Q&A: Navigating the Money Maze
Our society is chock full of self-anointed “experts.” Get a gig as a talking head on television, confidently opine on matters you know very little about, and voila. You’re an expert. A high-level position in Washington will soon be yours.
Which is why it’s always a pleasure for me to speak with the experienced professionals on our investing team. They’re experts in the true sense of the word.
For this Friday’s Q&A, I chatted with Amber Hestla, chief investment strategist of the trading services Income Trader, Maximum Income, Profit Amplifier, and Precision Pot Trader.
Here’s Amber, on her ranch in Wyoming. You might not have guessed it from this bucolic photo, but Amber served on the battlefield in Operation Iraqi Freedom. When it comes to data analysis, she knows her stuff.
In military jargon, Amber’s job was to “analyze strategic and tactical intelligence about enemy forces and potential battle areas.” In plain English, she spent 14 hours a day trying to make sure other soldiers didn’t get blown apart by roadside bombs.
Upon her return to civilian life, Amber honed the analytical skills she learned in combat to find money-making opportunities on Wall Street. She’s now an award-winning trader who consistently generates market-beating gains for her followers.
I chatted with Amber this week, for guidance on how investors can maneuver through the maze of coronavirus challenges. My questions are in bold.
We seem to be witnessing an asset price bubble, fueled by the Federal Reserve’s massive monetary stimulus. Do you expect a correction sometime this year, or will the economy sufficiently recover to forestall another market drop?
My indicators show only two possible outcomes. We are either in the early stages of a bubble or near a top. As you noted, the Fed is fueling something. In the past, models show that when the Fed adds money to the economy at more than a 10% annualized rate the stock market soars. But the Fed broke the models with the recent stimulus.
That’s a problem, because economic and earnings models are broken too, by one-time factors including the shutdown and reopening of the economy.
The Fed has gone well past normal stimulus. We could see a crash when the central bank withdraws stimulus, just bringing money supply growth to half of what it is now, which would still be higher than at any time in the past.
My analysis indicates we are in a stock market disconnected from fundamentals. It’s a great market for options trading since there will be large moves, both up and down, over the coming months.
The Fed is propping up the stock market by printing money to buy corporate debt, much of it toxic. Is the Fed’s bond buying strategy sustainable? And is it a good idea?
It’s sustainable because anything the Fed decides to do is sustainable. The Fed has unlimited resources and can buy every bond in the world if it chooses to. That process could even be implemented in minutes noting that all bonds quoted in Bloomberg and not issued by countries or companies subject to U.S. sanctions would be bought at the price determined by a pricing service.
Six months ago, you’d have said I was wasting my time envisioning a scenario like that. Now, you have to admit it’s unlikely, but you won’t rule it out. So, Fed buying is theoretically sustainable. But is it advisable? That’s a different question.
Young children are capable of getting on the roofs of their homes. Just because they can do it doesn’t mean it’s a good idea. Some children I know would climb out on the roof and only then realize they didn’t have a plan for getting off the roof.
I think the Fed has climbed out on the roof. I’m not convinced the Fed has a plan to end the bond buying. They never really changed course after they began various easing programs in 2009. The chart below shows the size of the Fed’s balance sheet just kept growing, even after the recession ended.
If the Fed can’t end its buying program, and I think that is a real possibility, they will effectively be setting corporate interest rates at artificially low levels for years to come.
Which sectors look the most appealing to you right now? I’m particularly keen on utilities, consumer staples, and health care. How about you?
I agree with you that the traditional recession proof sectors like utilities, health care and consumer staples are attractive. But I think it’s important when looking at sectors to remember that this is a market that can change suddenly.
Sector-targeting should be short-term and when the facts change, it is important that investors be willing to change their opinions.
Income investors are understandably nervous about the recent flurry of dividend cuts. How bad do you think it will get in the second half of 2020 and what can conservative investors do about it?
Conservative investors should consider selling call options on their long-term holdings. That strategy works well in this environment.
Conservative investors should also avoid buying high-yield stocks without extensive research. In 2008, big banks like Citigroup (NYSE: C) and solid companies like General Electric (NYSE: GE) offered double-digit dividend yields. But the dividends were cut and the investors suffered large losses.
If yields fall, long-term Treasury funds should deliver large gains. My model shows that iShares 20+ Year Treasury Bond ETF (TLT) could gain more than 19% if yields drop 1%. So bonds could be attractive to income investors. But I think of them as trades rather than buy-and-hold investments for now because they will suffer large losses when yields rise.
You’re an expert at trading options. What’s a simple but effective options trading strategy to cope with coronavirus volatility?
If you want the simplest strategy possible, buy a long-term put option on Invesco QQQ Trust (NSDQ: QQQ). There’s a put option expiring in June 2022 that could serve as insurance against a bear market. For example, the put with an exercise price of $200 trades for about $1,500. That could offset losses if stocks fall by more than 20%.
Now, that’s a simple strategy but it’s not necessarily the best strategy. Shorter term options offer insurance at lower costs. The strategy is the same: buy puts on QQQ as insurance against a bear market. QQQ is the most volatile major index which makes it the best insurance against a crash.
After a brutal shakeout in late 2019, marijuana stocks are bouncing back. What qualities should investors seek in a cannabis investment? What are the red flags?
For cannabis stocks, I recommend technical factors. In simplest terms, if it’s going up buy it and sell when it stops going up. I know that doesn’t sound like a serious answer, but it is. That’s the idea behind the momentum anomaly to the efficient market hypothesis, using academic terms.
Cannabis is a great sector for traders who rely on the right momentum indicators and follow a plan to take profits when they are available, while limiting risk on the inevitable losing trades.
Editor’s Note: In a clear sign that marijuana has become an everyday consumer substance, several states and localities have deemed recreational and medical pot as essential, amid a coronavirus lockdown that’s crushing the economy as a whole.
Pot sales in America are surging to record highs during the COVID-19 pandemic, especially in the medical sector. In fact, our team of investment analysts have pinpointed a small marijuana biotech that’s poised to disrupt Big Pharma and become “The Pfizer of Pot.” Click here for details.
John Persinos is the editorial director of Investing Daily. You can reach him at: email@example.com