have climbed up. Compare that to what happened in the 2008–2009 Financial Crisis, when bond and equity markets moved in near-unison. For several years, bonds continued to drop and then rejoined the overall market’s climb around 2016. Finally, in 2018 the bond market decoupled from the bull market by descending once more. This could be a sign that long-term confidence in the markets may be waning.

In 2018, inflation didn’t rise to a level where the Fed would need to raise interest rates, and while it was largely a result of the Trade War, the Fed actually reduced interest rates. Meanwhile, the bull market roared. Goldman Sachs called it a “Goldilocks era” of manageable inflation, low rates and high economic growth.

The US economy isn’t going to recover with the snap of a finger, despite how quickly the Fed is willing to act to hold everything up. It’ll be at least one year to put the 26.5 million people who lost their job due to COVID back into the workforce. We may see rolling bankruptcies across the board into the end of 2020 and beginning of 2021, because one stipulation of the Fed bailing out a number of companies is many of those companies aren’t allowed to fire people for a period of time, as part of their agreement with the Fed. Whether you’re talking about airlines or auto companies, these organizations may be restructured, rebranded, or even nationalized. The Fed has slowly bought or indebted these companies, and the long-term implication of Fed intervention in the market could be devastating.

This crisis should have empowered small businesses to have a shot at competing, but the fact is the Fed continues to reward companies for being fiscally irresponsible. Out of the $7 trillion stimulus, it’s shocking how much of that was funneled into stock buybacks and dividends of corporations. The illusion that we live in a free market capitalist world crumbles in the face of what the Fed has done.

Last week, the S&P 500 and Moody’s downgraded several prominent companies to BBB, only one level above “junk bond” status. Two of those companies were Hertz and Avis. The price floor of Hertz has completely dissolved, and now its value is 1/10th of where it stood in 2014. Ford was also downgraded. Gap, Inc. recently priced a $2.25 billion junk bond in an attempt to shore up liquidity.

Source: Bloomberg

Greedy bailouts for the goliaths

Many companies that make up the S&P 500 are asking for bailout money, despite having ample cash reserves. For an idea of what these companies may look like, consider IBM.

IBM maintained the same CEO for 24 consecutive declining quarters (a testament in itself of IBM’s 10-year decline in innovation). Yet the CEO was able to make millions through stock buybacks in the range of $140 billion over the last 11 years. Today the company has a roughly $100 billion market cap. The CEO and her board of directors made millions over a 10-year bleed. It’s dizzying to imagine how that’s possible. Despite that, the company had healthy cash reserves when COVID hit. The company hasn’t asked for bailout money…yet.

Jim Bianco mentioned that back in the 40s and 50s, there was no such thing as a “bailout”. If a company asked the government for a bailout, the government would drag them to court to challenge the company’s fiscal irresponsibility. Fast-forward through the dot-com bubble and the last recession, the government is considering bailing out airlines and even cruise lines, and some of these companies are in trouble for the same reasons as IBM — corporate executives getting high on their own supply.

The ECB is following the Fed’s lead in buying junk bonds. If these junk bonds start to roll into insolvency, that is printed on the balance sheets of these banking institutions that are responsible for the bonds. The domino effect

The eurozone is imploding.

Emerging markets, such as Brazil, Argentina, and parts of the Asian bloc are collapsing. Let’s take a bird’s eye view of Brazil’s current financial crisis. Their stock market fell through the floor last week, while the national currency took a 9.9% swing up against the dollar in under a week.

Many of these emerging markets have pegged their local currency to the US dollar and therefore denominate the majority of their debt in dollars. This is critical to understand: When a country holds dollar-denominated debt, while the local currency is getting weaker against the dollar, that makes it even harder to pay back that debt because the dollar is continuously gaining strength against the local currency. One reason these emerging markets are breaking down is because the dollar is getting stronger. The other reason is there’s a global lack of demand for many goods and services.

Brazil and Argentina are at the brink of currency collapse, while their stock markets follow suit.

We have mapped out the landscape for our community and update our game plan daily. Moving forward, Alpha Trades will develop trading alerts across multiple instruments that we watch carefully throughout the week. That will include an updated track record of current and previous trades taken by our core team. Watch this week’s video analysis for more details, or jump over to the Discord server where we’ll answer any of your questions.

Important: This is earnings season, meaning a lot of big companies will report their earnings this week, such as Amazon, Apple, McDonald’s, Microsoft, Tesla, Boeing, Caterpillar, Facebook, Qualcomm, Google, Starbucks, United Airlines, VISA and a lot more. This is not investment advice, but we will be watching these names before their earnings dates.

Faisal’s long pick of the week: Medtronic

The technicals look good, and the sector has shown a lot of momentum on the tail of EW’s (a medical tech company) positive earnings report last week. The medical tech sector currently looks stellar, and Medtronic is benefiting from ventilator production.

Faisal’s short pick of the week: XRT

XRT is a retail ETF mostly composed of department stores like Dillards and Macy’s, but also auto dealers like CarMax and O’Reilly (ORLY). Many of the assets within XRT have had a positive bump recently, but that momentum is due to fall. The retail sector is poised to be one of the worst-performing this week.

That’s your information fastball for the week. We provide tons of information to our advantage members that you’ll never see here, so I hope you’ll come join and until then, we’ll see you next week. Cheers.


Information provided by Alpha Trades, LLC is not intended to be utilized in making any financial decisions and is not a solicitation, nor recommendation to buy, hold, and/or sell a particular product, digital asset, or ICO.

This article was adapted from our weekly Sunday market overview video, recorded at 11:50 AM, April 26.



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