Feb 01 - Fear Not The Forces Of Reddit, Nor The False Prophets Of Bubble Doom

Summary

  • The short squeeze has captivated the market, but it's really a side show and a distraction from some very bullish news.
  • 4% GDP for the last quarter, while not as high as expected, is still might strong, and it will only get stronger as we reopen.
  • More vaccines are about to be flooding the market with JNJ the latest vaccine, and Novavax with good results as well.
  • Sometimes it's hard to see that you have hit bottom and about to rise, but we are now at the beginning of the beginning. Get used to hearing the meme "Roaring 20s."
  • Many commentators are saying we are at a bubble, but valuations are actually getting better as 80% of earnings are beating expectation. I don't remember any quarter doing as well.

Last Week Was a Sloppy Mess, and Perhaps it Continues a Bit on Monday But…

This is really what the market needed. It needed to flush the extreme risk takers out a bit. In fact I'm as bullish as ever, even more so as this type of selling forestalls the bigger plunge that I feared would happen a la January 2018, when for a time the market went parabolic and ran out of buyers resulting in a blow off top. The short squeeze is nothing new and is not the sign of a bubble. It is the exact opposite, what is new is that the concept of a squeeze is being used by the little people, you and I.

I don’t want to spend time on the mechanics of this phenomenon, the mass media has taken up this task, and I am bored with it at this point. If any of you have joined the fun and are long GameStop (GME), or AMC Entertainment (AMC), or any of the other publicized names, please sell it Monday. Even if they double by Tuesday I still have done you a favor. They are no longer being squeezed, and all the shorts have dropped their shorts (pun intended with all that it implies).

Right now these shares are being kited by people who think they are sticking it to the man but are really sticking it to each other. Also shorting is not an evil practice, it's an important part of the stock market mechanism. In fact if shorting stops then the market will become more volatile, because often the first buyers of a dive in a stock or the market are those shorts that are now covering and buying the stock back. If you don’t understand shorting, go to the Investopedia dictionary and take a look. One more thing, don’t you dare short anything. Better to find a way to use Put options instead. In fact I am effectively short $GME right now using Puts which I will talk about later.

Why Am I Still Bullish When Obviously the Market Dropped the Furthest Since October?

Precisely because the market hasn’t really dropped this steeply since October. That is not normal, or healthy, especially since the VIX has been consistently above 20 for months. The VIX anticipates volatility, after all it is called the Volatility Index. When I see a signal like this for so long with no follow-through I get concerned. Of course you can get upward volatility, with a hyperbolic reach for the skies, which as I said would give us that blow-off top You don’t want that, that drop damaged the market technically for months. With all the action last week we didn’t notice some good things:

  • Johnson & Johnson vaccine is a safe and effective single shot injection that can be stored in a normal refrigerator. The headline said it was 66% effective, but a little reading reveals that it is 85% effective to protect serious illness requiring hospitalization and 100% against death. I want to take this one ASAP. If Moderna (MRNA) and Pfizer (PFE)/BionTech (BNTX) would now be testing no way would they be 95% effective against the disease because of the mutations. COVID-19 may be with us forever.

  • Novavax (NVAX) had very good results for their Vaccine. Eli Lilly (LLY) announced an injectable antiviral. More progress on antivirals are more important than ever now that new strains are forming. I know this sounds like bad news, but we are about to get an abundance of vaccines and we are already well over 1 million vaccinated per day, going to 3 million per day in a few weeks. We are past the bottom of all of this, and beginning to get better is perhaps two weeks away.

  • The fourth quarter had a GDP of 4%, that is lower than expected but 4% is still a big number and this coming quarter will likely be 6%-7%. You don’t have bear markets with 4%-5%-7% GDP.

  • One of the complaints about the market being a bubble is valuation. Valuation is almost by definition backward-looking. I believe that of all S&P companies reported earnings 80% have beaten their numbers. This is unheard of and earnings will only be getting better as the economy reopens. There is no bubble, in fact there are plenty of stocks that are UNDERvalued in my humble opinion, or decently valued.

  • We still have talk of fiscal stimulus in the form of ,400. That in itself will keep the market ebullient.

  • Most legislators Republican and Democrat want infrastructure that will boost the economy too. Again, this will keep the market on the bull’s side.

  • Reopening will be swift. Get ready to hear about the “New Roaring 20s” until you are sick of it. Services spending will go through the roof, so will the population. New people = new growth.

  • One day all the plans of the "Socialist Democrats" that can be put into place will be put into place and the party will end (tongue-in-cheek). Until then we have money to make.

My Trades: (at this point all trades here are Call Spread options trades. Buy the shares are fine too).

How I bet against GameStop (GME)

The premium to buy Puts against GME is crazy, so I went long Puts against the Retail ETF (XRT). As GME has rocketed higher it has taken up more and more of the valuation of this ETF I believe it is at 26% now, also there are other squeezed retailers like Bed Bath & Beyond (NASDAQ:BBBY), and $M that lend to the overvalued pop of XRT. XRT is a passive ETF that is not re-balanced often. In any case the premium is within normal bounds as compared to the crazy premium of GME Puts. I have them out to March with my strike about 15+ points below the current level of the XRT and I am prepared to roll them out every week until this nonsense is over. XRT should fall sharply in the next week or two. If not my trade is wrong and I will take my lumps.

I am taking a barbell approach to trading, favoring cyclicals and growth

For cyclicals, I am in Cleveland-Cliffs (CLF), Freeport-McMoRan (FCX), Steel Dynamics (STLD), Olin Corp. (OLN), Eagle Materials (EXP), Nucor Corp. (NUE), ON Semiconductor (ON), MP Materials (MP), and Desktop Metal (DM).

For reopening plays, I am in Boeing (NYSE:BA), General Motors (GM), DraftKings (DKNG), and Hims and Hers (HIMS). I will be expanding my reopening plays stay tuned.

For Technology. Advanced Micro Devices (NASDAQ:AMD), Afirm (AFRM), Upstart (UPST), and Snowflake (SNOW), Skillz (SKLZ). I sold BigCommerce (NASDAQ:BIGC) because of IPO lockup expiration tomorrow, but I will get back in going into earnings in a few weeks.

You will notice that almost all the names above are recent IPOs. There is tremendous beta in these names, and that gives opportunity to trade. SNOW was over 400, now it's trading in the 270s, I have been trading Lemonade (NYSE:LMND), and C3.ai (NYSE:AI) as well and am looking for them to come in again to reload on them.

SPACs

I treat this as a special category. I participate in SPACs either as warrants as well as options when available. I wait for the mergers to be announced then slowly accumulate the warrants as people lose interest in the name and the SPAC invariably falls in price. I add tiny bits several times a week to each position, and when I say tiny I mean like 10 warrants a day. That is until I am convinced that the SPAC has stopped falling then I get more aggressive. I'm going to list them in the order of those I find most interesting

  1. Longview (NYSE:LGVW) merging with Butterfly Networks

  2. VPC Impact (VIH) merging with BAKKT

  3. VG Acquisition (VGAC) merging with 23 & Me

  4. Experience Investment (EXPC) merging with Blade

  5. Foley Trasimene II (BFT) merging with Paysafe

  6. New Providence (NASDAQ:NPA) merging with SpaceMobile

I want you to look into each of these on your own. I think SPACs are the single best thing that has happened for the small investor in a decade. Much better than free trading because let’s face it nothing is really free is it? That said, with great reward comes greater risk. Many of these SPACs, I would say most are not as fully developed as a traditional IPO. In fact I am fully expecting that a Theranos, or Enron, or even a Bernie Madoff type scam will happen in SPACs. So please do as much research as possible.

We actually have an almost Theranos case in Nikola (NKLA) trucks. I'm not going to go into it here, but the founder was too much of a showman, let's leave it at that. Still I think NKLA might bring it off, but I would not touch it at this point. In fact I'm staying away from the whole EV thing right now, unless the Lucid deal is truly announced and real. I left off the SPAC rumored to come away with that prize for now. I would recommend starting with just three of the above.

It takes discipline to buy 10 to 20 warrants every few days so more than three will be a pain. The key is to dollar cost average in. The difference can be enormous, as some SPACs lose +50% of their value while the paperwork to merger is finally finished and the date of the vote is announced. This can take as much as 3-4 even 5 months. People get bored or see another shiny object and sell that dang SPAC. That is your opportunity. I have not told you the symbols of the warrants, you will have to look them up, and in doing so please read what you are buying and make sure you want to risk your money on it.

A word about my options strategy

Many of the above options positions are maintained for many months. I keep rolling them forward. I never let an option expire worthless. Every month, I reassess if I believe in a name, if I do I roll them to the next month out. Also I generally start a long call several months out. Most players will take the next month expiration, and watch the premium melt away like a snowshower in April. I have most of my Long Calls out to April, May and June. So this week any March and April Options left will be rolled to May or June. In the meantime the Short position will be expiring mid February generating revenue for me. I will then reshort my long position to expire in March. Maybe I am doing it wrong.

It seems like the pros will jump on a Call option expiring that week, and other seeming heroic moves like that. They take huge positions and take advantage of pennies. Just understand that I have a lot of very small positions, and I tend to take positions that are out of the money, sometimes way out. Meantime as each successive short position expires the cost of that long position goes down.

Ok that is it for now. Please do your own homework. Just because I say I am in a position today, I might be out of it tomorrow. So know what you are buying. never take a “tip” from anyone and just blindly go into a stock. I'm not an investment advisor or broker, I have no fiduciary duty towards you. Neither does any schmo on the street that tells you to buy this or that. I would of course never knowingly steer you wrong.

I take great pride in my writing about stocks, for me to introduce a wrong play is more than about losing money if I write about it. So maybe that is why I have been having trouble writing lately. Anyway, let me sum up, by saying I am extremely bullish. Will this all end very badly? Yeah, it will. I don’t write about politics generally. The day to day political machinations are just noise. In fact when the morons were storming the capitol I was buying with both fists.

However, two years from now, as all the chickens come home to roost from the 40 executive orders our new old president signed and all the damage from the “Squad” add up, the economy will go back to 1% growth. We will still be able to trade, but the glory days of 15% to 20% growth in the S&P won’t be there. I assume that the House will turn over to the GOP by that time and we can put the breaks on further nonsense. Meanwhile “Roaring Twenties”! Um yay...

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