When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Technology Letter
May 7, 2025
Fiat Lux
Featured Trade:
(AI AND LOWER EMPLOYEE WAGES)
(TSLA)
Students hoping to become bankers shouldn’t study finance, they should dive into programming.
This is the big takeaway from how investment banks are run these days.
Gone are the moments when finance degrees were the hottest commodity; now it is all about generative AI.
Artificial intelligence (AI) could replace the equivalent of 300 million full-time jobs, a report by investment bank Goldman Sachs says.
It could replace a quarter of work tasks in the US and Europe, but may also mean new jobs and a productivity boom.
And it could eventually increase the total annual value of goods and services produced globally by 7%.
Generative AI, able to create content indistinguishable from human work, is "a major advancement", the report says.
Silicon Valley is keen to promote investment in AI not only in the United States but in a way that will ultimately drive productivity gains across the global economy.
The report notes AI's impact will vary across different sectors - 46% of tasks in administrative and 44% in legal professions could be automated, but only 6% in construction and 4% in maintenance, it says.
Journalists will therefore face more competition, which would drive down wages unless we see a very significant increase in the demand for such work.
Consider the introduction of GPS technology and platforms like Uber (UBER). Suddenly, knowing all the streets in London had much less value - and so incumbent drivers experienced large wage cuts in response, of around 10% according to our research.
The result was lower wages, not fewer drivers.
Over the next few years, generative AI is likely to have similar effects on a broader set of creative tasks.
According to research cited by the report, 60% of workers are in occupations that did not exist in 1940.
However, other research suggests technological change since the 1980s has displaced workers faster than it has created jobs.
Nobody understands how the technology will evolve or how firms will integrate it into how they work.
Lower wages and higher output is a perfect recipe for higher technology share prices, and that is exactly what we will get.
Currently, we are experiencing a mild pullback from the AI mania, but that is simply because it got too far ahead of its skis.
Tesla is also in a prime position to apply AI to power robot-taxis, which would create a windfall.
Tesla’s self-driving tech needs high volumes of AI chips to outfit their EV cars, but they have signaled to investors that they are experiencing trouble reaching that “2nd wave” of incremental buyers for their car.
Why buy a Tesla when a robo-taxi Tesla is around the corner?
Tech as a whole is not in trouble, but individual companies will find an imbalance treatment to their stock.
The AI pixie dust might have leveled off in the short term, and the broader tech market is being dragged down by a confluence of headwinds like spiking interest rates, geopolitical strife, beaten-up consumers, and diminishing addressable market revenue.
I do believe in the AI hype, but these trends don’t go up in a straight line and need time to digest, which often results in short-term pullbacks.
“Life is too short for long-term grudges.” – Said CEO of Tesla Elon Musk
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
(A RETEST OF THE LOWS IS QUITE LIKELY)
May 7, 2025
Hello everyone
The bounce since the lows on April 8 has been quite strong on easing angst about tariffs and Federal Reserve independence.
The strength and breadth of the rally have triggered some positive technical signals. However, it would be foolish to believe that we have escaped the bear in the woods altogether just yet.
History provides a sobering reminder about bear market psychology.
Let’s revisit 2008.
During the Global Financial Crisis, the S&P 500 experienced rallies averaging 10% each (typically lasting less than two months), while ultimately losing 57% over a year and a half. The Tech Bubble saw seven rallies averaging 14% over five-month periods amid a 49% overall decline spanning two and a half years.
Dan Niles, founding partner of Alpha One Capital Partners, explains that “the desire to believe it was the bottom was quite high during each of those rallies, but earnings estimates, and trailing PE (share price to earnings) multiples had to still go lower, which ultimately drove the stocks lower.”
Niles argues that finding the market bottom will normally take more time unless there is fiscal stimulus or easier monetary policy. However, the government is currently prioritizing spending cuts and as Niles points out, “the Fed is on hold given their concerns over tariff-driven inflation in the pipeline, and unemployment still remains low.”
U.S.-China relations remain a significant market variable. Prospects of a meaningful resolution in the short term, at least, appear dim.
As we head into the second half of the year, it appears likely that underlying weakness in the economy will show up in the data and will lead to negative GDP growth in the third quarter and S&P500 earnings expectations being revised lower.
Given this scenario, the current Wall Street estimates for over 10% S&P 500 earnings per share growth for 2025 look optimistic and should instead be dialled back down to flat. If we enter a recession, EPS growth is likely to go negative.
This means that the market’s current valuation multiple is too high. The S&P trailing multiple at 23x should probably be closer to 19x at the current inflation levels. Niles explains that in a recession, this PE is usually closer to mid-teens.
Niles comments that the above factors will probably cause a retest of the lows for stock prices at the very least.
The U.S. dollar will continue to fall
The dollar index (DXY) has tumbled 9% below its January peak and tumbled to a three-year low. After a near-term bounce, more dollar weakness is on the horizon.
Cheers
Jacquie
Global Market Comments
May 7, 2025
Fiat Lux
Featured Trade:
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS),
(TLT)
For me, the glass is always half full, not half empty, and it’s usually darkest just before the dawn. After all, over the past 100 years, markets have risen 80% of the time, and that includes the Great Depression.
However, every now and then, conditions arise where it is prudent to sell short, or make a bet that a certain security will fall in price.
This could happen for myriad reasons. The economy could be slowing down. Companies might disappoint on earnings. “Sell in May, and go away?" It works….sometimes.
Other securities have long-term structural challenges, like the US Treasury bond market (TLT). Exploding deficits as far as the eye can see assure that government debt of every kind will be a perennial short-term issue for years to come, but not yet.
Once you identify a short candidate, you can be an idiot and just buy put options on the security involved. Chances are that you will overpay and that accelerated time decay will eat up all your profits, even if you are right and the security in question falls. All you are doing is making some options traders rich at your expense.
For outright put options to work, your stock has to fall IMMEDIATELY, like in a couple of days. If it doesn’t, then the sands of time run against you very quickly. Something like 80% of all options issued expire unexercised.
And then there’s the right way to play the short side, i.e., MY way. You go out and buy a deep-in-the-money vertical bear put debit spread.
This is a matched pair of positions in the options market that will be profitable when the underlying security goes down, sideways, or up small in price over a defined, limited period of time. It is called a “debit spread” because you have to pay money to buy the position instead of receiving a cash credit.
It is the perfect position to have on board during bear markets, which we will almost certainly see by late 2019 or 2020. As my friend Louis Pasteur used to say, “Chance favors the prepared.”
I’ll provide an example of how this works with the United States Treasury Bond Fund (TLT), which we have been selling short nearly twice a month since the bond market peaked in July 2016.
On October 23, 2018, I sent out a Trade Alert that read like this:
Trade Alert - (TLT) - BUY
BUY the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.60 or best.
At the time, the (TLT) was trading at $114.64. To add the position, you had to execute the following positions:
Buy 37 November 2018 (TLT) $120 puts at…….………$5.70
Sell short 37 November 2018 (TLT) $117 puts at…….$3.10
Net Cost:………………………….………..………….............$2.60
Potential Profit: $3.00 - $2.60 = $0.40
(37 X 100 X $0.40) = $1,480 or 11.11% in 18 trading days.
Here’s the screenshot from my personal trading account showing you where I get the price:
This was a bet that the (TLT) would close at or below $117 by the November 16 options expiration day.
The maximum potential value of this position at expiration can be calculated as follows:
+$120 puts
-$117 puts
+$3.00 profit
This means that if the (TLT) stays below $117, the position you bought for $2.60 will become worth $3.00 by November 16.
As it turned out, that was a prescient call. By November 2, or only eight trading days later, the (TLT) had plunged to $112.28. The value of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread had risen from $2.60 to $2.97.
With 92.5% of the maximum potential profit in hand (37 cents divided by 40 cents), the risk/reward was no longer favorable to carry the position for the remaining ten trading days just to make the last three cents.
I, therefore, sent out another Trade Alert that said the following:
Trade Alert - (TLT) – PROFITS
SELL the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.97 or best
In order to get out of this position, you had to exit the following trades:
Sell 37 November 2018 (TLT) $120 puts at…………….......…$7.80
Buy to cover short 37 November 2018 (TLT) $117 puts at….$4.83
Net Proceeds:………………………….………..………….…..............$2.97
Profit: $2.97 - $2.60 = $0.37
(37 X 100 X $0.37) = $1,369 or 14.23% in 8 trading days.
Of course, the key to making money in vertical bear put spreads is market timing. To get the best and most rapid results, you need to buy these at market tops.
If you’re useless at identifying market tops, don’t worry. That’s my job. I’m right about 90% of the time and send out a STOP LOSS Trade Alert very quickly when I’m wrong.
With a recession and bear market just ahead of us, understanding the utility of the vertical bear put debit spread is essential. You’ll be the only guy making money in a falling market. The downside is that your friends will expect you to pick up every dinner check.
But only if they know.
“Savers are losers”, said a radio ad for a mortgage broker in Reno, Nevada.