What if they gave a recession, and nobody came?

Better yet, what if we’re already in a recession that is about to end?

Q1 brought us a GDP growth of negative 1.5%. All we need is for the current quarter to bring in a negative number and we meet the textbook definition of a recession. That means an economic recovery could begin in as little as two weeks.

The way all asset classes traded worldwide last week confirms this view. What has really been impressive is how energy has gone from the most loved sector in the market to the most hated….in hours. Oil and energy stocks have seen the most extreme price reversals in their history, down some 20%.

If you truly believed that we were going into a recession, oil is the last thing in the world you want to own. It cost money to store and there is no storage. The Russians have locked up all they can get to place the oil that no one is buying because of the sanctions.

Tanker charters have disappeared as new buyers of Russian oil, like India and China, re-route crude from its traditional buyers in Europe.

And if you don’t sell maturing futures contracts, you have to take physical delivery of millions of barrels of oil. This is borne out by the futures market, which already has oil trading at a lowly $70 one year out. This is why the oil industry isn’t investing a dime in their own business. They’ve seen this movie before.

It isn’t just stocks and oil that are collapsing. It is everything, from copper to new home construction to retail sales. All of the loss in share prices this year, some 20%, is due to multiple compression, from 21 down to 17. Earnings are still rising. That shows there is no logic to the selling.

People just want out.

We have just about dotted all the “I”’s and crossed all their “T”’s to meet the requirements of a bear market bottom. Only 2% of stocks are now above their 50-day moving average. Equity put to call ratios are close to one. There has been massive selling of sectors that only recently started to plunge, like energy and utilities.

This has brought us a negative wealth effect that has sucked $13.1 trillion out of the real economy since November.

Watch for the trifecta of yields ($TNX), the US dollar (UUP), and oil (USO) rolling over. The “everything” bubble is over.

That makes the Bitcoin crash particularly compelling to watch, as it has become a great risk indicator for all asset classes. It broke $19,000 over the weekend. It turns out that 24/7 trading means it can go down a lot faster.

Crypto in general is having its “Lehman Brothers” moment. Crypto banks, NFTs, and brokers are dropping like flies as cascading margin calls wash through the system.

This was a field where there was margin on margin upon margin. Celsius, a crypto lender, has frozen $11 billion worth of deposits. As a long-time hedge fund manager, I can tell you that gating an asset class and preventing withdrawals brings certain death.

Some of these banks were guaranteeing 19% interest rates. It’s proof yet again that if it’s too good to be true, it usually isn’t.

All of this presages a crash in the inflation rate of epic proportions from the current 8.6%. We could be back to the Fed target of 2% by yearend if last week’s trends continue.

Since the Fed is so slow to act, the next two 0.75% rate hikes are in the bag. After that, even the Fed will release that it has a recession on its hands. All further rise hikes will cease, and they may even be back to cutting by 2023.

What happens if the above scenario plays out? It’s back to the Roaring Twenties once again and my new American Golden Age.

And while we are talking about the possibility of stocks going up once again, let me fill you in on a trade that looks particularly compelling.

Sell Short the July 15 Tesla $500 puts.

That closed at $12.25 on Friday with 18 days until expiration. At an 82.3% implied volatility, Tesla is one of the most volatile stocks in the market so they will pay you fortunes for the puts. For each put you sell short, you earn $1,225. The $500 strike price is down 58.3% from the $1,200 high seen in January. This is for a company that is seeing vehicle sales rise by 40% this year, and gross sales up 50% (they raised prices three times).

In this trade, you WANT the share to get sold to you at $500. Just take delivery of the shares. Then you can ride them up to my ten-year forecast of $10,000 and get a 20-fold return. If you don’t get triggered on the puts, just do the trade again for August and take in another $1,225 and every month until you are, or the trade goes away.

I know this trade works as I have done it several times with these results.

How do you think I got three Teslas?

Fed Raises Rates by 75 Basis Points, the most in 28 years, lifting a great weight from the shoulders of the market. Stocks rallied as well as bonds. It was one of the most confusing market responses I can recall. Two more 75 basis point hikes are in the can. The overnight rate could be at 2.75% by September. This may not be THE bottom, but it is A bottom. I’m adding risk here.

Dow Average Breaks 30,000, for the first time in a year, down 8,000 in less than six months, or 21%. Jay Powell has really taken a whip to this market. Suddenly, money costs money. I see another 5% of downside easy, then a strong rally.

Tesla is Raising Prices on its Cars, passing on rising commodity prices directly to customers because they can. There is still a one-year wait to get a new Model X. $7.00 gasoline is a dream come true for all EV makers, which are getting overwhelmed with demand. Ford quit taking orders for their all-electric F-150 at 200,000 because they can’t fill them. It might be smart to sell short the Tesla July $500 puts expiring in 20 trading days for a generous premium. If the stock falls that far, just take delivery of the shares and then ride them up to $10,000.

Tesla Proposes 3:1 Stock Split, its third since the company went public in 2010. Elon Musk is not above financial engineering to boost the share price. A cheaper share price would suck in more Millennial investors who love the company. Keep buying (TSLA) on dips like this one.

Soaring Interest Rates Demolish New Home Construction, down 14.42% in May. It’s only going to get worse. Avoid homebuilders like the plague.

Weekly Jobless Claims come in at 229,000, down 3,000. Watch this number climb as recession fears rise. The risk of a hard landing is growing exponentially.

Bitcoin is Still in Free Fall, down 10% on the day, and is just cents from breaking the crucial $20,000 support level. There are no buyers anywhere, and margin calls are running rampant. Several cryptos are not at risk of going under. This is when you find out who’s been swimming without a swimsuit. I am so glad I avoided crypto this year.

Ten-Year Treasuries Hit 11-Year High, at a 3.48% yield. This is the beginning of the end for the bear market in bonds, the worst in history.

30-Year Fixed Rate Mortgages Rocket to 6.28%, from 5.5%, effectively shutting down the market. Now you REALLY have to worry about real estate. That’s up from 2.8% in November. Avoid homebuilders like (LEN), (PHM), and (KBH) on pain of death.

FDA Approves Covid Shots for Kids, down to six months. Two mini shots are all that is needed. It will do a lot to bring working parents back into the workforce, and address worries of grandparents like me.

Producer Price Index Jumps 10.8% YOY, fanning the flames of inflation. The April print was up 0.8% compared to 0.4% a month earlier according to the Labor Department.  Russia’s war in Ukraine continues to roil food and oil supplies globally, and China has started re-imposing Covid-19 restrictions just weeks after loosening them in major cities

Strong Dollar is Demolishing US Corporate Profits, and the worst is yet to come. Weaker foreign currencies like the Euro (FXE) and the yen (FXY) means international sales bring in less dough. Blame the Fed for a steady diet of interest rate rises which make the greenback the most attractive currency in the world.

My Ten-Year View

When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil peaking out soon, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!

With some of the greatest market volatility in market history, my June month-to-date performance exploded to +5.91%.

My 2022 year-to-date performance ballooned to 47.78%, a new high. The Dow Average is down -17.66% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 69.35%.

Last week, we made an absolute killing with the June option expiration day, running six position into their maximum profit into the close. Those were in (NVDA), a double short in (SPY), (MSFT), (V), and (TLT).

I also used the big down 1,000-point days to add new July longs in (MSFT), (NVDA), (BRKB), and (TSLA). Putting on front month call spreads with the Volatility Index over $30 is like shooting fish in a barrel.

That brings my 14-year total return to 560.34%, some 2.40 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.23%, easily the highest in the industry.

We need to keep an eye on the number of US Coronavirus cases at 86.3 million, up 300,000 in a week and deaths topping 1,014,000 and have only increased by 2,000 in the past week. You can find the data here.

On Monday, June 20 markets are closed for the first-ever Juneteenth, the celebration of the freeing of the slaves.

On Tuesday, June 21 at 7:00 AM, Existing Home Sales for May are published.

On Wednesday, June 22 at 7:00 AM, MBA Mortgage Applications for the previous week are printed.

On Thursday, June 23 at 8:30 AM, Weekly Jobless Claims are announced.

On Friday, June 24 at 7:00 AM, New Home Sales for May are disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.

As for me, since I hike ten miles with a 50-pound pack every evening, it is not unusual for me to wake up feeling like I was run over by a truck.

But one morning was different. I had no energy. So, I took a Covid test. It was negative. The next morning, I was still weak, so I took the test again. Still negative.

It was only on the third morning that I produced a positive test. I had Covid-19.

I don’t know how the heck I got this disease as I had been so careful for the past 2 ½ years with my background in virology. No UCLA degree helped here. That’s why they call this variant the “stealth omicron BA.2”.

The scary thing was that I tested negative for three days while I was potentially spreading the virus.

Thank goodness for the two vaccinations and two booster shots I received. They saved my life. They headed off a long hospital stay, a long covid disability, or even death. Thank you, Pfizer!

So I quarantined myself, donned a mask whenever I left my bedroom, and shoved cash under the door whenever the kids needed to eat.

I became a couch potato of the first order, binge-watching Killing Eve, Yellowstone, and every Star Trek ever made (there are hundreds).

Fortunately, I did not lose my sense of taste or smell, as do many others. But when you sleep 18 hours a day, you don’t eat. In two weeks, I lost 15 pounds. I guess every virus has a silver lining. But every day, I felt better and better.

Of course, I had to keep working. I sent out a dozen trade alerts while I had Covid, and the newsletters and Hot Tips kept pouring out every day.

One day, I had to give two webinars and I almost passed out during the second one. I had to excuse myself for a minute and place my head between my knees to keep from blacking out.

No rest for the wicked!

I’m completely over it now. I had to cut more loops in my belts because my pants kept falling off. I can get into clothes which haven’t fit for 40 years. Fortunately, men’s fashion never go out of style.

And here’s the really great news. I am totally immune to all covid variants for a year. The disease acts as a fifth super booster.

Looks like it’s time to top up that bucket list again. If nothing else, Covid reminded me of the shortness of life and the transitory nature of opportunity. The response of a lot of Covid survivors has been to trash the budget, throw caution to the wind, and go do those things you always wanted to do.

Why should I be any different? There is no tomorrow, next week, or next year, only now.

I’ll be hitting the road.

See you at Harry’s Bar in Venice!

Stay Healthy,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Oops, I Got Covid

 

A Negative Test at Last